Global
Economic
Prospects
Uncertainties
Vulnerabilities
AND

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Global Economic Prospects
Uncertainties and vulnerabilities

January 20123

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 Justin Yifu
Lin. Several people contributed substantively to the report. The modeling and data team was lead by Theo Janse van
Rensburg assisted by Irina Kogay, Sabah Zeehan Mirza and Betty Dow. The projections, regional write-ups andsubject annexes were produced by Dilek Aykut (Finance, Europe & Central Asia), John Baffes & Shane Streifel(Commodities) Annette De Kleine (South Asia, Exchange Rates and Current Accounts), Allen Dennis (Sub-SaharanAfrica, International Trade), Eung Ju Kim (Finance), Theo Janse van Rensburg (High-Income Countries), Elliot(Mick) Riordan (East Asia & the Pacific, Middle-East & North Africa, and Inflation), Cristina Savescu (Latin
America & Caribbean, Industrial Production). Regional projections and annexes were produced in coordination withcountry teams, country directors, and the offices of the regional Chief Economists and PREM directors. The shortterm commodity price forecasts were produced by John Baffes, Betty Dow, and Shane Streifel. The remittances
forecasts were produced by Sanket Mohapatra.
The accompanying online publication, Prospects for the Global Economy, was produced by a team led by Nadia
Islam Spivak and Sarah Crow, and comprised of Betty Dow, Kathy Rollins, and Sachin Shahria with technical support from David Horowitz and Roula Yazigi.
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 Abebe Adugna, Zeljko Bogetic, Kevin
Carey, Jorg Decressin, Tatiana Didier, Hinh Dinh, Punam Chuhan-Pole, Tito Cordella, Doerte Doemeland, Willem
van Eeghen, Manuela Ferro, Caroline Freund, Michael Fuchs, Bernard Funck, David Gould, Santiago Herrera, Bert
Hofman, Shahrokh Fardoust, Elena Ianchovichina, Fernando Im, Kalpana Kochhar, Asli Demirguc-Kunt, Barbara
Mierau-Klein, Audrey Liounis, Stephen Mink, Thomas Losse-Muller, Cyril Muller, Antonio M. Ollero, Kwang
Park, Samuel Pienkagura, Bryce Quillin, Sergio Schmukler, Torsten Sløk, Francesco Strobbe, Hans Timmer,
Merrell Tuck-Primdahl, David Theis, Volker Trichiel, Ekaterina Vostroknutova, Makai Witte, and Juan Zalduendo.

4

Global Economic Prospects January 2012:
Uncertainties and vulnerabilities
Overview & main messages
The world economy has entered a very difficult
phase characterized by significant downside
risks and fragility.
The financial turmoil generated by theintensification of the fiscal crisis in Europe has
spread to both developing and high-income
countries, and is generating significant
headwinds. Capital flows to developing
countries have declined by almost half ascompared with last year, Europe appears to haveentered recession, and growth in several major
developing countries (Brazil, India, and to alesser extent Russia, South Africa and Turkey)
has slowed partly in reaction to domestic policy
tightening. As a result, and despite relatively
strong activity in the United States and Japan,
global growth and world trade have slowed
sharply.
Indeed, the world is living a version of thedownside risk scenarios described in earlier
editions of Global Economic Prospects (GEP),
and as a result forecasts have been significantly
downgraded.
 The global economy is now expected to
expand 2.5 and 3.1 percent in 2012 and 2013(3.4 and 4.0 percent when calculated usingpurchasing power parity weights), versus the
3.6 percent projected in June for both years.
 High-income country growth is now expected
to come in at 1.4 percent in 2012 (-0.3 percent
for Euro Area countries, and 2.1 percent for
the remainder) and 2.0 percent in 2013, versus
June forecasts of 2.7 and 2.6 percent for 2012
and 2013 respectively.
 Developing country growth has been revised
down to 5.4 and 6.0 percent versus 6.2 and 6.3
percent in the June projections.
 Reflecting the growth slowdown, world trade,which expanded by an estimated 6.6 percent in2011, will grow only 4.7 percent in 2012,
before strengthening to 6.8 percent in 2013.

However, even achieving these much weakeroutturns is very uncertain. The downturn in
Europe and weaker growth in developing
countries raises the risk that the twodevelopments reinforce one another, resulting inan even weaker outcome. At the same time, theslow growth in Europe complicates efforts torestore market confidence in the sustainability of
the region’s finances, and could exacerbate
tensions. Meanwhile the medium-term
challenges represented by high deficits and debts
in Japan and the United States and slow trend
growth in other high-income countries have notbeen resolved and could trigger sudden adverse
shocks. Additional risks to the outlook include
the possibility that political tensions in the
Middle-East and North Africa disrupt oil supply,
and the possibility of a hard landing in one ormore economically important middle-income
countries.
In Europe, significant measures have been
implemented to mitigate current tensions and tomove towards long-term solutions. The
European Financial Stability Facility (EFSF) has
been strengthened, and progress made toward
instituting Euro Area fiscal rules andenforcement mechanisms. Meanwhile, theEuropean Central Bank (ECB) has bolsteredliquidity by providing banks with access to lowcost longer-term financing. As a result, yields on
the sovereign debt of many high-income
countries have declined, although yields remainhigh and markets skittish.
While contained for the moment, the risk of amuch broader freezing up of capital markets anda global crisis similar in magnitude to theLehman crisis remains. In particular, thewillingness of markets to finance the deficits andmaturing debt of high-income countries cannot
be assured. Should more countries findthemselves denied such financing, a much wider
financial crisis that could engulf private banks
and other financial institutions on both sides ofGlobal Economic Prospects January 2012

Main Text

Table 1 The Global Outlook in summary(percent change from previous year, except interest rates and oil price)
Global Conditions
World Trade Volume (GNFS)
Consumer Prices
G-7 Countries 1,2
United States
Commodity Prices (USD terms)
Non-oil commodities
Oil Price (US$ per barrel) 3
Oil price (percent change)
Manufactures unit export value 4Interest Rates$, 6-month (percent)€, 6-month (percent)International capital flows to developing countries (% of GDP)
Developing countries
Net private and official inflows
Net private inflows (equity + debt)
East Asia and Pacific
Europe and Central Asia
Latin America and Caribbean
Middle East and N. Africa
South Asia
Sub-Saharan Africa
Real GDP growth 5
World
Memo item: World (PPP weights) 6
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
Egypt 7
IranAlgeriaSouth Asia

2009

2010

2011e 2012f

2013f

-10.6

12.4

6.6

4.7

6.8

-0.2
-0.3

1.2
1.6

2.2
2.9

1.6
2.0

1.7
2.2

-22.0
61.8
-36.3
-6.6

22.4
79.0
28.0
3.3

20.7
104.0
31.6
8.9

-9.3
98.2
-5.5
-4.5

-3.3
97.1
-1.2
0.8

1.2
1.5

0.5
1.0

0.5
1.6

0.8
1.1

0.9
1.3

4.2
3.7
3.7
2.7
3.9
2.8
4.6
4.0

5.8
5.4
6.0
5.0
6.0
2.4
5.0
3.7

4.5
4.3
4.7
3.6
4.8
2.0
3.9
3.9

3.3
3.4
2.0
4.1
1.2
3.3
3.5

3.7
3.7
2.9
4.3
1.6
3.7
4.4

-2.3
-0.9
-3.7
-3.7
-4.2
-5.5
-3.5
-1.5
2.0
7.5
9.2
4.6
-2.3
-6.5
-7.8
-4.8
-7.1
-2.0
-0.2
-6.1
0.9
4.0
4.7
3.5
2.4
6.1
9.1
3.6
5.7
2.0
-1.8
7.0
2.4

4.1
5.0
3.0
2.8
1.7
4.5
3.0
7.2
7.3
9.7
10.4
6.1
7.8
5.2
4.0
9.0
-1.3
6.0
7.5
5.5
9.2
3.6
5.1
3.2
1.8
9.1
8.7
4.1
6.1
4.8
2.8
7.9
2.3

2.7
3.7
1.6
1.4
1.6
-0.9
1.7
4.5
6.0
8.2
9.1
6.4
2.0
5.3
4.1
8.2
2.2
4.2
2.9
4.0
7.5
1.7
1.8
2.5
3.0
6.6
6.5
2.4
6.7
4.9
3.2
7.0
7.0

2.5
3.4
1.4
1.3
-0.3
1.9
2.2
3.2
5.4
7.8
8.4
6.2
4.2
3.2
3.5
2.9
1.5
3.6
3.4
3.2
3.7
2.3
3.8
2.7
2.7
5.8
6.5
3.9
6.0
5.3
3.1
7.1
8.1

3.1
4.0
2.0
1.9
1.1
1.6
2.4
4.1
6.0
7.8
8.3
6.5
4.9
4.0
3.9
4.2
3.0
4.2
4.4
3.7
4.4
3.2
0.7
3.1
2.9
7.1
7.7
4.2
6.4
5.6
3.7
7.4
8.5

India 7, 8
Pakistan 7
Bangladesh 7
Sub-Saharan Africa
South Africa
Nigeria
AngolaMemorandum items
Developing countries
excluding transition countries
3.3
7.8
6.3
5.7
6.2
excluding China and India
-1.7
5.5
4.4
3.8
4.5
Source: World Bank.
Notes: PPP = purchasing power parity; e = estimate; f = forecast.
1. Canada, France, Germany, Italy, Japan, the UK, and the United States.
2. In local currency, aggregated using 2005 GDP Weights.
3. Simple average of Dubai, Brent and West Texas Intermediate.
4. Unit value index of manufactured exports from major economies, expressed in USD.
5. Aggregate growth rates calculated using constant 2005 dollars GDP weights.
6. Calculated using 2005 PPP weights.
7 In keeping with national practice, data for Egypt, India, Pakistan and Bangladesh are reported on a fiscal year basis in Table 1.1. Aggregatesthat depend on these countries, however, are calculated using data compiled on a calendar year basis.
8 Real GDP at market prices. GDP growth rates calculated using real GDP at factor cost, which are customarily reported in India, can varysignificantly from these growth rates and have historically tended to be higher than market price GDP growth rates. Growth rates stated on
this basis, starting with FY2009-10 are 8.0, 8.5, 6.8, 6.8 and 8.0 percent – see Table SAR.2 in the regional annex.

2Global Economic Prospects January 2012

Main Text

the Atlantic cannot be ruled out. The world
could be thrown into a recession as large or evenlarger than that of 2008/09.

financing needs (for maturing short and longterm debt, and current account deficits) thatexceed 10 percent of GDP. To the extent
possible, such countries should seek to prefinance these needs now so that a costly andabrupt cut in government and private-sector
spending can be avoided.
 Historically high levels of corporate bondissuance in recent years could place firms in
Latin America at risk if bonds cannot be rolled
over as they come due (emerging-market
corporate bond spreads have reached 430 basis
points, up 135 basis points since the end of2007).
 Fiscal pressures could be particularly intense
for oil and metals exporting countries. Fallingcommodity prices could cut into government
revenues, causing government balances in oil
exporting countries to deteriorate by more than
4 percent of GDP.
 All countries, should engage in contingency
planning. Countries with fiscal space should
prepare projects so that they are ready to be
pursued should additional stimulus berequired. Others should prioritize social safety
net and infrastructure programs essential toassuring longer-term growth.

Although such a crisis, should it occur, would becentered in high-income countries, developing
countries would feel its effects deeply. Even if
aggregate developing country growth were toremain positive, many countries could expect
outright declines in output. Overall, developing
country GDP could be about 4.2 percent lower
than in the baseline by 2013 — with all regions
feeling the blow.
In the event of a major crisis, activity is unlikely
to bounce back as quickly as it did in 2008/09, inpart because high-income countries will not havethe fiscal resources to launch as strong a countercyclical policy response as in 2008/09 or to offer
the same level of support to troubled financial
institutions. Developing countries would also
have much less fiscal space than in 2008 withwhich to react to a global slowdown (38 percent
of developing countries are estimated to have agovernment deficit of 4 or more percent of GDP
in 2011). As a result, if financial conditions
deteriorate, many of these countries could beforced to cut spending pro-cyclically, thereby
exacerbating the cycle.

A renewed financial crisis could accelerate theongoing financial-sector deleveraging process.
 Several countries in Europe and Central Asia
that are reliant on high-income European
Banks for day-to-day operations could be
subject to a sharp reduction in wholesalefunding and domestic bank activity —potentially squeezing spending on investment
and consumer durables.
 If high-income banks are forced to sell-off
foreign subsidiaries, valuations of foreign anddomestically owned banks in countries withlarge foreign presences could decline abruptly,
potentially reducing banks’ capital adequacy
ratios and forcing further deleveraging.
 More generally, a downturn in growth andcontinued downward adjustment in asset prices
could rapidly increase the number of nonperforming loans throughout the developingworld also resulting in further deleveraging.
 In order to forestall such a deterioration in
conditions from provoking domestic banking
crises, particularly in countries where credit

Arguably, monetary policy in high-income
countries will also not be able to respond as
forcibly as in 2008/09, given the already large
expansion of central bank balance sheets.
Among developing countries, many countries
have tightened monetary policy, and would be
able to relax policy (and in some cases alreadyhave) if conditions were to deteriorate sharply.

Developing countries need to prepare forthe worst
In this highly uncertain environment, developing
countries should evaluate their vulnerabilities
and prepare contingencies to deal with both theimmediate and longer-term effects of adownturn.
If global financial markets freeze up,
governments and firms may not be able tofinance growing deficits.
 Problems are likely to be particularly acute forthe 30 developing countries with external

3

Global Economic Prospects January 2012

Main Text

has increased significantly in recent years,
countries should engage now in stress testingof their domestic banking sectors.

the intensification of the turmoil in August 2011,
mainly reflecting internal dynamics (notably thebounce back in activity in Japan, following
Tohoku and the coming online of reconstruction
efforts).

A severe crisis in high-income countries, could
put pressure on the balance of payments andincomes of countries heavily reliant oncommodity exports and remittance inflows.
 A severe crisis could cause remittances todeveloping countries to decline by 6.3 percent— a particular burden for the 24 countries
where remittances represent 10 or more
percent of GDP.
 Oil and metals prices could fall by 24 percent
causing current account positions of somecommodity exporting nations to deteriorate by
5 or more percent of GDP.
 In most countries, lower food prices would
have only small current account effects. They
could, however, have important income effects
by reducing incomes of producers (partially
offset by lower oil and fertilizer prices), while
reducing consumers’ costs.
 Current account effects from reduced export
volumes of manufactures would be less acute(being partially offset by reduced imports), but
employment and industrial displacement
effects could be large.
 Overall, global trade volumes could decline bymore than 7 percent.
 GDP effects would be strongest in countries(such as those in Europe & Central Asia) thatcombine large trade sectors and significant
exposure to the most directly affectedeconomies.

Growth in several major developing countries(Brazil, India, and to a lesser extent Russia,
South Africa and Turkey) is also slowing, but inmost cases due to a tightening of domestic policy
introduced in late 2010 or early 2011 to combat
domestic inflationary pressures. So far, smaller
economies continue to expand, but weakbusiness sector surveys and a sharp reduction in
global trade suggest weaker growth ahead.
For the moment, the magnitude of the effects ofthese developments on global growth are
uncertain, but clearly negative. One major
uncertainty concerns the interaction of the policy-driven slowing of growth in middle-income
countries, and the financial turmoil driven
slowing in Europe. While desirable from adomestic policy point of view, this slower
growth could interact with the slowing in Europe
resulting in a downward overshooting of activity
and a more serious global slowdown thanotherwise would have been the case.
A second important uncertainty facing the global
economy concerns market perceptions of theability of policymakers to restore market
confidence durably. The resolve of European
policymakers to overcome this crisis, toconsolidate budgets, to rebuild confidence of
Figure 1. Short-term yields have eased but long-termyields remain highGlobal economy facing renewed
uncertainties

Bond yields, percent

8.0

7.5

The global economy has entered a dangerous
phase. Concerns over high-income fiscal
sustainability have led to contagion, which isslowing world growth. Investor nervousness has
spread to the debt and equity markets ofdeveloping countries and even to core Euro Area
economies.

Italy

Spain

5-year yields
10-year yields

7.0
6.5
6.0
5.5
5.0
4.5
4.0

So far, the biggest hits to activity have been felt
in the European Union itself. Growth in Japanand the United States has actually firmed since

3.5

May-11

Jun-11

Jul-11

Aug-11

Sep-11

Source: Datastream, World Bank.

4

Oct-11

Nov-11

Dec-11

Jan-12

Global Economic Prospects January 2012

Main Text

Box 1. Recent policy reforms addressing concerns over European Sovereign debt
Banking-sector reform: In late October the European Banking Authority (EBA) announced new regulations requiring banks to revalue their sovereign bond holdings at the market value of September 2011. The EBA estimates that
this mark-to-market exercise will reduce European banks’ capital by €115 billion. In addition, the banks are required to raise their tier1 capital holdings to 9 percent of their risk-weighted loan books. Banks are to meet these
new requirements by end of June 2012 and are under strong guidance to do this by raising equity, and selling noncore assets. Banks are being actively discouraged from deleveraging by reducing short-term loan exposures(including trade finance) or loans to small and medium-size enterprises. As a last resort, governments may takeequity positions in banks to reach these new capital requirements.
Facilitated access of banks to dollar markets and medium-term ECB funding: Several central banks took coordinated action on November 30th, lowering the interest rate on existing dollar liquidity swap lines by 50 basis points
in a global effort to reduce the cost and increase the availability of dollar financing, and agreed to keep these measures in place through February 1st, 2013. In addition in late November the ECB re-opened long-term (3 year) lending windows for Euro Area banks at an attractive 1% interest rare to compensate for reduced access to bond markets, and has agreed to accept private-bank held sovereign debt as collateral for these loans.
Reinforcement of European Financial Stability Facility: On November 29, European Union finance ministers
agreed to reinforce the EFSF by expanding its lending capacity to up to €1 trillion; creating certificates that could
guarantee up to 30 percent of new issues from troubled euro-area governments; and creating investment vehicles
that would boost the EFSF’s ability to intervene in primary and secondary bond markets. Precise modalities of
how the reinforced fund will operate are being worked out.
Passage of fiscal and structural reform packages in Greece, Italy and Spain: The introduction of technocratic governments with the support of political parties in Greece and Italy, both of which hold mandates to introduce both
structural and fiscal reforms designed to assure fiscal sustainability. In Greece, the new government fulfilled all of
the requirements necessary to ensure release of the next tranche of IMF/ EFSF support, while in Italy the government has passed and is implementing legislation to make the pension system more sustainable, increase value
added taxes and increase product-market competition. In addition, a newly elected government in Spain has also
committed to considerably step up the structural and fiscal reforms begun by the previous government.
Agreement on a pan-European fiscal compact: In early December officials agreed to reinforce fiscal federalism
within most of the European Union (the United Kingdom was the sole hold out), including agreement to limit
structural deficits to 0.3 percent of GDP, and to allow for extra-national enforcement of engagements (precise modalities are being worked out with a view to early finalization).

markets and return to a sustainable growth pathis clear. Indeed, recent policy initiatives (box 1)
have helped restore liquidity in some markets,with short-term yields on the sovereign debt of
both Italy and Spain having come down
significantly since December (figure 1). So far,longer-term yields have been less affected by the
se initiatives — although they too show recent
signs of easing albeit to a lesser extent.

Enduring market concerns include: uncertainty
whether private banks will be able to raise
sufficient capital to offset losses from themarking-to-market of their sovereign debt
holdings, and satisfy increased capital adequacy
ratios. Moreover, it is not clear whether there isan end in sight to the vicious circle whereby
budget cuts to restore debt sustainability reduce
growth and revenues to the detriment of debt
sustainability. Although still back-burner issues,
fiscal sustainability in the United States andJapan are also of concern.

Despite improvements, markets continue todemand a significant premium on the sovereign
debt of European sovereigns. Indeed, credit
default swaps (CDS) rates on the debt of evencore countries like France exceed the mean CDS
rate of most developing economies.

As in 2008/09, precisely how the tensions thatcharacterize the global economy now will
resolve themselves is uncertain. Equally
uncertain is how that resolution will affectdeveloping countries. The pages that follow do

5Global Economic Prospects January 2012

Main Text

Figure 2 Persistent concerns over high-income fiscal sustainability have pushed up borrowing costs worldwide
CDS spread on 5 year sovereign debt, basis points
Change in 5-year sovereign credit-default swap, basis points(as of Jan. 6th, 2012)*
3000

2500

450

IrelandSpain
Portugal
Italy
LMICs < 2005,929High-income
countries

Developing countries
300

2000

1500

150

0
500

0
Jan-11Mar-11

May-11

Jul-11

Sep-11

Nov-11

Jan-12

UkraineArgentina
Croatia
Romania
Bulgaria
Lithuania
TurkeyKazakhstan
RussiaSouth…
Indonesia
China
Malaysia
Thailand
Chile
Philippines
BrazilColombia
MexicoPeru
Venezuela
GreecePortugal
Italy
Spain
FranceGermany
Japan
USA
Ireland1000* Change since the beginning of July.

Source: DataStream, World Bank.

not pretend to foretell the future path of the
global economy, but rather explore paths thatmight be taken and how such path might interact
with the pre-existing vulnerabilities ofdeveloping countries to affect their prospects.

bond issuer defaults) of most countries upwards
beginning in August 2011 (figure 2).
This episode of heightened market volatility
differed qualitatively from earlier ones because
this time the spreads on developing country debt
also rose (by an average of 130 basis points
between the end of July and October 4th 2011),
as did those of other euro area countries(including France, and Germany) and those ofnon-euro countries like the United Kingdom.

Financial-market consequences fordeveloping countries of the post August
2011 increase in risk aversion
The resurgence of market concerns about fiscal
sustainability in Europe and the exposure ofbanks to stressed sovereign European debt
pushed credit default swap (CDS) rates (a formof insurance that reimburses debt holders if a

For developing countries, the contagion has beenbroadly based. By early January, emergingmarket bond spreads had widened by an averageof 117 bps from their end-of-July levels, andFigure 3 Declining stock markets were associated with capital outflows from developing countries since JulyMSCI Index, January 2010=100

Gross capital flows (July to December), bn of dollars$ billion

115

Emerging Markets

Developed markets
110

2010*
100

2011*

110

90

80

105

70

60
Equity

100

Bond

Bank

50

40

30

95

20

10

90
0
East Asia& thePacific

85
Jan-10* For July through December

Apr-10Jul-10

Oct-10Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Sources: Bloomberg, Dealogic and World Bank.

6

Europe &CentralAsia

Latin
America &theCaribbean

MiddleEast &
North
AfricaSouth
Asia

SubSaharanAfricaGlobal Economic Prospects January 2012

Main Text

developing-country stock markets had lost 8.5
percent of their value. This, combined with the
4.2 percent drop in high-income stock-market
valuations, has translated into $6.5 trillion, or 9.5
percent of global GDP in wealth losses (figure
3).

that were less than 200 bp before January 2010)
have declined to 162 points and developing
country sovereign yields have eased from 672 to
616 basis points.
Capital flows to developing countries weakened
sharply. Investors withdrew substantial sums
from developing-country markets in the second
half of the year. Overall, emerging-market equity
funds concluded 2011 with about $48 billion in
net outflows, compared with a net inflow of $97

The turmoil in developing country markets
peaked in early October. Since then the median
CDS rates of developing country with relatively
good credit histories (those whose CDS rates
Table 2. Net capital flows to developing countries$ Billions
2004
Current account balance
141.6
as % of GDP
1.8
Financial flows:
Net private and official inflows
347.3
Net private inflows (equity+debt) 371.6
Net equity inflows
245.5..Net FDI inflows
208.5..Net portfolio equity inflows
36.9
Net debt flows
101.9..Official creditors-24.3....World Bank
2.4....IMF-14.7....Other official-11.9..Private creditors
126.1....Net M-L term debt flows
73.2......Bonds
33.9......Banks
43.4......Other private-4.2....Net short-term debt flows
52.9
Balancing item /a-142.5
Change in reserves (- = increase) -395.7
Memorandum items
Net FDI outflows-46.1
Migrant remittances /b
155.6

2005
244.9
2.6

2006
379.8
3.4

2007
384.9
2.7

2008
354.5
2.1

2009
276.7
1.7

2010
221.2
1.1

2011e
190.0
0.9

519.7
584.0
382.0
314.5
67.5
137.7
-64.3
2.6
-40.2
-26.8
202.0
120.4
49.4
76.2
-5.1
81.6
-401.7-405.1

830.3
800.8
570.7
624.1
-53.4
259.6
29.5
7.2
10.8
11.5
230.1
234.4
26.7
212.5
-4.8
-4.4
-786.1-452.5

673.8
593.3
508.7
400.0
108.8
165.1
80.5
18.3
26.8
35.4
84.6
69.9
51.1
19.8
-1.1
14.7
-273.0-681.91126.81055.5
629.9
501.5
128.4
496.8
71.2
22.4
13.8
35.0
425.6
157.1
111.4
44.1
1.6
268.5
-596.0-752.01004.4
954.4
606.2
554.8
51.4
398.2
50.0
12.0
8.0
30.0
348.2
168.2
110.1
68.0
0.1
180.0
-611.9-578.4

-61.7
187.0

686.5 1129.7
755.5 1128.2
495.2
667.1
387.5
534.1
107.7
133.0
191.2
462.6
-69.0
1.5
-0.3
5.2
-26.7
-5.1
-42.0
1.5
260.2
461.1
164.9
292.8
34.3
91.7
135.0
204.7
-4.4
-3.5
95.3
168.3
-473.1 -486.4-636.9 -1085.3
292.8-130.4 -150.5
221.5
278.2

-214.5323.8-148.2306.8-217.2325.3-238.1
351.2

2005
5.4
6.1
4.0
3.3
0.7
2.1

2006
6.1
6.7
4.4
3.4
1.0
2.3

2008
4.9
4.8
3.4
3.7
-0.3
1.4

2009
4.2
3.7
3.1
2.5
0.7
0.5

2010p
5.8
5.4
3.2
2.6
0.7
2.2

2011f
4.5
4.3
2.7
2.5
0.2
1.6

2012f
99.0
0.4

2013f
32.0
0.1

807.4
583.7
521.6
62.1

1016.4
697.1
620.6
76.5

223.7

319.3

376.7

406.3

2012f

2013f

3.3
2.4
2.1
0.3
0.9

3.7
2.5
2.2
0.3
1.2

As a percent of GDP
Net private and official inflows
Net private inflows (equity+debt)
Net equity inflows..Net FDI inflows..Net portfolio equity inflows..Private creditors

2004
4.3
4.6
3.1
2.6
0.5
1.6

2007
8.1
8.0
4.8
3.8
0.9
3.3

Source: The World Bank
Note :e = estimate, f = forecast/a Combination of errors and omissions and transfers to and capital outflows from developing countries.
/b M igrant remittances are defined as the sum of workers’ remittances, compensation of employees, and migrant transfers

7

Global Economic Prospects January 2012

Main Text
issuance plummeted 80 percent to $25 billion
with exceptionally weak flows to China andBrazil accounting for much of the decline. Bondissuance almost halved to $55 billion, due to alarge fall-off to East Asia and Emerging Europe.
In contrast, syndicated bank loans held up well,
averaging about $15 billion per month, slightly
higher than the $14.5 billion in flows received
during the same period of 2010.

Figure 4. Capital outflows resulted in significant currency
depreciations for many developing countries
Percent change in nominal effective exchange rate (Dec. - Jul. 2011)
Malaysia
Indonesia
Chile
Colombia
TurkeyBrazilReflecting the reversal in bond and equity flows
in the second half of the year, developing
country currencies weakened sharply. Most
depreciated against the U.S. dollar, with major
currencies such as the Mexican peso, South
African rand, Indian rupee and Brazilian real
having lost 11 percent or more in nominal
effective terms (figure 4). Although not entirely
unwelcome (many developing–country
currencies had appreciated strongly since 2008),
the sudden reversal in flows and weakening ofcurrencies prompted several countries tointervene by selling off foreign currency reservesin support of their currencies.

India
South Africa
Mexico

-16

-12

-8

-4

0

Source: World Bank.

billion in 2010. According to JP Morgan,
emerging-market fixed-income inflows did
somewhat better, ending the year with inflows of$44.8 billion — nevertheless well below the $80
billion of inflows recorded in 2010. Foreign
selling was particularly sharp in Latin America,
with Brazil posting large outflows in the third
quarter, partly due to the imposition of a 6
percent tax (IOF) on some international financialtransactions.

For 2011 as a whole, private capital inflows are
estimated to have fallen 9.6 percent (table 2). In
particular, portfolio equity flows into developing
countries are estimated to have declined 60
percent, with the 77 percent fall in South Asia
being the largest.

In the second half of 2011 gross capital flows todeveloping countries plunged to $170 billion,
only 55 percent of the $309 billion received
during the like period of 2010. Most of thedecline was in bond and equity issuance. Equity

The dollar value of FDI is estimated to haverisen broadly in line with developing country
GDP, increasing by 10.6 percent in 2011. FDI
flows are not expected to regain pre-crisis levels

Figure 5 Industrial production appears to have held up outside of Europe and economies undergoing policy tightening
Industrial production volumes, 3m/3m saar

Industrial output growth, 3m/3m saar

40

15

30

Japan

10

20
5

China

10
Other high-income

Other developing0(also excluding Thailand)

0
-10

-5
Euro Area

Brazil & India

-20

-10

Jun-11

Jul-11

Aug-11

Sep-11

Oct-11

Nov-11-30-15
High-income East-Asia &Pacific-40
2011M01

2011M03

2011M05

2011M07

2011M09

2011M11

Source: World Bank.

8

Europe & Latin America Middle-East
Central Asia & Caribbean& NorthAfricaSouth Asia

Sub-SaharanAfricaGlobal Economic Prospects January 2012

Main Text

until 2013, when they are projected to reach$620.6 billion (vs. $624.1 billion in 2008).
Overall, net private capital flows to developing
countries are anticipated to reach more than
$1.02 trillion by 2013, but their share indeveloping country GDP will have fallen froman estimated 5.4 percent in 2010 to around 3.7 in2013.

income countries was also strong at 4.4 percent
during the three months ending October.
Among large developing countries, industrial
production has been falling for months in Brazil,
India, and weak or falling in Russia and Turkey— reflecting policy tightening undertaken tobring inflation under control. Output in China
has been growing at a steady 11 percent
annualized rate through November, whilesmaller developing countries (excluding above
mentioned countries and Thailand where output
fell 48 percent in October and November
following flooding) have also enjoyed positive,
if weak growth of around 2.4 percent (versus 3.7
average growth during the 10 years before theAugust 2008 crisis (see box 2 for more).
November readings in India and Turkey suggestthat the downturn in those two economies may
have bottomed out.

Data since August suggest negative realside effects have been concentrated inhigh-income Europe
Available industrial production data (data exist
through October for most regions — November
for the East Asia & Pacific and Europe &Central Asia regions) suggest that global growthis about normal, expanding at a 2.9 percent
annualized pace, just below the 3.2 percent
average pace during the 10 years preceding the
2008/09 crisis (figure 5).

The post August turmoil has impacted trade
more directly

Importantly, the data suggest that the financial
turmoil since August has had a limited impact on
growth outside of high-income Europe. In theEuro Area, industrial production declined at a2.2 percent annualized rate during the 3 months
ending October 2011 (-4.7 percent saar throughNovember if construction is excluded), and had
been declining since June. In contrast, Japaneseindustry was growing at a 6.5 percent annualizedpace over the same period, boosted byreconstruction spending and bounce-back effects
following the Tohoku disaster. Growth in the
United States through November was a solid 3.8
percent. And growth among the remaining high-Trade data suggests a clearer impact from theturmoil in financial markets and weakness in
Europe. The dollar value of global merchandise
imports volumes fell at an 8.0 percent annualizedpace during the three months ending October
2011. And import volumes of both developing
and high-income countries declined, with thebulk of the global slowdown due to an 18
percent annualized decline in European Union
imports (figure 6).

Figure 6 Trade momentum has turned negative
Merchandise export volumes, growth, 3m/3m saar

Contribution to growth of global import volumes, 3m/3m saar

40

35
30

30

25

20

20

15
10

10
5

0

0
-10

-5
-10
-15

China

Rest of DevelopingJapan

European Union

USA

Rest of High-Income

2010Q4
2011Q2
Most Recent

-20

World

-30

-20

2010M01

2011Q1
2011Q3

2010M04

2010M07

2010M10

2011M01

2011M04

2011M07

European
Union

2011M1014

Source: World Bank.

9

Japan

High-income
otherEast-Asia &Pacific

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

South Asia

Sub-SaharanAfricaGlobal Economic Prospects January 2012

Main Text

Box 2. Mixed evidence of a slowing in regional activity
Regional data suggest a generalized slowing among developing economies, mainly reflecting domestic rather than
external factors.
In the East Asia and Pacific region, industrial production growth eased from a close to 20 percent annualizedpace during the first quarter of 2011 (3m/3m, saar), to 5.6 percent in the second quarter. Since then growthrecovered, except in Thailand where flooding has caused industrial production to decline sharply. Excluding
Thailand, industrial production for the remainder of the region accelerated to a 10.1 percent annualized pacein the three months ending November 2011 (5.7 percent if both Thailand and China are excluded).

In developing Europe and Central Asia industrial production also began the year expanding at a close to 20
percent annualized rate (3m/3m saar), but weakened sharply beginning in the second quarter and declined
during much of the third quarter. Since then activity has picked up and expanded at a 5.9 percent annualized
rate during the three months ending November 2011.

In Latin American and the Caribbean, activity in the region’s largest economies has been slowing mainly
because of policy tightening and earlier exchange rate appreciations. For the region as a whole industrial production has been declining since May, and was falling at a 2.9 percent annualized rate in the 3 months ending
November, while GDP in Brazil was stagnant in the third quarter. Weaker export growth (reflecting a slowing
in global trade volumes and weaker commodity imports from China) is also playing a role. Regional export
growth has declined from a 14.1 percent annualized rate in the second quarter to 5.2 percent during the threemonths ending November.



Activity in the Middle East and North Africa has been strongly affected by the political turmoil associatedwith the ―Arab Spring‖, with recorded industrial activity in Syria, Tunisia, Egypt and Libya having fallen by
10, 17, 17 and 92 percent at its lowest point according to official data. Output has recouped most or more than
all of those losses in Egypt and Tunisia. Elsewhere in the region output has been steadier, but weakened midyear and was falling at a 0.8 percent annualized rate during the three months ending July (latest data).



Activity in South Asia, like Latin America, has been dominated by a slowdown in the region’s largest economy (India). Much weaker capital inflows and monetary policy tightening contributed to the 2.9 percent decline in India’s industrial output in October (equivalent to a 12.4 percent contraction at seasonally adjusted
annualized rates in the three-months ending October). Elsewhere in the region, industrial production in Sri
Lanka and Pakistan is expanding rapidly. The global slowdown has also been taking its toll on South Asia,with merchandise export volumes which had been growing very strongly in the first part of the year, declining almost as quickly in the second half -- such that year-over-year exports in October are broadly unchanged
from a year ago.



Industrial activity in Sub-Saharan Africa (Angola, Gabon, Ghana, Nigeria, and South Africa are the countries in the region for which industrial production data are available) was declining in the middle of the year,with all countries reporting data showing falling or slow growth with the exception of Nigeria. Recent months
have however shown a pick up. In the three months ending in August, industrial activity expanded at 0.8 percent annualized rate, supported by output increases among oil exporters and despite a decline in output inSouth Africa during that period, the region’s largest economy. Industrial activity in South Africa has since
strengthened, growing at a picked up to 14.9 percent annualized rated in the three months ending in October.

The mirror of the slowing in global imports has
been a similar decline in export volumes. Highincome Europe has seen its exports decline inline with falling European imports (data include
significant intra-European trade). In Japan,
exports expanded at an 18.5 percent annualizedpace in the third quarter, while the exports ofother high-income countries grew at a relatively
rapid 3.4 percent annualized pace. Developing
country exports declined at a 1.2 percent
annualized pace in 2011Q3 and have continued

to decline through November, with the sharpest
drop in South Asia (although this follows very
rapid export growth in the first half of the year).
Exports in East Asia have also been falling at
double-digit annualized rates, in part because of
disruptions to supply chains caused the by theflooding in Thailand. The exports of developing
Europe and Central Asia were expanding slowly
during the three months ending October 2011,
while data for Latin America suggest that at 5.2
percent through November, export growth is10

Global Economic Prospects January 2012

Main Text
sharp deterioration in expectations coming out ofChina—although at least one December
indicator for China shows a pickup (figure 7).

Figure 7 Business surveys point to a slowing in activity
Purchasing managers index (PMI), points
61

GlobalOther high-income

59

Declining commodity prices and inflation
are further indicators of the real-side
effects of recent turmoil

European Union
Developing

57

50-line55
53

Commodity prices, which increased significantly
during the second half of 2010, stabilized inearly 2011 and, except for oil whose price pickedup most recently, have declined since thebeginning of August (figure 8). Prices of metals
and minerals, historically the most cyclical ofcommodities1, averaged 19 percent lower in
December compared with July, while food andenergy prices are down 9 and 2 percent,respectively. Although concerns over slowing
demand certainly have played a role, increased
risk aversion may also have been a factor incausing some financial investors in commodities
to sell.

51
49
Values above 50 indicate expected growth, below 50 suggest contraction

47
45
2010M01 2010M04 2010M07 2010M10 2011M01 2011M04 2011M07 2011M10

Sources: JPMorgan, World Bank aggregation using country-

strengthening. Insufficient data are available forother developing regions to determine postAugust trends.
Overall, the real-side data available at this point
are consistent with a view that the turmoil thatbegan in August has dampened the post Tohoku
rebound in activity. The dampening effect has
been most pronounced in Europe, but isobservable everywhere. This interpretation isbroadly consistent with forward looking businesssentiment surveys. All of these point to slower
growth in the months to come, but the sharpest
negative signal (and the only one to deteriorate
markedly post August 2011) is coming from theEuropean surveys. Other high-income surveys
are more mixed suggesting slower but still
positive growth. PMI’s for developing countries
are also mixed, with two thirds indicating
strengthening growth, but the aggregate
declining in November, mainly because of aAmong agricultural prices, maize and soybeans
prices fell 17 and 15 percent over the past 6months on improved supply prospects, especiallyfrom the United States and South America.
Partly offsetting these declines, rice prices rose
14 percent in part due to the Thai government’s
increase in guarantee prices (which induced
stock holding and less supply to global markets).
The flooding in Thailand may have led to sometightness in the global rice market, but the
impact was marginal as most of the crop had
already been harvested. Indeed, rice prices havedeclined most recently by almost 5 percent
during December 2011. Looking forward,
India’s decision to allow exports of non-Basmati

Figure 8 Stable food prices and falling metals and energy prices have contributed to a deceleration in developing-world
inflation
Commodity price indexes, USD, 2005=100

Total and food inflation (3m/3m saar)

300

25

Developing country, Food CPI

250

20Developing country, Total CPI

Metal and Minerals

15

200

10

150
Food

Energy
5

100

0

50
Jan-04Jan-07

Jan-05Jan-06

Jan-07

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

Jul-07

Jan-08

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

Jul-11
29

Jan-12

Source: World Bank.

11

Global Economic Prospects January 2012

Main Text
most regions, inflation remains elevated and ofconcern in several countries, including
Bangladesh, Ethiopia, India, Kazakhstan, Kenya,
Nigeria, Tanzania, Turkey, and Vietnam. Among
high-income countries, inflation has softened
from 4.5 percent annualized rates in February
2011 to 2.2 percent by October.

Figure 9 Inflationary pressures are rising inEurope & Central Asia and South Asia
Quarterly inflation rate, annualized25
Long-term average (2000-present)
2010Q420

2011Q1
2011Q2
2011Q215

Most Recent (Nov in most cases)

An uncertain outlook

10

Overall, global economic conditions are fragile,and there remains great uncertainty as to howmarkets will evolve over the medium term.
While data to-date does not indicate that there
was strong real-side contagion from the up-tickin financial turmoil since August, thepronounced weakness of growth and the cutback capital flows to developing countries will
doubtless way on prospects and could potentially
undermine the expected recovery in growthamong middle-income countries that underpins
the projections outlined earlier in Tab1e 1.

50High-income

East-Asia &Pacific

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

Sub-SaharanAfricaSource: World Bank.

rice along with good crop prospects elsewhere in
the region, are likely to keep rice prices in check.
Despite recent declines, commodity prices
remain significantly higher in 2011 than in 2010
(14.4, 29.9 and 23.9 percent higher for the prices
of metals and minerals, energy, and foodrespectively).

Additional risks to the outlook include thepossibility that geopolitical and domestic
political tensions could disrupt oil supply. In the
Middle-East and North Africa, although politicalturmoil has eased, there remains the possibility
that oil supply from one or more countries could
be disrupted, while mounting tensions between
Iran and high-income countries could yield asharp uptick in prices, because of disruption to
supply routes, or because of sanctions imposed

But alongside this generalized improvement,
severe localized food shortages persist, notably
in the Horn of Africa, where crop failure andfamine threaten the livelihoods of over 13
million people (World Bank, 2011).
Weaker commodity prices have contributed tolower inflation

Figure 10 Market uncertainty has spread to coreEuropean countries

Partly reflecting the initial stabilization and thendecline in commodity prices, but also theslowing in economic activity, headline inflation
has eased in most of the developing world(second panel figure 8). The annualized pace of
inflation has declined from a peak of 9.0 percent
in January 2011, to 6.0 percent during the threemonths ending November 2011. Domestic foodinflation has eased as well from a 15.7 percent
annualized rate in February 2011, to about 6.2
percent during the three months ending June2011.

5-yr sovereign credit-default swap rates, basis points, Jan 2011-Jan 2012
700

600

500

400

Germany
FranceUK
Japanlmic <200
Italy

300

200

100

Inflationary pressures have declined in mostregions, but appear to be strengthening once
again in Europe & Central Asia and South Asia
(figure 9). Although inflation is decelerating in

0
Jan-11Mar-11

May-11

Jul-11

Sep-11

Source: DataStream, World Bank.

12

Nov-11

Jan-12
4

Global Economic Prospects January 2012

Main Text

Box 3 Regional outlook
The regional annexes to this report contain more detailed accounts of regional economic trends, including countryspecific forecasts
The East Asia and Pacific region was disrupted by Japan’s Tohoku disaster. Industrial production and exports
were hard hit, but are recovering as production chains re-equilibrate. Severe summer floods in Thailand have also
caused significant disruption and contributed to regional slowing in the second half of the year. Overall, GDP
growth in the region is projected to expand by 8.2 percent in 2011 while inflation is easing across the region.
Strong domestic demand and productivity growth should help the region withstand the effects of the projected
global slowing in the baseline scenario. As a result, regional growth is projected to slow only modestly to 7.8 percent in both 2012 and 2013. However, the very open nature of the regional economy makes it particularly vulnerable to a major decline in global demand. All the more so, as there is less room than in 2008 for fiscal expansion
should a major crisis emerge.
In developing Europe and Central Asia, growth has been slowing due to a combination of weakening domestic
as well as external demand (especially from the Euro area). While resource-rich economies are benefiting fromstill high commodity prices and good harvests, several countries have been affected by the ongoing euro debt crisis
because of their significant financial and trade linkages to problem countries. Despite strong growth in the earlier
part of the year, growth for the region is expected to just exceed the 5.2 percent pace of 2010 in 2011. Ongoinghousehold and banking-sector deleveraging and global economic uncertainty are projected to contribute to a decline in growth to 3.2 percent in 2012, before the pace of the expansion picks up to 4.0 percent in 2013. Several
Central European countries are particularly vulnerable to the deepening crisis in the Euro Area, due to trade linkages, high-levels of maturing debt, and domestic-bank dependency on high-income Europe parent-bank lending.
Commodity exporters in the region could also run into difficulties if a deterioration in the global situation results
in a major decline in commodity prices.
Growth in Latin America and the Caribbean is expected to decelerate to a below-trend pace of 3.6 in 2012 froman estimated 4.2 percent in 2011. Softer global growth in high-income countries and China is projected to hurt
exports, while rising borrowing costs and scarcer international capital will take a toll on investment and private
consumption. Growth is expected to strengthen to above 4.0 percent in 2013 boosted by stronger external demand,
but weaker domestic demand reflecting recent policy tightening is projected to keep growth in Brazil, for example
relatively weak. Growth is projected to decelerate sharply in Argentina due to easing domestic demand. Slowalbeit stronger growth in the United States is expected to temper prospects in Mexico and in Central America andthe Caribbean due to weak tourism and remittances flows, although reconstruction efforts in Haiti will sustain
strong growth there and in the Dominican Republic. Incomes in many countries in the region have benefitted because of high commodity prices, and future prospects will be vulnerable to the kinds of significant declines thatmight accompany a sharp weakening in global growth.
Economic activity in the developing Middle East and North Africa region has been dominated by the politicalturmoil of the ―Arab Spring‖ and strong oil prices. Despite high exposures to the weakening European export market, industrial production is improving and exports and remittances have performed better than earlier anticipated.
But tourism and FDI revenues are exceptionally weak, and government deficits high. Oil exporters of the region
have used substantial revenue windfalls to support large infrastructure and social expenditure programs, while inother countries political tensions have carried large negative effects on households and business, knocking GDP tolosses for the year. Looking forward, the region is vulnerable to a global downturn in 2012, through adverse termsof trade effects, and strong linkage with the Euro area. Assuming that the domestic drag on growth from politicaluncertainty begins to ease, regional GDP is projected to expand by 2.3 percent in 2012, with output strengthening
further to a 3.2 percent rate in 2013.
In South Asia, GDP growth is expected decelerate to 5.8 percent during the calendar year 2012, down from 6.6
percent rate recorded in 2010, reflecting domestic and external headwinds. Domestic demand is expected to continue to slow, with private consumption being hampered by sustained high inflation that has cut into disposable
incomes. Rising borrowing costs have cut into outlays for consumer durables and investment, with heightened
uncertainty and delayed regulatory reforms also playing a role. The external environment is expected to remaindifficult, with continued market unease and a significant weakening of foreign demand. South Asian governments
have limited space with which to introduce counter-cyclical fiscal stimulus measures due to large fiscal deficits,

13Global Economic Prospects January 2012

Main Text

while the possibility of monetary easing is constrained by still high inflation. Given the possibility of further weakening in the global economy, efforts at greater revenue mobilization (particularly in Pakistan, Sri Lanka, Bangladesh, and Nepal) and expenditure rationalization (especially in India) could pay dividends by allowing governments to maintain critical social and infrastructure programs.
Notwithstanding the recent perturbations in the global economy, as well as the drought in the Horn of Africa,
growth prospects in Sub Saharan Africa remain healthy over the forecast horizon. Recent economic developments have, however, reduced the growth momentum in Sub-Saharan Africa and shaved off between 0.1 and 0.5
percent of GDP growth in the region. Thus, GDP is now estimated to have expanded 4.9 percent in 2011—about
0.2 percentage points slower than had been expected in June, and output is projected to expand 5.3 and 5.6 percent
in 2012 and 2013, respectively, assuming no further significant downward spiral in the global economy. However,the uncertain global environment means that downside risks are significant. In the event of a deterioration of conditions in Europe, growth in Sub-Saharan Africa could decline by 1.6-4.2 percent compared with the current forecasts for 2012, with oil and metal prices falling by as much as 18 percent and food prices by 4.5 percent. The fiscal
impact of commodity price declines could be as high as 1.7 percent of regional GDP.

points if Greece is included in the mix) and stock
markets some 17.6 percent below their Julylevels.

Figure 11 Indicators of counter-party risk in banking-sector continue to riseInterbank overnight spreads, basis points

That said, steps taken thus far have beensuccessful in reducing or stabilizing spreads on
several major high-income countries (Germany
and the United Kingdom) and in developing
countries (figure 10). Moreover, as noted above
yields on several recent bond auctions(especially short-term bonds), including by
Spain and Italy, have declined.

400
350
300
250
200

Indications of rising concerns aboutcounter-party risk in European
banking system

150
100
50

Despite progress made, markets remain volatile,and funding pressures on banks elevated.
Worryingly, the spread between interbank
interest rates and central bank overnight lending
rates (a measure of private banks’ concerns overcounter-party risk) continue to rise and havereached almost 100 basis points in Europe and0

Jan-08

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

Jul-11

Jan-12

Source: DataStream, World Bank.

by high-income countries that shift demandaway from Iran toward other producers.2

Table 3. Baseline represents a significant downgradefrom June edition of Global Economic Prospects

The situation in Europe also presents animportant source of risk going forward. Most
recently, several successful bond sales by highspread countries have caused spreads to decline,
offering some hope that the worst of the crisis
may have passed (see earlier figures 2 & 3).
However, experience suggests they may yet sour
yet again — even though from an objective pointof view steps taken go along way to alleviating
the concerns that initially led to the loss ofconfidence and freezing up of capital markets(see earlier box 1).

2011
2012
2013
(Difference in aggregate growth rates)
World
-0.5
-1.1
-0.5
High-income countries
-0.6
-1.3
-0.6
Euro Area
-0.2
-2.1
-0.9
Other high-income
-0.8
-0.9
-0.5
Developing
-0.2
-0.8
-0.3
Low-income
0.1
0.0
0.0
Middle-income
-0.2
-0.8
-0.3
Oil exporting
Oil importing
Regions
East Asia & Pacific
Europe & Central Asia
Latin America & Caribbean
Middle-East & North Africa
South Asia
Sub-Saharan Africa

Overall, as of early January CDS spreads forhigh-spread European countries were about 173
basis points higher than in July (1,153 basis

Source: World Bank.

14

0.1
-0.4

-0.5
-0.9

0.0
-0.4

-0.3
0.6
-0.3
-0.1
-0.9
-0.1

-0.3
-1.1
-0.6
-1.2
-1.9
-0.4

-0.5
-0.3
0.1
-0.7
-0.8
-0.1

Global Economic Prospects January 2012

Main Text

50 basis point in the United States (figure 11).
And, markets are likely to remain skittish forsome time until they become convinced that theinitiatives announced at the national andmultinational level are being carried through andare succeeding in restoring economic growth andfiscal accounts to a sustainable path.

Annexes for more details on regional economic
prospects).
Global trade in goods and non-factor services is
projected to slow to about 4.7 percent in 2012
before picking up to 6.8 percent in 2013.

Thinking through downside scenarios

The baseline projections of this edition of Global
Economic Prospects presented in the earlier
Table 1 assume that efforts to-date and those that
follow prevent the sovereign-debt stress of thepast months from deteriorating further, but fail tocompletely eradicate market concerns. With high-income country growth of 1.4 and 2.0 percent in2012 and 2013, and developing country growthof 5.4 and 6.0 percent over the same two years,
these projections reflect a substantial downward
revision to prospects from those of June 2011(table 3).

The slow unwinding of tensions implicit in thebaseline projections of this Global Economic
Prospects remains a likely outcome for the
global economy. But, how that plays out ishighly uncertain. As a result, even assuming noserious deterioration (or rapid improvement) in
conditions, growth could be noticeably stronger
or weaker than in this baseline projection.
Moreover, the possibility of much worse
outcomes are real and market tensions are
particularly elevated. What form an escalation of
the crisis might take, should one occur, is very
uncertain — partly because it is impossible topredict what exactly might trigger a deteriorationin conditions, and partly because once unleashedthe powerful forces of a crisis of confidence
could easily take a route very different from theone foreseen by standard economic reasoning.

In the baseline, the recovery in the United States
is projected to continue in the fourth quarter of
2011, with growth around 3 percent before
weakening to an average of 2.2 percent in 2012
as fiscal stimulus is withdrawn, and 2.4 percent
in 2013. In high-income Europe, uncertainty hastaken its toll, with annualized growth declining
from 2.9 percent in the first quarter to 1.1
percent in the third quarter of 2011 due to fiscal
tightening, financial stress, banking-sector
deleveraging, and plunging confidence (theECB’s latest bank lending survey shows atightening of lending standards to households
and corporations that will weigh on activity inthe fourth quarter and beyond). As a result, theEuro Area is expected to enter into recession in
the fourth quarter of 2011 and whole-year GDP
is forecast to decline by 0.3 percent in 2012 (thebroader European Union is expected to grow 0.1
percent). Growth in Japan is projected toaccelerate to around 1.9 percent in 2012,reflecting reconstruction efforts and continued
rebound from the Tohoku disaster.

It follows that any downside scenario that might
be envisaged to help developing-country
policymakers understand the nature and size of
potential impacts will suffer from false precision(both in terms of the assumptions that the
scenario makes about the nature and strength of
precipitating events, and as to the path andmagnitude of their impacts).
The scenarios outlined in Box 4 are no different
in this respect and are presented, in the spirit ofrecent stress-tests of banking systems, as a toolthat could help policymakers in developing
countries prepare for the worst by helping thembetter understand the relative magnitude ofpotential effects, and gain some insights as to theextent and nature of vulnerabilities acrosscountries. These simulations should not beviewed as predictive. They are presented withfull recognition of the limitations of the toolsthat underpin them. If a downside scenario
actually materializes, its precise nature, triggers,
and impacts will doubtless be very different
from these illustrations.

Under these conditions, growth in developing
countries is now estimated to have eased to 6
percent in 2011 and projected to decline further
to 5.4 percent in 2012, before firming somewhat
to 6.0 percent in 2013—a 0.2, 0.8 and 0.3
percentage point reduction in the growth outlook
since the June 2011 edition of Global Economic
Prospects (see table 3, box 3, and Regional

15

Global Economic Prospects January 2012

Main Text

Box 4 Downside scenarios
In the current economic context, the risk that markets lose confidence in the ability of one or more high-income
countries to repay their debt is very real. The OECD (2012) estimates that high-income countries will need to borrow $10.5 trillion in 2012 (almost twice their borrowing levels in 2005). Moreover, almost 44 percent of the debt
in the OECD is relatively short-term debt, meaning that borrowers will have to come repeatedly to the market.
Ratings agencies have warned of further downgrades, and although reforms to date have been greeted positively,
markets are requiring a significant premium on the debt issues of stressed economies.
In a first scenario (box table 4.1) it is assumed that one or two small Euro Area economies (equal to about 4 percent of Area GDP) face a serious credit squeeze. An inability to access finance that extends to the private sectorsof the economies causes GDP in the directly affected
Table box 4.1 Impact of a small contained
countries to fall by 8 or more percent (broadly consistent with crisis
the decline already observed in Greece and in other high2011
2012
2013
income economies that have faced financial crises — see(% deviation of GDP from baseline)
Abiad and others, 2011). Other (mainly European) economies
World
0.0
-1.7
-1.7
are affected through reduced exports (imports from the directly
High-income countries
0.0
-1.7
-1.7
affected countries fall by 9 percent). It is assumed in this sceEuropean Union
0.0
-1.7
-1.5
nario that although borrowing costs in other European econoOther high-income
0.0
-1.6
-1.7
mies rise and banks tighten lending conditions due to losses in
Developing
0.0
-1.7
-1.8
the directly affected economies, adequate steps are taken in
Low-income
0.0
-1.4
-1.5
response to the crisis to ensure that banking-sector stress in
Middle-income
0.0
-1.7
-1.8
Europe is contained and does not spread to the rest of the highOil exporting
0.0
-1.8
-2.0
income world. However, uncertainty and concerns about poOil importing
0.0
-1.7
-1.7
tential further credit squeezes does induce increased precauRegions
3
tionary savings among both firms and households worldwide.
East Asia & Pacific

0.0

-1.8

-1.8

Europe & Central Asia
0.0
-1.8
-1.9
Overall, GDP in the Euro Area falls by 1.7 percent relative toLatin America & Caribbean
0.0
-1.7
-2.0
baseline, and by a similar margin in the rest of the high-income
Middle-East&
North
Africa
0.0
-1.3
-1.6
world. Developing countries are also hit. Direct trade and
South
Asia
0.0
-1.7
-1.7
tighter global financial conditions plus increases in domestic
Sub-SaharanAfrica
0.0
-1.8
-1.6
savings by firms and households as a result of the increased
global uncertainty contribute to a 1.7 percent decline in middle-income GDP relative to baseline in 2012. The decline among Table box 4.2 Impact of a larger crisis also
low-income countries (1.4 percent) is slightly less pronounced affecting two large Euro Area economies
reflecting weaker financial and trade integration. Weaker
2011
2012
2013
global growth contributes to a 10-12 percent decline in oil(% deviation of GDP from baseline)
0.0
-3.8
-4.3
prices and a 2.5 percent drop in internationally-traded food World
High-income countries
0.0
-3.8
-4.3
commodity prices.

In a second scenario (box table 4.2) the freezing up of credit isassumed to spread to two larger Euro Area economies (equal toaround 30 percent of Euro Area GDP), generating similar declines in the GDP and imports of those economies. Repercussions to the Euro Area, global financial systems and precautionary savings are much larger because the shock is 6 times
larger.4 Euro Area GDP falls by 6.0 percent relative to thebaseline in 2013. GDP impacts for other high-income countries(-3.6 percent of GDP) and developing countries (-4.2 percent )are less severe but still enough to push them into a deep recession. Overall, global trade falls by 2.6 percent (7.5 percent relative to baseline) and oil prices by 24 percent (5 percent forfood).

European Union
Other high-income
Developing
Low-income
Middle-income

0.0
0.0
0.0
0.0
0.0

-5.6
-3.1
-3.6
-2.9
-3.6

-6.0
-3.6
-4.2
-3.4
-4.2

Oil exporting
Oil importing
Regions
East Asia & Pacific
Europe & Central Asia
Latin America & Caribbean
Middle-East & North Africa
South Asia
Sub-Saharan Africa

0.0
0.0

-3.5
-3.6

-4.4
-4.0

0.0
0.0
0.0
0.0
0.0
0.0

-3.7
-4.4
-3.0
-3.1
-3.5
-3.7

-4.1
-5.2
-3.8
-4.4
-3.9
-3.7

Source: World Bank.

16

Global Economic Prospects January 2012

Main Text

With these caveats in mind, these simulations
suggest that if there were a major deterioration in
conditions, GDP in developing countries could
be much (4.2 percent) weaker than in thebaseline. Moreover, unlike 2008/09, global
growth is not expected to bounce back as quickly
because economies enter into this crisis in much
weaker positions than in 2008/09. They havemuch less fiscal and monetary policy space(especially high-income countries) with which tooffset the collapse in demand and to bailout
banks and other financial institutions that may
find themselves in trouble.

Developing countries arevulnerable than in 2008

Figure 12 Most developing countries have modest
debt levels
High-Income

Debt to GDP ratio

East Asia & Pacif ic

Japan

250

Europe & Central ASia
Latin America & Caribbean
Middle-East & North Af rica

200

South Asia
Sub-Saharan Af rica
150

Eritrea
Ireland

Italy
100

USA
Cape Verde50

Lesotho

more

0
-18

-16

-14

-12

-10

-8

-6

-4

-2

0

Government deficit % of GDP

Whatever the actual outcomes for the world
economy in 2012 and 2013 several factors areclear. First, growth in high-income countries isgoing to be weak as they struggle to repair
damaged financial sectors and badly stretchedfiscal balance sheets. Developing countries will
have to search increasingly for growth within thedeveloping world, a transition that has alreadybegun but is likely to bring with it challenges of
its own. Should conditions in high-income
countries deteriorate and a second global crisis
materializes, developing countries will findthemselves operating in a much weaker global
economy, with much less abundant capital, lessvibrant trade opportunities and weaker financial
support for both private and public activity.
Under these conditions prospects and growth
rates that seemed relatively easy to achieve

Source: World Bank Debt Reporting System.

during the first decade of this millennium may
become much more difficult to attain in thesecond, and vulnerabilities that remained hidden
during the boom period may become visible andrequire policy action.
The remainder of this report examines some ofthese potential vulnerabilities and attempts tooffer some policy advice for developing
countries to help prepare for what is likely to bea weaker global economy going forward, andwhat potentially could be a second major global
recession.

Figure 13 Developing countries have much less fiscal space than in 2008, partly for cyclical reasons
43% of developing countries have government deficit of 4% of GDP or more in 2011, vs 18% in 2007
percent
10.0

Percent of developing countries
40

Output gap
Real GDP growth

8.0

2007

35

Potential GDP growth

2011

30

6.0

25
4.0

20
2.0

15
10

0.0

5
-2.0

0
-15

-10

-8

-6

-4

-2

0

2

4

More

-4.0

Government balance (% of GDP)

1993

Source: World Bank

17

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

Global Economic Prospects January 2012

Main Text

Box 5 Structural budget balances
Fluctuations in the business cycle and external factors such as commodity prices can have a significant impact on acountry’s fiscal position. In developing countries, tax revenues vary significantly with the business cycle, risingwhen economic activity is buoyant or commodity prices are high. In similar, but reverse fashion, expenditures(unemployment and social security related) tend to rise when activity is low. Indeed, during the boom year 2007
developing countries’ fiscal revenues increased by nearly 26 percent in U.S. dollar terms, only to fall by 10 percent
in 2009 during the recession.
The structural budget balance (or cyclically adjusted budget balance) attempts to provide a sense of what thebudget balance would be if GDP were equal to its underlying trend. By definition, estimates of structural budgetbalances are subject to significant imprecision, partly because they rely on estimates of potential output (itself subject to significant estimation error) and partly because isolating the cyclical component of government revenues
and expenditures in a constantly changing policy environment is very difficult.
The estimates of structural budget balance presented here are based on World Bank estimates of potential output,
which project developing country potential growth of around 5½ – 6 percent during 2011/13 (World Bank, 2010)
buoyed by strong productivity growth and fixed investment growth of around 7 – 8½ percent.
According to these estimates, cyclical revenue in developing countries peaked at 2.1 percent of GDP in 2007, but
fell to about -0.6 in 2009 – a total cyclical fiscal revenue swing of nearly 3 percent of GDP within two years. Thiswas mostly related to developing country output gaps declining from +3.5 percent in 2007 to -1.2 percent in 2009
for the 125 countries with fiscal data.
Overall, and reflecting that developing country output gaps are close to zero, the structurally adjusted fiscal balance of developing countries in 2011 is estimated to be roughly equal to the actual budget balance. But there issignificant divergence among the regions’ estimated budget balances in calendar 2011 (box figure 5.1). In highincome countries, the estimated cyclical revenue component is relatively large and negative, reflecting the stilllarge output gaps observed in many of these economies.
Fiscal deficits among commodity exporters (and countries with large subsidies on commodity consumption) are
sensitive to fluctuations in commodity prices. Turner (2006) uses estimates of a real-income gap (or the output gap
adjusted for terms of trade effects) that adjusts government revenues and expenditures for abnormally high/low
commodity prices as well as the business cycle. Such a measure assumes that much of the run up in commodity
prices since 2005 was temporary. As a result, it ascribes a larger share of increased government revenues to cyclical forces and results in higher structural deficits than the more traditional measure that is retained here.
Box figure 5.1 Cyclical surplus in 2007 has disappeared, although results by region differ widely
percent of GDP

percent of GDP

2.0

4.0

3.0

0.0

2.0

-2.0

1.0
-4.0

0.0
-6.0

Actual budget balance-1.0

Cyclical component

Developing countries: Output gap

-8.0

-2.0

Structural budget balance

Developing countries: Cyclical revenue
-10.0

-3.0
2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

G7 countries

2013

Source: World Bank.

18

High-income

Developing
countries

East Asia &Pacific

Europe &Latin America Middle East &Central Asia & Caribbean
N. Africa

South Asia

Sub-SaharanAfricaGlobal Economic Prospects January 2012

Main Text
Nevertheless, fiscal positions in developing
countries have deteriorated markedly since 2008.
In particular, government balances have fallen
by two or more percent of GDP in almost 44
percent of developing countries in 2012 (figure13). As a result, developing countries have muchless fiscal space available to respond to a newcrisis.

Conditions today are less propitious fordeveloping countries than in 2008
One of the more positive elements of therecession of 2008/9 was the speed with whichdeveloping countries (other than those in Central
and Eastern Europe) exited the crisis. Indeed, by
2010, 51 percent of developing countries hadregained levels of activity close to or even above
estimates of their potential output).

To a large extent the reduced fiscal space reflects
the fact that in 2007 many countries were at thepeak of a cyclical boom that had boosted fiscal
revenues above normal rates. As a result, fiscal
deficits were smaller by about 2 percent of GDP
than they would have been had activity been inline with underlying potential. Now mostdeveloping countries are much closer to normal
levels of output, and this cyclical windfall has
disappeared.

This was in stark contrast to many high-income
countries, where, even now, GDP remains well
below the levels that might have been expected
had pre-crisis trends continued. The good
performance partly reflects the healthy fiscal,current account and reserves positions withwhich most developing countries entered thecrisis, which allowed most to absorb a large
external shock without serious domestic
dislocation (see Didier, Hevia, and Schmukler,
2011).

Fiscal balances have not deteriorated by thewhole (windfall) amount because policy reforms
and high commodity prices have benefitted fiscal
balances. In most regions structural fiscal
balances (the balance that would be observed if
demand was just equal to potential GDP) haveneither increased nor decreased appreciably (box5).

Today fiscal conditions are still generally betterin developing countries than in high-income
countries (figure 12). Only 27 countries forwhich comprehensive data exist, have fiscal
deficits in excess of 5 percent of GDP, and while
14 have gross debt to GDP ratios in excess of 75
percent, only 3 countries (Eritrea, Egypt and
Lebanon) combine a deficit in excess of 5
percent of GDP and a gross debt to GDP ratio inexcess of 75 percent of GDP in 2011.

Europe and Central Asia and South Asia are
exceptions in this regard. In Europe and Central
Asia the policy reforms necessitated by the verylarge shock that the region encountered in
2008/9 resulted in a 3.0 percent of GDP
reduction in structural deficits, from -3 to 0
percent of GDP. In contrast, a sharp increase in
fiscal spending in South Asia contributed to a
3.1 percent deterioration in structural budgetbalances to -8.0 percent of GDP in 2011.

Table 4 Impact on fiscal balance of a fall in commodity prices like that observed in the 2008/09 crisis(change in fiscal balance percent of GDP)World
High income countries
Developing countries
Oil exporting
Oil importing
East Asia and Pacific
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa

2012
-0.1
0.4
-1.0
-4.3
0.4
0.7
-2.9
-2.4
-4.8
0.3
-4.0

High commodity prices have also boosted
government revenues and served to keep deficits
low. For oil exporting developing countries, theincrease in commodity prices since 2005 has
improved government balances by an average of
2.5 percent of GDP, among metal exporters the
improvement has been of the order of 2.9
percent of GDP, while for non-oil non-metals
commodity exporters the improvement has beenmuch less pronounced.
Independent of whether fluctuations incommodity revenues (and subsidy expenditures)

Source: World Bank.

19

Global Economic Prospects January 2012

Main Text

Table 5 Countries with large funding requirements may
be vulnerable to a tightening of credit conditions 5

Figure 14 Countries with high levels of short- or maturing long-term debt are at risk

External Financing Needs
CurrentProjections for 2012

LebanonNicaragua
Albania
Jamaica
Georgia
TurkeyLao PDR
GuyanaBelarusRomania
Moldova
LatviaArmenia
Bulgaria
Lithuania
UkrainePanama
Mauritania
Macedonia, FYR
JordanTanzania
El Salvador
Dominican Republic
Vanuatu
Vietnam
Chile
Kyrgyz Republic
Ghana
Tunisia
Peru

Account
Deficit(share of
20.6
16.3
11.7
9.8
12.7
9.8
14.0
10.6
10.5
4.5
12.1
0.4
12.7
-2.0
2.3
5.4
12.3
11.2
5.1
8.5
9.1
3.8
8.2
6.7
4.9
0.4
6.9
7.0
5.8
2.7

Philippines
Paraguay
Nicaragua
Moldova
Uruguay
GuatemalaIndia
Vietnam
Peru
BelarusMacedonia,…
Georgia
El Salvador
TurkeyAlbania
Malaysia
Chile
UkraineJamaicaKazakhstan
Romania
Lithuania
LebanonLatviaBulgaria

Debt
Repayment
EFN(share of GDP) (share of GDP)
14.5
35.1
5.6
21.9
9.6
21.3
11.3
21.1
8.2
20.9
9.2
19.0
4.7
18.7
7.8
18.4
7.7
18.2
13.5
18.0
5.7
17.8
17.2
17.6
4.9
17.6
18.6
16.6
14.1
16.4
10.9
16.3
3.2
15.6
3.9
15.1
7.8
12.9
4.0
12.5
3.0
12.2
8.2
12.0
3.4
11.6
4.9
11.5
6.6
11.5
10.9
11.3
3.7
10.6
3.4
10.4
4.4
10.2
7.3
10.0

0

Short-term debt 2012(%GDP)
Maturing medium and longterm debt (%GDP)

5

10

15

20

Source: World Bank, Debt Reporting system.

Financial vulnerabilities
The contagion of risk aversion from a few welldefined high-spread, high-income European
countries to developing countries and even tocore Euro Area countries since August 2011 haschanged the game for developing countries. As
noted above, capital flows to developing
countries have declined sharply and risk premia
on both their private and sovereign debt haveincreased – raising borrowing costs.

Developing country external financing needs are defined as
the current account deficit (assumed to equal its 2011 shareof GDP times projected nominal GDP in 2012), plus scheduled payments on short-term and longer-term debt to private
creditors.
Source: World Bank

Tighter financial conditions could makefinancing current account and government
deficits much more difficult
Should risk aversion escalate further,international capital flows could decline evenmore, forming a binding constraint on thebalance of payments of some countries,
potentially freezing some governments out of
capital markets and even threatening the fiscal
sustainability of some heavily indebted
developing countries by raising borrowing
costs.5

are included in the cyclical or structural deficit,
if commodity prices were to fall then fiscal
conditions in exporting countries would
deteriorate rapidly. Simulations suggest that if
commodity prices were to fall as they did in the
2008/09 crisis, fiscal balances in oil exporting
countries could deteriorate by more than 4
percent of GDP. Impacts in metals exporting
countries could also be large, with some regional
impacts exceeding 4 percent of GDP (table 4).

As a whole, the external financing needs ofdeveloping countries have risen slightly since the
2008/9 financial crisis from an ex ante estimate

20

Global Economic Prospects January 2012

Main Text
Figure 15 Countries exposed to external financing risks

Estimated financing requirements for 2012
exceed 10 percent of GDP in some 30
developing countries (table 5).7 In the baseline
scenario, the financing of that debt is unlikely topose a problem for most countries, coming in therelatively stable form of FDI, or remittances. For
others, however, a significant proportion will
have to be financed from historically morevolatile sources (short-term debt, new bondissuances, equity inflows).8

Source: World Bank.

If international financial market conditions
deteriorate significantly, such financing might

Risks are particularly acute for countries like
Turkey that combine large current accountShort-term Debt /FX reserves 2011 (%)

of $1.2 trillion (7.6 percent of GDP) in 2009 to$1.3 trillion (7.9 percent of GDP) in 2012.6 Thisapparent stability masks a situation where all
regions, except South Asia, have reduced theirexternal financing needs as a share of GDP since2008. South Asia’s estimated external financing
requirements have increased from 5.8 percent to
8.4 percent, mainly because of a sharp rise in
India’s external debt in 2011. As in the 2008/9
crisis, Eastern Europe and Central Asia remains
the most vulnerable developing region, withexternal financing needs on the order of 17
percent of GDP. Several countries in the region
have high current account deficits as well asprivate debt coming due in 2012.

100

Montenegro

90

BelarusTurkey

80
70

Chile

60
50

Egypt
Lithuania

40
30
20

Romania

LatviaBrazilSouth Africa
Sri Lanka Kenya

Georgia

Peru

JamaicaUkraine10

Moldova

Jordan

0
0

2

4

6

8

10

CA Deficit-Net FDI flows ratio (2011 projections)become difficult to maintain. Twenty-fivedeveloping countries have short-term debt andlong-term debt repayment obligations to private
sector equal to 5 or more percent of their GDP(figure 14). Should financing conditions tighten
and these debts cannot be refinanced, countries
could be forced to cut sharply either into reserves
or domestic demand in order to make ends meet.9

Box 6 Domestic bonds — an imperfect hedge against capital flow reversals?
Developing countries are increasingly turning to domestic bond markets for funding (see World Bank, 2011B).
While this reduces their exposure to currency risk, it does not necessarily make them less exposed to a reversal incapital flows. More than 25 percent of the domestic bonds sold in Peru, Indonesia, Malaysia, South Africa and
Mexico (foreign holdings of local government bonds in Mexico have surged because of their inclusion in international bond indexes, such as the WBGI — normally a relatively stable source of funding) were bought by foreigners (Table B6.1). Should foreigners lose confidence in the local issue, or be forced by losses elsewhere in theirportfolio to sell these bonds – there could be significant adverse effects for the countries involved – including fordomestic bond yields, government financing costs, investment and currency stability. According to JP Morgan figures, EM bond funds received $44.8 billion of inflows in 2011, down from $80 billion in 2010, mostly due to sharp
decline in local-currency bonds–partly contribBox table B6.1. Foreign bonds holdings as a percentage of oututing to the depreciation of currencies described standing local government bonds
earlier. Foreign selling has been particularly
sharp in Latin America, with Brazil postinglarge outflows in the third quarter of 2011.
By the same token, firms that rely on foreign
investment in local stock markets may also be
exposed to a deterioration in foreign investor
sentiment or by an externally generated need todeleverage – particularly in cases where local
markets are relatively illiquid. Indeed, emerging
market equities have declined by 8.5 percent
since recent peaks, much more than the 4.2 percent observed in high-income equity markets.

21Global Economic Prospects January 2012

Main Text

Box 7 The Banking system and the transmission of deleveraging pressures
The transmission of a crisis can occur through several financial channels. Increased risk aversion raises the cost ofdebt, and decreases its supply. To the extent that high-income banks are forced through losses in their portfolio (orregulatory changes) to rebuild their capital stock they may engage in de-leveraging – either by calling or not renewing loans (thereby reducing loans to capital ratios), or by selling assets or issuing new equity (thereby raising
capital).
In the current crisis, high-income banks have already engaged in a significant degree of deleveraging. Although
the large and ill-defined nature of the shadow banking sector makes this process difficult to quantify, European
banks do appear to be decreasing their loan books (by 2.5% y-o-y in the case of Spain). In the U.S., loan books
have started to grow once again after falling 1.7 percent last year. While given the excesses of the boom period, anorderly deleveraging of high-income banks is desirable, a too rapid or fire-sale deleveraging process could haveserious implications for developing countries.
In general, developing countries with large shares of bank debt, either short-term debt or maturing longer-term
debt are most vulnerable to de-leveraging as non-renewal of loans coming due is a relatively easy mechanism forbanks to reduce leveraging. The effect of de-leveraging may also be more acute in economies whose domesticbanking systems have close ties with banks in troubled high-income countries.
Overall, high-income European banks have $2.4 trillion in foreign claims in the assets of developing countries,
which could be called upon in the case of crisis. The bulk of these claims lie in Europe & Central Asia ($633bn or
21 percent of GDP) and Latin America & the Caribbean ($861bn or 16 percent of GDP). Other regions carry lesslarge, but still significant exposures to high-income banks in general (claims on East Asia total $440 billion, SubSaharan Africa $190 billion and South Asia $176 billion).
The nature of these holdings and vulnerabilities to deleveraging differ across regions and countries. European bankclaims are very significant for some African countries, representing more than 45 percent of countries GDP, in the
Seychelles (200 percent), Cape Verde (82 percent) and Mozambique (45 percent). In Latin America and the
Caribbean, European banks claims are 38 and 21 percent of GDP in Chile and Mexico.
Despite these claims, banking systems in these countries are operated independently of their mother companies
through subsidiaries, with their loan books fully funded domestically (loan to deposit ratios of close to or below
100 percent). Moreover, some countries (e.g. Mexico and Brazil) have regulations limiting the amount of intercompany loans between parent and daughter banks and limiting the ability of parent banks to reduce daughter
bank’s capital below prudential levels. As a result, the financial systems in these countries would not be excessively exposed to a sharp reduction of inflows of funding from European banks (except through the trade financechannel). As long as this kind of deleveraging occurs gradually, domestic banks and non-European banks shouldbe able to take up the slack – as appears to be taking place in Brazil.
Banking in Eastern Europe and Central Asia is more exposed to deleveraging because many daughter banks in theregion are heavily dependent on cross-border lending from their parents rather than domestic depositors to support
their loan portfolios. In contrast, foreign owned banks in Latin America tend to have strong deposit bases and do
not depend on continuing inflows from their parents to maintain lending levels. In Europe & Central Asia loan–to–
deposit ratios exceed 100 percent by a large margin in several countries: Latvia (240 percent), Lithuania (129 percent) and Russia (121 percent). Should inflows from parent banks be cut off, and local sources not found daughterbanks in these countries could be forced to dramatically reduce lending in order to maintain capital adequacy requirements. The situation is made more problematic because loan portfolios of banks in the region are nothealthy, with non-performing loan ratios in excess of 15 percent in several countries.
In a worrying development, Austrian bank supervisors have instructed Austrian banks to limit future lending intheir central and eastern European subsidiaries — while several high-income European banks have independently
announced their intention to reduce operations in Europe and Central Asia.

deficits, high short-term debt ratios and low
reserves (which have been falling in recent
months and now represent less than 4 months ofimport cover). By this measure but to a lesser
extent, Belarus and Montenegro are also

vulnerable to a freezing-up of global credit.
Other countries also have significant
vulnerabilities. Jamaica, for example, is at risk
since it finances its current account deficit withflows other than FDI, which tend to be volatile.

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Figure 16 Outstanding claims of banks in high-spread European countries
S hare of European Banks in
Total Banking Assets of Selected EMs (%)

Eu ropean Banks' Foreign Claims(2011 Q2, %GDP )Senegal
MexicoDominica
TurkeyMalaysia
South Africa
MoroccoChile
MozambiqueAlbania
Lithuania
Bulgaria
Romania
LatviaBrazilArgentina
Chile
PolandHungary
MexicoSerbiaBulgaria
Macedonia, FYR
Albania
Romania

0

20

40

60

80

Spain
Italy
GreeceAustria-FranceGermany

0

20

40

60

80

100

Source: World Bank, BIS

Source: Citibank.

If global credit does freeze up, firms ineconomies such as Albania, Chile and Egypt
with high levels of short-term debt could beforced to cut activity back if existing loans are
not renewed (figure 15).

and Bankers' Association for Finance and Tradesurveys indicate that larger banks are tightening
lending standards and some of the European
Banks that have suffered the largest declines inequity values are particularly active in tradefinance.

Indications are that trade finance is alreadybeing squeezed as European banks deleverage

In the event of a significant deterioration in
global conditions, trade finance could freeze up.
The evidence from 2008 is mixed in this regard,with some authors (Mora & Powers, 2009;
Levechenko, Lewis and Tesar, 2010) suggestingthat the large observed drop in trade finance in2008/09 was mainly due to reduced tradevolumes, rather than a drop in trade financehaving caused the decline in global trade. On theother hand, there is strong anecdotal evidence oftrade finance having become more scarcesuggesting that perhaps there was a drying up in
trade finance availability, but that trade volumes
fell more quickly so that for most firms reduced
availability of trade finance was not a binding
constraint.

The sensitivity of short-term finance to changes
in financing conditions could pose problems for
trade. A significant portion of short-term debt isthought to reflect trade finance (e.g. as much as
75 percent of Chinese short-term debt is reported
to be for trade-finance). Since 2010, there has
been a 20 percent increase in short-term debt
taken out by developing countries — with thetotal now equal to $1.1 trillion or 4.8 percent ofdeveloping-country GDP — or 15.7 percent of
total developing country exports.
Press and market participants report thatconditions for trade finance are alreadytightening. In what may be a permanent change
in behavior, commercial banks appear to berationalizing their participation in trade financeand concentrating on larger markets. Such atrend, to the extent it is occurring, would be to
the detriment of smaller markets and particularly
smaller and newer enterprises that lack longerterm relationships with trade partners that mightlead to inter-company solutions that could
substitute for bank intermediated finance. Others
banks are cutting trade finance exposures as partof a broader move toward reducing loan books(see deleveraging discussion, box 7). Recent IMF

Banking-sector linkages could be anothersource of vulnerability, notably for Europe andCentral Asia
Banking sector linkages remain strong between
several high-spread Euro area countries anddeveloping countries, and their solvency also
represents a risk to other European banks
through various interlinkages (see box 6 for a
discussion of the relative merits of domestic
versus foreign capital markets and box 7 for the23

Global Economic Prospects January 2012

Main Text

vulnerabilities associated with reliance on
foreign banks). Currently, funding pressures inthe European banking sector remain high due toconcerns about exposure to stressed sovereigns(figure 16). Several banks have been squeezed
out of the dollar interbank market, and EuriborEonia spreads (a measure of banks’ willingness
to take on the debt of other banks) have risen tolevels last observed in the early days of thefinancial crisis of 2008 (see earlier figure 11).

Figure 17 Direct trade exposures to high-spread European countries are largest in the Middle-East & North
Africa and in Europe and Central Asia
Percent of merchandise exports destined to Europe
45
Rest of EU

40

High-spread EU
9.5

35
16.3

30

7.3

25
6.2

20
15

Among developing regions, the most direct
exposures to high-income European banks are inEurope and Central Asia and in Latin America— reflecting both inter-regional lending andownership patterns. As of 2011Q2, total foreign
claims by European banks in developing
countries was $2.4 trillion ($1.4 trillion for EuroArea banks), with two-thirds of these claims in
Latin America and developing Europe. On theownership-side of the ledger, key European
banks account for large shares of domestic bankassets in several developing economies (e.g.
Spanish banks own over 25 percent of bankassets in Mexico and Chile, while Portuguesebanks account for almost one-third of banking
assets Angola and Mozambique).

4.2

4.8

10
5

0
Latin America &Caribbean

East Asia &Pacific

South Asia

Sub-SaharanAfricaEurope & Central Middle East &Asia
North Africa

Sources: U.N. COMTRADE (WITS), World Bank.

and Central Asia would be affected, but not in
Latin America.
Indeed, Austrian Banks have been advised bydomestic regulators to limit future lending totheir regional subsidiaries. Depending on how
binding this directive proves to be it could
significantly tighten financial conditions in
Albania, Bosnia-Herzegovina and Romania—
countries where Austrian banks are very active.

These cross-border relationships take many
forms, ranging from autonomous subsidiaries(with their own locally-funded capital and assetbase) to more traditional branch operations andin most their operations are subject to hostcountry prudential regulation that includes
safeguards against many forms of capital
repatriation. While such rules should limit thescope for a wholesale repatriation of assets in theevent of a crisis in the home country, they are
unlikely to prevent a significant tightening of
capital conditions in host countries if parent
banks run into financial difficulty.

Figure 18 Second and third-round trade effects likely todominate initial impacts
Impact of a 1 percent decline in household demand in high-income Europe (% of exports)
0
-0.1

-0.2
-0.3
-0.4
-0.5

Banking in Europe & Central Asia is likely more
exposed to European deleveraging because
daughter banks in several countries are
dependent on cross-border flows from parent
banks to service their loan portfolios. In contrast
in Latin America the loan books of daughterbanks are almost entirely covered by local
deposits. As a result, if deleveraging in highincome countries causes them to cease funding
new loans in daughter banks, lending in Europe

-0.6
-0.7
-0.8

First-round effects
Second-round effects

-0.9

-1
Latin America & Sub-Saharan
Carribean
AfricaMiddle East & East Asia PacificNorth Africa

South Asia

Europe &Central Asia

Note: First round effects – declines in exports directly attributable to reduced European imports; Second round effects –difference between total decline in exports and first roundeffects.
Source: World Bank simulations using GTAP.

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Figure 19 Estimated declines in remittances in the event of deterioration in global conditions
Percent change in remittances (from baseline)

Change in remittances (from baseline), % of GDP
Tajikistan

Europe and Central Asia

Kyrgyz Republic
East Asia and Pacific

Nicaragua
Moldova

Latin America and Caribbean

Lesotho
El Salvador

Sub-Saharan Africa

Samoa

Severe crisis
Middle-East and North Africa

Severe crisis

Gambia, The

Moderate crisis

Moderate crisis

NepalSouth Asia

Armenia-10.0 -9.0 -8.0 -7.0 -6.0 -5.0 -4.0 -3.0 -2.0 -1.0 0.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

Source: World Bank.

are taken into account, negative impacts would
be more widely felt. Overall, large trading areas
such as East Asia and the Pacific would feel thelargest hits to overall GDP as the initial decline
in high-income European demand for the exportsof other countries (including Europe and Central
Asia but also the United States and Japan) would
cause the imports of these countries from otherregions such as East Asia & Pacific to decline.
Ultimately these knock-on effects would belarger than the initial direct trade effects (figure
18).

Indeed, Austrian Banks have been advised bydomestic regulators to limit future lending totheir regional subsidiaries. Depending on how
binding this directive proves to be it could
significantly tighten financial conditions in
Albania, Bosnia-Herzegovina and Romania—
countries where Austrian banks are very active.

Developing countries with close trade
linkages to crisis prone high-income
countries may be at risk
A significant slowdown in import demand, suchas might accompany a market-induced credit
event in high-income Europe, would initially
impact hardest those economies with the closest
trade ties and those countries exporting the mostdemand-elastic commodities (see below for a
discussion of commodity impacts). If the crisis isconcentrated among high-spread countries, it islikely to hit exporters in the Middle-East andNorth African economies (whole economy
impacts would not be so severe because the nonoil exports are a relatively small share of overallGDP) most directly because of strong trade ties
with high-spread European economies (figure17). Were the wider euro area to become
embroiled, the impact on the exports of all
regions would be significantly larger, with
developing Europe and Central Asia (Romania,
Lithuania and Latvia among others) and SubSaharan Africa (Cape Verde, Cameroon, Niger
among others) facing the largest direct
exposures.

In addition to trade effects, a significant cycle inhigh-income Europe would tend to reduceincomes in host-countries for developing world
migrants, and, as a result, reduce remittances,which, in addition to combating poverty, are inmany countries a critical source of foreign
currency. Assuming a cycle of the size of thesmall crisis scenario outlined above, remittanceflows to developing countries would decline by
3.1 percent in US dollar terms in 2012 relative tothe baseline. In a severe crisis scenario,
remittance flows to developing countries could
fall by as much as 6.3 percent, with declines of 7
percent or more in Europe and Central Asia
(figure 19) and several other developing regions.
Remittance declines as a percent of GDP would
be biggest in countries receiving large levels ofremittances, including Tajikistan, Kyrgyz
Republic, Nicaragua, Moldova, Lesotho and
Honduras among others. Even with these large
projected declines relative to the baseline, overall
remittance flows to the developing world would
remain almost flat in US dollar terms even in the
more serious scenario. This reflects the stability

While initial impacts in these regions would belarge, once second, third and fourth-round effects

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Global Economic Prospects January 2012

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Box 8 Commodity prices expected to ease in the context of weaker global growth
The slowing of growth in the second half of 2011 has already resulted in a significant easing of commodity prices,with metals and minerals prices — the most cyclically sensitive group of commodities — having given up all of
their gains since 2010. Oil prices have also eased, although not as much, and are currently at levels observed in
December 2010 — about 35 percent higher than in January 2010. Food prices have also eased in recent months(down 14 percent since their February 2011 peak).
Looking forward, given the weaker growth projected for the global economy, commodity prices are expected tocontinue to ease in 2012 — although at a slower pace. Overall, metals and mineral prices are projected to decline 6
percent in 2012 relative to the average price in 2011. The price of crude oil (World Bank average) is expected toaverage $98 per barrel in 2012, down 6 percent from the 2011 average; while food prices are expected to easeabout 11 percent.
Prospects are, however, uncertain and will be sensitive to both Box figure B8.1 Prospects for Wheat andsupply and demand factors. Continued political unrest in the Maize have been improving throughout the
Middle East and North Africa could further disrupt oil sup- year
plies resulting in higher prices in the short-term — especiallyWheatgiven low stocks and market shortages of light/sweet crude. million tons
700
220
Production
Stocks (right axis)
Metals prices are now at levels where high-cost producers
210
may shutter capacity so it is unlikely that they will decline 690
sharply from current levels, while supply disruptions or an 680
200
uptick in Chinese demand (China currently consumes more
190
than half of the world’s metal production) could cause prices 670
to strengthen. Agricultural and (to a lesser extent) metal prices 660
180
will remain sensitive to developments in energy prices. While
650
170
lower energy prices should translate into lower production
MAY JUN JUL AUG SEP OCT NOV DEC JAN
and final sales prices for food crops, stock-to-use ratios forsome food commodities (particularly maize and rice) remain
Maizemillion tons
below their 15 year averages and lower prices will mean that 900
150
Production
Stocks (right axis)
prices will remain sensitive to adverse events (such as policy
880
135changes and flooding in Thailand).
860

120

Downside risks entail mostly slower demand growth due to840
the deterioration of the debt crisis, especially if it expands toemerging countries where most of the growth in commodity 820
demand is occurring. The downside risks apply mainly to 800
metals and energy, which are most sensitive to changes in
MAY JUN JUL AUG SEP OCT NOV DEC JAN
industrial production, and less so to agriculture; the latter,
Source: US Department of Agriculture.
however, may be affected indirectly through energy.

105

90
75

Although prices of wheat and maize eased recently (they declined about 17 percent each from July to December2011), rice prices were increasing up until recently due to policy factors and the recent flooding in Thailand. They
began weakening in December, on news of good crop prospects elsewhere in the region. Globally, markets forwheat and rice are well supplied, while maize stocks remain well below long-term averages. That said the supply
outlook for the 2011/12 crop for all three grains has been improving throughout the year (box figure B8.1).

Developing countries remain vulnerable
to developments in commodity markets

producing countries, but reduce
commodity importing countries.

The past six years have driven home theimportance of commodity price developmentsfor prospects in developing countries. Strong
commodity prices boost incomes in commodity

The large commodity price hikes of 2010 had
important terms-of-trade effects in many
economies, with income gains of more than 10
percent in several oil exporting developing
countries, while losses were concentrated among

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them inGlobal Economic Prospects January 2012

Main Text
Consistent with historical experience, thesesimulations suggest that were commodity prices
to fall sharply in the context of a crisis, thenincomes of major exporters would be hit hardest,
while the benefits for importers would be more
diluted. Oil exporting countries/ regions would
be hardest hit, while large food and fuelimporting regions would take the largest
benefit.10

Figure 20 Large terms of trade effects in 2011
Republic of Congo
Equatorial Guinea
AngolaGabon
Oman
KuwaitSaudi Arabia
Azerbaijan
Moldova
Cambodia
Kenya
Eritrea
LebanonJordanLesotho
Seychelle

Oil exporters
Oil importers

Sub-Saharan Africa
Middle East & North Africa
Europe & Central Asia
Latin America & Caribbean
East Asia & Pacific
Sub-Saharan Africa
Latin America & Caribbean
Europe & Central Asia
East Asia & PacificSouth Asia
Middle East & North Africa-10 -8 -6 -4 -2

0

2

4

6

Major winners in these scenarios include China,
Nepal and Uruguay (because oil prices decline
more than the prices of Uruguay’s exports),
while losers are concentrated among thecommodity exporting nations of the Latin
America, Sub-Saharan Africa and Middle-Eastand North Africa regions. Oil exporters in theseregions should see the biggest swings in theirexternal accounts, with Venezuela, Russia andAngola among the most exposed.

8 10 12 14 16 18 20 22 24 26 28

Source: Thomson Datastream & World Bank.

heavy food and oil importing regions (figure 20).
At the regional level, the biggest percentage
gains (10.6 percent of GDP) were among SubSaharan African oil exporters — reflecting thesize of the oil sector in their overall economies.
The biggest losses were among the oil- and foodimporting countries of the Middle-East andNorth Africa, whose real incomes were reduced
by 1.5 percent of GDP. South Asia, which islargely self-sufficient in food, registered a 2.0
percent deterioration – mainly because of highoil prices.

Among the larger developing countrycommodity exporters, Brazil and particularly
Argentina, are vulnerable to agricultural priceswings. Brazil and South Africa are major
exporters of iron ore, while Chile and Zambia
are also significantly exposed to metal (copper)
prices. With Chinese demand the key driver ofglobal demand outturns in these markets, prices
would depend importantly on Chinese growth
and the commodity-intensity of any stimulus
plan introduced in that country. In 2008/09
stimulus targeted infrastructure development
which is relatively metals intensive activity, amore services or safety-net oriented program
would likely not affect metals demand to thesame extent. South Africa would also be
particularly vulnerable to changes in platinum
and gold prices, with limited offsets from lower
oil prices due to the relatively low weight of oilin total imports.

Looking forward, commodity prices are
expected to ease (see box 8). On the basis ofthese projections, regional terms of trade effects
can be expected to be modest. However as thepast 10 years have illustrated, commodity prices
can be volatile, especially in the face of sharp
fluctuations in economic activity.
In the case of the 2008/09 crisis, energy prices
fell by 60 percent, metals prices by 57 percent
and food prices by 31 percent between August
2008 and their first-quarter 2009 lows—
although all three indexes rejoined earlier levels
relatively quickly as the global economy
recovered.

Negative impacts could be larger in so far as themodel assumes that declines in current accountbalances and government revenues can befinanced. If these declines occur in the context ofa global crisis, this assumption may not be met
and domestic demand in these countries could beforced to contract even further.

Simulations suggest that a 4 percentage point
decline in global growth (broadly consistent withthe large crisis of scenario 2) could be expected
to result in a 24 percent decline in energy and a 5
percent decline in food prices, mainly reflecting
the impact of lower energy prices on production
costs.

As discussed earlier, commodity prices also playa major role in determining inflation rates indeveloping countries because the share of food27

Global Economic Prospects January 2012

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and energy in overall consumption tends to bemuch higher than in high-income countries.
Indeed, rapidly rising food and energy prices inthe second half of 2010 and persistent strength ofthese prices in 2011 contributed to a sharp
acceleration in developing country inflation in2010 and into the first half of 2011.

the global economy or support the financial
system to the same degree as they did in
2008/09. While developing countries are inbetter shape than high-income countries, they
too have fewer resources available (especially ifinternational capital is not available to support
deficit spending). No country and no region will
escape the consequences of a serious downturn.

Overall, internationally traded food prices areprojected to ease further in 2012 as very tightstock conditions ease (box 8). However, grainstocks are low, making prices vulnerable tosupply disruptions. Should international foodprices surge, developing country inflation is
likely to pick up once again, putting monetary
policy under pressure even as economic growthis slowing.

Importantly, because this second crisis will comeon the heels of the earlier crisis, for any given
level of slowdown its impact at the firm andhousehold level is likely to be heavier. In 2008
developing countries went into the crisis in verystrong cyclical positions (GDP was on average 3
percent higher than potential), now they are atbest in a neutral position. Like national
governments, firms and households are likely tobe less resilient than in 2008, because the earlier
crisis has depleted the cushions and buffers thatallowed them to cope so well last time.

In addition to these vulnerabilities that stemfrom the international environment, many
developing countries remain vulnerable to local
food shortages, when domestic crops fail andcountries either cannot afford internationallytraded food products or do not have connections
to international markets. Indeed, althoughconditions in the Horn of Africa are improving
due to recent rains, the situation there remains agrave concern, with crop failure and famine
threatening the livelihood of over 13 million
people.

While the main responsibility for preventing a
global financial crisis rests with high-income
countries, developing countries have an
obligation to support that process both throughthe G-20 and other international fora.
Now is not the time to pursue narrow national
agendas on the global stage — too much is atstake. In this regard, developing (and highincome) countries could help by avoiding
entering into trade disputes and by allowing
market prices to move freely. On the one hand,developing countries could take steps to ensurethat lower international commodity prices are
passed through more quickly to domestic prices;while on the other hand, producers should avoid
using their market power to resist market
pressures for lower prices.

Concluding remarks
The global economy is at a very difficult
juncture. The financial system of the largest
economic bloc in the world is threatened by afiscal and financial crisis that has so far eluded
policymakers’ efforts to contain it. Outside ofEurope, high-income country growth, thoughstrengthening, remains weak in historicalperspective. At the same time some of the largest
and most dynamic developing countries haveentered a slowing phase.

Faced with the enormous economic forces thatwould be unleashed by an acute crisis, there islittle that developing countries can do to avoid
being hit. There is, however, much that they can
do to mitigate the effects that a deep crisis might
have domestically.

These are not auspicious circumstances, anddespite the significant measures that have beentaken, the possibility of a further escalation of
the crisis in Europe cannot be ruled out. Should
this happen, the ensuing global downturn islikely to be deeper and longer-lasting than therecession of 2008/2009 because countries do nothave the fiscal and monetary space to stimulate

In the immediate term, governments should
engage in contingency planning to identify
spending priorities, seeking to preserve
momentum in pro-development infrastructure
programs and shore up safety net programs.

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Global Economic Prospects January 2012

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Contingencies should include the possibility thatexternal financing is unavailable or that
commodity prices (and therefore associatedgovernment revenues) fall abruptly.

relative prices for North Sea, Mediterranean
and West African crudes. Meanwhile Japan
has said it will also take concrete steps toreduce its dependency on Iranian oil.

Policymakers should also take steps to identify
and address vulnerabilities in domestic banking
sectors through stress-testing. Risks here include
the possibility that an acute deleveraging in high-income countries spills over into domestic
markets either as a cutting off of wholesalefunding or asset sales. In addition, in the context
of a major global recession the balance sheets oflocal banks could come under pressure as firms
and households capacity to service existing debt
levels deteriorate. This could be a particular
problem in economies that have gone through avery rapid credit expansion in recent years.

3. Scenario 1 is modeled as an exogenous 7
percent decline in consumer demand and a
25 percent decline in investment in 2 small
high-income European countries, over the
2012-2013 period (with respect to thebaseline). The effects on consumer andinvestment demand are drawn as the
midpoint between the median and meanvalues derived from an analysis of financial
crises over the past 20 years. Confidence
effects in other countries are modeled as a0.75 percentage point increase in householdsavings and a 1.5 percent decrease ininvestment growth, with impacts doubled inhigh-income Europe, and halved in low
income countries (due to weak global
financial integration).

From a longer-term perspective, countries may
want to take the time now to identify new driversof growth so that post-crisis investment andprogress is concentrated in the sectors that are
most likely to succeed over the longer-term.
Finally, governments may wish to address longstanding and tough policy challenges. Often it is
only in serious crises that the political will canbe mustered to put through difficult andunpopular (but necessary) reforms.

4. Scenario two builds on scenario 1, by
assuming that two larger European
economies are also frozen out of capital
markets and subjected to a 7 percent cut in
consumer depending and a 25 percent fall ininvestment. Confidence effects in othercountries are now modeled as a 1 percentage
point increase in household savings and a
2.5 percent decrease in investment growth,with impacts doubled again in high-income
Europe, and halved in low income countries(due to weak global financial integration).

Notes
1. Econometrically, a 1 percent decline fromtrend growth of industrial production willcause a more—than 9 percent decline inmetals and minerals prices. The likeelasticity for food prices is much smaller(0.7 percent). See discussion in thecommodity annex for more information.

5. Abiad and others (2009) in a study of 88
financial crises in OECD countries over the
past half century found quasi permanent
GDP effects of up to 7 percent of GDP as
compared with pre-crisis growth trends up to
7 years following a financial crisis.

2. In reaction to concerns about Iran’s nuclear
program, the United States has passed a lawthat will prohibit foreign financial
institutions that do business with Iran’scentral bank or other financial institutions
from conducting financial operations in the
United States. At the same time theEuropean Union (EU) reached a preliminary
agreement on an Iranian crude oil embargothat would force EU refiners to findalternative sources (for 0.5 mb/d of Iraniancrude), potentially lifting demand and6. Developing countries’ external financing
needs, are defined as the current-accountdeficit (assumed to be a constant at its 2011
level as a percent of GDP) plus scheduled
principal payments on private debt (based on
information from the World Bank’s Debtor
Reporting System).
7. Countries with the debt repayment to GDP
ratios that are less than three percent are29

Global Economic Prospects January 2012

Main Text

excluded from this list. These countries aremostly aid dependent and theirvulnerabilities are mostly related to official
flows.

Policy Research Working Paper. 5637, World
Bank, Washington, DC.
Levchenko, Andrew, Logan T. Lewis and Linda
L. Tesar. 2010. The role of financial factors
in the trade collapse: a skeptic’s view . Paper
downloadedfrom
http://wwwpersonal.umich.edu/~ltesar/pdf/LLT_WB.pdf
December 15, 2011.

8. During the 2008 financial crisis and even in2011, equity and short-term debt flows havereacted rapidly to changing market
conditions. FDI, aid and remittances flows
are not immune to such changes but tend toreact more slowly and are therefore
considered to be more stable sources offinance.

Mora, Jesse and William M. Powers. 2009.
―Decline and gradual recovery of global tradefinancing: U.S. and global perspectives‖.
Vox.eu.org article. http://www.voxeu.org/
index.php?q=node/4298. accessed Dec. 15,
2011.

9. Ex-post rollover-rates depend on bothdemand for new loans and supply. In thebaseline, the stock of short-term loans is
assumed to remain a constant share of GDP
between the beginning and end of the year.
For reference, the stock of loans increased
by 40 percent in 2010 and declined byalmost 30 percent in 2011 as conditions
tightened after August.

Turner, David. 2006. ―Should measures of fiscal
stance be adjusted for terms of tradeeffects?‖. OECD Economics Department
Working Paper. 519.
World Bank. 2010. Global Economic Prospects:
Finance, Crisis and Growth. World Bank.
Washington DC.

10. While swings in oil prices tend to be
macroeconomically important for both
exporters and importers, swings in metals
and mineral prices tend to be more importantfor exporters than importers (because theirshare in total import demand and GDP isrelatively small). For most countries foodprice swings have larger impacts on internalbalances (transferring money from producers
to consumers domestically) rather than
external balances because the vast majorityof food in mostly all countries is produced
and consumed in the same country.
Nevertheless, large swings in food prices canhave large poverty and domestic inflation
effects.

World Bank. 2011. Food Price Watch.
November, World Bank, Washington DC.
World Bank. 2011B. Global Economic
Prospects: Finance, Maintaining Progress
amid Turmoil. World Bank. Washington DC.

References
Abiad, Abdul and others. 2009. ―What’s theDamage? Medium-term Output Dynamics
After Banking Crises‖. IMF Working Paper.
WP/09/245
Didier, Tatiana; Constantino Hevia, and Sergio
Schmukler. 2011. ―How Resilient Were
Emerging Economies to the Global Crisis?‖30

Global Economic Prospects January 2012

Industrial Production Annex

Industrial Production Annex
disrupted some supply chains, although themagnitude of the impact is expected to be only afraction of that induced by the Tohoku disaster.
All these shocks and the rebound from them
have impacted industrial output growth todifferent degrees and had a differentiated impact
across regions and time (figure IP.1).

Recent economic developments
Unique exogenous shocks have affectedindustrial output throughout the year. The
recovery in industrial output growth from thesoft growth patch in the second half of 2010 was
dampened earlier in 2011 by adverse weather
conditions in Europe and the United States. Just
as the impacts of adverse weather conditions
were starting to ease, the shock to global supply
chains from the Tohoku earthquake depressedindustrial sector activity at the beginning of thesecond quarter, affecting in particular the autoand electronics sector.

Reflecting the confluence of diverging forces
affecting industrial production, global industrial
output has been moving sideways since the startof the year, recording monthly growth in excess
of 2 percent in May and August, followed bydeclines of about 1.2-1.3 percent in June and
September and 0.1 percent in October (figureIP.2).

Industrial output growth began to strengthen
again into the mid-year boosted by restorationof global supply chains and reconstruction
efforts in Japan post-Tohoku, only to face further
headwinds as a crisis of confidence engulfed
high-income countries in the wake of the U.S.
debt ceiling debate and the surfacing of the Euro
area fiscal crisis. The heightened uncertainty
related to the sovereign debt concerns in highincome countries started to shake investors andconsumers’ confidence, weighing on theindustrial sector recovery as consumers delayedpurchases of durable goods and businesses drew
down stocks. The recent floods in Thailand haveTwo-speed industrial production growth in highincome countries. Growth in the industrial sector
in the United States had proved resilient in thesecond half of 2011, with growth supported byrevived consumer spending and relatively solid
external demand. The relatively weaker pace ofgrowth in the wake of the Tohoku disaster
persisted however, even after the restoration of
supply chains, with 3m/3m seasonally adjusted
annualized rate of growth hovering around 3
percent in the second half of 2011. Industrial
output advanced 0.7 percent in October month-Figure IP.1 Industrial production moving sideways

Figure IP.2 Broad-based industrial output
growth in August gives way to weak performance in September-October%ch, 3m/3m saar
40

30

30

20

25

10

20

Frequency

0
-10
-20

September
October10Developing, excluding China
High-income countries
China

-30
-40
Jan-07

August15

Oct-07

Jul-08Apr-09Jan-10

Oct-105

0Jul-11

-4

-1

0

1

month-on-month growth

Source: World Bank

Source: Datastream, World Bank.

31

4

More

Global Economic Prospects January 2012

Industrial Production Annex

on-month, supported by a 0.5 percent gain in
manufacturing output on the back of strong
increase in motor vehicle output and parts
production, but growth dipped to 0.14 percent inNovember.

previous quarter. Growth would have been even
weaker were it not for the 0.5 percent and 0.4
percent expansion in Germany and France.
The performance of the industrial sector in theEuro Area started to deteriorate however as thesovereign debt crisis intensified and the latest
industrial sector data suggests a very weak
fourth quarter. Industrial output declined 4.7
percent in the three months to November in theEuro Area, with output in Germany down 7.4
percent after robust growth in the previous
quarters. Industrial output continued to decline
sharply in Italy, down close to 12 percent during
the same period. Meanwhile output continue todecline in most high-spread economies. It fell
more than 15 percent in Greece, and more than 7
percent in Spain. Due to a particularly weak
fourth quarter, industrial output in the Euro Arearose a mere 4.1 percent in the first eleven monthsof the year. Industrial output in Greece declined
8.4 percent year-to-date, while output in Spain
and Portugal was down 1.2 percent during thesame period. Germany recorded one of thestrongest performances in the Euro Area, withindustrial output up 8.3 percent.

Industrial output in Japan staged a V-shaped
recovery from the earthquake-induce plunge inindustrial output. GDP posted a solid 5.6 percent
quarter-on-quarter (saar) advance in the third
quarter and industrial output expanded at morethan 30 percent annualized rate in the threemonths to August, notwithstanding soft external
demand, the strength of the yen, and the global
slump in IT sector. Industrial sector growth
remained strong through October (expanding 6.5
percent 3m/3m saar) and the supply disruptions
from the floods in Thailand are expected to have
only a short-lived impact on growth, with theauto sector impacted most severely. Growth inother high-income countries in East Asia andPacific has also rebounded from the effects of
the Tohoku supply chain disruptions, and it
appears that the effects of weaker growth in theEuro area have been relatively limited so far andthat confidence effects following the financial
turmoil since August have also been lesspronounced to date.

Events in high-income countries and domestic
policies have impacted industrial production
performance in developing countries. Most
recent data for the developing countries show ageneralized slowing across regions, with the
exception of Middle East and North Africa
where output is rebounding from the disruption
associated with the Arab Spring.

Overall, after growth decelerated throughout thefirst half of 2011, industrial sector performancein core euro area countries strengthened
somewhat in the third quarter – reflecting a
combination of strong growth in July and August
and much weaker or even falling growth in
September. Output in Germany was particularlyrobust, expanding at 7.2 percent annualized ratein the third quarter, and somewhat more subdued
in France where it expanded at a 2.3 percent
annualized rate. Growth in the industrial sector
in core euro countries was supported byconsumer spending and the post-Tohoku bounceback effect. Meanwhile industrial production
declined 1.9 percent, 3.6 percent, and 2.8 percent
in Italy, Spain, and Portugal, where consumer
spending was affected by falling confidence.
Despite a mild reacceleration in industrial output
growth in the third quarter, Euro area GDP
growth almost came to a standstill in the third
quarter, advancing 0.2 percent relative to the

In East Asia and Pacific, excluding China,
growth reaccelerated in the three months to
November to 6.4 percent annualized rate,
following a sharp deceleration in the wake of the
Tohoku earthquake. The effects of Tohoku andpolicy tightening has contributed to adeceleration in China’s industrial production
growth starting in the second quarter of 2011,
with growth easing to an average 7 percent
annualized growth throughout much of the third
quarter, down from 21 percent growth in the firstquarter. Growth has reaccelerated to around 10.5
percent 3m/3m annualized rate, as output gained
0.8 percent month-on-month in November,32

Global Economic Prospects January 2012

Industrial Production Annex

notwithstanding the drag on domestic demand
from some cooling in the housing market. In
Thailand the disruptions caused by flooding havebrought to a halt the recovery in the industrial
sector, with output plunging at a 71.6 percent
annualized rate in the three months to
November.

Saharan Africa may reflect a pull back from therelatively higher demand for oil and metal andminerals resources in the first quarter of 2011.
Industrial activity in South Asia has been
deteriorating for several months, as policy
tightening and uncertainty about theimplementation of proposed regulatory changes
in India weighed heavily on industrial
production, which was contracting at a 12
percent annualized pace in the three months to
October.
Meanwhile growth Sri Lanka
continued at a robust pace, while in Pakistanindustrial output recovered strongly in the third
quarter, after a dismal performance earlier in theyear.

Europe and Central Asia, whose industrial sector
is most reliant on demand from Europe, started
the year strongly, with industrial output
expanding at a 17 percent annualized pace, but
growth has weakened significantly since March,and output contracted during much of the second
and third quarters, in large part due to a sharp
slowdown in Turkey. Since then industrial
activity has recovered slightly, with output rising
at a 6.8 percent annualized rate in the threemonths to November, bolstered by a bounceback in industrial activity in Romania andUkraine.

Industrial output data for the Middle and North
Africa are published with a considerable lag. In
the aftermath of the political turmoil of the ArabSpring industrial activity in Syria, Tunisia, Egypt
and Libya has fallen by 10, 17, 17 and 92
percent at its lowest point according to official
data. Activity surged during the second quarterof 2011 as the negative effects of the politicalturmoil in Tunisia and Egypt faded and activity
regained (and exceeded by more than 15 percent)pre-Arab Spring levels. Nevertheless Egypt’s
industrial output growth relapsed in the third
quarter when growth turned sharply negative,
and in Tunisia, where growth was slightly
negative.

Output is also declining in the Latin America
region, with industrial production contracting at
an accelerated rate through October (3 percent
annualized rate) following the deceleration ofactivity in the largest economies in the region.
Monetary policy and credit tightening in
conjunction with a stronger currency havecaused industrial production in the largest
economy to contract starting with May.
Weakness in domestic demand that caused
Brazil’s GPD to stall in the third quarter also
explains the decline in industrial output.
Meanwhile growth in Mexico’s industrial output
has also dipped into negative territory in thethree months to October.

Weakening prospects for the industrial
sectorGiven recent volatility in industrial output andthe associated difficulties in extracting trend
information from recent data, we rely on recent
business surveys to gauge near-term
developments in industrial output. In addition,
uncertainties regarding the magnitude of the
impact of supply-chain disruptions caused by theThai floods further complicate the assessment ofindustrial sector outlook. There are indications
however that these new supply disruptions areless damaging to global industrial output thanthe ones caused by the Tohoku earthquake, since
factories elsewhere in Asia are able to make up
for some of the lost Thai production.

Industrial production in Sub-Saharan Africa,
where data is available for only a few countries(Angola, Gabon, Ghana, Nigeria, and South
Africa) has contracted through most of thesecond quarter remained relatively flat in thethree months to August. Nigeria has been thestrongest performer in the region with growthreflecting rising oil production. Output in South
Africa, the region’s largest economy started torecover, reaching a 15 percent annualized pacein the three months to October. The decline inindustrial output in both Latin America and Sub

33

Global Economic Prospects January 2012

Industrial Production Annex

The recent business surveys suggest industrial
activity will remain weak in the months ahead.
The readings of the global manufacturing
purchasing managers index (PMI), down a sharp
7.7 points as of November from its 56-monthpeak recorded in February 2011 suggest that
global industrial output has likely contracted in
the fourth quarter, notwithstanding the modest
improvement recorded in December (figureIP.3). The PMI remains at weak levels,
indicating that global manufacturing growth isexpected to remain weak, on weak economic
activity in the Euro area, a slowdown in growthin China in part due to weaker external demand,and partly due to cooling in the real estatemarket (figure IP.4). In addition policy
tightening and tighter credit conditions
contributed to a slowing in domestic demand in
Brazil, while in India policy tightening anduncertainties about the implementation of
proposed regulatory changes are dampening
growth.

inventory correction in the months ahead if
external demand does not strengthen. The PMI
has recovered sharply in December, rising 3.1
points to 47.1 but continues to point tocontraction in output. The deterioration inbusiness sentiment has been less pronounced inSouth Korea and Singapore, but sentimentremains depressed there as well. In South Korea
both output and new orders PMIs have declined
sharply, but other business surveys show a mild
improvement in business sentiment (figure IP.3).
Industrial output in the Euro Area is likely havecontracted in the fourth quarter. Indicators forEuro area industrial production are particularly
weak, with the PMI for the Euro area sliding
further below the 50 no-growth mark for the
fourth consecutive month in November (46.4 pts
nearing the level recorded in July 2009) andrecovering only slightly to 46.9 in December(figure IP.4.). Business sentiment is lowest in
Greece, Spain, and Italy. Business sentiment asmeasured by the PMI deteriorated in core
countries in November, while those for highspread countries remained stable or inched up
slightly before improving almost across theboard in December (figure IP.5). Businesssentiment indicators suggests that German
industrial output will stall in coming months,
with the PMI index below the 50 no-growthmark for a third consecutive month, in December(figure IP.6).

Small open economies that are highly
synchronized with global business cycles alsosuggest that global industrial production growth
will slowdown in coming months. Businesssentiment was depressed in Taiwan, China in
November, with the diffusion index down to adepressed 43.9 level, with weak external demand
from the U.S. and Japan taking a toll on techexports in particular. The high ratio of inventory
to shipments increases the likelihood of an
Figure IP.3 China’s PMI fell below the 50 nogrowth markFigure IP.4 Euro area PMI points to recession
Points, 2m/2m moving average

points
70

60

50

40

China
South Korea
Singapore

70

20

65

15

60

10

55

5

50

0

45

Global PMI
Taiwan, China
Growth mark

40
35

30
Mar-09 Aug-09 Jan-10 Jun-10 Nov-10 Apr-11 Sep-11-10

6 months
difference (RS)

Source: World Bank

34

-5

E15 PMI30
Jan-05 Mar-06 May-07

Source: World Bank

points-15-20
Jul-08

Sep-09 Nov-10

Global Economic Prospects January 2012

Industrial Production Annex

A 3.4 percent negative carry over from the third
quarter, lingering weak business sentiment, weak
consumer demand and continued fiscal austerity
will depress industrial output in the Euro Area in
the fourth quarter, and through the first half of2012. Despite a modest recovery in the second
half of 2012 industrial output is expected tocontract in 2012.

expected to average about 2 percent in 2012,
about half the growth pace recorded in 2011.
Industrial output growth in Japan is expected tobe more upbeat next year, although quarterly
growth should decelerate somewhat after the
speedy and impressive rebound in the aftermathof the Tohoku disaster (figure IP.7). Several
factors will exert opposing pressures. On one
hand increased public sector spending stipulated
in the third supplementary budget, the easing ofelectricity shortages that hampered production
during the course of the summer, and thereplenishment of depleted auto inventories at
Japanese overseas affiliates, and resilient
personal consumption will support growth incoming months. The supply-chain disruptions
from the Thai floods that have weighed on
growth in the fourth quarter will ease early nextyear, but the strong yen and weakening external
demand, in particular from the Euro area will
limit growth. One source of weakness for next
year is subdued growth in the auto sector as
demand in major export markets, namely the
U.S. and Euro area is expected to be weak.

In the United States and Japan, the picture issomewhat more positive. After falling in August
industrial production in the US picked up in
September and has increased 0.7 percent in
October, the strongest pace since March, boosted
by more robust retail sales and solid external
demand. The Institute of Supply Management’s
Manufacturing Purchasing Managers’ Index rose
to 53.9 by December from 50.8 in Octobermarking the 29th successive month of growth inmanufacturing activity. The supply-chain
disruptions from the Thai floods have weighedon the U.S. industrial output in the fourth
quarter, with auto manufacturers having alreadyannounced lower output for November becauseof parts shortages. Indeed industrial production
advanced only 0.1 percent in November from theprevious month. Nevertheless with stocks at
relatively low levels and US consumer andbusiness spending remaining resilient amidst
financial turmoil elsewhere, manufacturing
output is likely to continue increasing in themonths ahead with growth expected to be inexcess of 3.5 percent, in the fourth quarter before
weakening in the first half of 2012. Growth isAmong developing regions the outlook is more
upbeat than in high-income countries. Led by
China, developing country industrial production
growth will remain stronger than high-income
countries although growth will moderate due to
weakness in external demand, and in particular
Figure IP.6 Manufacturers’ business sentimentis consistent with weak output growth

Figure IP.5 Deterioration in business sentiment

Purchasing managers index (PMI), points

December, 7-month change, points

65

DI,sa

USA

60

Japan
Australia
Russian Federation
TurkeyBrazilCanadaSingapore
China
India
Denmark
The UK
GreeceSouth Korea
PolandPolandSpain
Ireland
Switzerland
Austria
FranceCzech RepublicEuro Area
Taiwan, China
Italy
Netherlands
Germany

55

Germany

China

50
45
40

Readings above 50 indicate expansion,
those below 50 signal contraction

Italy

35
30
Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11
-25

0

25

50

Source: Haver and World Bank

Source: World Bank

35

Global Economic Prospects January 2012

Industrial Production Annex
part of 2011, sentiment has recovered somewhat
with the PMI above the 50 no-growth mark since
September. Similarly in Russia businesssentiment improved since September, rising
above the 50 growth mark in October.

Figure IP.7 Japan’s industrial production
bounces back%ch, 2m/2m saar

points

90

70

70

65

50

60

30
10

50

-10

45

-30
-50

Overall, global industrial output growth isexpected to ease to around 2.0 percent in the
fourth quarter, from 2.9 percent (saar) in thethird quarter, and ease further in the first half of2012, before reaccelerating in the second half of2012, when the current headwinds will abate.
The floods in Thailand, which are disrupting the
global supply-chain, have created further
headwinds and are likely to disrupt production
for at least two quarters. Another headwind for
global industrial production is the expected
correction in the global inventory cycle in thenear-term. Indeed, the inventory to shipment
ratio in countries that provide timely and reliabledata (South Korea, Taiwan, China) is still above
long-term trends. Policy tightening in major
emerging economies is also likely to contributeto the slowdown in industrial production overthe short-term.

55

IP

40

PMI

35

-70
-90
Jan-05 Mar-06 May-07

30
Jul-08

Sep-09 Nov-10

Source: World Bank.

subdued demand from high-income countries,
especially in the first half of 2012, as well assome policy-induced deceleration in growth.
China’s industrial production growth shows
signs of policy-induced deceleration in growth,with the PMI below the 50 no-growth mark inboth November and December. The policyinduced correction in the housing market led tomoderation in real estate investment andcontributed to the slowdown in industrial output
in related industries. Furthermore, concerns
about funding conditions for small and medium
enterprises have emerged recently, which
together with softer global demand could
moderate growth somewhat in coming months.
In Thailand production will likely contract
through the fourth quarter of 2011 and stage amodest recovery starting in the latter part of thefirst quarter of 2012. Given Thailand’s
importance as an auto parts hub, floods will
likely affect output in other countries both within
the East Asia region and outside, although somecountries in the region could benefit as they will
likely produce some of the parts and materials
that used to be produced in Thailand.

Risks and vulnerabilities
Should the financial turmoil and deterioration in
financial market confidence lead to a marketinduced freezing-up in capital markets, and atightening in global credit, the prospects for theindustrial sector would deteriorate markedly. In
the small contained crisis scenario global GDP
growth could be 1.7 percent lower than thebaseline in 2012, while in the scenario of a larger
crisis economic activity could see a 3.8 percent
decline relative to the baseline in 2012 (SeeMain text). In these two downside scenarios,
economic activity in developing countries,
including industrial sector growth, could be 1.7
percent and 3.6 percent lower than the baseline,
respectively, in 2012, and 1.8 and 4.3 percent
lower than the baseline in 2013, respectively.
In the event of an economic downturn similar tothe one following the 2008 crisis sharp declines
will likely occur in the demand for machinery,
capital goods and durables, with countries that
depend heavily on this type of production being

In Europe and Central Asia, industrial output
outlook has deteriorated, as the region is likely
to suffer from the financial turmoil in Euro area.
In Turkey after a marked deterioration in the first36

Global Economic Prospects January 2012

Industrial Production Annex

the most vulnerable to postponement in capital
expenditures by investors and government andbig ticket purchases by consumers. Countries
that rely heavily on manufactures (China, India,
Korea, Malaysia, The Philippines, Thailand,
Taiwan, China, and Turkey) would be affected.
Another risk to industrial output growth is thepossibility of domestic banking crises, as nonperforming loan ratios are likely to increase withthe deceleration in GDP growth in developing
countries. A sharp slowdown in credit growth oroutright contraction will have marked impacts on
domestic demand, and industrial output.
Economies in Europe and Central Asia and Latin
America could be vulnerable to possibledeleveraging by European banks. There are
already signs that many emerging country banks
are tightening terms and standards of lending
across all regions, and all types of loans(business, real estate, and consumer).

37

Global Economic Prospects January 2012

Trade Annex

Trade Annex
As sharp as the April trade contraction was, its
rebound in May was equally strong, as much of
the production capacity that had been sidelined
in Japan was restored or replaced elsewhere, andthe back log of unfilled orders boosted the
expansion in trade, with trade growing at a 19
percent (3m/3m, saar) pace in April (30% in East
Asia).

A year of shifting fortunes in global trade
expansion.
The volume of global trade(merchandise and services) is estimated to have
expanded by 6.4 percent in 2011— over a
percentage point above its ten-year average.
However, performance across the year was not
uniform. In the first quarter global trade growth
was expanding at a historically high pace.
However, the strong performance at the
beginning of the year was punctured by multiple
shocks to the global economy.

Global economic uncertainty rises, dampening
what had looked like a robust recovery. Just as
the effects of the Tohoku quake were dissipating,global economic uncertainty rose with theescalation of the Eurozone debt crisis, downward
revisions to estimates of US growth, andcontentious US debt ceiling discussions that led
to a downgrade of US sovereign debt by S&P(see main text and finance annex for detailed
discussion). The associated uncertainty and risk
aversion had a rapid impact on the real economy,
with global trade growth turning negative inAugust.

The Tohoku quake rattled supply chains,particularly in East Asia. The disruptions to
supply chains that occurred in the wake of the
Tohoku quake dealt a severe blow to trade incapital goods and electronic appliances. Thoughmany regions were affected, the impact wasmost pronounced in East Asia (and in particular
China), as many Japanese firms are verticallyintegrated with production networks in theregion. Indeed, global trade decelerated rapidly
from a high annualized pace of 22.6 percent(3m/3m, saar) in March to 12.4 percent (3m/3m,saar) in April (figure Trade.1). Much of this drop
in growth was driven by a 6.5 percent
contraction in import demand from East Asia.
China’s import demand fell by 11.3 percent andSouth Korea’s by 13.7 percent.

The slowdown in global trade volumes was moremarked in high-income countries. High-income
countries’ contribution to global trade fell by
24.0 percentage points from May to October(from 14.7% to minus 9.3%), while developing
countries’ contribution to trade growth fell by
only 0.9 percentage points (2.9% to 2.0%). The
slowdown in global trade has been stronger inEurope, with imports volumes of European
Union member states falling at a 17.4 percent(3m/3m), and 20.9% (3m/3m) annualized pace in
September and October respectively, amid
slowing industrial production and weakening
order books (see Industrial production annex). In
the US the deceleration has been less marked
than in Europe, with import demand falling at
7.8 percent (3m/3m, saar) and 9.5 percent(3m/3m, saar) annualized pace in September andOctober respectively. And in developing
countries, supported by a rebound in China’s
imports volumes, imports increased at anannualized pace of 0.6 percent and 6.4 percent

Figure Trade.1 Global trade expansion interrupted
by multiple shocks(growth in import volumes, % 3m/3m)Rest of Developing
25
20

China
Germany
USA

15
10Rest of High-Income
Global

5
0

-5
-10
-15
2010M04

2010M07

2010M10

2011M01

2011M04

2011M07

2011M10Source: World Bank.

39

Global Economic Prospects January 2012

Trade Annex(3m/3m, saar) in the three months to September
and October respectively.

Most of the weakness in global trade volumes
reflects the relatively sluggish recovery in highincome countries. As of October 2011,
developing country exports were 9.2 percent
above their pre-crisis peaks, while high-income
exports had fallen to 9.4 percent below their precrisis peak volumes, having previously reached1.5% of their peak volumes in May 2011 (figure
Trade.3).

Current recovery lags behind the previous
recession.
With the recent sharp deceleration in the pace of
global trade volume growth, world trade isfalling once again below its pre-crisis peakvolumes a milestone that it reached in December
2010. In contrast, 39 months after the previous
recession in global trade in 2001, trade was some
13 percent above pre-crisis peak levels (figure
Trade.2). Given the greater depth of the 2008
recession, it took twice as long during thecurrent recovery to regain pre-crisis levels of
trade activity as it did in 2001 recession (32 vs
16 months).

Regional exports have slowed sharply, but
growth has remained in positive territory
through AugustSouth Asia’s exports, driven mostly by soaring
Indian trade with China, eclipsed theperformance of any other developing region in
the first three quarters of 2011 (South Asian
Figure Trade.3 Recovery of exports in highincome countries lags behind that of developing
countries

Figure Trade.2 Trade recovery in current crisis
still lags behind previous crisis
Peak export volume = 1

Pre-crisis peak export volumes

1.2

1.20
1.15

1.1

1.10

High Income

Developing

World

1.05
1.0

1.00

0.95
0.9

0.90
0.85

From peak April 2008

0.8

0.80

From peak of January 2001

0.75

Months

0.7
1

3

5

7

9

0.70

11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43

2008M01

2008M10

2009M07

2010M04

2011M01

2011M10Source: World Bank.

Source: World Bank.

Table Trade.1 Regional export growth slowed sharply in the third quarter(Merchandise export volume growth, seasonally adjusted annualized rates, unless otherwise stated)

2011
Developing
East Asia & Pacific
Europe & Central Asia
Latin America & Caribbean
Middle-East & North Africa
South Asia
Sub-Saharan Africa

2007
10.7
14.5
10.7
4.6
5.9
8.1
9.4

2008
3.9
5.3
3.2
-1.8
6.2
7.1
5.5

2009
-8.8
-8.4
-11.6
-7
-12
0.4
-12.8

2010 Q1
Q2
18.5
-15
24.3
-1.4
12.1
10.5
12.3
4.3
13.5
-20.8
19.2
23.8
10.2
14

Source: World Bank.

40

Q3
16
18.7
15.1
14.2
0.8
24.8
9.2

(month-on-month growth)
OctoberNovember
-1.2
-1.2
-1.6
-0.9
4.0
-6.8
3.0
1.1
1.4
-9.7

-10.9

10.3

Global Economic Prospects January 2012

Trade Annex

exports grew at about 24% for the first twoquarters of 2011. Nevertheless, the region likeall other developing regions saw export demand
plummet in the third quarter as global
uncertainty picked up and its export volumes
actually declined 9.6 in the 3 months ending
September 2011. Most developing regions(except the Middle-East & North Africa where
activity was interrupted by the Arab Spring) saw
their export growth decline from double digit
rates to negative ground in the third quarter, with
Latin America performing best. Third quarter
performance in Europe and Central Asia (-6.8
percent ) was among the worst (-6.8 percent),
reflecting their close trading ties with highincome Europe, the epi-center of current
financial market turmoil (table Trade.1).

Outlook and Risks
Outlook
The volume of global trade (merchandise andservices) is estimated to have expanded by 6.6
percent in 2011. The sharp slowdown in growthin the second half of 2011, will have negative
impacts on whole-year growth statistics in 2012
– even if, as we expect quarterly trade growth
rates within year to return positive. This negative
carry-over will reduce annual growth to around
5.2 percent in 2012, before it picks up to around
7.2 percent in 2013.
This rate of growth in 2012 is below the average
5.5% growth between 1991 and 2011, though it
exceeds it in 2013. However, even with thisgrowth, global trade will remain well short of thelevel it would have attained had the 2008/09
recession not occurred. Indeed, at a growth rateof 7.5% it would require some four years for
trade to reach trend volumes (figure Trade.5).

Oil exporters have enjoyed large terms of tradegains. As discussed in more detail in the
Commodity Annex, the rise in oil prices boosted
oil exporters’ terms of trade from January to
September (figure Trade.4).
Sub-SaharanAfrican oil exporters gained the most (8.5% ofGDP), while oil importers in every region except
Sub-Saharan Africa experienced a decline intheir terms of trade (many of the oil importers in
Sub-Saharan Africa are exporters of metals andminerals, which also have seen increases ininternational prices).

As has been the case throughout the recovery,
trade growth in developing countries (between 810%) is projected to be higher than in highincome countries (between 5 to 7%) over theforecast horizon. However, with high-income
countries still accounting for some two-thirds ofglobal trade flows, trade developments in
Figure Trade.5 It could take four years for global
trade to catch-up with pre-boom trend volume.

Figure Trade.4 The recovery in prices has favored
oil exporters(Terms of trade changes as a share of GDP, percent)(constant dollars, millions)South Asia

1,600,000

Europe and Central Asia Oil exporters

1,400,000

East Asia Pacif ic

1,200,000

projections

1,000,000

Sub Saharan Af rica Oil Importers

800,000

Latin America and the Carribean

600,000
Middle East and North Af rica

400,000
Europe and Central Asia Oil Importers

200,000
Sub Saharan Af rica Oil Exporters
-2.0

0.0

2.0

4.0

6.0

8.0

0
1991M01

10.0

Source: World Bank.

ActualPre-boom(2005) trend

1997M11

Source: World Bank.

41

2004M09

2011M07

Global Economic Prospects January 2012

Trade Annexdeveloping countries over the forecast horizon
will not be decoupled from the growth trajectoryof high-income countries.

import demand from the EU, countries in the
Middle East and North Africa as well as Europe
and Central Asia could potentially suffer thegreatest direct impacts.

Risks

The vulnerability of developing regions to a
slowdown in Europe depends not only on theshare of its exports going to Europe but also on
the commodity composition of its exports to
Europe. In addition, besides the first roundeffects of slowing demand from Europe, there
will be second round demand slowdown effects
from other regions, triggered by the initial EU
slowdown.

An escalation of the debt crisis in the Eurozone(beyond what is currently envisaged under thebaseline assumptions) would have strong
negative effects on global trade. In the scenario
of a contained crisis in some smaller euro-areacountries described in the main text, global trade
growth will slowdown to between 0.9 and 1.8
percent in 2012 depending on the extent ofconfidence effects. In the scenario, where several
larger European economies also become
involved global trade would contract between 4
to 6 percent.
Vulnerabilities to slow down in Europe differ
by region.

To disentangle some of these effects we adapt
the standard GTAP model to estimate the effects
of a 1% reduction in EU consumption (say on
account of increased precautionary savings due
to a further escalation in the Eurozone debt
situation).

Thanks to their proximity, cultural links andexisting preferential trade agreement Europe andCentral Asia, and the Middle East and North
Africa are the developing regions with theclosest trade linkages with the European Union
and would be hardest hit (figure Trade.6). In
total, some 43% of exports for each of these tworegions are destined for the European Union.
Latin America and the Caribbean are the least
dependent on Europe - accounting for only 18%of their exports. Hence, while all developing
countries will be impacted by a slowdown in

Simulation results using the standard GTAP
(Global Trade and Protection) generalequilibrium model of world trade suggest that
although first-round effects for Europe andCentral Asia are largest (and in line with export
shares), first round effects are also strong forSouth Asia, because South Asian exports to
Europe (in particular textiles and clothing) are
more sensitive to a decrease in consumer
demand. Moreover, second round effects are
actually much higher than first round effects for
all regions. In particular, knock on effects

Figure Trade.6 MENA & ECA regions remain themost exposed to a trade downturn in Europe

Figure Trade.7 A slowdown in EU will havevarying effects on developing country exports...
(%ch, export volumes)

Percent of non-oil merchandise exports destined to Europe
45%

0.00

40%

-0.10

High-Spread EU

Rest of EU

35%

-0.20

30%

-0.30

-0.40

25%

-0.50

20%
-0.60

15%

Second round effects
First round effects

-0.70

10%

-0.80

5%

-0.90
-1.00

0%
Latin America& Caribbean

East Asia &Pacif ic

South Asia

Sub-SaharanAf rica

Latin America sub-Sahara& Carribean
Af rica

Europe & Middle East &Central Asia North Af rica

Source: WITS, COMTRADE

Middle East &North Af rica

Source: World Bank, GTAP.

42

East Asia
Pacif ic

South Asia

Europe &Central Asia

Global Economic Prospects January 2012

Trade Annex(including reductions in derived demand fromregions hit hardest in the first round) cut sharply
into exports of East Asia & Pacific and to alesser extent the Middle East and North Africa,even though for both regions the first roundeffects are relatively moderate (figure Trade.7).

industrial commodities, compared to othercommodities (including food and oil) as
fluctuations in the export volume of thesecommodities also were larger.
It follows from this analysis that major industrial
commodity exporters like Chile, Botswana and
CAF are likely to suffer large price and earnings
swings and therefore be exposed to large swings
in current account balances, government deficits
and currency swings (figure Trade.8). Further,
the negative income effects and loss in foreign
currency earnings can in some instances provoke
a significant deceleration in domestic demand
and therefore GDP. Indeed, these secondary
effects could be long-lasting if reduced export
earning caused countries to delay the import ofproductivity and growth enhancing capital goods(Go and Timmer, 2010).

Country vulnerabilities to a downturn in the
global economy differ by the composition ofexports.
Another approach to determining whichdeveloping countries would be most vulnerable
to a deterioration in conditions is to look at theprice and volume sensitivity of their exports inthe context of a global downturn.
Looking at the fluctuations in trade prices andvolumes of 97 commodities (commodities
disaggregated at the two-digit level of theHarmonized System) following the 2008 crisis,
we can calculate the extent to which the exports
of individual countries might be hit if a similar
downturn were to be reproduced.

On the demand side, manufacturing goods saw
the sharpest drop in volumes, with the demand
for machinery, capital goods and durable goods
dropping most as given uncertain prospects
investors and consumers delay capital
expenditures and big-ticket purchases (figure
Trade.9). Countries more reliant on
manufactures (such as China, India, Malaysia,
Philippines, Thailand, and Turkey) may not see
as large swings in their nominal balances, but are
more likely to see bigger hits to GDP as thevolume of exports falls relatively sharply.

According to these calculations that exporters ofindustrial metals such as copper (Chile andZambia), precious stones (e.g. Botswana andCentral African Republic) and oil and gas(Algeria, Yemen, Venezuela, Nigeria, Saudi
Arabia) suffer the largest declines in export
prices. Prices of non-industrial commodities
proved to be more resilient. Moreover, the total
value of exports declined even more sharply for
Figure Trade.8 Commodity exporters are most
likely to see a sharper fall in their export prices
during a global downturn...
Venezuela
Kazakhstan
Algeria
Nigeria
Krygzstan
JordanAzerbaijan
Sudan
Belarus
Cameroon
Cote d'Ivoire
Gabon
GuyanaBolivia
Peru
Uruguay
Botswana
ZambiaChile
Niger
Central African Republic

Figure Trade.9 Manufactured goods and precious mineral exporters likely to see a sharper
fall in demand during downturn
MexicoTanzania
Malaysia
TurkeyArmenia
Ukraine
India
PolandBurundiHungary
Slovenia
Thailand
China
BosniaSouth Africa
LebanonKrgyzstan
Djibouti
Central African Republic
Burkina Faso
Botswana

Price Vulnerability Index

-29

-27

-25

-23

-21

-19

-17

-0.60

-15

Quantity vulnerability index-0.55

Source: World Bank.
Source: World Bank.

43

-0.50

-0.45

-0.40

-0.35

-0.30

Global Economic Prospects January 2012

Trade Annex

In comparing the two effects – price and volume- Haddad and Harrison (2010) find that overall
the impact from the volume effect is stronger,
thus implying that countries vulnerable throughthe volume channel are more likely to experiencegreater down turns in their export receipts.

percent between the first half of 2011 and thesecond half of 2011 (when the Euro Area crisis
escalated), for developing countries the fall was
42 percent with the sharpest declines occurringin Latin America and the Caribbean (57.3
percent), and in Africa (47.5 percent). Further
evidence of this is observed by the increase intrade finance demand provided by multilateraldevelopment banks, including the International
Finance Corporation.

Developing country trade financing remains
vulnerable to Eurozone financial crisis. Evenfor developing countries whose banking sectors
are less integrated with the banking sector in theEurozone, the ongoing debt crisis in the zone
threatens to impact them indirectly through thetrade finance channel. This is all the more
important as European banks are major players
in global trade finance. According to data from
Dealogic, while US and Japanese banks
accounted for 5 percent and 4 percent
respectively of global trade finance in Q3 2011,
large Euro Area banks alone accounted for atleast 36 percent of the total. Over that period
French and Spanish banks accounted for some
40 percent of trade credit to Latin America andAsia. Recent calls by regulators to European
banks to shore-up their capital adequacy ratios
albeit necessary could lead to significant
deleveraging. The typical short-term maturity oftrade finance lends itself to being cut. And
indeed, there is already indication that this istaking place with developing regions being hit
harder. Using data from Dealogic (figure
Trade.10), we observe that while high-income
countries trade financing volumes fell by 7.8

A further slowdown in the global economy risks
a rise in trade protectionist measures.
In general, during periods of economic
downturns the application of trade defensive
measures rise, as governments, pressured by theprospects of higher unemployment or existingm a c r o e c o n o mi c i m b a l a n c e s , p u r s u emercantalistic policies to protect domestic
industries (and employment) and or gain market
shares. Indeed, during the recent recession, theincidence of trade restrictive measures
implemented by G-20 economies rose by some
175 new measures over the 11-month period
between April 2009 to February 2010, according
to the World Trade Organization (WTO). Whilethe number of new measures implemented
continued to increase during 2010, there areworrying signs that since the latter half of 2011,
as global economic conditions deteriorated, theincidence of trade restrictive measures is picking
pace. Indeed, according to the latest Global
Trade Alerts report, the number of harmful trademeasures implemented in the third quarter 2011
increased by 12.5% (q/q).

Figure Trade.10 Decline in trade finance volumes between first and second half of 2011.
0

However, the unilateral `implementation of trademeasures has the potential to trigger tit-for-tat
trade policy responses. A multilateral approach
offers the best prospect (Hoekman, 2011). By
one estimate, the gains to accepting what isalready on the table as regards the market accessgains from the Doha Development Agenda
amounts to a conservative estimate of $160bn
per year (Laborde, Martin, and van der
Mensbrugghe).

-10
-20
-30
-40
-50
-60
-70
Latin
America

AfricaAsia

Middle East Developed

Source: Dealogic and World Bank staff calculations

44

Global Economic Prospects January 2012

Trade Annex

References
Barclays Capital Research, ―Macroeconomic
impact for emerging markets and trade finance‖,
November 22, 2011.
Go, D. and H. Timmer (2010), ―The Millenium
Development Goals after the Crisis‖ in Fardoust,S., Kim, Y., and C., Sepulveda (eds) , Post Crisis
Growth and Development, The World Bank,
Washington DC.
Haddad, M., Harrison, A., and C. Hausman(2010). ―Decomposing the Great Trade Collapse:
Products, Prices, and Quantities in the 2008–2009 Crisis.‖ National Bureau of Economic
Research Working Paper 16253.
Hoekmann, B (2011), The WTO and the Doha
Round: Walking on Two legs. World Bank
Economic Premise, Number 68, October 2011.
Laborde, D.W., W. Martin, and D. van der
Mensbrugghe (2011) , Implications of the Doha
Market Access Proposals for Developing
Countries, World Bank Policy ResearchWorking Paper 5697, Washington DC.
WTO (2011), Report on G-20 Trade Measures(May to Mid-October 2011), The World Trade
Organization, Geneva.

45Global Economic Prospects January 2012

Finance Annex

Finance Annex
Ukraine, and Vietnam. In 2011, developingcountry equities have fallen 15.6 percent
compared with an 8.4 percent drop for mature
markets.

Recent developments in financial markets
Contagion from the Euro area debt crisis todeveloping countries has emerged

Emerging market equity and fixed income funds
experienced a sudden reversal of the positive
inflows trend since early 2009. With many
developing countries in a sweet spot both
cyclically and structurally, the flows into thesefunds had gone up consistently since 2009,
reaching a record volume in 2010. However, theturmoil of the second half of 2011 caused theseflows to reverse. EM equity funds had registeredan outflow of $48.5 billion in 2011—in sharp
contrast to the net inflow of $97 billion for all of2010. The reversal was less sharp for emerging
market fixed-income funds, which posted net
inflows of $17.3 billion in 2011. Foreign selling
was particularly sharp in Latin America, with
Brazil posting large outflows.

Emerging markets have been engulfed by a wave
of market volatility that had started with theAugust downgrade of U.S. sovereign ratings andsharply heightened with the increased
uncertainty related to the resolution of theEuropean debt crisis. In contrast with earlier
episodes of market turmoil centered around high-spread European economies, this time contagion
from high-income countries affected the risk
premia, yields, stock markets, capital flows andcurrencies of developing countries.
Developing-country equity markets experienced
significant sell-offs later in 2011…
As of early-January 2012, emerging equity
markets (as measured by MSCI index) dropped
8.5 percent since the end of July (figure FIN.1).
All developing regions experienced pricedeclines—although these were much moremarked (around 20 percent) in Eastern Europe.
Among the worst country declines were forArgentina, Brazil, Egypt, India, Serbia, Bulgaria,…and bond spreads have widened rapidly
Reflecting this reversal in fortunes, developingcountry composite spreads (EMBIG) widened by
152 basis points (bps) between July and early
January (they had been broadly stable at aroundFigure FIN.1 Emerging market equities fall by
more than developed country equities

Figure FIN.2 Contagion from Europe causes
developing-country spreads to rise
EMBIG Soverign Bond Spreads
basis points

MSCI Equity Index
Jan 2011 =100
110

500

105

450

100
400

95
90
85
80

350

MSCI EM300

MSCI Developed

75
70
Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Source: Bloomberg.

250
Jun-11

Sep 09-May 11
AverageAug-11

Source: JP Morgan

47

Oct-11

Dec-11

Global Economic Prospects January 2012

Finance Annex

310 bps since late 2009) (figure FIN.2). The bulkof the deterioration in spreads occurred in thesecond half of September, with the EMBIG
spread reaching a peak of 490 bps on October
4th—206 bps higher than July 2011. Spreads
have narrowed after October 4th amid signs that
EU policy action to address banking sector
vulnerabilities would be forthcoming, but
remained volatile reflecting the uncertainties
about the size, funding and implementation of
the Euro-zone rescue plan. By early-January,
spreads were about 54 bps lower than their peakon October 4th.

2010 (figure FIN.3). Equity issuance and bondflows were especially weak between September
and December. The volume of equity issuance
was 80 percent down at $25 billion compared tothe same period last year that had the record
breaking level of equity issuance particularly
through initial public offerings (see GEP 2010
Winter). After a mere $2.6 billion in
September—the lowest monthly level since
December 2008, bond flows recovered slightly
after October, following issuances by Venezuela($6.4 billion), Russia ($2.4 billion), Indonesia
and Turkey (both $2 billion). Bond issuance wasstrong in the first weeks of 2012 as January
tends to be one of the busiest months for bondissuance. Brazil, Chile, Mexico, and Philippines
issued a total of $6.6 billion combined in the firstweek of the month.

Although significant, the deterioration offinancial conditions in 2011 is much less marked
than in the fall of 2008, when developingcountry sovereign bond spreads widened by 385
bps and stock indexes dropped 40 percent
between mid-September and mid-December
2008.

International syndicated bank loans, on the other
hand, held up well even after the increased
volatility, a reflection of several large loans tocompanies from natural resource related sectors
in Russia and Mexico, the banking sector in
Turkey and infrastructure sectors in Brazil andSouth Africa. The relative resilience ofsyndicated bank loans can be in part explainedby the time that syndications take to becompleted. In fact the decline in bank-lending
was more gradual following the 2008 crisis
compared to bond and equity flows.

Gross capital flows to developing countries havebeen weak since September
The increased turmoil and risk aversion thatdrove the hike in spreads, was reflected in
sharply weaker capital flows to developing
countries in the second half of 2011. Gross
capital flows (international bond issuance, crossborder syndicated bank loans and equity
placement) totaled only $170 billion between
July and December 2011, 55 percent less than of$309 billion received during the like period of

As a result, gross capital flows in 2011 totaled$450 billion, 9.6 percent below the 2010 level of$498 billion reflecting the robust flows during
the first half of the year.

Figure FIN.3 Capital flows to EMs declined
sharply in the third quarter

Developing countries are vulnerable tomounting funding pressures in the European
banking sector and loss of confidence inglobal financial markets$ billion

250
Bank

200

Bond
150

EquityThe volatility in high-income financial markets
and the possibility that the situation deteriorates
further represents a serious risk for developing
countries (see discussion and scenarios in themain text). From a finance perspective, the maintransmission channels from the ongoing crisis in
high-income countries to developing countries
have been through direct linkages with distressed

100
50
0

2008 Q1

2008 Q4

2009 Q3

2010 Q2

2011 Q1

2011 Q4

Source: Dealogic and World Bank Staff calculations

48

Global Economic Prospects January 2012

Finance Annex

high-income European banks, and moregenerally through tightening up of global
financial conditions that constrained developingcountry access to high-income debt (bank andbond) markets. If conditions deteriorate further,
FDI inflows might also contract spreading thenegative effects of the crisis both to middle andlow income countries.

several Eastern European countries (Latvia,
Romania, Bulgaria, Lithuania and Albania) as
well as countries from other regions(Mozambique and Chile), these claims are quite
significant as they are equal to more-than 25
percent of GDP (figure FIN.4).
European banks operate in developing countries
also through their local subsidiaries and accountfor considerable shares of some countries‘
banking assets (figure FIN.5). In Latin Americancountries exposures are concentrated among
Spanish banks, which own over 25 percent ofbank assets in Mexico and Chile. In Europe andCentral Asia, Austrian and Greek banks haveplayed a significant role in Albania, Bulgaria andRomania, while the country source of holdings
in other countries are more diversified.
Portuguese banks account for almost one-third ofbanking assets in Angola and Mozambique.

Risks stemming from developing-country
exposure to fragile high-income European
banks...
Given the fragile state of high-income country
banks, their extensive operations in somedeveloping countries and regions are an
important channel of contagion. As high-income
European banks are forced through losses intheir portfolio and regulatory changes to rebuild
their capital stock, they are now engaged in deleveraging—either by calling or not renewingloans (thereby reducing loans to capital ratios);
or by tightened credit conditions or selling assets
or issuing new equity (thereby raising capital).1...with the nature of the exposure determining its
impact on domestic credit...

Starting in the early 2000s, European banks
rapidly grew their exposure to developing
countries, and now have $2.4 trillion in
outstanding foreign claims on actors within thesecountries.2 The bulk of these claims lie in Latin
America & the Caribbean ($861 billion or 16
percent of GDP) and Europe & Central Asia($633 billion or 21 percent of GDP) regions. In

Despite their significant presence and high levelsof foreign claims in Latin America, Spanishbanks are mostly decentralized in their crossborder operation with independently managed
affiliates in the region. Their claims are mostly
in local currency/locally funded. Indeed, averageloan to deposit ratios in the region are at or
below 100%, with few exceptions including
Chile (107%). Moreover, some countries (e.g.

Figure FIN.4 Developing countries with strong
dependence on European Banks

Figure FIN.5 Ownership position of European
Banks in selected developing countries

European Banks' Foreign Claims(2011 Q2, %GDP )Share of European Banks in
Total Banking Assets of Selected EMs (%)

Senegal
MexicoDominica
TurkeyMalaysia
South Africa
MoroccoChile
MozambiqueAlbania
Lithuania
Bulgaria
Romania
Latvia

0

20

40

60

Spain

BrazilArgentina
Chile
PolandHungary
MexicoSerbiaBulgaria
Macedonia, FYR
Albania
Romania80

Italy
GreeceAustria-FranceGermany0

Source: BIS

Source: Citibank.

49

20

40

60

80

100

Global Economic Prospects January 2012

Finance Annex

Brazil and Mexico) have regulations limiting theamount of inter-company loans between parent
and daughter banks and limiting the ability ofparent banks to reduce daughter bank‘s capital
below prudential levels.

...but the risk of rapid sales of bank assets ismore widespread.
European banks have been trying to reduce
exposure and/or raise capital also by sellingstakes in developing country banks or fullyowned subsidiaries. The need to find a buyer
forces Euro-area banks to disinvest from some of
the better markets where they can have profitable
exits. For example, Greek banks have started tosell Turkish bank assets.3 Any of such sales
represent FDI outflows when the buyer is notforeign but local, which was the case in one of
the sales in Turkey.

As a result, the financial systems in thesecountries would not be excessively exposed to a
sharp reduction of inflows of funding from
European banks (except through the tradefinance channel). As long as this kind ofdeleveraging occurs gradually, domestic banks
and non-European banks should be able to takeup the slack – as appears to be taking place inBrazil.

Developing countries with relatively high private
debt levels would be most vulnerable to a
generalized tightening of financial conditions

In contrast, European banks operating in most of
the Eastern European countries have reliedheavily upon cross-border lending from theirparents to support their loan portfolios, with loan
–to–deposit ratios well over 100 percent inseveral countries: Latvia (240%), Lithuania(129%), Romania (127%) and Russia (121%). In
addition, large portions of cross-border lending
was short-term (see the next section) that can beeasily reduced by simply not being rolled-overor renewed. As a result, these countries are
extremely vulnerable to a cut off of lending by
European banks. So far, deleveraging in theregion has been orderly. In a worrying
development, however, Austrian banksupervisors have instructed Austrian banks tolimit future lending in their central and eastern
European subsidiaries — while several highincome European banks have independently
announced their intention to reduce operations in
Europe and Central Asia.

The recent market turbulence has already led to
declines in capital flows to developing countries
and substantial losses to developing-country
equity markets. Should financial conditions
deteriorate sharply, countries with high externalfinancing needs (current account projections andamortization of external debt) would be mostvulnerable to sudden reversals in capital flows, adrying up of credits or substantial increases inborrowing costs.
Many developing countries remain vulnerable todeterioration in credit conditions. Overall, theexternal financing needs of developing countries
have risen slightly since the 2008/9 financial
crisis (box FIN.1) from an ex ante estimate of$1.2 trillion (7.6 percent of GDP) in 2009 to $1.3
trillion (7.9 percent of GDP) in 2012.4 Allregions except South Asia have reduced theirexternal financing needs as a share of GDP since2008. South Asia‘s estimated external financing
requirements have increased from 5.8 percent to
8.4 percent mainly because of a sharp rise in
India‘s external debt in 2011.

Arguably, markets are already factoring in therisks from these connections. During the recent
episode of elevated turmoil, developing-country
CDS spreads rose most among those countries
with close banking ties with troubled highincome European banks, for example, thespreads in Ukraine, Romania and Bulgaria roseby 422 bps, 231 bps and 203 bps, respectively
versus an overall average for developing
countries of 114 basis points.

Nevertheless, ex ante external financing needs
are very high for some countries and in someregions (figure FIN.6). As in the 2008/9 crisis,
the Eastern Europe and Central Asia region
remains the most vulnerable developing region
with external financing need in the order of 17
percent of GDP. Several countries in the region

50

Global Economic Prospects January 2012

Finance Annex

have high current account deficits as well asprivate debt coming due in 2012.

Table FIN.1 External Financing Needs Projectionsfor 2012
Current

Among countries with access to international
capital markets, estimated ex ante financing
requirements in 2012 exceed 10 percent of GDP
in 30 developing countries (table FIN.1).5 For
many, the financing is unlikely to pose a
problem, coming in the relatively stable form of
FDI or remittances. For others, however, asignificant proportion will have to be financed
from historically more volatile sources (shortterm debt, new bond issuance, equity inflows).

LebanonNicaragua
Albania
Jamaica
Georgia
TurkeyLao PDR
GuyanaBelarusRomania
Moldova
LatviaArmenia
Bulgaria
Lithuania
UkrainePanama
Mauritania
Macedonia, FYR
JordanTanzania
El Salvador
Dominican Republic
Vanuatu
Vietnam
Chile
Kyrgyz Republic
Ghana
Tunisia
Peru

If international financial market conditions
deteriorate significantly, such financing might
become difficult to maintain. Some 25
developing countries have short-term debt andlong-term debt repayment obligations equal to 5
or more percent of their GDP in 2012. Should
financing conditions tighten and these debts
cannot be refinanced, these countries could beforced to cut sharply into reserves or domestic
demand in order to make ends meet. Indeed,following the sharp contraction in capital flows
in 2008 and 2009, many developing countries
were forced to close external financing gaps
through current account adjustments, increased
aid or depletion of foreign exchange reserves(box FIN.1).
Risks are particularly acute for countries like
Turkey that combine large current accountFigure FIN.6 External financing needs of developing countries4
DEBT/GDP

20.0
CA Deficit/GDP
15.0
10.0

deficits, high short-term debt ratios and low
reserves. Indeed, Turkey‘s current accountdeficit in 2011 is estimated to be six times larger
than its net FDI flows in 2011, and its short-term
debt represents 80 percent of its reserves (whichhave been falling in recent months and alreadyrepresent less than 4 months of import cover). Ina similar fashion but to a lesser extent, Belarus

5.0
0.0
-5.0
EAP

ECA

LAC

MNA

SAS

Debt
Repayment
EFN(share of GDP) (share of GDP)
14.5
35.1
5.6
21.9
9.6
21.3
11.3
21.1
8.2
20.9
9.2
19.0
4.7
18.7
7.8
18.4
7.7
18.2
13.5
18.0
5.7
17.8
17.2
17.6
4.9
17.6
18.6
16.6
14.1
16.4
10.9
16.3
3.2
15.6
3.9
15.1
7.8
12.9
4.0
12.5
3.0
12.2
8.2
12.0
3.4
11.6
4.9
11.5
6.6
11.5
10.9
11.3
3.7
10.6
3.4
10.4
4.4
10.2
7.3
10.0

Developing countries‘ external financing needs, aredefined as the current-account deficit (assumed to be aconstant at its 2011 level as a percent of GDP) plus
scheduled principal payments on private debt (basedon information from the World Bank‘s Debtor Reporting System and Bank of International Settlements).
Source: World Bank.

External Financing Needs%GDP

Account
Deficit(share of
20.6
16.3
11.7
9.8
12.7
9.8
14.0
10.6
10.5
4.5
12.1
0.4
12.7
-2.0
2.3
5.4
12.3
11.2
5.1
8.5
9.1
3.8
8.2
6.7
4.9
0.4
6.9
7.0
5.8
2.7

SSA

Source: World Bank, Debt reporting system

51

Global Economic Prospects January 2012

Finance Annex

and Montenegro are also vulnerable to a freezing-up of global credit. Other countries have alsosignificant vulnerabilities. Jamaica, for example,
is at risk since it finances its current accountdeficit with flows other than FDI, which tend tobe volatile. High levels of short-term debt toreserves ratios may put countries such as Chile,
Albania and Egypt also at risk of roll-overdespite their healthy current account balances(figure FIN.7).

The sensitivity of short-term finance to changes
in financing conditions could pose problems for
trade (box Fin.2). In China for example, as muchas 75 percent of short-term debt is reported to be
for trade-finance. Since 2010, there has been a
20 percent increase in short-term debt taken out
by developing countries — with the total now
equal to $1.1 billion or 4.8 percent of developing-country GDP—or 15.7 percent of total
developing-country exports. Should a financial
crisis cause trade finance to freeze up as banks

Box FIN.1 How did developing countries close the (ex-ante) external financing gap in 2009?*
When the global financial crisis hit in September 2008, developing countries‘ external financing needs (current
account projections and amortization of external debt) for 2009 were projected to be around $1.2 trillion. With aprojected sharp retrenchment in capital flows for 2009, the ex-ante external financing gap was estimated in theorder of $352 billion (Global Development Finance 2009, page 82). Financing gaps are ex-ante notions and expost, can be closed through the combination of reduced spending, official flows, and running down the reserves.
As expected, high external financing needs in a time of sharp retrenchment in capital flows (40 percent actual decline in 2009) led to significant current account adjustments and slower growth in several developing countries in2009. Current account adjustments reduced the ex-post gap by $140 billion. Current account balances in deficit
countries were almost halved from -$283 billion to -$128 billion in 2009. In particular, in several ECA countries,
deficits narrowed by more than 50 percent. Net private capital flows (inflows-outflows-debt repayments/
redemptions of debt) were $152 billion higher than initial projections, while more-than doubled official flows andreserves depletion accounted for the reminder.
An important factor that helped developing countries with their 2009 external financing needs was official lending(including assistance from the IMF), which jumped to $28 billion immediately after the crisis in 2008, and morethan doubled in 2009, reaching $70 billion. The World Bank Group tripled its lending to $21 billion. Between
September 2008 and February 2010, more than 20 countries entered agreements with the IMF, with four of thestand-by agreements (Romania, Pakistan, Hungary and Ukraine) larger than $10 billion. The IMF also introduced
a new flexible credit line that provided precautionary arrangements, but there have been no draws so far. Lending
from other multilaterals as well as bilateral loans also increased in response to the crisis.
*Note: Some countries Croatia, Hungary, and Poland that were classified as developing countries for the earlier calculation are
now classified as developed countries by the World Bank. The calculations referred here are based on 2008 classifications;hence the data might differ from the current capital flows tables.

52

Global Economic Prospects January 2012

Finance Annex

Box FIN. 2: Sharp increase in short-term debt
Short-term debt in the developing world is highly concentrated: 15 middle-income countries account for 86 percent.1 Most of the borrowing is done by banks and corporations to finance their growing trade as firms contracted
short-term loans to finance imports and prepay for exports. For example, trade finance accounted for almost 75
percent of short-term debt in 2011 in China and almost all of India‘s short-term debt.
Short-term debt flows have exhibited higher volatility than medium- and long-term flows, particularly during crises. During the Asian and 2008 financial crises, for example, short-term debt fell more sharply in developing
countries than did other flows. One of the reasons is that banks can reduce their exposure quickly through shortterm debt, which can be simply not renewed. The other reason may be that in times of crisis lenders tend to shift
their portfolios to more creditworthy borrowers, which are in a better position to serve longer-maturity loans.
Some part of the decline in short-term debt following a crisis might be also due to demand factors, especially for
trade credit portion of it. Several studies suggest that the sharp decline in trade volumes observed in 2008/9 caused
trade finance to decline and not the reverse.2 But others have argued that a more comprehensive analysis of thefinancial sector‘s role in international trade including the concept of a ‗financial accelerator‘, shows how export
flows are actually significantly affected by financial shocks. 3
1

China, India, Brazil, Turkey, Russia, Indonesia, Mexico, Malaysia, Chile, Romania, Thailand, South Africa, Peru, Philippines,
and Argentina.
2

Levechenko A., L. Lewis and L. Tesar. 2010. ―The collapse of International Trade during the 2008-2009 Crisis‖ NBER
Working Paper 16006.
3

Amiti M and D. Weinstein. 2009. ―Exports and Financial Shocks.‖ CEPR Working Paper 7590.

seek to deleverage (as it is reported to have
happened for a short while in 2008) it could haveserious consequences for global trade.

FIN.8). For example, in the first half of October,
Turkey‘s central bank intervened directly, sellingan estimated $0.5 billion of reserves, bringing
the average monthly decline in reserves since
end-July to $2.7 billion. Turkey‘s reserves
currently are at $84.8 billion, equivalent lessthan 4 months merchandise import-cover. Given
recent reserve sell-offs, South Africa faces
similar exposures, but Brazil, Russia and India‘s

Foreign currency reserve accumulation has
already declined sharply, even reversed inseveral developing countries
Large capital outflows in the second half of 2011and ensuing currency fluctuations prompted
several central banks to sell-off reserves (figure

Short-term Debt /FX reserves 2011 (%)

Figure FIN.7 Countries at risk should capital
flows reverse

Figure FIN.8 Depletion of FX reserves accelerated
in recent months in selected economies
6100

FX Reserves
monthly percent change

Montenegro

90

Belarus4

Turkey

80
70

2

Chile

60
50

Egypt
Lithuania

40
30
20

Romania

LatviaBrazilPeru

Jamaica-4

Ukraine10

Moldova

Jordan-6002TurkeySouth Africa
Brazil
India
Russia-2South Africa
Sri Lanka Kenya

Georgia

0

4

6

8

10

Jan-11Mar-11

May-11

Jul-11

Sep-11CA Deficit-Net FDI flows ratio (2011 projections)

Source: World Bank, IMF IFS

Source: IMF, Central Banks, World Bank

53

Nov-11

Global Economic Prospects January 2012

Finance Annex

larger reserve-buffers offer more scope forextended currency support.

Some countries have undertaken steps to slow
down the credit growth with limited success.
China, for example, has raised interest rates andincreased the required reserve ratios (RRR) fivetimes in 2011. As a result, the credit growth inChina has eased significantly but remains highcompared to previous credit booms and busts.
Similarly, credit growth in Brazil and Turkey hasremained buoyant in 2011 despite the RRR
hikes. Unlike China, however, Turkey lowered
its key policy rate to deter volatile international
portfolio flows and stimulate economic growth.

Following the strong domestic credit growthsince the crisis, domestic banking sectors may
also be vulnerable to a sharp increase in nonperforming loans in the event of a slowdown
in growth.
Although non-performing loans (NPLs) remain
low in most developing regions so far, they
could shoot up in the event of a sharp slowdown
in growth (figure FIN.9). Given rapid credit
expansion in recent years (loans to GDP ratios
increased by more than 10 percentage points
between 2005 and 2011 in several countries),
commercial banks could see a marked
deterioration in loan performance in the face ofslowing growth, heightened risk aversion andrestricted access to finance. In some countries,
NPLs and provisioning are already an issue. The
share of NPLs in outstanding bank lending in theEurope and Central Asia region lofted to 12
percent in 2010 from 3.8 percent in 2007.
Available data indicates that NPL ratios havecontinued to deteriorate in 2011 in Kazakhstan(32.8%) and Romania (14.2%).

More recently concerns about the deteriorating
global outlook and its potential adverse impact
on output growth have caused a shift in policies.
China, for example, cut its RRR by 0.5
percentage point in December, the first such cut
since December 2008.
International capital flows to developing
countries are expected to decline slightly in2011 after a strong rebound in 2010

With the possibility of further economic
slowdown, the need for macro-prudential
reforms and stress tests have risen to ensure thatbanks are best placed to deal with deteriorationin credit quality and much tighter liquidity
conditions.

Net private capital flows (earlier data referred togross flows) to developing countries are
estimated to have declined to $0.95 trillion (4.3
percent of GDP) in 2011 from $1.1 trillion (5.4
percent of GDP) in 2010 (figure FIN.10).6 The
increased global market volatility of the second
half of 2011, and associated equity-market selloffs caused portfolio equity flows to decline by
60 percent, from $128.4 billion in 2010 to an
estimated $51.4 billion in 2011. Overall, short-

Figure FIN.9 Possible resurgence in NPLs withslower growth…a danger to banking

Figure FIN.10 International capital flows fell in
2011

The share of NPLs in total loans outstanding
percent$ trillion

Euro Zone (excl. GER, NLD, CYP)
Other HICs
ECA
Asia
Other LMICs

14
12
10

1.0
0.8

0.6

6

0.4

4

0.2

2

0.0

0

-0.2
2007

2009

Bank Lending
Portfolio Equity

1.2

8

2005

ST Debt
Bond Flows
FDI Inflows

2011Q2

Source: IMF Financial Soundness Indicators

2006

2007

2008

Source: World Bank.

54

2009

2010

2011e

Global Economic Prospects January 2012

Finance Annex

term flows for the year as a whole also declined
despite their strong performance in the first halfof the year – partly because of slower trade
growth (and therefore less trade finance) in thesecond quarter due to disruptions emanatingfrom Tohoku. In addition, prudential measurestaken by developing countries (such as China) tolimit the risk associated with short-term flows
also played a role. This year‘s fall in short-term
debt flows is in sharp contrast with last year‘ssurge, when these flows led the recovery in net
capital inflows (box FIN.2).

in the Eastern Europe and Central Asia region
was mainly driven by the economic problems in
Europe, which weighed both on the capacity ofhigh-income European firms to invest and on theattractiveness of developing countries in theregion as destinations for FDI due to reduced
growth prospects. Inflows to the Middle East andNorth Africa region suffered because of politicalturmoil associated with the Arab Spring, while
the decline in Sub Saharan Africa is mainly due
to net dis-investment from Angola. Despite thenominal increase, however, FDI inflows as apercent of GDP were flat or declined (figure
FIN.11).

FDI inflows to developing countries continued toincrease modestly in 2011

Prospects: Uncertain in the short-term but
strong in the medium-term

Foreign direct investment (FDI) inflows todeveloping countries rose by an estimated 10.6
percent in nominal terms, reaching $555 billion(2.5 percent of GDP) in 2011 (figure FIN.11).
Most of the gains in FDI came in the first half ofthe year, with flows slowing in the third quarter.
The largest increase was in the Latin America
and Caribbean region, which attracted
investment due to relatively robust growth, richnatural resources and a large consumer base. The
East Asia Pacific and South Asia regions remain
attractive destinations for multinationals, withinvestors drawn to the fast growing regional
economies of China, India, Indonesia andMalaysia. FDI inflows declined in other regions
but for different reasons. The fall in FDI inflows

The outlook for 2012 has become morechallenging as the world economy has entered avery difficult period. The likelihood that thesovereign debt crisis in Europe deteriorates
further resulting in a freezing up of capital
markets and a global crisis similar in magnitude
to the Lehman‘s crisis remains very real. The
increased risk-aversion among global investors
has reduced global financial flows including
those to developing countries since mid 2011.
The actual impact of the current turmoil ondeveloping countries, in terms of international
financial flows and the real economy, are not yet
fully apparent but suggest a generalized slowing
in global growth (see the main text) and reduced
capital flows.

Figure FIN.11 Despite the nominal increase, FDI
flows as a percent of GDP to most developing
regions were flat or declined in 2011

Increased risk aversion and banking-sector
deleveraging are expected to continue cutting
into capital inflows to developing countries inearly 2012. As a result, net private debt andequity flows, which comprise net debt flows(incoming disbursements less principal
repayments) and net equity flows (FDI and
portfolio inflows net of disinvestments) areprojected to decline further by 18 percent to $0.8
trillion (3.3 percent of GDP) in 2012, with sharp
contraction in cross-border debt flows. Even FDI
inflows to developing countries are expected tolevel out by 6 percent next year because of theuncertainly in global financial markets. The
projected decline in FDI inflows is relatively

FDI inflows as a share of GDP (%)

2009

4.0

2010

2011e

3.5
3.0
2.5

2.0
1.5
1.0

0.5
0.0
EAP

ECA

LAC

MENA

SA

SSA

Source: World Bank

55

Global Economic Prospects January 2012

Finance Annex

Figure FIN.12 Overall capital flows to remain astable share of GDP
ST Debt

Bank Lending

Bond Flows

Portfolio Equity

Figure FIN.13 Improving credit quality for
emerging market sovereigns
Net rating (number of upgrades-downgrades)
50
40
30
20
10
0
-10
-20
-30
-40
-50

FDI Inflows$ trillion

9
8
7
6
5
4
3
2
1
0

1.2
1.0
0.8
0.6
0.4
0.2
0.0
-0.2
2004

2006

2008

2010

Developing countries
High-income countries

2007

2008

2009

2010

2011*

* Includes rating actions by Moody's, S&P, and Fitch

2012f

Source: World Bank

Source: Bloomberg and DECPG staff calculation

At the same time, credit quality for developing
countries has been improving, and the gap
between mature and emerging markets
sovereigns is narrowing (figure FIN.13). The
wave of sovereign rating downgrades acrossEurope, the United States, and Japan stands insharp contrast with the improved
creditworthiness in emerging markets asmeasured by sovereign credit ratings. The ratioof emerging market rating upgrades todowngrades is six to one this year. Since the2008 financial crisis, 47 developing countries
have received 117 upgrades by major rating
agencies, while the last rating upgrade for adeveloped country occurred in 2007, when
Japan‘s sovereign debt was upgraded. Many
developing countries currently have a positive
outlook assigned to their sovereign debt,
signaling that additional upgrades are possible.

small compared to the 40 percent contraction of
2009. The impact on capital flows is expected tobe disproportionately higher for the developing
Europe and Central Asia region, whose
economies are more closely tied to those in highincome Europe.
Under the assumption that the ongoing
turbulence in Europe will be resolved tomarket‘s satisfaction towards the end of 2012,
net capital flows to developing countries are
expected to have a sharp rebound in 2013 withthe growth in global economy, reaching $1.02
trillion in 2013 (3.7 percent of GDP) (figure
FIN.12). By 2013, all flows are expected toincrease. Bond issuance is expected to level
down slightly as bank lending picks up the pacesupported by South-South flows.
The rebound should be supported by the factthat conditions that underpin the capital flows todeveloping countries remain strong. Emerging
markets entered 2012 with an improved risk
profile, higher growth prospects and higher
interest rates than in high-income countries.
Despite the recent downward revision,developing-country growth (between 5 and 6
percent) is expected to continue to be muchhigher than in developed countries (around 2
percent) in the medium-term.

56

Global Economic Prospects January 2012

Finance Annex

Table FIN.2 Net capital flows to developing countries ($ billions)
2006
2007
Current account balance
379.8
384.9
as % of GDP
3.4
2.7
Financial flows:
Net private and official inflows
686.5 1129.7
Net private inflows (equity+debt) 755.5 1128.2
Net equity inflows
495.2
667.1
..Net FDI inflows
387.5
534.1
..Net portfolio equity inflows
107.7
133.0
Net debt flows
191.2
462.6
..Official creditors
-69.0
1.5
....World Bank
-0.3
5.2....IMF-26.7-5.1....Other official
-42.0
1.5
..Private creditors
260.2
461.1
....Net M-L term debt flows
164.9
292.8
......Bonds
34.3
91.7
......Banks
135.0
204.7
......Other private
-4.4
-3.5
....Net short-term debt flows
95.3
168.3
Balancing item /a-473.1 -486.4
Change in reserves (- = increase) -636.9 -1085.3
Memorandum items
292.8
Net FDI outflows-130.4 -150.5
Migrant remittances /b
221.5
278.2

2008
354.5
2.1

2009
276.7
1.7

2010
221
1.1

2011e
190
0.9

830.3
800.8
570.7
624.1
-53.4
259.6
29.5
7.2
10.8
11.5
230.1
234.4
26.7
212.5
-4.8
-4.4
-786.1-452.5

673.8
593.3
508.7
400.0
108.8
165.1
80.5
18.3
26.8
35.4
84.6
69.9
51.1
19.8
-1.1
14.7
-273.0-681.91126.81055.5
629.9
501.5
128.4
496.8
71.2
22.4
13.8
35.0
425.6
157.1
111.4
44.1
1.6
268.5
-596.0-752.01004.4
954.4
606.2
554.8
51.4
398.2
50.0
12.0
8.0
30.0
348.2
168.2
110.1
68.0
0.1
180.0
-611.9-578.4-214.5323.8-148.2306.8-217.2325.3-238.1
351.2

2008
4.9
4.8
3.4
3.7
-0.3
1.4

2009
4.2
3.7
3.1
2.5
0.7
0.5

2010p
5.8
5.4
3.2
2.6
0.7
2.2

2011f
4.5
4.3
2.7
2.5
0.2
1.6

2012f
99
0.4

2013f
32
0.1

807.4
583.7
521.6
62.1

1016.4
697.1
620.6
76.5

223.7

319.3

376.7

406.3

2012f

2013f

3.3
2.4
2.1
0.3
0.9

3.7
2.5
2.2
0.3
1.2

As a percent of GDP
Net private and official inflows
Net private inflows (equity+debt)
Net equity inflows..Net FDI inflows..Net portfolio equity inflows..Private creditors

2006
6.1
6.7
4.4
3.4
1.0
2.3

2007
8.1
8.0
4.8
3.8
0.9
3.3

Source: The World Bank
Note :e = estimate, f = forecast/a Combination of errors and omissions and transfers to and cap ital outflows from develop ing countries.
/b M igrant remittances are defined as the sum of workers‘ remittances, comp ensation of emp loy ees, and migrant transfers

2. Foreign claims by BIS reporting banks
comprise cross-border claim, local claims offoreign affiliates in foreign currency, andlocal claims of foreign affiliates in local
currency.

Notes
1. The European banking sector remains undera significant funding pressure (see main text)
as concerns about exposure to stressedsovereign debt have affected their liquidity.
They were squeezed out of the USD
interbank market as US money market funds
reduced their exposure to banks in Euro area
in late 2011. Also, European interbank
lending has also been deteriorating, as
Euribor-Eonia spreads have been rising totheir beginning of 2008 crisis (September
15th 2008) levels.

3. According to Bloomberg news on December
9th 2011, EU lenders including Deutsche
Bank AG and France‘s Societe Generale SA
have announced plans to shed more than $1
trillion (€750bn) of assets over the next two
years to bolster capital. On top of sellingloans, the banks put at least 50 businesses up
for sale in markets spanning the globe. (See
http://www.bloomberg.com/news/2011-1207/bargain-bank-values-in-europe-fail-to-57

Global Economic Prospects January 2012

Finance Annex

lure-buyers-as-debt-crisis-deepens.html )4. Developing countries‘ external financing
needs, are defined as the current-accountdeficit (assumed to be a constant at its 2011
level as a percent of GDP) plus scheduled
principal payments on private debt (based on
information from the World Bank‘s Debtor
Reporting System).
5. Countries with the debt repayment to GDP
ratios that are less than three percent are
excluded from this list. These countries aremostly aid dependent and theirvulnerabilities are mostly relatedwithofficial flows.
6. The capital inflows numbers are revised up
for 2010. Our June estimate for total inflows
was $930 billion, compared to $1129 billion(almost the same levels of 2007). Major
revision in ST debt for 2010: from $120
billion to $268 billion, mostly because of the
upward revisions for China and India.

58

Global Economic Prospects January 2012

Commodity Annex

Global Commodity Market Outlook
Following more than two years of strong growth,commodity prices peaked in early 2011 and thendeclined on concerns about the global
macroeconomic and financial outlook andslowing demand in emerging markets, notably
China (figure Comm.1). The biggest decreases
were for metals but some of the largest
individual declines were among agriculture raw
materials (cotton and rubber), edible oils
(coconut and palmkernel oil), and cocoa. Most
indices ended the year much lower compared totheir early-2011 peaks—agriculture down 19
percent, energy down 10 percent, and metals
down 25 percent.

Commodity prices are generally expected to
decline from their high levels in 2012 due to a
slowdown in demand and improved supply
prospects—in part because high prices have led
to greater investment. Crude oil prices are
expected to average $98/bbl in 2012, assuming
the political unrest in the Middle East is
contained and Libyan crude exports return to themarket. Metals prices are expected to decline by
6 percent in 2012 on moderating demand andcommissioning of new supply projects—partly
the result of a lengthy period of high prices.
Food prices in 2012 are expected to average 11
percent lower than 2011, assuming a normal
crop year and a moderation in energy prices (seetable Comm.1).

The recovery in prices in 2009-10 was due tostrong economic growth, re-stocking in China,
and a number of supply constraints. In early
2011, several disruptions, including drought andheavy rains that affected most agriculture
markets as well as coal and mineral output invarious locales, pushed prices to annual highs.
Political unrest in North Africa and the Middle
East resulted in a loss of significant oil supplies,
most importantly in Libya. As markets absorbed
these disruptions and supply conditions
improved, prices began to come under additional
downward pressure from slowing demand anduncertainty about the near-term economic andfinancial outlook.

There are both upside and downside risks to theforecast. Continuation of political unrest in the
Middle East and North Africa could lead tofurther disruption of supplies and higher oil
prices in the shorter term—especially given low
stocks and a market short of light/sweet crude.
Strong demand by China, including for restocking, could keep metal prices higher thanprojected, and a continuation of supply
constraints that has plagued the industry the past
decade could further aggravate markets.
Given low stock levels in some agricultural
markets (especially grains), prices are stillsensitive to adverse weather conditions, energy
prices, and policy reactions. Moreover, thediversion of food commodities to production of
biofuels (it reached almost 2 million barrels per
day crude oil equivalent in 2011), makes markets
tighter and more sensitive to weather and policy
responses.

Figure Comm.1 Commodity price indices$US nominal, 2005=100250

EnergyMetals200

Agriculture

150

Downside risks entail mostly slower demand
growth due to the deterioration of the debt crisis,
especially if it expands to emerging countries
where most of the growth in commodity demandis occurring. The downside risks apply directly
to metals and energy, which are most sensitive to100

50
Jan-04Jan-06

Jan-08Jan-10Jan-12

Source: World Bank.

59

Global Economic Prospects January 2012

Commodity Annex

Table Comm.1 Key nominal annual price indices—actual and forecasts (2005=100)
FORECASTACTUAL
EnergyNon-Energy
Agriculture
Food
Beverages

2006
118
125
112
111
107

2007
130
151
135
139
124

2008
183
182
171
186
152

2009
115
142
149
156
157

2010
145
174
170
170
182

2011
188
210
209
210
208

2012
179
190
185
188
183

2013
177
184
175
177
165

Raw Materials
Metals & Minerals
Fertilizers
MUV

118
154
104
102

129
186
149
109

143
180
399
117

129
120
204
109

166
180
187
113

207
205
267
123

183
193
252
117

177
196
234
118

Source: World Bankchanges in industrial production, and indirectly
to agriculture.

Subsequently, IEA member governments
released 60 million barrels of emergency stocks
over the summer, half of which were from the
U.S. Strategic Petroleum Reserve. During thefourth quarter, the World Bank average oil priceaveraged a little over $100/bbl due to weakening
oil demand, recovery in Libyan oil production,and surplus conditions in the U.S. mid-continentthat saw WTI prices diverge substantially frominternationally traded crudes (box Comm.1).
However, heightened geopolitical concerns
surrounding Iran‘s nuclear program, help lift
prices toward year-end—it averaged $104/bbl in
December.

Crude Oil
Crude oil prices (World Bank average) peakednear $120/bbl in April following the loss of 1.4
mb/d of Libyan oil exports. This significantly
tightened light/sweet crude markets, particularly
in Europe where much of Libya‘s crude wassold. Disruptions of light crude production
elsewhere—including other MENA countries,
West Africa and the North Sea—led to a draw oninventories of both crude and products outside ofNorth America (figure Comm.2). At OPEC‘s
June meeting, oil ministers were reluctant toadjust production levels or even discuss how tomake up for the shortfall in Libya‘s output.

High oil prices and weakening economic growth
impacted oil demand in 2011, with worldconsumption growth of just 0.7 mb/d or 0.8

Figure Comm.2 Oil prices and OECD oil stocks$US per bbl
140

Figure Comm.3 World oil demand growth (y-y)

million bbl

4

2800

OECD oil inventories (right axis)

120

2700

mb/d

2

Other

Other Asia

China

OECD

100
80

2600

60

2500

0

40
20

0
Jan-00-2

2400

oil price-42300
Jan-02Jan-04Jan-06

Jan-08Jan-10

1Q03

Jan-12

Source: World Bank.

1Q05

Source: World Bank.

60

1Q07

1Q09

1Q11

Global Economic Prospects January 2012

Commodity Annex

percent—a little more than one-quarter of thelarge jump in 2010 (figure Comm.3). OECD oil
demand declined for the fifth time in the past six
years, and is on track to fall again in 2012. NonOECD oil demand growth, of 1.2 mb/d or 3
percent, was down from a 2.2 mb/d climb in2010. For 2012, world oil demand is projected torise by 1.3 mb/d or 3.6 percent, with all of thegrowth in emerging markets.
In the near term, light/sweet crude markets could
ease with recovery of oil production in Libya.
Following the fall of Tripoli in early September,
Libya‘s national oil company and joint venture

Box Comm.1 WTI-Brent price dislocation
In early 2011 the price of WTI (which historically traded at a small premium to Brent for quality and location reasons) fell by more than $25/bbl below Brent due to a large build-up of crude in the U.S. mid-continent near Cushing Oklahoma—the delivery point for the NYMEX WTI futures contract (box figures Comm.1.1 and Comm.1.2).
Crude flows into the region have increased from the new Keystone Pipeline which brings greater volumes from
Canada and from rapidly growing production of liquids-rich shale projects in North Dakota. The mid-continentalso sources crude from elsewhere in the U.S. as well imports through the Gulf of Mexico. While there are plentyof options to bring crude into the region, there are few to move it out, especially to Gulf coast refineries.
Stocks at Cushing rose in 1Q2011 but then declined, in part due to higher refining runs prodded by large margins
from low crude input prices. Maintenance at local refineries was also deferred to take advantage of the high margins. Producers began moving crude to the Gulf coast by rail, barge and truck, as the large WTI-Brent price spread
rendered such move profitable. Other pipeline flows into Cushing also eased substantially, as producers sought
higher value alternatives for their crude.
In November, the price spread narrowed significantly, following announcement of a planned reversal of the Seaway pipeline that currently ships crude from the Gulf coast to Cushing. The pipeline‘s prospective new owners
said that they will ship 0.15 mb/d to the Gulf in 2Q2012, and raise capacity to 0.4 mb/d by early 2013. Meanwhile
the U.S. government deferred a decision until 2013 on the proposed 0.6 mb/d Keystone Pipeline extension, thatwould transport Canadian crude to the U.S. Gulf, so owners could re-route the pipeline away from environmentally sensitive areas in Nebraska.
Therefore, WTI is expected to be trading at a sizeable discount to Brent until adequate pipeline capacity is constructed to the Gulf of Mexico, or from Alberta to the Pacific coast (expected to be operational in 2017). In addition, more storage capacity is coming online, and lower net volumes flowing into the region are likely to reduce
the spread.
Meanwhile Brent crude prices have remained firm due to the tightness in light/sweet markets in the eastern hemisphere, strong demand in Asia, and low stocks. Brent became the main international marker crude in 2011, andprices averaged $111/bbl in the second half of the year. WTI, largely dislocated from international markets, averaged just $92/bbl.
Box figure Comm 1.1 Crude oil prices

Box figure Comm 1.2 WTI-Brent price differential
$/bbl

$/bbl

5

130

115

Brent

0

Dubai

-5

WTI

-10

100

-15
-20

85
70
Jan-10 May-10 Sep-10

Source: World Bank.

-25-30
Jan-10Jan-11 May-11 Sep-11 Jan-12

May-10 Sep-10

Source: World Bank.

61

Jan-11

May-11

Sep-11

Jan-12

Global Economic Prospects January 2012

Commodity Annex

partners moved quickly to restore output infields that were unaffected by the fighting.
Production is reported to have reached 0.9 mb/din December – more than half of pre-crisis levelsof 1.6 mb/d. The IEA expects that production
will fully recover by 2014.

In the medium term, world oil demand is
expected to grow only moderately, about 1.5
percent p.a., owing to slower global GDP growthcoupled with efficiency improvements intransport and ongoing efforts by governments
and industry to reduce carbon emissions,particularly in high-income countries. As in thepast, all of the consumption growth is expected
to be in emerging markets (figure Comm.5),
with modest declines in OECD countries—
largely due to expected efficiency
improvements.

Non-OPEC supply developments (figure
Comm.4) continue to perform above
expectations due to double digit investment
growth and less-tight conditions for rigs,
equipment and services. These are bearing
results, not only with new project developments
but also by slowing the decline rates in mature
OECD areas, such as the U.S. and North Sea.
Last year saw a number of unplanned outages
and heavier-than-expected maintenance in the
North Sea that kept non-OPEC production
growth fairly modest. However non-OPEC
output (which accounts for 60 percent total
world oil supplies) is expected to increase by 1
mb/d in 2012, according to the IEA, and satisfy
much of the growth in global oil demand. The
return of Libya‘s oil production may necessitate
accommodation by other OPEC members tokeep prices from falling significantly. This
would in turn raise OPEC‘s spare capacity, at atime when most OPEC countries are also
investing in new capacity. Iraq‘s production has
risen above 2.7 mb/d, due to increased output
from new joint venture projects, and oil exports
have also reached new highs. Iraq‘s oil output is
expected to reach nearly 3.2 mb/d in 2012.

On the supply side, non-OPEC countries are
expected to continue to rise moderately their oil
supply, in part due to high prices, but also
continued technological advances that havebrought forth new supplies from shale deposits
and deepwater offshore. Production increases are
expected from a number of areas, such as Brazil,
Canada, the Caspian and West Africa. These will
be offset by declines in from older fields,
especially in the North Sea and Mexico.
Globally there are no resource constraints into
the distant future. Impediments are mainly
policy issues, such as access to resources andsuitable fiscal terms and conditions forinvestment.
Oil prices (World Bank average) are expected to
decline from $104/bbl in 2011 to an estimated$98/bbl in 2012 and fall over the forecast period
due to slowing global demand, growing supply,
efficiency improvements, and substitution away

Figure Comm.4 World oil production

Figure Comm.5 World oil consumption

mb/d
55

mb/d
55

50

50

Non-OPEC

45

45

40

40

35

35

30

25
Jan-00

Jan-04Jan-06

Jan-08

Non-OECD

30

OPEC
Jan-02OECD

Jan-1025
1Q00

Jan-12

Source: IEA

1Q02

Source: IEA

62

1Q04

1Q06

1Q08

1Q10

1Q12

Global Economic Prospects January 2012

Commodity Annex

from oil. The long-term oil prices that underpin
these projections are based on the upper end costof developing additional oil capacity, notably
from oil sands in Canada, assessed at $80/bbl inconstant 2011 dollars. It is expected that OPEC
will endeavor to limit production to keep prices
relatively high, given the large expenditure needs
in most countries. However, the organization
will also be wary of letting prices rise too high,having witnessed the impact this has had on
demand in recent years, especially in OECD
countries.

have declined less than one-quarter and havefallen into the upper end of the cost curve.
Metals prices are expected to rebound from theirlows in the near term on re-stocking in China,
but are not expected to reach earlier highs
because of moderating demand growth andexpected supply increases for all metals (see box
Comm.2 for the role of China in metal demand).
Prices are projected to decline into the medium
term for all metals with the exception ofaluminum, which is expected to rise, supported
by higher costs for power and other inputs.
Although there are no resource constraints into
the distant future for any of the metals, over the
longer term a number of factors could result in
upward pressure on prices such as declining ore
grades, environmental and land rehabilitation, as
well as rising water, energy and labor costs.

Metals
Metals prices fell from their highs in early 2011
due to concerns about global growth emanatingfrom the debt crises and policy slowing in China.
Prices were strengthening up to the first quarterof 2011 on strong demand in China (including
earlier re-stocking), lower stocks, production
cutbacks and various supply disruptions.
However, China moved into de-stocking modeand stocks outside China began to rise. China‘s
metal imports in the first half of 2011 fell
sharply, but started to pick up in the second half,
especially for copper. World metals
consumption, which grew at 11 percent in 2010,
slowed to 4 percent in the first 10 months of
2011, with growth slowing sharply in all main
regions (world metals consumption grew 3.8
percent during 2000-10.) For China, however,the data only show apparent demand and do notinclude stock changes, indicating that underlying
consumption may have been higher. Prices werealso supported by numerous supply constraints,
notably for copper. The aluminum market, whichis in surplus, had a substantial portion of stocks
tied up in warehouse financing deals andunavailable to the market.

Copper prices fell from over $10,000/ton in
February to $7,500/ton during 4Q2011 on highstocks and slowing demand. Copper
consumption growth in the first ten months of2011 fell slightly from an 11 percent gain in
2010. China‘s apparent demand (excluding stockchanges) slowed sharply from 2010, but given
likely de-stocking, actual consumption wasprobably higher (China‘s copper imports picked
up in the second half of the year suggesting an
end to inventory withdrawal). In the OECD,strong demand growth at the start of the year
turned sharply negative, and growth elsewhere
also turned slightly negative. High prices in
Figure Comm.6 Refined metal prices ($/ton)$/ton
10,0008,000

All metals prices are well off their highs in early2011 (figure Comm.6). Nickel prices havedeclined more than one-third because of slowing
demand by the stainless steel sector andexpectations of large new nickel production
capacity additions in 2012 and beyond. Copper
prices dropped one-quarter third, but still remain
above the costs of production due to supply
tightness at the mine level. Aluminum prices$/ton60,000

CopperAluminum

50,000

Nickel (right axis)

40,0006,000

30,0004,000

20,0002,000

10,0000
Jan-00

Jan-02Jan-04

Source: World Bank.

63

Jan-06

Jan-08Jan-10Jan-12

Global Economic Prospects January 2012

Commodity Annex

recent years have taken their toll on
consumption, as users substituted copper withother materials, such as aluminum and plastics,
and lowered the copper content in applications.
Copper prices have remained well above thecosts of production because of continued
problems at the mine supply level, including

slower than expected ramp-up at new mines,
technical problems at existing operations,declining ore grades, strikes, accidents andadverse weather. Many of these incidents haveoccurred in Chile, which supplies 35 percent of
the world‘s mined copper. However, growth in
new capacity globally is underway with

Box Comm.2 Metals consumption in China and India
India, with its large population, is often cited as the ―next China‖ in terms of consumption of commodities. Since
1990, China‘s refined metal consumption (aluminum, copper, lead, nickel, tin and zinc) jumped 17-fold, and its
share of world refined metal consumption grew from 5 percent to 41 percent (box figure Comm.2.1). Its averagerate of growth since 2000 was 15 percent p.a., while demand in the rest of the world was essentially unchanged.
Unquestionably, China has been the major driver of metals demand and higher prices, as the country consumed
large quantities of metals (and other primary resources) for construction, infrastructure, and manufacturing to significantly raise its level of income. Consider, for example, that China‘s metal intensity (metal use per $1,000 ofreal GDP) was almost three times higher than the rest of the world back in 1990 and it reached almost 9 times in2008 (box figure Comm 2.2).
It is expected that metals demand will slow over the next decade as economic growth slows and the country transitions from an export-led and investment-driven economy to a domestic consumption and services economy, andseeks to improve the environment and air quality. Still metals demand will remain robust due to urbanization(more high-rise construction), infrastructure needs, and moving up the value chain in manufacturing—all are resource intensive.
India‘s share of world metals consumption has risen from 2 percent in 1990 to only 3 percent currently due to thevery different structure of the economy, levels and direction of investment, sector growth trends, trade and policies. Moreover, its pace of metal demand growth has been only half that of China, and much closer to the pace ofeconomic growth. Should India‘s refined metal consumption grow at 15 percent p.a., it would take nearly two decades to overtake China‘s current level consumption. Should that occur, it would present substantial challenges tothe metals industry to supply these resources, similar or greater to the challenges the industry has faced the past
decade. One possible impact is for even higher prices and pressures on the downstream sectors to innovate andsubstitute away from high-priced materials. India has ambitious plans for growth and has unveiled a significant
power generation program. Thus, a key question is what other policy and structural changes would need to takeplace to have India‘s metal consumption growth double for the next twenty years.
Box figure Comm 2.1 Refined metal consumption

Box figure Comm 2.2 Metal consumption intensity'000 tons

kg per $1000 GDP

60,00010

50,000Rest of World

China

8

40,000

630,00010,000

0
1990

4

China

20,000

1993

1996

1999

2002

2005

2008

World (excluding China)

2

India

0
1990

2011

Source: World Bank.

64

1993

1996

1999

2002

2005

2008

2011

Global Economic Prospects January 2012

Commodity Annex

numerous medium-sized projects expected
online beginning in 2012, as well as the massive
Oyu Tolgoi project in Mongolia which will add
significant growth in 2013-14. Copper prices are
expected to rebound from the recent drop as
economic growth recovers and China re-stocks.
Over the medium term, however, copper prices
are expected to decline as demand moderates andnew capacity pushes the market into modest
surplus.

from their 2009 lows due to large growth inworld stainless steel production in 2010 ofnearly 25 percent, driven by China but there wasalso strong growth in Europe and Japan. Growthslowed to around 5 percent in 2011 on slowing
output in China and in industrial countries.
(About 70 percent of global nickel supply is usedin the production of stainless steel.) Nickel
prices came under pressure in 2011, despite
falling inventories and positive demand gains,because of the expected surge in new nickel
projects—the largest being in Brazil,
Madagascar, New Caledonia, Papua New
Guinea, but increases also expected in Australia,
Canada and elsewhere. The new capacity fromthese and other projects will include traditional
nickel sulphides, ferro-nickel and laterite highpressure acid leach (HPAL) projects, andChinese nickel pig iron (NPI) producers. HPAL
projects have had considerable technicalproblems and delays in recent years but are now
scheduled to begin operation. The Chinese NPI
industry developed as a result of the nickel priceboom in the mid-2000s, with the import ofnickel laterite ores from Indonesia and thePhilippines. However, Indonesia has proposeddeveloping its own NPI industry and isconsidering banning nickel ore exports from2014, which could reduce China‘s output. NPI
production is relatively expensive and may servea longer-term cost-floor to prices. Nickel prices
are expected to decline over the forecast period
due to the substantial supply additions in the
coming years, and are likely to reflect production
costs in the medium term.

Aluminum prices, which traded close to copperback in 2000, languished the past decade despite
demand growth twice as high copper. The main
reason was China which expanded production
capacity substantially and exported surplus
aluminum to the global market—unlike forcopper and other resources in which it is asignificant importer. Robust aluminum demandis expected to continue, in part because of its
lower relative price which helps it penetrateother markets such as copper, but mainly
because of its light-weight, durable
characteristics and multiple uses (in transport,
construction, packaging and electrical). There
are no resource constraints given the abundanceof bauxite ore in the earth‘s crust. However, therecent price decline has fallen into the smelting
industry‘s cost curve, where around 30 percentof the world‘s producers lose money on a cashcost basis, much of it China at plants that use
outdated technologies. A strengthening renminbi
will accelerate closure of this capacity which
will be replaced with lower-cost and more
efficient facilities. The construction of new
capacity will generally be directed to locations
with lower power cost advantages, such as theMiddle East (power accounts for about 40
percent of aluminum‘s production cost). Most of
the world‘s new state of the art capacity will be
added in China, but large plants are also plannedin India and Russia. Aluminum prices are
expected to increase over the forecast period
driven by higher production costs for power,
carbon, and alumina.

Agriculture
After reaching a peak in early 2011, prices formost agricultural commodities moderated with
the index ending the year 19 percent below its
February high (figure Comm.7); food prices
declined 14 percent. Yet, average agricultural
prices (including food) were up 23 percent in2011, and in real terms averaged the highest
level since the aftermath of the 1970s oil crisis(figure Comm.8). Most of the drivers of the post2005 price increases are still in place (table
Comm.2). Energy and fertilizer prices (keyinputs to agricultural commodities) are still high,Nickel prices are down substantially from their2007 highs, but remain volatile due to large
stainless steel production cycles and stocking/destocking in China. Nickel prices recovered

65

Global Economic Prospects January 2012

Commodity Annex

production of biofuels (currently accounting forthe equivalent of 2.2 percent of global crude oil
demand) is still growing, the US$ remains weakby historical standards, while most grain markets
are experiencing low level of stocks. On theother hand, investment fund activity is set toreach another record level—an estimated US$
450 billion as of Q4:2011 have been invested incommodities (figure Comm.9). Though notexpected to affect long term trends, such activity
may induce higher price variability.

Figure Comm.8 Real price indices (MUV-deflated)

Following a brief period of relative stability
during 2009, grain prices (especially maize andwheat), began rising in the summer of 2010
following weather-induced production shortfalls
in Eastern Europe and Central Asia (figure
Comm.10). From June to December 2010, wheat
prices increased by almost 120 percent,exceeding $300/ton and having since remained
above that mark. Maize prices followed a similar
pattern, increasing from $152/ton in June 2010
to $320/ton in April 2011, fluctuating around$300/ton since then.

01948 1954 1960 1966 1972 1978 1984 1990 1996 2002 2008

2005=100

250

Agriculture

200

MetalsEnergy150

100
50

Source: World Bank.
Figure Comm.9 Funds invested in commodities
billion US dollars, year-end

500
400

EnergyBase metals

Agriculture
Precious metals

300

While maize and wheat markets are tight byhistorical standards, the rice market appears to
be well-supplied. For most of 2010, rice prices
fluctuated within a narrow band of $450 to $500
per ton, far below the early-2008 peak of $900
per ton, but twice as much as its historical
average. However, they gained momentum and

200
100
0

2006

2007

2008

2009

2011e

Source: Bloomberg, Barclays Capital.

Figure Comm.7 Nominal agriculture price indicesFigure Comm.10 Grains prices

2005=100
250

$/mt
500

Food
200

2010

1000
Wheat

Beverages

400

Raw Materials

300

800

Maize
Rice (right axis)

600

150
100

50
Jan-00

200

400

100

200

0
Jan-02Jan-04Jan-06

Jan-08Jan-10Jan-12Jan-00Source: World Bank.

0
Jan-02Jan-04

Source: World Bank.

66

Jan-06

Jan-08Jan-10Jan-12

Global Economic Prospects January 2012

Commodity Annex

Table Comm.2 Most of the price-boom conditions are still in place
2001-05

2006-10

ChangeAgricultural prices (nominal index, 2005 = 100)
Grain/oilseed price volatility (stdev of log differences, monthly)
Crude oil price (US$/barrel, nominal)
Fertilizer prices (nominal index 2005 = 100)
Exchange rates (US$ against a broad index of currencies)
Interest rates (10-year US Treasury bill)

89
2.3
34
72
119
4.7

147
3.5
75
208
104
4.1

+66%
+52%
+120%
+172%
-13%
-14%

Funds invested in commodities ($ billions)
GDP growth (low and middle income countries, % p.a.)Industrial production (low and middle income countries, % p.a.)
Stocks (total of maize, wheat, and rice, months of consumption)
Biofuel production (millions of barrels per day equivalent)
Yields (average of wheat, maize, and rice, tons/hectare)
Growth in yields (% change per annum, average)

30
5.0
6.3
3.2
0.4
3.8
1.4

230
5.8
7.1
2.5
1.3
4.0
1.0

+667%
+16%
+13%
-21%
+203%
+7%
-32%

Natural disasters (droughts, floods, and extreme temperatures)

374

441

+18%

Source: World Bank.

increased almost 30 percent between May andNovember 2011, mainly in response to two
problems. First, the decision by the Thaigovernment to sharply increase the intervention
price to 15,000 baht/ton under the Paddy Rice
Program. At the time of the announcement, thisnew intervention price was 65% higher thanmarket price. Under the program, growers andmillers become eligible for a government loan(based on the intervention price) if they place
their rice as collateral, stored at a government–
certified facility. If, after the expiration of theloan, the market price is higher than theintervention price, the millers sell the rice andrepay the loan. Otherwise, the millers can choseto default and the rice becomes property of thegovernment. After the higher intervention price
was announced, growers and millers began
holding supplies of current off-season-crop
paddy in order to participate in the program. Yet,the program is expected to have only limited
long term impact as the stored rice will
eventually find its way into the market. Second,on the weather front, some flooding in South
East Asia appears to have damaged part ofThailand‘s rice crop. Because Thailand accounts
for 25 to 30 percent of word rice exports, thepolicy and weather developments may affect theworld market. On the positive side, India‘sdecision to allow the export of non-Basmati ricealong with good crop prospects elsewhere in theregion, are likely to keep rice prices in check.
Indeed, rice prices declined 5 percent in
December 2011.
Edible oil prices were relatively stable andslightly declining during 2011; the World Bank
edible oils index averaged 246 (2005 = 100) in
January 2011 and ended the year below 200. A
weather-induced shortfall of soybean oil earlier
in the year was balanced by better palm oil
production—these two oils account for almost
two thirds of global edible oil production. The
diversion of oils for biodiesel production in
Europe appears to be the largest demand-driven
factor and is likely to support high prices in thenear and medium term. Unlike grains, where
demand tends to be relatively stable above acertain income threshold, per capita demand foredible oils continues to rise even in high income
countries, as a rising share of food consumed isprepared in professional establishments and inpackaged form, both oil consuming processes(the income elasticity of edible oils is twice ashigh as that of grains).
Beverage prices averaged the year 14 percent
higher than 2010, supported primarily by coffee(arabica) prices. During 2011 arabica prices
averaged close to $6.00/kg, their highest nominal

67

Global Economic Prospects January 2012

Commodity Annexlevel. The rally reflected tight supply conditions,especially from Brazil, the world‘s dominantarabica supplier. Cocoa price increases earlier inthe year reflected political instability in Côted‘Ivoire but supplies have recovered more
recently, which combined with weak demand inEurope due to the crisis induced price declines
towards year‘s end—Côte d‘Ivoire accounts foralmost 40 percent of global supplies. The
strength in tea prices reflects mainly East Africa
supply shortages and strong demand, especiallyof high quality teas by Middle Eastern oil
exporting countries.

OutlookAs supply conditions improve, agricultural
prices are expected to decline 11 percent in2012. Specifically, for 2012, wheat and maize
prices are expected to average 9 and 12 percent
lower than their 2011 levels while rice prices are
anticipated to decline 6 percent. Soybean andpalm oil prices are expected to be 16 and 20
percent lower, respectively. Beverage prices will
experience declines as well (cocoa, coffee, andtea 11, 17, and 4 percent down, respectively).
Cotton and rubber prices are expected to decline
30 percent, each.

The cotton market experienced tight supplies
earlier in the year as well, further exacerbated by
an export ban imposed by India to protect its
domestic textile industry. The shortfall, coupledwith strong demand and low stocks, boosted
prices above $5.00/kg in March 2011, effectively
doubling within six months. That price level,
however, turned out to be unsustainable and by
August 2011 cotton prices were down to $2.50/
kg on strong supplies and weakening demand.
Natural rubber prices reached historic highs
earlier due to weather-related supply disruptions
in South-East Asia rubber producing countries(accounting for 90 percent of global production).
However, following weakness in crude oil prices(a key input to competing synthetic rubber) andweaker tire demand due to the economic
downturn, rubber prices moderated and ended
the year 46 percent below their February 2011
peak. Timber prices surged, especially
Malaysian logs and to a lesser degree
Cameroonian logs and Malaysian sawnwood.
Strong demand following the Tohoku disaster inMarch 2011 contributed to the strength of timber
prices.

A number of assumptions underpin the outlook.
First, is that energy and fertilizer prices areprojected to experience moderate declines.
Second, it is assumed that the supply outlook
during the 2011/12 crop year will improve.
Third, no policy responses similar to the ones
during 2008 will take place; if they do, they
could always upset markets—the changes in ricepolicy in Thailand introduced in September 2012is a case in point. On the other hand, thediversion of food commodities to the productionof biofuels continues reached the equivalent ofalmost 2 million barrels per day of crude oil in2011 (figure Comm.11). Nevertheless, there aresigns of a slowdown in global biofuel
production: preliminary estimates for 2011indicate that it grew only marginally comparedto the double digit growth rates during the past
10 years. The policy environment for biofuels
begins to change as well. The US government let
Figure Comm.11 Biofuels production
mb/d equivalent

2.0

Fertilizer prices averaged 43 percent higher in2011 than 2010 on strong demand for
agricultural (especially grain and oilseed)production. Fertilizers are a key input to mostagricultural commodities (especially grains) invalue terms and, due to their tight relationship tonatural gas prices, they tend to co-move withenergy prices very closely—energy prices gained
25 percent in 2011.

1.6

1.2
0.8
0.4
0.0

2000

2002

2004

Source: BP Statistical Review

68

2006

2008

2010

Global Economic Prospects January 2012

Commodity Annex

its ethanol tax credit expire as of January 1st2012 and eliminated ethanol tariffs. Yet, thesepolicy changes are expected to have only aminimal impact on ethanol production in the US(and biofuel related corn production), sincemandates requiring minimum amounts ofgasoline to be supplied through biofuels are stillin place. Moreover, with crude oil prices over$100 per barrel most biofuel production is likely
to be profitable without any government
intervention. Thus, the role of energy prices indetermining agricultural prices (both as a cost
component and diversion to biofuels) is expected
to remain important.

Figure Comm.12 Monthly updates on global production and stock estimates for 2011/12

Maize

million tons

900

Production

Stocks (right axis)

150

880

135

860

120

840

105

820

90

800

75
MAY JUN JUL AUG SEP OCT NOV DEC JANThe USDA during its first assessment for the
2011/12 crop year (published in early May)
projected that global food supply conditions will
improve with production of maize expected torise 6.4 percent over the previous crop year,
wheat output higher by 3.3 percent, and rice by
1.4 percent. Maize stocks were expected toincrease by 13 percent, while stocks for wheat
were set to decline by 3 percent (no change was
expected in rice stocks). During USDA‘s
subsequent monthly assessments from June 2011
to January 2012, the outlook has been improving
gradually, except for the large downward
revision of maize stocks in June (figure
Comm.12).

Wheat

million tons

700

Production

Stocks (right axis)

220

690

210

680

200

670

190

660

180

650

170
MAY JUN JUL AUG SEP OCT NOV DEC JAN

Ricemillion tons

465

While low stocks and poor crops have been the
key factors underpinning the early 2011 pricehikes, most of the post-2005 increase inagricultural prices can be explained by energy
price increases. Energy is a particularly
important determinant of agricultural prices andhence an important risk to agricultural prices.
Energy feeds into food prices through three main
channels. First, as a cost of production (mainly
fuel to run agricultural machinery andtransporting commodities to markets), second,
indirectly through fertilizer and other chemicalcosts (e.g., nitrogen-based fertilizers are madedirectly from natural gas), and third, via
competition from land to produce biofuels.
Indeed, econometric evidence (presented below)
ranks energy as the most important driveraffecting prices of food commodities, followed

Production

Stocks (right axis)

105
102

460

99

96

455

93

450

90
MAY JUN JUL AUG SEP OCT NOV DEC JAN

Source: USDA

by stocks and exchange rate movements. Other
drivers matter much less.

69

Global Economic Prospects January 2012

Commodity Annex
The interpretation and signs of most parameters
are straightforward. The stock-to-use ratio is
expected to be negative, since a low S/U ratio(associated with scarcity) leads to high prices
while a high S/U ratio (associated withsurpluses) leads to low prices (Wright 2011). To
circumvent endogeneity, the S/U ratio entered
the regression in lagged form. The price of crude
oil will have a positive impact on the prices offood commodities, since it is a key factor of
production (Baffes 2007). The depreciation of
the US dollar—the currency of choice for mostinternational commodity transactions —strengthens demand (limits supply) from nonUS$ commodity consumers (producers) thusincreasing prices (Radetzki 1985). An increaseof the interest rate reduces commodity prices by(i) increasing the required rate of return on
storage, (ii) changing expectations about
aggregate economic activity, and (iii) stimulating
demand; but, it can raise prices by reducing
capital investment thereby reducing supplies(Pindyck and Rotemberg 1990). Thus, the effectof interest rate changes on commodity price isambiguous. Because of the long time period
under consideration, the Manufacture Unit Value(MUV) is used as an inflation proxy.

Fundamentals and long term food pricemovements
To examine the role of fundamentals in
determining food prices, a reduced-form
econometric model was utilized and concluded
that oil prices contributed about two third to theprice increase of key food commodities between
2000-05 and 2006-10. Exchange rate movements
accounted for 23 percent while stocks were
responsible for 8 percent.
Specifically, the following price determination
model was utilized:
log(Pti) = µ + β1 log(S/Ut-1) + β2 log(PtOIL) + β3 log(XRt) +β4 log(Rt) + β5 log(GDPt) + β6 log(MUVt) + β7 t + εt.

Pti denotes the annual average nominal price ofcommodity i (i = maize, wheat, rice, soybeans,and palm oil). S/Ut-1 denotes the lagged stock-touse ratio, PtOIL is the price of oil, XRt is theexchange rate, Rt denotes the interest rate, MUVt
is a measure of inflation, GDPt denotes global
GDP, and t is time trend. The βis are parameters
to be estimated while εt is the error term.
Table Comm.3 Parameter estimates: 1960-2010
Maize
1.29
(1.57)

Wheat
3.17***(5.13)

Rice
6.41***(3.33)

Soybeans
4.46***(7.91)

Palm oil
4.25***(3.01)

Stock-to-Use ratio (S/Ut-1)-0.45***(4.67)-0.53***(3.78)-0.08(0.38)-0.17**(2.31)-0.38**(2.04)

Oil price (PtOIL)

0.19***(4.05)

0.24***(5.18)

0.25**(2.55)

0.31***(6.41)

0.45***(5.26)

Exchange rate (XRt)

0.02(0.04)-0.81**(2.21)-2.83***(4.50)-1.31***(3.65)-1.09*(1.74)

Interest rate (Rt)

-0.05
(0.60)

0.05(0.63)

0.34***(2.75)-0.06(0.64)-0.04(0.27)

Global GDP (GDPt)-0.01(0.32)-0.01(0.28)-0.05**(2.56)

0.01(0.66)

0.01(0.31)Inflation (MUVt)

0.64***(2.70)

0.08(0.42)-0.62(1.32)-0.01(0.05)

0.04(0.10)-1.76***(3.07)
0.87
1.03-3.90***-0.65(1.31)
0.91
1.10-5.52***-0.76(0.99)
0.76
1.03-3.96***-1.14*(1.78)
0.84
1.27-4.68***-2.17**(2.02)
0.62
1.24-4.43***

Constant (µ)

Trend x 100 (t)Adjusted-R2
DW
ADF

Note: The numbers in parentheses denote absolute t-ratios. DW is the Durbin-Watson statistic of serial correlation
and ADF denotes the Augmented Dickey-Fuller statistic for unit roots (Dickey and Fuller 1979). Asterisks indicate
parameter estimates different from zero at the 1% (***), 5% (**) and 10% (*) levels of significance, respectively.
Source: Baffes (2011).

70

Global Economic Prospects January 2012

Commodity Annex

Furthermore, instead of deflating each priceseries, we used the deflator as an explanatory
variable in order to relax the homogeneity
restriction and obtain a direct estimate the effectof inflation (Houthakker 1975). Lastly, the timetrend is expected to capture the effects oftechnological change, which for mostagricultural commodity prices is expected to be
negative.

(albeit negative). This result indicates that,
despite what has been reported in the literature,
increases of global GDP are not associated withfood prices increases (similar results have beenreported elsewhere, e.g. Ai, Chatrath and Song2006). Indeed, per capita grain consumption inIndia and China has declined or flattened (thesetwo countries are often mentioned as having
contributed to food price increases because of
their changing diets and high incomes). Price of
manufactures (proxy for inflation) turned out not
to be significant (with the exception in maize).
Lastly, the parameter estimate of the time trend
is negative as expected, but significantly
different from zero in maize, wheat, and palm oil(not rice and soybeans). Estimates place theeffect of technical change on prices to about 1
percent per annum, very close to the average 1.3
percent estimated here.

Table Comm.3 reports parameter estimates forthe 1960-2010 period for five food commodities.
More than half of the parameter estimates are
significantly different from zero, with an averageadjusted-R2 of 0.80 and a stationary error term
(implying cointegration), confirming that themodel performed well. A number of interesting
results emerge from the analysis. First, the S/Uratio estimates are negative and all but one casesignificantly different from zero. Second, theparameter estimate of the oil price confirms thatenergy plays a key role in food pricemovements. In fact, the parameter estimate of
the oil price is highly significant in all five cases.
Third, with the exception of maize, exchange
rate has a strong impact on food prices with therespective elasticity exceeding unity in threecases—the estimate of the exchange for maize(effectively zero) and rice (the highest among the
5 prices) most likely reflects that fact that the US
is a dominant player in the global maize market
but not a player in the rice market. Interest rate
movements do not matter, except for rice.
Income has no impact in all prices but rice

What portion of the post-2005 food pricemovements is explained by the fundamentals?
The model was re-estimated by excluding theboom period (i.e., reduced the sample to 19602005). Then, based on these estimates, pricelevels of all five commodities were simulated forthe post-2005 period. During the boom years of
2008-10, in all 5 commodities actual prices weremuch higher than the forecast prices—ranging
from 35 percent (wheat in 2009) and 130 percent(rice in 2009). During 2008-10, prices were 70
percent higher than what the model forecasts. It
is worth noting that since 1965, the highest
model-generated gaps were in 1974 (+37
Figure Comm.14 Gap between actual and modelgenerated prices: wheat, 1965-2010

Figure Comm.13 Gap between actual and modelgenerated prices: wheat, 1965-2005
Percent

Percent

100

100

80

80

Out of sampe forecast

60

60

40

40

20

20

0

0

-20

-20

-40

In sampe forecast

-40
1965

1975

1985

1995

2005

1965

1975

Source: Baffes (2011).

Source: Baffes (2011).

71

1985

1995

2005

Global Economic Prospects January 2012

Commodity Annex

Table Comm.4 Decomposing the contribution of each variable to food price changes from 2000-20 to 200610 (percent)
Maize

Wheat

Rice

Stock-to-Use ratio (S/Ut-1)

12.0

14.4

0.9

Soybeans-2.4

Palm oil1.3

Oil price (PtOIL)

32.6

41.4

27.2

57.0

58.2

Exchange rate (XRt)

-0.1

11.5

25.4

19.9

11.9

Interest rate (Rt)

0.5

-0.5

-2.0

0.6

0.3

Global GDP (GDPt)

0.4

0.4

1.2

-0.4

-0.3

Inflation (MUVt)

13.6

1.7

-8.4

-0.2

0.7

Time trend

-0.3

-0.1

-0.1

-0.2

-0.3

SUM

58.7

68.8

44.2

74.3

71.8

Residual

41.3

31.2

55.8

25.7

28.2

All

100.0

100.0

100.0

100.0

100.0

Note: The contribution was based on the 1960-2010 model parameter estimates
Source: Baffes (2011).

percent) and 1990 (-20 percent). Figure
Comm.13 depicts the out-of-sample forecast forthe price of wheat. Based on the parameter
estimates of the full sample model, fitted prices
were calculated. The gap during 2008-10 was
eliminated, implying that the addition of just 5
observations (the boom years) eliminates themodel-generated error (figure Comm.14).

Prices.‖ American Journal of Agricultural
Economics, vol. 88, pp. 574–588.

Baffes, John (2011). "Commodity Markets:
A New Structure or Deviations from Long
Term Trends?" In Commodity Market
Development in Europe: Proceedings of
the October 2011 Workshop, pp. 80-82,
ed. T. Fellmann and S. Helaine. Institutefor Perspective Technological Studies,
European Commission, Seville. <ftp://
ftp.jrc.es/pub/EURdoc/JRC67918.pdf>

Finally, using the parameter estimates of themodel, the relative contribution of eachexplanatory variable to price changes for the
2000-05 to 2006-10 was calculated (table
Comm.4). The unexplained portion of the pricechanges during this period was 36 percent. Of
the remaining 64 percent, oil‘s contribution was
more than two thirds, followed by exchange rate
movements (23 percent) and stocks (8 percent).
The contribution of the remaining variables was
negligible. Two key conclusions are reached.
First, econometric evidence confirms that
fundamentals explain most of the food pricevariation, including the 2005-10 boom years.
Second, oil prices matter the most while fromthe macro perspective exchange rates
movements matter as well; interest rates andincome growth do not seem to have a long term
impact on food prices.

Baffes, John (2007). ―Oil Spills on Other
Commodities.‖ Resources Policy, vol. 32, pp.
126-134.
Dickey, David, and Wayne A. Fuller (1979).
―Distribution of the Estimators for Time Series
Regressions with Unit Roots,‖ Journal of theAmerican Statistical Association, vol. 74, pp.
427-431.
Houthakker, Hendrik S. (1975). ―Comments andDiscussion on ‗The 1972-75 Commodity
Boom‘ by Richard N. Cooper and Robert Z.
Lawrence.‖ Brookings Papers on Economic
Activity, vol. 3, pp. 718-720.
Pindyck, Robert S. and Julio J. Rotemberg(1990). ―The Excess Co-movement ofCommodity Prices.‖ Economic Journal, vol.
100, pp. 1173–1189.

References
Ai, Chunrong, Arjun Chatrath, and Frank Song(2006). ―On the Co-movement of Commodity

Radetzki, Marian (1985). ―Effects of a Dollar
Appreciation on Dollar Prices in International72

Global Economic Prospects January 2012

Commodity Annex

Commodity Markets.‖ Resources Policy, vol.
11, pp. 158-159.
Wright, Brian D. (2011). ―The Economics ofGrain Price Volatility.‖ Applied Economic
Perspectives and Policy, vol. 33, pp. 32-58.

73

Global Economic Prospects January 2012

Inflation Annex

Inflation Annex
Inflation has fallen in the past year, on average,
in both high-income OECD and developing
countries. Inflation has declined rapidly in mostof the high-income countries, while outcomes
have been more varied in developing countries
that nevertheless show an overall, declining
trend.

activity since the Tohoku disaster of March
2011.
The decline in inflation has been driven by realand financial aftereffects of the first financial
crisis, and importantly by related developments
in commodity markets. Producers and exportersof electronics and machinery have offered
substantial price discounts linked to the massivebuildup of inventories during the global growth
downturn of 2009. This latter effect echoes theincreasing importance of global factors,
particularly the expansion of manufacturing
production in East Asia, in determining inflationin the rich countries.2

OECD: rapid demand-altering effects (fuels);lack of pass-through. Inflation is falling in thedeveloped world. From April to November
2011, headline inflation in the G-5 countries
dipped by nearly 2 percentage points (figure
INF.1), while the earlier, rapid pass through ofheadline inflation to so-called “coreprices” (which exclude food and fuels) appears
to be abating (figure INF.2).1 Among the G-5
countries, the United States and Germany
achieved the largest decline (2 pts) in headline
inflation since the first quarter of 2011; and otherEuro Area countries have seen a substantial
falloff of about 1.5 points, accentuated by theonset of sluggish growth there and a still fairlystrong euro to that time. Japan‟s initial low
levels of inflation mean its delta in consumer
prices is small. Still, the shift to deflation in
Japan is reflective of the slow-build-up in

Moreover, commodity price shocks have had amajor, sustained impact on inflation during thisperiod among the industrialized economies. In
particular, international oil prices surged to nearrecord highs following the cut-off of Libyan
crude oil in 2011, driving both increases in fuels
prices and in food prices, the latter due to higher
transport costs, increased prices for fertilizers,
and reduced supply--as biofuel mandates shifted
land usage towards the production of ethanol.3
The direct effects of the hike in oil prices areseen quickly at the petrol pump. Demand forfuels soften with some lag, but also with

Figure INF.1 G-5 headline CPI drops nearly 2
points November vs April 2011
6

Figure INF.2 Core picked up in recent recoverybut gap has widened recently
10

Apr: 4.2%, saar

4

8
6

2

Headline

4

0
2

-2
-4
-6

Core

0

Nov: 2.3% saar

Headline CPI
G-5 countries, GDP-weighted
percentage change (3m/3m, saar)

-2
-4
-6

-8

Headline and Core CPI
G-5 countries, GDP-weighted
percentage change (3m/3m, saar)-8

Source: Thomson-Reuters Datastream; World Bank.

Source: Reuters-Thomson Datastream; World Bank.

75

Global Economic Prospects January 2012

Inflation Annex

substantial weight, with a shift toward e.g. public
transport, improved efficiency automobiles, or“self-propelled” modes to getting places. But incontrast with conditions in developing countries,
the co-rise in foods prices has smaller overall
effects, given its diminished share in the OECD
consumption basket. Typically, subdued
inflation during a period of high unemployment
should allow authorities some room for
expansionary policies. However, as OECD
inflation moves quickly in a broader direction
toward zero (indeed the momentum of producer
prices is now negative for the G-3 countries) andgovernments are beset by high debt burdens,authorities‟ ability to undertake expansionary
policies has become more limited. Further
reductions in demand as consumers begin to
expect lower prices in the future (as may be
happening in Japan) could possibly undercut
hopes for a revival of economic activity.

group: while inflation in China in the firstquarter was well below the average 10 percent
rate in other developing countries, since theninflation in many countries has fallen sharply,
but in China these have fallen more rapidly
still—a reversal of recent price trends for thedeveloping world. Easing price pressures in mostdeveloping countries should serve to boost
domestic demand (over time), as well as provide
additional headroom for staving off more severe
effects of potential global economic difficulties
ahead (for example with real interest rates now
rising, monetary authorities could opt to cut
nominal rates further).


Developing countries: hysteresis andvulnerabilities. As is widely recognized, risingfood prices contribute more to inflation indeveloping than in advanced economies, because
food‟s share of the consumption basket in theformer tends to be much larger than in the latter.
For example, food accounts for 15 percent of the
U.S. (CPI) basket but 50 percent of theconsumption basket of the Philippines.
Moreover, there is evidence to suggest that there
is a more significant pass-through of food prices
to non-food prices in developing countries
compared with OECD economies--where there isalmost none. An example of this possible
transmission mechanism is higher food prices
triggering protests for higher wages acrossNorthern Africa, elsewhere in Africa, and the
Middle East during 2007-08.4

In East Asia and the Pacific, easing inflation
is now the watchword in the wake of aperiod when higher Chinese inflation was“holding up” the index at higher levels. For
China, the ASEAN countries and others in
the region, underlying momentum inheadline CPI is now diminishing: China to
2.8 percent over the three months to
November (saar); for countries excluding
China to 4 percent. The increase in the East
Asian CPI reached a recent peak of 8 percent
in January 2011 under increasing food andfuel price pressures, as well as still strong
domestic demand, and is now running at rate
below 3 percent thanks to developments in
China. With economic activity now
anticipated to continue fairly strong,accompanied by lower commodity prices,

Figure INF.3 DEV inflation eased by 3 points
since Jan 2011 to 6% by November
Headline CPI, ch% (3m/3m, saar)
11

Roundup of inflation trends across developing
regions9

For developing countries as a group, headline
inflation rates have eased at a somewhat slower
pace than for the advanced economies, falling by
3 percentage points since the start of 2011 and
1.3 percentage points from April throughNovember (figure INF.3). The decline ismoderately less if China is excluded from the

75
2010M01 2010M04 2010M07 2010M10 2011M01 2011M04 2011M07 2011M10

DEV

Source: : World Bank.

76

DEV x China

Global Economic Prospects January 2012

Inflation Annex
the Central Bank recently has cut rates). A
moderate uptrend has set in during the fallmonths, carrying inflation above 6.8 percent
by November, which is nonetheless expected
to be short-lived, given anticipated stepdown in economic growth. In similar
fashion, Mexico’s recent upturn is more
likely than not to be temporary. Average
inflation for the region now lies at 7.5
percent (owing to continued double-digit
advances for both Argentina and Venezuela),albeit down from 9 percent in the firstquarter of the year (figure INF.6).

we may expect a continuing deflationary
trend through 2012 at a minimum (figure
INF.4).


In Europe and Central Asia, Turkey is theoutlier in this group of diverse economies,
experiencing higher inflation (at 13.8% in
November, saar) on the back of robust
growth and recent reductions in interest
rates. At the same time, inflation in Russia
has eased rapidly from a 10 percent
annualized pace in the first quarter of 2011
to 3.9 percent by October, but picked up in
November, possibly reflecting ruble
depreciation. Here, slowing growth andweaker oil prices have driven the sharp
earlier fall in inflation. In the remainder ofthe region (Central Asian oil- andcommodity exporters) inflation has trended
down well into single digits essentiallylinked to similar developments in their larger
neighbor, Russia. Regional inflation eased
from 10.7 percent (saar) at end-2010 to a
low of 7 percent in April, before returning to
9.6 percent by November 2011 (figure
INF.5).



In the Middle East and North Africa, higher
food and oil prices, disruptions to economic

Figure INF.5 Softer oil prices, slower growthstart to weigh on Europe & Central Asia CPI-Turkey an outlier
Headline CPI, ch% (3m/3m, saar)
16
14

Russia12

Turkey1086In Latin America and the Caribbean,Brazilian inflation, which had been runningat an overly-rapid 8 to 10 percent pace formost of 2011, eased to below 6 percent by
August, owing to somewhat slower growthand determined monetary tightening (though42Europe and Central Asia

02010M01

2010M04

2010M07

2010M10

2011M01

2011M04

2011M07

2011M10Source: World Bank.

Figure INF.4 China shows sharp slowing of CPI
momentum carrying East Asia & the Pacific to
below 3%Figure INF.6 Brazil and Mexico still experiencemodest uptrend-- short lived?
Headline CPI, ch% (3m/3m, saar)

Headline CPI, ch% (3m/3m, saar)

10.0

10

8

China

7.5

Brazil6

EAP x China
5.0

4

Mexico2.52Latin America and the Caribbean

East Asia and Pacific02010M01

2010M04

2010M07

2010M10

2011M01

2011M04

2011M07

0.0

2011M10

2010M01 2010M04 2010M07 2010M10 2011M01 2011M04 2011M07 2011M10

Source: World Bank.

Source: World Bank.

77

Global Economic Prospects January 2012

Inflation Annex

activity occasioned by the “Arab Spring”, aswell as continuing violence in countries suchas Yemen and Syria, have boosted regional
inflation (as defined by limited data
available for all countries of the region) to a
20 percent range as of June (3m/3m saar).
As such data is less meaningful now that
more recent indicators for Egypt, Morocco
and Tunisia have become available we focus
here and find that headline inflation in these
economies show a clear tendency towardeasing. However, consumer prices measured
at the market are exceptionally biased bylarge-scale government subsidies for foodand in some cases fuel that move such
indicators lower. Underlying pressures areindeed much higher, but the cost is being
borne by local governments. Still the region
remains highly exposed to further food pricehikes, weighing down budgets, leading toworsening trade deficits at a time of concern
about MENA‟s largest trading partners in
Europe (figure INF.7).


had earlier softened in the “post-conflict”
environment in Sri Lanka (figure INF.8).
And in Sub-Saharan Africa, South Africa
and Nigeria, representing the bulk of theregion‟s GDP, have shown opposing
movements of late, with South African
headline inflation moving to a range of 6
percent from 2 percent at the start of theyear; in contrast, inflation is plummeting in
Nigeria owing to lower oil prices, revenues
and disposable incomes. For the region
outside of South Africa, inflation remains
elevated, but falling, currently ranging near
10 percent, in large measure due todevelopments in Kenya (figure INF.9).

Figure INF.8 India showing deceleration, butSouth Asia region still at high rates near 9%
Headline CPI, ch% (3m/3m, saar)
20

15

Pakistan

In South Asia, headline inflation for Indiaand several other countries remains high, forthe former within a 5-6 point range (saar),and for Pakistan between 10-and 11 points.
But when measured on a seasonally adjusted
annualized rate, inflation in India has fallen
by 2.5 percentage points since the start of2011, to 5.2 percent in November. Inflation
remains more problematic in Pakistan; but

10

5

India

0

South Asia

Sri Lanka-5
2010M01 2010M04 2010M07 2010M10 2011M01 2011M04 2011M07 2011M10

Source: World Bank.

Figure INF.7 MENA inflation easing as foodsubsidies distort "markets"

Figure INF.9 African inflation making some
strides, but still high at near 7%

Headline CPI, ch% (3m/3m, saar)

Headline CPI, ch% (3m/3m, saar)

16

25

14

20

12
10

15

8

10

6

4

5

2

Sub-Saharan Africa

002010M01 2010M04 2010M07 2010M10 2011M01 2011M04 2011M07

2010M01 2010M04 2010M07 2010M10 2011M01 2011M04 2011M07 2011M10

Tunisia

JordanEgypt

SSA

Source: World Bank.

South Africa

Source: World Bank.

78

Nigeria

SSA x South Africa

Global Economic Prospects January 2012

Inflation Annex

Notes
1. Headline‟ inflation refers to price changes
for all goods in an economy. „Core‟ inflation
excludes fuels and foods from that basket. G-5 headline CPI growth (inflation) is a GDPweighted measure of price changes,
computed as a 3m/3m “rolling quarter” andannualized “seasonally adjusted annualized
rate”, or SAAR. This method helps toremove what could be biased “base effects”
from year-over-year calculations, as well as
to present a clearer picture of turning points
in the data.
2. “Globalization and Inflation in OECDCountries”. Pehnel, Gernot; ECIPE Working
Paper No 04/2007.
3. “A Note on Rising Food Prices”. Donald
Mitchell. World Bank Policy ResearchWorking Paper. No. 4682. July 2008. The
World Bank. Washington DC.
4. Guimaraes, Roberto. Osorio Buitron.
Carolina; Porter, Nathan; Filiz, Unsal D. andWalsh, James. “Consolidating the Recovery
and Building Sustainable Growth”. Chapter
2, Washington DC: International Monetary
Fund, October 2010, pp. 41-55.

79

Global Economic Prospects January 2012

East Asia & the Pacific Annex

East Asia and the Pacific Region
Overview

and less reserves to stem financial disturbances.

Economies in the East Asia and Pacific region
are being affected in varying ways by thecurrent, difficult economic times.1 After
expanding 9.7 percent in 2010 on the back ofstrong performance in China, GDP in developing
East Asia is estimated to have slowed to an 8.2
percent pace in 2011, and is projected to easefurther to 7.8 percent in 2012 and 2013 (table
EAP.1). The middle income countries of theregion are generally well positioned to withstandthe global slowdown underway (see main text),
with substantial fiscal space available, a degreeof downside flexibility in policy interest rates,
significant reserve levels, and a still-strong
underpinning for domestic demand.

The anticipated modest slowing of overall
growth in the base-case projections is due to aneasing in China, offset in part by what may besufficient vigor in ASEAN-4 domestic demand.
The larger driver for the slowdown is found in
faltering OECD demand, affecting exports bothfrom China and from those middle income
countries joined in tight manufacturing
production chains with the former economy andwith others. A more serious downturn in the high-income countries could certainly exact a larger
toll on growth— and would likely be amplified
by changes in commodity prices, potential
narrowing of international sources of financeand, importantly for East Asia, a ―second round‖of adverse trade effects, given a ―first round‖slowing of worldwide demand.

Still, a more serious deterioration of conditions
in high-income economies and an attendant
sharp decline in global trade could have serious
implications for these countries, which as agroup are exceptionally open to world trade.
Vietnam, and the region’s low-income to lowermiddle income economies (Cambodia and LaoPDR), as well as the small island economies areless well positioned than the major countries of
the region, with limited space for policy change

Declines in commodity prices alongside a global
downturn could exact a toll on East Asia’s large
exporters of agricultural products, fats and oils,
and hydrocarbons, reducing fiscal revenues andpressuring deficits. At the same time, the diverse
nature of the region means that fallingcommodity prices will help numerous countries,
foremost including China, with lower oil prices
also benefitting countries such as Indonesia,
where budgets are still burdened by fuelsubsidies. Remittance receipts are potent drivers
for growth in countries from the Philippines tothe small island economies—and these flows, aswell as tourist arrivals (important for the region
broadly) could slow because of sluggish labormarket and growth developments in the OECD,
although migrant remittances held up quite wellduring the 2008-2009 crisis.

Figure EAP.1 Industrial production showing reboundpost-Tohoku; Thailand suffers from flooding
industrial production, ch% 3m/3m, saar
35
30
25
20
15
10
5
0
-5
-10

GDP growth in China, the region’s largest
economy (about 80 percent of regional GDP),
eased from 10.4 percent in 2010 to and estimated
9.1 percent in 2011, and is expected to dip
further to a (still robust) 8.4 percent in 2012 as
authorities continue to dampen quite rapid
growth in a number of sectors of the economy.

-15
-20
-25
-30
-35
2010M01

2010M05
China

2010M09
Indonesia

2011M01
Malaysia

2011M05
Philippines

2011M09
ThailandSource: World Bank.

81

Global Economic Prospects January 2012

East Asia & the Pacific Annex

Table EAP.1 East Asia and the Pacific forecast summary(annual percent change unless indicated otherwise)
GDP at market prices (2005 US$)GDP per capita (units in US$)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 (%)

98-07a

2008

2009

Est.
2010

Forecast
2011
2012

2013

7.9
7.0
7.8
5.9
7.9
9.2
13.7
12.1
1.4
4.1
5.0
-2.1

8.5
7.6
8.4
7.4
8.6
9.1
7.1
4.7
1.6
7.5
7.8
-0.5

7.5
6.6
7.5
7.3
7.3
19.0
-9.2
-1.9
-3.6
5.8
4.4
-2.9

9.7
8.8
9.6
7.7
6.6
6.6
22.6
20.8
1.9
4.7
3.6
-1.9

8.2
7.4
8.2
7.6
7.6
11.0
10.3
13.0
-0.2
3.1
5.0
-1.9

7.8
7.0
7.8
7.8
7.0
8.9
8.5
10.2
-0.1
2.6
5.2
-2.3

7.8
6.9
7.8
7.7
6.4
8.8
11.2
11.2
0.6
2.3
4.6
-2.1

4.5
9.1
4.1
4.5

4.8
9.6
6.0
2.5

1.5
9.2
4.6
-2.3

6.9
10.4
6.1
7.8

5.2
9.1
6.4
2.0

5.5
8.4
6.2
4.2

5.6
8.3
6.5
4.9

b

Memo items: GDP
East Asia excluding China
China
Indonesia
Thailanda. Growth rates over intervals are compound average; growth contributions, ratios and the GDP deflator
are averages.
b. GDP measured in constant 2005 U.S. dollars.
c. GDP measured at PPP exchange rates.
d. Exports and imports of goods and non-factor services (GNFS).
e. Estimate.
f. Forecast.

Source: World Bank.

Output is projected to ease in 2013 to 8.3
percent, in-line with the country’s longer-term
potential growth rate. GDP growth in the rest of
the region slowed sharply in 2011 from 6.9
percent to a 4.8 percent pace, but is expected tostrengthen gradually over 2012 and 2013,
coming in at 5.8 percent in the final year.

March 2011 caused industrial production growthin the region to slip from 18 percent before thecrisis to 6 percent in the three months ending in
June (saar). Output then picked up, reaching 7.7
percent growth by November 2011. Indeed,
China’s production growth fell from a peak of 22
percent in the first quarter (saar) to 11 percent by
November (figure EAP.1, earlier). In contrast,
first quarter production in Malaysia increased by
6.5 percent; and in the Philippines by 8.8
percent, giving way to double digit declines asof August, before undergoing moderate
rebounds. More recently the severe flooding in
Thailand has dampened industrial output
severely in the short run (72% contraction in
output in the three months to November 2011)
until repairs to infrastructure and utilities
intensify through the course of 2012—a factor
likely to boost growth for the country (boxEAP.1).

Recent developments
GDP data for developing East Asia available forthe first three quarters of 2011 (table EAP.2)
together with high-frequency indicators, point toslowing from the region’s strong growth of
2010. Natural disasters and more recently thefinancial market turmoil in Europe have started
to exact a moderate toll on regional economic
activity in the middle income countries. The
disruption to international supply chains fromthe Tohoku earthquake and tsunami in Japan ofTable EAP.2 Quarterly GDP over the first 3 quarters of 2011*, estimates for the year
2010
Q4
2011
Q1
Q2
Q3
2011 (est)

East Asia
9.7
9.8

China
10.4
10.0

Indonesia
6.1
6.1

Malaysia
7.2
9.2

Philippines
7.6
1.9

Thailand
7.8
5.3

7.5
7.3
7.0
8.2

8.2
10.0
9.5
9.1

6.5
6.2
6.2
6.3

7.3
2.5
4.4
4.4

7.8
-1.9
5.0
3.7

7.5
0.2
2.1
2.0

Source: Haver Analytics, Thomson/Reuters Datastream, China National Bureau of Statistics, World Bank.
Note: * Data at seasonally adjusted annualized rates.

82

Global Economic Prospects January 2012

East Asia & the Pacific Annex

Box EAP.1 Floods in Thailand—what consequences for growth?
Thailand is no stranger to natural disasters. However, the floods which inundated 66 of the country’s 77 provincesfrom July through November 2011 were the worst in 50 years. Losses have mounted in part as the structural
makeup of the Thai economy has shifted in the last decades to one of manufacturing intensity, and damages arewell beyond what would have occurred in an earlier era.
In 2011, accumulated water from months of storms and high precipitation resulted in a severe flooding of the central regions, with water drifting southward toward Bangkok, affecting some 5 million people in this region alone.
At the time of this writing, more than 680 lives have been lost, and the accumulated affected population is estimated at 13.6 million (a large 21% of total population). Social safety nets were rapidly put in place or upgraded,
and new loans for firms and agricultural cooperatives have been proposed to invest in recovery operations. Total
damages and losses have been estimated at $46.5 billion, with the manufacturing sector carrying some 70 percentof the damages and losses; overall the private sector has borne up to 90 percent of damages and losses.
Official Thai sources have estimated that reconstruction will be realized over three years, from 2011 through 2013,
and that the cost to Thai GDP of the flooding will be a fairly moderate loss of growth in 2011 of 1.1 percentage
points, and additions to growth of 0.2 and 0.9 percent respectively over 2012 and 2013 as reconstruction moves
toward completion.
Source: World Bank, East Asia and the Pacific region.

Quarterly GDP data for the region confirm aslowing in annualized growth from 9.8 percent
for the final quarter of 2010 to an average ofabout 7.2 percent for the first three quarters of2011 (saar). Third quarter numbers for major
economies, excluding China and Indonesia,
show some pickup from the second quarter, butwith the exception of the Philippines the rebound
was generally modest. Growth was driven acrossmost countries by a surge in government outlays
offset by inventory draw-downs (given thestalling out of industrial production) (figure
EAP.2).
From a trough following Tohoku in April 2011,

Chinese and middle-income regional exports
rebounded sharply (figure EAP.3). But export
volumes slowed dramatically beginning inAugust and fell at a 10.5 percent annualized paceduring the 3 months ending November, likely
reflecting knock-on effects from the financial
turmoil in Europe. Most of the decline was due
initially to weaker Chinese exports, while
shipments from the rest of the region continued
to expand sluggishly until falling 16 percent in
the 3 months to November. Though press reportsof the time suggested significant disruption to
supply chains in specific sectors from floodingin Thailand, such impacts are just becoming
apparent at the aggregate level. Over the course

Figure EAP.2 Recent weakness in ASEAN sets moderate
downtrend for GDP growth

Figure EAP.3 Export volumes hit by Tohoku andsluggish OECD demand

growth of real GDP, ch% q/q, saar

export volumes, ch% 3m/3m saar
75

12
10

50

8

25

6
4

0

2
0

-25
-2
-4
East Asia

China

Indonesia
2010Q4

2011Q1

Malaysia
2011Q2

Philippines-50

Thailand2009M01 2009M05 2009M09 2010M01 2010M05 2010M09 2011M01 2011M05 2011M09

2011Q3

East Asia

Source: Haver Analytics, China NBS, World Bank.

Source: World Bank.

83

China

East Asia excl China

Global Economic Prospects January 2012

East Asia & the Pacific Annexof 2012 these connections will likely be reset as
infrastructure repairs are completed in Thailand.

particularly trade and other short term credits(one-year or less). Gross equity flows in theform of initial public offerings were robust
during the year (table EAP.3). Although capital
inflows were relatively stable year on year in2011, this masks a pattern of unusually strong
inflows during the first half– and sharply weaker
inflows in the second half of the year. In
particular, regional equity and bond markets
soured markedly after August, reflecting
increases in global risk aversion following thedowngrading of U.S. sovereign debt andrenewed concerns about European fiscal
sustainability. Chinese equity markets―aftermodest gains from the start of the year throughMay ― plummeted 25 percent from July to
December, before recouping 5 percent into the
New Year on somewhat more muted pessimism
on European developments (figure EAP.6).

Despite the erstwhile continued growth ofregional exports (excluding China), exporters in
the Philippines, Malaysia, Indonesia andThailand and Vietnam are vulnerable to slowing
import demand growth in OECD economies. For
example, 48 percent of the Philippines’ exports
are destined to three markets: Europe (20%), theUnited States (18%) and China (10%), the latterin part representing demand from production
chains serving Europe and the United States(figure EAP.4). Already, external demand for
manufactures has weakened significantly (thedollar value of imports of the United States, theEuro Area and China declined 10 percent in thethird quarter, saar) (figure EAP.5). A ―China
effect‖ in trade is also of concern for its regional
partners: a slowdown China’s import demand
could be grounded in a quicker-than-expected
slowdown in China’s domestic demand or afalloff in orders from China’s production chainsdue to slower high-income country demand.
These developments could constitute a ―double
hit‖ on shipments from a number of East Asia
region manufacturing export -intensive
economies.

Fortunately, most countries in the region do nothave significant external financing needs for2012 (mainly due to current account surpluses orrelatively small deficits). The sum of short- andlong-term debt coming due plus expected current
account deficits represent a relatively modest 3.4
percent of regional GDP in 2012, with a high of
4.2 percent for Malaysia (where reserves would
be more-than sufficient to cover financing
requirements). Reserve levels are exceptionallyhigh across East Asian middle income countries,
ranging from 8.2 months of imports in Indonesia
to 23 months in China. As a result, the region

Volatile capital flows and exchange rate
movements. During 2010, private and public
capital inflows into developing East Asia jumped
from their depressed $235 billion level of 2009
to $448 billion, with virtually all flows rising,

Figure EAP.5 East Asia & Pacific export markets
show declining trends, auguring poorly for rapid trade
recoveryFigure EAP.4 Exposures in manufactures exports arehighimports of manufactured goods, nominal (ch$, 3m/3m saar)

Share (%) of mfgr exports to indicated markets from exporters
listed below. (data is average 2008-2009)

100

50
75

40
50

30

20

25

10

0

0
China

Indonesia

Malaysia

Philippines

Mf gr shr in U.S.

Mf gr shr in EU25

Mf gr shr in China

Total "exposure"-25

Thailand

1/1/2010

5/1/2010

US imports Mf grs

9/1/2010

1/1/2011

EA imports Mf grs

5/1/2011

China imports Mf grs

Source: National Agencies through Thomson/Reuters
Datastream.

Source: World Bank WITS- Comtrade Database.

84

9/1/2011

Global Economic Prospects January 2012

East Asia & the Pacific Annex

would not be particularly vulnerable should
external finance begin to dry-up in 2012 or 2013.
Again, lower-income and island economies may
be in a different position, as external financing
needs remain high and reserves to financedeficits are more limited.

the currencies of a number of developing
countries to depreciate vis-à-vis the dollar. In
general, East Asian declines were modest
compared with those of other large middleincome countries such as South Africa (the rand
fell 22 percent against the dollar) and Brazil (thereal dropped 18 percent). For East Asia, only theIndonesia rupiah and the Malaysian ringgit cameunder moderate pressure, falling 5.8 and 5.4
percent respectively during the second half of theyear (figure EAP.7).

In September 2011 a spurt of capital flighttoward ―safe haven‖ assets in the United States
tied to the unfolding events in Europe, caused
Figure EAP.6 Equity markets turned down in 2011,
with evidence of some recovery in January

Easing inflation is now the watchword in East
Asia. Inflation problems in the region havemoderated substantially reflecting stable andeven falling food and fuel prices, the modest
slowing of the regional economy and policy
measures taken to rein in CPI gains. For China,
the ASEAN countries and others in the region,
underlying momentum in headline CPI is now
diminishing: China to 2.8 percent over the threemonths to November (saar); for countries
excluding China to 4 percent. The increase in the
East Asian CPI reached a recent peak of 8
percent in January 2011 under increasing foodand fuel price pressures, as well as still strong

Equity indexes, January 2009 = 100).
350
325
300
275
250
225
200
175
150
125
100
75
50
1/1/2009

Shenzen B share

5/1/2009

9/1/2009

1/1/2010

5/1/2010

9/1/2010

Dow Jones AP

1/1/2011

5/1/2011

9/1/2011

1/1/2012

Source: Thomson/Reuters Datastream.

Table EAP.3 Net capital flows to East Asia and the Pacific
Net capital flows to EAP$ billions
2004
Current account balance
83.5
as % of GDP
3.2
Financial flows:
Ne t private and official inflows
127.0
Ne t private inflows (e quity+private de bt)
132.2..Net private inflows (% GDP)
5.0
Net equity inflows
89.7..Net FDI inflows
70.4..Net portfolio equity inflows
19.3
Net debt flows
37.3..Official creditors-5.2....World Bank
-1.9....IMF-1.6....Other official-1.7..Private creditors
42.5....Net M-L term debt flows
9.1......Bonds
9.6......Banks
1.7......Other private-2.1....Net short-term debt flows
33.4
Balancing item /a26.6
Change in reserves (- = increase)-237.1
Memorandum items
Migrant remittances /b
38.5

2005
143.2
4.7

2006
271.0
7.4

2007
399.9
8.7

2008
438.5
7.5

2009
361.8
5.8

2010
352.6
4.8

2011e
268.8
3.1

209.0
212.3
7.0
168.1
142.4
25.7
40.9
-3.3
-0.6
-1.6
-1.1
44.2
9.3
10.1
1.6
-2.3
34.8
-134.5-217.7

238.6
247.9
6.8
207.9
151.7
56.2
30.7
-9.3
-0.4
-8.5
-0.4
40.0
14.9
4.0
12.2
-1.3
25.1
-214.1-295.4

301.3
304.7
6.6
234.0
198.9
35.1
67.3
-3.4
-0.3
0.0
-3.1
70.7
18.7
1.2
17.8
-0.3
52.1
-160.0-541.2

209.4
210.4
3.6
206.8
214.1
-7.3
2.6
-1.0
1.2
0.0
-2.1
3.6
15.0
1.2
16.1
-2.3
-11.4
-215.7-432.2

235.3
231.7
3.7
166.3
137.5
28.9
69.0
3.7
2.2
0.1
1.3
65.3
1.9
8.4
-6.6
0.0
63.5
-62.2
-535.0

448.2
444.8
6.0
268.2
227.7
40.5
180.0
3.4
2.7
0.0
0.8
176.6
35.1
20.8
13.1
1.1
141.5
-249.8-551.0

411.6
408.1
4.7
264.2
243.7
20.5
147.4
3.5
1.2
0.0
2.3
143.9
43.9
33.8
10.0
0.1
100.0
-270.2-410.2

48.8

55.9

71.5

84.9

85.3

94.0

101.1

Source: The World Bank
Note :e = estimate, f = forecast/a Combination of errors and omissions and transfers to and cap ital outflows from developing countries.
/b M igrant remittances are defined as the sum of workers’ remittances, comp ensation of emp loyees, and migrant transfers

Source: World Bank.

85

2012f
261.6
2.6

2013f
262.7
2.3

350.4
3.4
258.4
234.8
23.6

426.2
3.7
285.2
258.7
26.5

92.0

141.0

108.5

117.2

Global Economic Prospects January 2012

East Asia & the Pacific Annex
cyclical and policy reasons. The Institute ofInternational Finance estimates that fiscal
measures in China could have amounted to as
much as 12.5 percent of that country’s GDP over
two years, though its recorded deficit increased
by only 3 percentage points from a surplus of 0.9
percent of GDP in 2007 to deficit of 2.1 percent
in 2009.3 Since then a combination of stronger
growth and normalization of fiscal policy has
seen China’s deficit decline to an estimated 1.7
percent of GDP in 2011, with most of that
improvement (1.5 percentage points according toWorld Bank estimates) the result of better
cyclical conditions.

Figure EAP.7 Capital outflows are affecting several
Brics fex-rates and reserves-- EAP largely spared
percentage change in currency units against the dollar:
2010, first-half 2011 and mid-2011 to end-December
Euro/dollar
ZAF R

BRA rei
CHN R
MYS R

PHL P
Thai B
Indo R
-20

-15

-10

-5

ch% Mid-year 2011 to December 7

0

5

10

ch% 1st Half 2011

15

2010

For the remainder of the region the decline andsubsequent rebound in public deficits was lesspronounced, with the government balance
deteriorating 2.6 percentage points of GDP
between 2007 and 2009 and recovering 0.8
percentage points since, to come to a deficit of
2.6 percent in 2011. Fiscal shortfalls differ
substantially across countries across the year,
from 5.5 percent of GDP in Malaysia to 1.6
percent in Indonesia. Most middle income
countries carry some fiscal space for a relaxationof policy (assuming financing is forthcoming—or sufficient international reserves are available
for backup), though on average they have 1.5
percentage points less available compared with
2007.

note: in this presentatin, stronger LCU is a positive percentage change

Source: World Bank.

domestic demand, and is now running at a rate
below 3 percent thanks to developments in
China. With economic activity now anticipated
to continue fairly strong, accompanied by lower
commodity prices, we may expect a continuing
softening trend in inflation through 2012 at aminimum.
Partly reflecting diminished inflationarypressures, but also slowing growth–notably in
China―monetary policy in the region has begun
to ease. Since August 2011, policy rates havebeen cut 75 basis points in Indonesia; they had
been raised 25 basis points in Thailand prior to
the flooding, then reduced once more2, while
Malaysia and the Philippines have kept policy
rates stable since a second-quarter increase. In
China, the PBOC reduced the reserve
requirement ratio by 50 basis points on
November 30, the first time the central bank has
moved to ease credit supply since 2009. But
overall policy remains fairly tight, mainly
because inflation rates have declined by morethan policy interest rates – implying rising realinterest rates— and the potential for additional
rate reductions if desired.

Medium-term outlook
Despite the increasingly cloudy global
environment, growth in the East Asia and Pacificregion is projected to slow by only 0.4
percentage points to 7.8 percent in 2012 (underbase case assumptions) and stabilizes at 7.8
percent for 2013 as well, as the effects of amodest easing in China’s growth iscounterbalanced by a pickup in GDP gains in theremainder of the region, to yield 7.8 percent
growth for 2013 (figure EAP.8). The slowdown
of 2012 reflects an expected continuation ofstrong domestic demand (already in someevidence in third-quarter 2011 GDP data andhigh-frequency indicators), as export growth isanticipated to slow by almost 2 percentage
points due to turmoil in Europe and sluggish

Fiscal policy in the region loosened significantlywith the global recession of 2008/9. The region’s
overall government deficit widened by 3.6
percent of GDP between 2007 and 2009 for both86

Global Economic Prospects January 2012

East Asia & the Pacific Annex
fillip to GDP gains in 2012. Growth in Malaysia
is likely to sustain rates near 5 percent over the
coming two years, as recent upward revisions to
GDP complement a view for strong domestic
demand grounded in government consumption
and a substantial pickup in public investment.
Indonesia is expected to see growth ease from
6.4 percent in 2011- to a still very strong 6.2
percent in 2012- before picking up to 6.5 percent
by 2013, with domestic demand the prime moverfor GDP.

Figure EAP.8 Baseline view for moderate decline
growth of real GDP, percent
12

10

8

6

4

2

Both Thailand and the Philippines may be able
to avert a slowing of GDP in 2012. In theformer, reconstruction spending to repair theextensive damage from flooding may provide aboost to output growth in 2012; while in thelatter economy the continued strength ofremittance inflows and renewed public spending
is projected to boost growth to 4.2 percent from
3.7 percent in 2011. That the tenor of domestic
demand in most countries will remain resilient
may be attributable to policy decisions regarding
monetary accommodation (now coming on
stream) and fiscal support (potentiallyforthcoming). On balance, GDP gains of 4.6
percent registered in 2011 for the ASEAN-4 are
anticipated to be followed by advances of 5.2
and 5.7 percent through 2013.

0
DEV East Asia

China
2010

ASEAN-4
2011

Vietnam & LICs

2012

Islands

2013

Source: World Bank.

OECD demand, contributing nil to overall
regional growth (see table EAP.1, earlier).4
In China, the lagged effects of monetary policy
tightening (both in terms of interest rates andregulatory adjustment) are expected to combinewith weak external demand to slow GDP growthfrom 9.1 percent in 2011 to 8.3 percent by 2013.
The bulk of activity is expected to come fromdomestic demand―with private consumption
and fixed investment contributing 3-and-4
percentage points to GDP in 2012―while net
exports afford only a modest 0.2 point addition
to growth. Inflation is anticipated to decline; andmonetary policy relaxation could be in the cards
during 2012. Key domestic risks for China are
the property sector, local government borrowing,
and bank balance sheets; but the baseline
scenario envisages that policy will focus closelyon these aspects, with efforts sufficient to stem
systemic effects on the economy.

Growth in low-income Cambodia together withlower-middle income Vietnam and Laos PDR,
slowed from 6.8 percent in 2010 to 5.9 percent
in 2011. Looking forward, growth in Vietnam
and Cambodia is projected to strengthen
somewhat further during 2012 and 2013 due tothe ability to utilize hydrocarbon windfalls tosustain spending in the former, and improved
macroeconomic stability in the latter, while alack of strong financial linkages should mutethat transmission channel from the disturbanceamong high-income countries for both.
Vietnam’s fiscal stance remains accommodative,
though tightening of monetary policy to stemhigh inflation is helping to reduce the country’s
macroeconomic instability gradually. Vietnam’s
exports have expanded at double digit rates forsome time, though this is likely to give way for
all economies in the group over 2012-13. GDP
for the group is anticipated to achieve a robust

Prospects for the ASEAN-4 countries are
mixed, but in a ―baseline view‖ are likely toachieve a pick-up in growth despite the 2012global slowdown. Following a sharp decelerationfrom 6.9 percent to 4.6 percent gains for thegroup in 2011, softening export volumes andmixed terms-of-trade movements are anticipatedto be offset by the strong momentum of domestic
demand for a number of countries, to produce a87

Global Economic Prospects January 2012

East Asia & the Pacific Annex

6.8 percent pace in 2012 (in part due to newlarge-scale mining and hydropower operations
coming on stream in Lao PDR), before easing to
6.5 percent in 2013. Current account deficits
remain at high levels, however, given the heavy
import content of manufactures exports, while
fiscal deficits are a continuing concern.

networks, such that a larger number of middle
income countries are affected. And under anassumption of an acute European crisis, ―secondround‖ trade effects could take an additional tollon trade growth as more countries globally
experience depressed growth and dampened
imports.

Risks and vulnerabilities

Terms of trade developments can have apowerful influence on trade positions, on thepurchasing power of export revenues (income
gains/losses for the population) and on fiscal
balances. East Asia represents a highly mixed setof countries in terms of oil and natural gas
exporters (Indonesia, Malaysia and Vietnam), oil
importers, and countries whose export baskets
reflect a complex mix of commodities andmanufactures (electronic components, auto partsand finished goods of all kinds) which include
China, Indonesia, Malaysia, Indonesia andThailand. Other countries are more dependent ona single commodity (e.g. Papua New Guinea,
copper).

For the majority of middle income countries in
East Asia, the health of the global economy andhigh-income Europe in particular, represents the
key risk at this time. An acute financial crisis in
Europe could reduce East Asian GDP gains in2012 substantially compared to 7.8 percent
growth in the baseline depending on the severityof the crisis – reflecting trade effects, potential
terms of trade changes, a drying up ofinternational capital and increases in regional
precautionary saving by firms and households(see main text for description of a potential low
case scenario).

For the developing region as a whole, the foodand energy price spikes of 2010-2011 carried
negative terms of trade effects on balance, with
the index dropping 1.9-and-0.6 percent
respectively. Under baseline conditions, terms oftrade should be moving positively for the region
over 2012-2013 (plus 2.2 and 0.5 percent
respectively), notably for China, the low income
countries, as well as several middle income
ASEAN-4 economies (figure EAP.9).

Trade. Despite global recession in 2009, exports
of developing East Asia to the world amounted
to $1.8 trillion, representing 30 percent ofregional GDP. Of that total, trade within thegeographic region has advanced to $840 billion
on growth of almost 50 percent over the last
decade. Just as international and intra-region
trade has proved a powerful engine of growth fora good number of East Asian countries, so can
the intricate trade links among economies in theregion, and generalized exposures to conditions
in final destination markets serve as fairly
powerful means of transmission of adverse tradeeffects to- and within East Asia (see figures
EAP.4 and EAP.5, earlier, and table EAP.4).

East Asia is well prepared for yet anotherpotential bought of strong capital inflows,
should international investors in search of yield(returns in the high single digits in local currency
vis-à-vis low single digits in the high-income
financial markets) turn once more to emerging
markets. Reserve levels are high, interest rates
are starting to be reduced; growth is likely toslow moderately and fiscal space is abundant in
the middle income countries of the region.
Exchange rates have—on average—weakened
slightly against the greenback, but strengthened
appreciably versus the euro, which may create a―win-win‖ situation for equity and bond flows
toward East Asia, with expectations of returns

Model simulations5 for the base case scenario
suggest that a fall of GDP growth in the eurozone from 0.5 percent postulated for 2012 tozero would be sufficient to reduce East Asia’s
export volume growth by 2-tenths of apercentage point in the year—and broadly(dependent on export shares in GDP), cut
economic growth by 1-to-2 tenths of apercentage point. Slower OECD demand echoes
quickly through East Asian production and trade88Global Economic Prospects January 2012

East Asia & the Pacific Annex
effects passing to the remainder of the region.
Expansionary policies that supported strong
growth during the ―great recession‖ also fed areal estate boom in China. And rapid credit
growth may have weakened the portfolio qualityof the banking system. Attempts to cool parts ofthe economy were successful; monetary policy
and regulations were notched up earlier, andgrowth in formal bank lending was tightened.
However, because real estate is often used ascollateral or as an investment, it is a growing risk
for the banking system and for informal
creditors. Should conditions worsen, thegovernment has ample policy space, especially
now that inflation appears to be on the wane.
While further adjustments in property markets
present a downside risk, the prospects for a softlanding for China remain high.

Figure EAP.9 Terms of trade move with East Asia
in 2012 before relapse
terms of trade (merchandise), ch%
10
8
6
4
2
0
-2

-4
-6
-8
01/01/08

01/01/09

China

01/01/10

01/01/11

ASEAN-4

01/01/12

01/01/13

Low income

Source: World Bank.

Policy. Although government deficits in theregion have deteriorated relative to their precrisis levels of 2007, there remains scope for a
pro-active policy response in a number of middle
income countries–assuming financing isforthcoming, an important element in defining
the range of operations feasible. Monetary policy
may have some leeway as well to become more
accommodative as inflation eases and realinterest rates rise, opening the potential for lower
policy interest rates—already in train in several
countries.

plus capital gains on the exchange ratetransaction to boost overall income receipts.
The potential for a ramp-up in capital flows
under emerging global conditions has increased,
exposing those East Asian countries, notably,
China, Indonesia, Malaysia and Thailand to thepossibility of market disruption and exchange
rate volatility. Reserves will serve to provide
some underpinning to economies, but underworse-case scenarios, those countries which
experience large amounts of capital inflow will
be more vulnerable to these ―stop-go‖ effects.
These could occur under the base case, as
financial workouts in Europe and the UnitedStates get underway; but could be much
amplified under a low case scenario.

To the extent that external finance becomes very
tight, countries would have to rely on domestic
sources – which are less likely to be available in
the low-income and island nation groups where
domestic capital markets remain underdeveloped
and reserve levels may be inadequate to coveradditional financing requirements.

Consumer and business confidence appears to beholding up well, suggesting that a spate ofprecautionary savings behavior on the part ofhouseholds and firms may not characterize
conditions in East Asia in the current world
conjuncture. Only under a serious crisis scenario
might these effects take a meaningful toll on
economic activity.

For the longer term, however, under the premisethat growth in the OECD economies slips fromaverage rates of 2.7 percent of the last decade to
2-2.25 percent (particularly given the need to
improve fiscal sustainability), there may be a setof policies worthwhile for authorities in East
Asia to consider. These might include means tokeep domestic demand advancing at asustainable, non-inflationary pace, to replacesome of the impetus to growth lost to weaker

Finally, the region itself is exposed to the sort ofeconomic landing that will characterize China’s
future in its efforts to quell growth in selectsegments of its economy- and to follow-on

89Global Economic Prospects January 2012

East Asia & the Pacific Annex

OECD demand. And here lies longer-term
efforts at improving education and humancapital, and the productivity of investment.
Moreover, a strengthening of social welfare nets
and reforms of their distributional characteristics
could help to support domestic demand more

fully during times of economic downturn.
Though such policies have been in progress formany years, in several some cases, the current
episode of slower growth may provide an
auspicious time to implement these with morevigor.

Table EAP.4 East Asia and the Pacific country forecasts(annual percent change unless indicated otherwise)
Cambodia
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
China
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Indonesia
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Lao PDR
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Malaysia
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Mongolia
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Papua New Guinea
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Philippines
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Thailand
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Vanuatu
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Vietnam
GDP at market prices (2005 US$) b
Current account bal/GDP (%)

98-07 a

2008

2009

Est.
2010

Forecast
2011
2012

2013

8.8
-4.2

6.7
-10.2

0.1
-9.8

6.0
-10.4

6.0
-12.7

6.5
-11.5

6.5
-10.4

9.1
4.1

9.6
9.1

9.2
6.0

10.4
5.2

9.1
3.5

8.4
3.0

8.3
2.6

4.1
3.1

6.0
0.0

4.6
2.0

6.1
1.1

6.4
0.4

6.2
-0.2

6.5
-0.5

6.4
-10.6

7.6
-18.7

7.5
-12.2

8.6
-9.1

7.9
-14.0

7.5
-16.2

7.4
-18.6

5.1
12.5

4.7
17.5

-1.6
16.7

7.2
10.1

4.8
9.7

4.9
9.0

5.3
8.5

6.4
-2.9

8.9
-12.9

-1.3
-9.0

6.4
-5.8

14.9
-15.1

15.1
-13.6

15.0
-14.0

1.7
3.3

6.7
8.8

5.5
-8.8

7.6
-0.4

9.0
-24.0

7.0
-18.0

5.0
-18.8

4.2
0.6

4.2
2.1

1.1
5.6

7.6
4.2

3.7
2.0

4.2
2.3

5.0
2.0

4.5
4.7

2.5
0.8

-2.3
8.3

7.8
4.6

2.0
0.7

4.2
-0.7

4.9
1.3

2.5
-9.3

6.3
-9.0

3.5
-8.6

3.0
-7.6

3.9
-6.7

4.0
-6.9

4.2
-7.4

6.6
-8.6

6.3
-18.4

5.3
-6.6

6.8
-3.9

5.8
-4.9

6.8
-3.5

6.5
-3.5

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; Korea, Democratic People's Republic; Marshall Islands; Micronesia, FederateStates; Mongolia: Myanmar; N. Mariana Islands; Palau; Solomon Islands; Timor-Leste; and Tonga are notforecast owing to data limitations.
a. Growth rates over intervals are compound average; growth contributions, ratios and the GDP deflator
are averages.
b. GDP measured in constant 2005 U.S. dollars.
c. Estimate.
d. Forecast.

Source: World Bank.

90

Global Economic Prospects January 2012

East Asia & the Pacific Annex

Notes:
1. The developing East Asia region presented
in the projections (countries with sufficienteconomic data for compilation of a small
econometric model) include: China(mainland); the larger ASEAN members:
Indonesia, Malaysia, Philippines andThailand; Cambodia (low-income country),and lower middle income economies
Vietnam and Lao PDR; and a subset ofsmaller island economies: Fiji and Papua
New Guinea are also part of the model
system. Several high-income countries areprojected as part of the ―geographic region‖,(not the headline ―developing East Asia‖
region) including Hong Kong SAR, China;
the Republic of Korea, Singapore andTaiwan, China.
2. Thailand’s policy rate was raised by 25 basis
points on August 24—but in the wake of theserious flooding throughout most of thecountry, the rate hike was rescinded on
October 24 in a move to stimulate theeconomy and lower costs for construction
financing.
3. ―Global Economic Monitor‖. November 22,
2011. The Institute of International FinanceInc. Washington DC.
4. For the developing region, the contributionof net exports continues to be a drag on
growth from 2011 through 2012, before
reviving to a 0.6 point fillip to GDP.
5. World Bank, Development Economics,
Prospects Group, iSIM modeling system,
December 2011.

91

Global Economic Prospects January 2012

Europe & Central Asia Annex

Europe and Central Asia Region
GDP growth in developing Europe and Central
Asia remained stable at 5.3 percent in 2011
despite the disruptive effects of the turmoil inglobal financial markets since August 2011 andweakening external demand, especially from theEuro area (box ECA.1). The disruptions andglobal slowdown caused by the Tohoku disasterin Japan caused second quarter GDP to slow. In
the third quarter, however, robust domestic
demand led to strong growth in several middleincome countries—Russia, Romania and Turkey.

of foreign subsidiaries, and affect valuations offoreign and domestically owned banks incountries with large foreign presence. And
slower growth and deteriorating asset prices
could rapidly increase non-performing loans(NPLs) throughout the region.
Should conditions in global financial market
deteriorate and crisis in the Euro Area deepen, as
highlighted in the risk section of this annex,
several Central European countries will be
particularly affected through financial and trade
linkages. Commodity exporters in the region
could also run into difficulties if deterioration in
the global situation results in a major decline incommodity prices.

Nevertheless, a projected recession in highincome Europe, still troublesome inflationarypressures in the region and reduced capital
inflows due to the deepening Euro Area debt
crisis are projected to slow regional GDP to 3.2
percent in 2012, before a modest recovery begins
in 2013 with growth of 4 percent (table ECA.1).
These aggregate figures hide significant
variations across countries within the region.
While resource-rich economies benefit from stillhigh commodity prices, other countries havebeen more adversely affected by the turmoil inhigh-income Europe (figure ECA.1).

Based on simulations highlighted in the main
text (see box 4 in the main text for details), thereal-side consequences of a much deeper crisis
might be significant for the region. A scenario
which assumes that one or two small Euro zone
economies face a serious credit squeeze may
reduce the growth in the developing Europe andCentral Asia by 1.9 percent in 2012 and 2.2
percent in 2013. The impact might reach as highas 5.4 percent for 2012 and 6.6 percent for 2013
if the freezing up of credit spreads to two larger
Euro Zone economies.

There are considerable downside risks to theregion’s economic outlook. The baseline forecast
presented here assumes that efforts to-date andthose that may follow prevent the sovereign-debt
stress of the past months in Europe fromdeteriorating further, but fail to completely
eradicate market concerns. Several countries in
the region are particularly reliant on high-income
European banks and are vulnerable to a sharp
reduction in wholesale funding and domesticbank activity. Deleveraging of banks in highincome countries could result in a forced sell-off

Figure ECA.1 Significant variation across countries
within the region
Annual GDP Growth
Volume, y/y percent

ECA Oil Exporters

12.0

ECA Oil Importers

10.0
8.0
6.0

Box ECA.1 Country coverage

4.0

For the purpose of this note, the Europe and Central Asia
region includes 21 developing countries with less than
$12,276 GNI per capita in 2010. These countries are listed
in the Table ECA.5 at the end of this note. This classification
excludes Croatia, the Czech Republic, Estonia, Hungary,
Poland, Slovakia, and Slovenia. The list of countries for theregion may differ from those contained in other World Bank
documents.

2.0
0.0
-2.0
-4.0
-6.0
-8.0
2000

2002

2004

Source: World Bank.

93

2006

2008

2010

2012f

Global Economic Prospects January 2012

Europe & Central Asia Annex
Industrial production (IP) in developing Europe
and Central Asia expanded at close to a 20
percent annualized rate (3m/3m saar) early in theyear, but weakened sharply beginning in thesecond quarter and declined during much of thethird quarter. The contraction was reversed since
September, and the region’s IP growth reached

Recent developments
Third quarter growth was strong in large middle
income countries…
Economic growth in several countries in theEurope and Central Asia region remained robustin the third quarter of 2011, as favorable
domestic factors offset the weakening external
environment. Domestic consumption was strong
in the third quarter in Lithuania, Ukraine, Russia,
and to a lesser degree in Latvia and Romania(figure ECA.2). Robust domestic demand also
supported growth in Turkey that remained higheven after declining from its first quarter level. A
bumper harvest contributed to strong economic
performance in Romania, Ukraine, and Russia in
the third quarter. Bulgaria and Serbia, on theother hand, continued to suffer from weak
consumption and investment.

Figure ECA.2 Mixed economic performance in the third
quarter
GDP Growthy-o-y, percent
2011 Q1

14

2011 Q2

12

2011 Q3

10
8
6
4

2
0

Romania Ukraine

RussiaLatviaStrongerIndustrial production has rebounded since
September...

Lithuania Turkey Bulgaria
Flat

SerbiaSlower

Source: World Bank.

Table ECA.1 Europe and Central Asia forecast summary(annual percent change unless indicated otherwise)
98-07aGDP at market prices (2005 US$) b
GDP per capita (units in US$)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 (%)

5.4
5.4
5.6
6.3
2.5
8.8
7.2
10.1
-0.3
2.4
10.0
-2.1

Est.
2007
7.5
7.4
7.8
10.8
4.2
15.4
7.5
19.6
-3.7
-0.7
12.5
2.9

2008
3.9
3.9
4.3
6.6
3.3
6.0
3.1
8.3
-1.9
0.4
13.2
1.1

2009
-6.5
-6.6
-6.6
-6.3
2.3
-18.0
-7.1
-23.9
6.5
0.8
2.2
-5.9

2010
5.2
5.2
5.0
7.1
0.6
3.5
5.9
12.7
-1.9
0.8
9.5
-4.0

2011
5.3
5.2
5.0
7.7
2.3
7.9
6.7
9.9
-0.9
0.6
6.7
-1.4

Forecast
2012
3.2
3.1
3.3
5.0
2.4
3.5
4.4
6.7
-0.8
-0.4
6.2
-2.2

Memo items: GDP
Transition countries e
6.2
8.6
5.2
-7.2
3.7
4.1
3.5
Central and Eastern Europe f
4.7
7.1
5.3
-8.1
-0.4
2.7
1.8
Commonwealth of Independent States g
6.5
8.9
5.2
-7.0
4.5
4.3
3.5
Russia
6.3
8.5
5.2
-7.8
4.0
4.1
3.5
Turkey
3.7
4.7
0.7
-4.8
9.0
8.2
2.9
Romania
4.3
6.3
7.3
-7.1
-1.3
2.2
1.5
Source: World Bank.
a. Growth rates over intervals are compound average; growth contributions, ratios and the GDP deflator are averages.
b. GDP measured in constant 2005 U.S. dollars.
c. GDP measured at PPP exchange rates.
d. Exports and imports of goods and non-factor services (GNFS).
e. Transition countries: 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, Moldovia, RussianFederation, Tajikistan, Turkmenistan, Ukraine, Uzbekistan.
h. Estimate.
i. Forecast.

Source: World Bank.

94

2013
4.0
3.9
4.0
5.3
2.0
4.3
6.2
7.6
-0.5
-0.7
5.0
-2.1

4.3
3.2
4.1
3.9
4.2
3.0

Global Economic Prospects January 2012

Europe & Central Asia Annex

to a 5.9 percent annualized rate during the threemonths ending November 2011. Industrial
activity at the country level has been mixed.
After the sharp contraction in earlier months
reflecting both a global slowing and a sharp
slowdown in domestic spending, industrial
production growth rebounded strongly in
Romania, Ukraine, and Turkey in October. In
contrast, industrial production in Russia (50percent of regional GDP) slowed down despite
persistently high oil prices, and it has contracted
in Bulgaria since May (figure ECA.3).

In 2008-10 these countries accounted for morethan 50 percent of the region’s exports.
Romania, Lithuania, Latvia, FYR Macedonia,
and Bulgaria are particularly dependent on
demand from high-income Europe, while moredistant countries are less so. The Octoberrebound in exports was likely supported by therobust import demand from developing countries
that grew at 7 percent annualized during thethree months ending October 2011.
Figure ECA.4 The regions’ export growth fell in tandemwith the slow-down in world trade

Figure ECA.3 IP growth has rebounded in October

Import and Export Volume
3m/3m saar

IP Volume Growth
3m/3m saar, percent

50

50

40

40

30

30

20
10

20

0

10

-10

0

-20

-10
-20
-30
-40

Europe Central Asia Exports
Developing Country Exports
High-income Imports
Developing Country Imports-30
Europe Central Asia
TurkeyRussiaRomania
Bulgaria

-40
-50
-60
2009M01-50
2009M01 2009M07 2010M01 2010M07 2011M01 2011M07

2009M09

2010M05

2011M01

2011M09

Source: World Bank.
Source: World Bank.

Signs of contagion from the European debt crisis
have appeared…

…after being depressed by the sharp fall inexport growth since the first quarter.

A sharp decline in risk appetite triggered by theEuro Area debt crisis has led to an abrupt decline
in capital inflows (particularly in portfolio
investment flows), a jump in risk premia and acollapse in stock prices in developing countries
since August (See the Main Text and FinanceAnnex for further discussion). The widening inrisk premia for Europe and Central Asia—
proxied by median CDS spreads—was thehighest among developing countries (figure
ECA.5). The largest jumps in the spreads since
July were in Ukraine, Romania, Bulgaria andKazakhstan, which are particularly vulnerable toa possible downturn (see the risk section of thisannex). Political uncertainty ahead ofparliamentary or presidential elections also seemto have played a role in some countries.

After strong growth in the first half of the year,
export growth slowed during the second quarterand then contracted at a 6.7 percent annualizedpace during the third quarter. The decline inexport growth was reversed in October to 1.1
percent annualized rate supported by strong
export growth in Turkey and Romania. Other
countries continue to suffer from a loss of
momentum, with the sharpest slowdowns
experienced by Russia and Ukraine.
Activity in the region is being affected by theanemic growth in high-income Europe—where
economies grew almost zero percent in 2011
(figure ECA.4). High-income European importdemand declined at a 13 percent annualized rateduring the three months ending November 2011.

95

Global Economic Prospects January 2012

Europe & Central Asia Annex

Increased risk aversion also led to significant sell-offs from developing country equity markets.
Emerging market MSCI stock index lost 12
percent since July (figure ECA.6). Stock market
declines were steepest in Eastern Europe, downaround 20 percent since July, with Ukraine,
Serbia, Bulgaria and Lithuania experiencing the
sharpest falloffs. Portfolio investment flows toTurkey registered net outflows of $4.7 billion in
August and September. Russia also experienced
large capital outflows despite high oil prices.

Exchange rates have weakened sharply inseveral countries.
Several countries’ dollar exchange rates
weakened sharply in 2011 (figure ECA.7).
Depreciation was gradual until July, and thenaccelerated sharply during September andOctober as portfolio equity inflows reversed.
The currencies gained some of their lost valuesin October but have continued their depreciation
since November. The value of the Turkish liradeclined more than 15 percent against dollar
between June and early January 2012, prompting
the authorities to use foreign exchange reservesto the tune of $10 billion to defend the currency.

Figure ECA.5 Largest increase in risk premia was inEastern Europe and Central Asia
Price of credit default swap (CDS)
median basis points
380
ASIAN Developing

330

LAC Developing (exc. Argentina and Venezuela)

280

ECA Developing

230
180

130
80
Jan-10May-10

Sep-10Jan-11

May-11

Sep-11

Jan-12

Source: Datastream.

Despite high oil prices and a current accountsurplus, the Russian ruble has dropped by morethan 10 percent against its $0.55/€0.45 basket
since July. The depreciation came on the heels oflarge outflows from equity markets, large
repayments of foreign debt that Russianborrowers were unable to refinance, and a sharp
acceleration in resident lending abroad. Overall,
capital outflows are estimated to have reached$80 billion in 2011, partly reflecting politicaluncertainty ahead of the March presidential
elections and growing worries about the adverseand deteriorating business environment. The
central bank has allowed the ruble to adjust
faster than in past episodes of ruble weakness,
limiting exchange market interventions only tosmoothing excessive volatility. Under similar
Figure ECA.7 Exchange rates begin to depreciate

Figure ECA.6 Sharp reversal in emerging countries
equity markets

Real Effective Exchange Rates
Index, Jan 2010=100

MSCI equity index
Index (Jan 2011=100)

115

120

110
110

105

100

100

90
80

95
MSCI LAC index

90

MSCI EM Eastern Europe
70
60January-11

85

MSCI EM Asia Index
May-11

September-11

80
2010M01

January-12

Source: Bloomberg.

ROM
TUR

2010M07

Source: Datastream.

96

RUS

2011M01

2011M07

Global Economic Prospects January 2012

Europe & Central Asia Annexpressures, Ukraine had to sell $3.5 billion of FX
reserves during September and October to keep
the hryvnia to its target peg (UAH 8.0) to thedollar.

reflecting a fall in oil prices from record highlevels, year-over-year inflation picked up again
in November (figure ECA.8). At 7.6 percent
median for the region in November, inflation
remains a major concern for more than half ofthe countries in the region, particularly as sharp
currency devaluations and high oil prices may
yield further increases.

Strong fiscal adjustment and prudent monetary
policy in Romania have limited the fallout fromthe shift in market sentiment. The leu has
weakened only around 2 percent against the euro
since July, partly reflecting the absence of large
inflows earlier in the year.

Although budget balances continued to improvein 2011 (with the exception of Azerbaijan—due
to increase in non-oil sector deficit, andKyrgyzstan), there is limited fiscal space tosupport growth, particularly if commodity prices
fall in response to a global slowdown. While theregion’s cyclically adjusted budget balance
improved from –3.5 percent of GDP in 2007 to
0.1 percent in 2011, this was mostly due toimprovements in commodity exporters. The
increase in commodity prices since 2005 has
improved government balances for oil exporting
developing countries by an average of 2.5
percent of GDP, among metal exporters the
improvement has been of the order of 2.9 percent
of GDP. Going forward however if commodity
prices were to fall, then fiscal conditions inexporting countries would deteriorate rapidly.
Simulations suggest that if commodity prices
were to fall as they did in the 2008/09 crisis,
fiscal balances in oil exporting countries could
deteriorate by more than 5 percent of GDP.
Impacts in metals exporting countries could also
be large, with some regional impacts exceeding
7 percent of GDP.

Fiscal and monetary policy: worries shift frominflation to growthConcerns about the deteriorating global outlook
and its potential adverse impact on output
growth caused a shift in monetary policies.
Earlier this year, reflecting concerns about
inflation, a monetary tightening trend was
gaining strength in the region, via both increases
in interest rates (Belarus and Russia—twice inthe case of the latter) and in reserve requirements(Turkey). Starting in August, however, several
countries surprised the markets by lowering
rates, including Turkey (by 50 bps on August4th), Serbia (by 50 bps on October 6th), andRomania (by 25 bps on November 2nd). Russia
has stopped tightening since May 2011. The
central bank of Turkey has also cut reserve
requirements on FX liabilities and raised its
overnight borrowing rate to attract short-term
capital inflows.1
After losing momentum in the third quarter
Figure ECA.8 Inflationary pressures appears to beeasingFigure ECA.9 International capital flows fell in 2011

Rate of Inflation$ billion
350

ST Debt

12
10

8

300

Portfolio Equity

250

FDI inflows

200

Net private inflows (% GDP)--RHS

100

4

50

CPI (3m/3m saar)0

CPI (y-o-y)-5002009M01

percent

Bonds

150

6

2

Banks

2010M01-100

2011M012008

Source: World Bank.

2009

Source: World Bank.

97

2010

2011e

10
9
8
7
6
5
4
3
2
1
0

Global Economic Prospects January 2012

Europe & Central Asia Annex

Table ECA.2 Net capital flows to Europe and Central Asia
Net capital flows to ECA$ billions
Current account balance
as % of GDP
Financial flows:
Net private and official inflows
Net private inflows (equity+private debt)..Net private inflows (% GDP)Net equity inflows..Net FDI inflows..Net portfolio equity inflows
Net debt flows..Official creditors....World Bank....IMF....Other official..Private creditors....Net M-L term debt flows......Bonds......Banks......Other private....Net short-term debt flows
Balancing item /aChange in reserves (- = increase)
Memorandum items
Migrant remittances /b

2004
36.7
2.8

2005
44.9
2.9

2006
30.7
1.8

2007
-31.2
-0.5

2008
-5.3
0.4

2009
13.4
0.6

2010
26.6
0.8

2011e
23.5
0.6

104.1
111.6
8.4
44.4
42.6
1.8
59.7
-7.6
1.0
-5.9
-2.7
67.2
53.5
14.6
40.2
-1.3
13.7
-71.4
-69.3

135.3
163.8
9.7
58.6
52.0
6.7
76.6
-28.5
-0.7
-9.8
-18.0
105.1
84.4
16.8
68.9
-1.3
20.8
-92.8
-87.3

248.9
279.3
13.5
106.6
94.3
12.3
142.2
-30.4
0.2
-5.8
-24.8
172.6
128.4
34.0
95.2
-0.8
44.3
-105.6-174.0

424.1
426.4
15.9
163.2
136.2
27.0
260.9
-2.3
0.2
-5.0
2.6
263.3
190.7
60.0
131.8
-1.0
72.5
-165.4-227.5

313.0
301.0
9.1
146.9
162.2
-15.3
166.0
12.0
0.7
7.0
4.3
154.1
160.9
16.4
145.1
-0.6
-6.9
-365.5
57.9

104.0
68.4
2.7
92.3
85.9
6.4
11.7
35.7
3.0
20.5
12.2
-23.9
14.6
-1.8
16.8
-0.4
-38.5
-90.8
-26.6

172.8
150.2
5.0
85.4
86.3
-0.8
87.4
22.6
3.5
9.4
9.8
64.7
19.2
27.1
-7.7
-0.2
45.5
-133.2
-66.2

135.0
122.1
3.6
77.1
76.1
1.0
57.9
12.9
2.1
3.8
7.0
45.0
11.0
16.0
5.0
0.0
34.0
-115.7
-42.8

12.7

19.7

24.9

38.7

45.0

36.1

36.0

40.0

2012f
-14.2
-0.4

2013f
-26.6
-0.6

76.3
2.0
71.3
70.5
0.9
5.0

129.1
2.9
112.1
108.1
4.0
17.0

5.0

17.0

43.5

47.9

Source: The World BankNote:e = estimate, f = forecast/a Combination of errors and omissions and transfers to and capital outflows from developing countries.
/b Migrant remittances are defined as the sum of workers’ remittances, compensation of employees, and migrant transfers

Source: World Bank.

Despite strong performance in the first half, net
private capital flows declined in 2011

countries. FDI inflows fell sharply in Bulgaria
following large repayments on intra-company
loans in the first quarter of the year, andconsiderably in Ukraine. In contrast, flows toLatvia almost tripled and increased significantly
in Kazakhstan and Turkey.

After a strong recovery in 2010, net private
capital flows2 to the region declined to an
estimated $122 billion (3.6 percent of GDP) in2011 from $150.2 billion (5.0 percent of GDP)in 2010 (table ECA.2, figure ECA.9). Almost all
types of capital flows have contracted, but thelargest decline was in international bond, andshort-term debt flows.

The outlook for 2012 has become morechallenging as the world economy has entered avery difficult period. The likelihood that thesovereign debt crisis in Europe deteriorates
further resulting in a freezing up of capital
markets and a global crisis similar in magnitude
to the Lehman crisis remains very real. As
discussed in the risk section, the Europe andCentral Asia region has very close financial andtrade ties with the high-spread Euro Area
countries generating uncertainty for the region’s
economic outlook. Europe is the main source ofcross-border bank-lending and other flows suchas FDI. Increased risk aversion and bankingsector deleveraging have been cutting into

Overall, short-term flows for the year as a wholedeclined despite their strong performance in thefirst half of the year. This year’s fall in shortterm debt flows is in sharp contrast with lastyear’s surge, when these flows led the recovery
in net capital inflows.
FDI inflows declined by an estimated 10 percent
in 2011 despite high inflows in the first half ofthe year, with significant differences across98

Global Economic Prospects January 2012

Europe & Central Asia Annex

capital inflows to the region, which are projected
to decline further by 40 percent to $76 billion(2.0 percent of GDP) in 2012, with sharp
contraction in cross-border debt flows.

remittance outflows from Russia—which
contributes almost one-third of remittances to theregion (figure ECA.10). Outflows from Russia,
mainly to Central Asian countries, haveincreased with the recovery of oil prices but
appear to have become more volatile in the postcrisis period (figure ECA.11).

Under the assumption that the ongoing
turbulence in Europe will be resolved tomarket’s satisfaction by the end of 2012, net
capital flows to the region are expected torebound in 2013 in tandem with the growth in
the global economy. Net private capital flows areprojected to reach $129 billion in 2013 around
2.9 percent of region’s GDP. By 2013, all flows
are expected to increase. Bond issuance is
expected to level down slightly as bank lending
picks up the pace supported by South-Southflows.

Even though remittances to developing countries
grew in 2011, they are vulnerable to uncertain
global economic prospects. Remittance flows to
the region are expected to grow at a slower paceof 8.8 percent in 2012 to reach $44 billion.
However, with global growth expected toresume in 2013, remittances are projected to
grow at higher rates of 10.1 percent to reach $48
billion by 2013 (see Migration and Development
Brief 17).

Migrant Remittances

Figure ECA.10 Sources of remittances for ECA in2010

Migrant remittances are a very importancesource of both foreign currency and domestic
incomes for several countries in the developing
Europe and Central Asia region. Overall, they
represent about 1.3 percent of regional GDP, butrise to 10 or more percent of GDP for countries
like Albania, Armenia and Bosnia andHerzegovina, and between 20 and 35 percent of
GDP for the Kyrgyz Republic, Moldova andTajikistan.

Share in total (%)
50
40

30
20
10
0
Western Europe

After falling by almost a quarter between 2008
and 2009, and stagnating in 2010, remittances tothe Europe and Central Asia region grew by an
estimated 11 percent to $40 billion in 2011 intandem with the global trend (table ECA.3). The
recovery was supported by the increase in

Developing
Countries

Other High Income

US

Source: World Bank Migration and Development Brief#17.

Figure ECA.11 Oil prices remain a key driver of remittances to Central Asia
$ billions

Table ECA.3 Workers’ remittances, compensationof employees, and migrant transfers, credit(US$ billion)$/barrel

140

8
6

120

Outward remittancesfrom Russia

2008 2009 2010 2011e 2012f 2013f 2014f
All developing countries

324

307

321

351

377

406

441

4

Europe and Central Asia

45

36

36

40

44

48

53

2

Growth rate (%)

0

100
80

60
40

Crude oil price(right scale)20
0

All developing countries 16.4% -5.3% 4.6% 9.3% 7.4% 7.7% 8.6%
Europe and Central Asia 16.3% -19.8% 0.0% 11.1% 10.0% 9.1% 10.4%

Source: World Bank Migration and Development
Brief #17.

Source: World Bank Migration and Development Brief
#17.

99

Global Economic Prospects January 2012

Europe & Central Asia Annex

These rates of growth are considerably lower
than those seen during the 2002-2007 period.
This is partly because the ongoing debt crisis in
Europe and other high-income OECD countries
has been adversely affecting the economic andemployment prospects of migrants. Persistently
high unemployment rates have also createdpolitical pressures to reduce the current levels of
immigration, which could depress remittanceflows to developing regions. While buoyant oilrevenues and increased spending on
infrastructure development could make Russia
and other destinations even more important for
migrants from developing countries, volatile
exchange rates and uncertain oil prices present
further risks to the outlook.

percent in 2010. Growth is expected to be heldback by the deleveraging and the euro crisis next
year. It is forecasted to slow down to 1.5 percent
in 2012 but later rebound to 3 percent in 2013.
Similarly, growth in Serbia is expected to ease to
1.5 percent in 2012 from 2 percent in 2011,
recover to 4 percent in 2013. In contrast, theCommonwealth of Independent States is
projected to post somewhat stronger real GDP
growth of 3.5 percent and 4.1 percent in 2012
and 2013, respectively. Most of the commodity
exporters—with the exception of Azerbaijan due
to the temporary interruption in oil production—
had robust growth in 2011. All of these countries
are expected to have robust growth for theforecast period.

Medium-term Outlook

The region’s current account balance is projected
to shift to a deficit of 0.7 percent of GDP in 2013
from a surplus of 0.6 percent of GDP in 2011, as
domestic demand is expected to strengthen fasterthan exports. The current account surplus ofcommodity-rich exporters is expected to fallfrom 5.9 percent of GDP in 2011 to 2.8 percent
in 2013 despite high commodity prices, as
additional revenues are projected to leak into
spending and imports relatively quickly. Current
account deficits among oil importers are
estimated to reach over 7.7 percent of GDP in2011 and only gradually improve to around 5.7
percent of GDP in 2013.

GDP growth in Europe and Central Asia is
projected to slow to 3.2 percent in 2012 from 5.3
percent in 2011, before firming to 4.0 percent in2013. Growth rates remain well below the boomperiod average of 7.5 percent recorded during
2003-07. While these growth rates are close to
estimates of the region’s potential growth rate,they will have limited impact in reducing sparecapacity generated by the crisis. As a result
regional unemployment, albeit falling, is
expected to remain a challenge throughout the
projection period. The deceleration in 2012
mainly reflects weaker exports due to slower
growth in export markets (notably high-income
Europe), and domestic demand being held backby high unemployment and banking sector
deleveraging.

High commodity prices should boost
government revenues in resource-rich countries,
turning the government deficit of 2.3 percent of
GDP in 2010 to a slight surplus of 1.2 percent by
2013. At the same time, slowly improving
activity levels and ongoing fiscal consolidation
measures are projected to reduce government
deficits in oil importers from 4.5 percent of GDP
in 2010 to about 2.8 percent of GDP in 2013.

Projected growth paths vary significantly acrosscountries (table ECA.5). For example, after two
years of strong growth in 2010 and 2011, GDP
growth in Turkey is projected to slow down to
2.9 percent in 2012 due to the weak global
economy and the implications of recent market
turmoil for consumer and investor confidence.
Assuming that global conditions do not
deteriorate further, we forecast that economic
growth will pick up to an average of 4.2 percent
in 2013. With its strong performance in the third
quarter, growth rate in Romania is estimated tohave reached 2.2 percent in 2011 from –1.3

Risks and vulnerabilities
As emphasized in the main text, the primary risk
facing the global economy is a deterioration of
the situation in high-income Europe, which
could result in a significantly weaker external
environment for Europe and Central Asia’s main
trading partner but also a significant

100Global Economic Prospects January 2012

Europe & Central Asia Annex

exacerbation of negative confidence effects.
Such deterioration would magnify a number of
pre-existing vulnerabilities in the region,
including those arising from direct trade andbanking-sector exposures, as well as moreindirect effects running through both financial
and real channels, including possibly sharp
reductions in global external financing
conditions, weaker remittances and lower
commodity prices.

economies, generating considerable vulnerability
to any repatriation of funds (figure ECA.13).
The nature of European banks’ holdings in theregion underscores its vulnerability todeleveraging. Banks in the region have reliedheavily upon cross-border lending from theirparents to support their loan portfolios, with loan
–to–deposit ratios well over 100 percent inseveral countries: Latvia (240%), Lithuania(129%), Romania (127%), and Russia (121%).
As a result, banks are extremely vulnerable to a
cut-off of lending, let alone to an active effort byparent banks to recover funds either by selling
assets or calling loans where possible. Indeed, ina worrying sign that such risk is actually being
realized, Austrian bank supervisors have
instructed Austrian banks to limit future lending
in their central and eastern European
subsidiaries.

Very strong financial linkages…
The region has unusually strong banking-sector
linkages with high-income Europe, both in termsof ownership links and day-to-day financing. As
European banks are required to raise their capital
positions, they have been forced to deleverageand tighten credit conditions. So fardeleveraging has been relatively orderly, andalthough accompanied by a sharp slowing ofcredit growth in Eastern Europe, cross-border
capital flows have not dried up. But in case of afurther acceleration of the process, transmission
to the financial markets in developing Europe
and Central Asia would likely be swift andpotentially very damaging.

Funding pressures will add to the stress in thedomestic banking sectors that are already at risk
to a sharp increase of NPLs in the event of aslowdown in growth (figure ECA.14). In somecountries, NPLs and provisioning are already an
issue. The share of NPLs in outstanding banklending in the Europe and Central Asia region
jumped t 12 percent in 2011 from 3.8 percent in2007. Available data indicates that NPL ratios
have continued to deteriorate in 2011 in
Kazakhstan (32.8%) and Romania (14.2%).

As of the second quarter of 2011, total foreign
claims by European banks reporting to BIS were$0.6 trillion in the region (figure ECA.12). Key
European banks also account for large shares ofdomestic bank assets in several of the region’s

Figure ECA.13 Significant reliance on foreignbanks

Figure ECA.12 Strong banking sector linkages
European Banks' Foreign Claims(2011 Q2, %GDP )Share of European Banks in
Total Banking Assets of Selected EMs (%)

Azerbaijan
Belarus
UkraineGeorgia
Kazakhstan
JordanArmenia
Moldova
TurkeyAlbania
Lithuania
Bulgaria
Romania
Latvia100
80Austria-France-Germany
Italy-Greece

60
40

20
0

0

20

40

60

80

Source World Bank staff calculation based on data fromCentral Banks and Bankscope

Source: BIS.

101

Global Economic Prospects January 2012

Europe & Central Asia Annex
term debt makes Albania, Belarus, Montenegro,
Romania, and Serbia vulnerable to a tighteningof international bank-lending conditions – even
if these were not associated with a wider crisis.

Figure ECA.14 Possible resurgence in NPLs
Share of NPL in total loans outstanding(percent)
Euro Zone (excl. GER, NLD, CYP)
Other HICs
ECA
Asia
Other LMICs

14
12
10

The region would be particularly affected byweaker activity in the European Union, whichbuys more than half the region’s exports. The
countries most likely to suffer from a sharp
downturn in EU demand include Romania,
Lithuania and Latvia because of their large
exposure to Europe in general, and Albania,
Macedonia FYR, and Bulgaria because they rely
particularly on the high-spread European
economies that are likely to be hardest hit (table
ECA.4). In addition, the region is also quite
vulnerable to second, third and fourth-roundtrade effects (Main Text figure 15).

8
6
4
2
0
2005

2007

2009

2011Q2

Source: IMF Financial Soundness Indicators…and other worrisome vulnerabilities

A sharp downturn in high-income Europe would
also reduce remittances to the region (40 percent

In addition to financial linkages to high-income
European countries, several countries in theregion are also vulnerable to generalized risk
aversion, when both foreign and domestic
investors will retreat from risky assets. Should
conditions deteriorate substantially, international
capital flows could weaken much further andborrowing costs rise sharply. To a limited
degree, increased risk aversion has already
reduced portfolio equity flows since July.
Countries with high levels of short-term debt or
maturing long-term debt and those with large
current account deficits are particularly
vulnerable to such a tightening in financial
conditions. Overall, Europe and Central Asia isseriously exposed to such risks, with ex ante
external financing needs totaling some $279
billion (16.9 percent of GDP) for 2012.

Table ECA.4 ECA’s trade linkages with the EU
Merchandise Exports to the EU, Share of total,
2008-2010 averages (percent)EU27
High-spread(Total) EA economies
Country
Europe & Central Asia
52
10
Romania71
19
Lithuania
70
5Latvia70
4
Macedonia, FYR
69
24
Bulgaria
65
21
Azerbaijan
61
32
Bosnia and Herzegovina
61
16
Russian Federation
53
8
Moldova
50
13
Kazakhstan
47
12Turkey47
14
Armenia45
4Albania
44
37
Belarus39
2
Georgia
38
6
Ukraine28
7
Turkmenistan
25
5
Tajikistan
17
9
Kyrgyz Republic
15
0
Uzbekistan
10
4Should external financing conditions worsen,
short-term debt and bond financing could dry up
relatively quickly3—potentially forcing countries
to cut sharply into reserves (or reduce imports)
in order to make ends meet.
On this basis, Turkey is the among the mostvulnerable of developing countries, with its
projected current account deficit in 2011 set tobe six times larger than its FDI inflow. The
country also carries short-term debt equal to 80
percent of its reserves. Heavy reliance on short-

Source: COMTRADE and World Bank.

102

Global Economic Prospects January 2012

Europe & Central Asia Annexof the region’s remittances come from highincome Europe). In the aftermath of 2008 crisis,
migrant remittances declined by 20 percent.
High unemployment levels have alreadygenerated political pressures to reduce

immigration in many high-income countries. In
addition, as discussed earlier, remittances
outflows from Russia, which also accounts for alarge share of remittances in the region, would
decline considerably with a fall in oil prices.

Table ECA.5 Europe and Central Asia country forecasts(annual percent change unless indicated otherwise)
98-07aEst.

Forecast

2007

2008

2009

2010

2011

2012

2013

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

5.5
-6.3

5.9
-10.8

7.7
-15.6

3.3
-15.3

3.5
-12.4

3.0
-11.7

2.0
-9.7

3.5
-9.9

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

9.6
-8.6

13.7
-6.4

6.9
-11.9

-14.1
-15.5

2.1
-14.5

4.6
-12.7

4.3
-11.1

4.2
-9.6

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

14.2
-7.2

25.0
27.3

10.8
35.6

9.3
23.7

5.0
28.3

0.2
26.6

3.1
19.1

3.0
17.1

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

6.9
-3.9

9.8
-6.7

11.3
-8.6

0.2
-13.0

7.6
-15.5

5.0
-10.9

0.5
-6.0

3.5
-4.1

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

4.8
-8.7

6.4
-27.3

6.2
-22.9

-5.5
-8.7

0.2
-1.0

1.9
2.0

1.2
-1.0

3.3
-2.2

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

6.6
-9.8

12.3
-20.9

2.3
-22.8

-3.8
-11.2

6.4
-11.5

6.5
-12.7

5.0
-11.1

5.2
-9.3

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

8.3
-2.7

8.9
-7.9

3.3
4.7

1.2
-3.7

7.3
3.1

6.6
6.3

5.5
3.9

5.8
3.6

6.3
-17.4

6.9
-22.8

2.9
-25.0

3.9
-16.3

5.3
-24.0

5.0
-20.9

4.7
-18.9

GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Kyrgyz Republic
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Lativa

4.2
-8.4

8.5
-0.2

7.6
-8.1

2.9
0.7

-1.4
-7.2

7.0
-6.9

5.5
-6.6

5.7
-7.2

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

7.8
-11.6

10.0
-22.3

-4.2
-13.1

-18.0
8.6

-0.3
3.6

4.5
-0.4

2.0
-1.1

3.7
-2.0

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

6.7
-8.5

9.8
-14.4

2.9
-12.9

-14.8
4.4

1.4
1.5

5.8
-2.3

3.2
-3.1

3.5
-3.6

GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Macedonia, FYR

4.1
-8.4

3.1
-16.5

7.8
-17.3

-6.0
-9.9

6.9
-8.3

6.0
-12.1

4.0
-11.3

4.3
-11.4

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

2.6
-5.2

6.1
-7.4

5.0
-12.5

-0.9
-6.4

1.8
-2.2

3.0
-5.1

2.5
-5.3

3.5
-4.9

10.7
-40.2

6.9
-51.3

-5.7
-30.1

2.5
-25.0

2.5
-20.9

1.8
-20.3

2.5
-19.7

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

4.3
-7.0

6.3
-13.7

7.3
-11.4

-7.1
-4.2

-1.3
-4.2

2.2
-4.5

1.5
-4.7

3.0
-5.3

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

6.3
9.5

8.5
6.0

5.2
6.2

-7.8
4.0

4.0
4.7

4.1
5.1

3.5
2.7

3.9
2.2

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

3.1
-7.4

5.4
-17.6

3.8
-21.4

-3.5
-7.1

1.0
-7.2

2.0
-7.5

1.5
-8.4

4.0
-7.7

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

7.9
-4.2

7.8
-8.6

7.9
-7.7

3.9
-5.9

6.5
2.1

6.0
-4.1

6.0
-6.5

5.0
-7.0

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

3.7
-2.4

4.7
-5.9

0.7
-5.7

-4.8
-2.3

9.0
-6.4

8.2
-9.8

2.9
-7.5

4.2
-6.3

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

5.9
3.2

7.9
-3.7

2.1
-7.1

-14.8
-1.6

4.2
-2.1

4.5
-5.4

2.5
-4.9

4.0
-4.3

GDP at market prices (2005 US$) b
5.6
9.5
9.0
8.1
8.5
8.3
8.0
6.5
Current account bal/GDP (%)
4.9
7.3
8.7
2.2
6.7
8.1
7.0
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.
Bosnia and Herzegovina and Turkmenistan,are not forecast owing to data limitations.
a. Growth rates over intervals are compound average; growth contributions, ratios and the GDP deflator are averages.
b. GDP measured in constant 2005 U.S. dollars.
c. Estimate.
d. Forecast.

Source: World Bank.

Source: World Bank.

103

Global Economic Prospects January 2012

Europe & Central Asia Annex

As highlighted by the simulations outlined in themain text, a small, sustained crisis scenario
could lead to declines in remittances flows in theEurope and Central Asia region in the order of 3
to 4 percent in 2012 and 2013 with the largest
effects in Tajikistan, Kyrgyz Republic, andMoldova. The contraction might reach as high as
9.1 percent in 2012 and 7.4 percent in 2013 in an
event of a severe crisis when two larger Euro
Zone economies are squeezed from the credit
markets.
Finally, a substantial faltering of global growth
may disproportionately impact commodity
exporters through a possible reduction incommodity prices. Following the 2008 crisis,
energy prices fell by 60 percent and metals
prices by 57 percent by 31 percent between
August 2008 and their first-quarter 2009 lows.
Simulations suggest that a sharp slowdown inglobal growth could result in more than 20
percent decline in energy prices. Based on
current export volumes, in an event of a sharp
fall in oil prices the hardest hit economies in theregion are likely to include Russia andAzerbaijan.

Notes:
1

In addition, the central bank recently raised
its emergency lending rates sharply anddropped its easing bias, paving the way for
future hikes in its key policy rate, the oneweek repo rate.

2

Net private capital flows comprise net debt
flows (incoming disbursements lessprincipal repayments) and net equity inflows(FDI and portfolio inflows net of
disinvestments).

3

Historically, these capital flows are morevolatile than Foreign Direct Investment –although in 2008/9 there was a global 40
percent decline in FDI, it was more gradualthan the still larger cuts to other flows.

104

Global Economic Prospects January 2012

Latin America & the Caribbean Annex

Latin America & the Caribbean Region…with momentum for both imports and exports
slowing markedly...

Recent developments
Growth in the Latin America and the Caribbean
region is slowing after robust growth in the firsthalf of 2011

The strong performance in export revenues in thefirst part of the year, when a combination ofstrong external demand and high commodity
prices boosted growth to more than 25 percent
year-on-year, gave way to a marked slowdown
in the third quarter on account of softer external
demand from major trade partners, and declines
in commodity prices. Oil and metals exporters,
including Mexico, Ecuador, and Chile, saw someof the sharpest declines in export revenues
growth on a quarter-on-quarter seasonallyadjusted annualized rate or momentum basis(saar).1 The marked slowdown in Brazil’s GDP
growth has also affected export revenues incountries that trade heavily with Brazil.
Meanwhile Colombia benefitted from the partial
recovery in external demand from Venezuela,
and an improvement in bilateral relations.

The economies of Latin America expanded at apace near or above potential through the firsthalf of 2011. Growth was particularly strong inSouth America, lifted by strong domestic
demand, accommodative external financing
conditions in the case of countries integrated
with the global financial system, and highcommodity prices in the case of commodity
exporters. In many of these economies the output
gaps were positive. Growth in Central America
was more subdued, but accelerating supported
by recovery in domestic demand, while stronger
agricultural performance gave an additional
impetus to growth in Mexico. In the Caribbean
economies growth remained weak with theoutput gap still negative.

Against the backdrop of increased global
uncertainty, the apparent soft-landing in China,
weak performance in the Euro area, andrelatively subdued demand in the United States
external demand for the region’s exports has
indeed weakened, with export volumes
momentum decelerating to 1.4 percent in thethird quarter (saar) from the 14 percent in thesecond quarter, before reaccelerating slightly
into the year end.

Monetary, credit and fiscal policy tightening incountries where signs of overheating wereapparent caused domestic demand growth tomoderate. The slowing in domestic demand hascoincided in some of the economies in the region
with the softening in external demand causing
sharper than expected deceleration in growth.
Although through the first half of the year there
have been little spillovers from the sovereign
debt tensions in the peripheral Euro Area, theincreased likelihood that the further deteriorationin Euro Area’s sovereign debt crisis could freeze
up capital markets has started to affect thefinancially integrated economies of Latin
America, as reflected by developments in theequity and currency markets. Heightened
uncertainty about the short-term economic
outlook and increased financial market volatility
have started to take their toll on consumer andbusiness sentiment, dampening further domestic
demand. Retail sales and import data show thatthe moderation in domestic demand is broadlybased across the region.

The contribution of net exports to growth has
been less negative than the sharp deceleration inexport volumes would suggest, due to a 4.6
percent quarter-on-quarter (saar) contraction in
imports in the third quarter, following rapid
growth in the first two quarter of the year (18.7
and 15.6 percent respectively), which attests tothe marked moderation in domestic demand, inparticular in investment. In the fourth quarter thecontribution of net exports was positive asimports continued to decline at an accelerated
pace (10.5 percent decline (saar) in the threemonth to November) while export performance

105

Global Economic Prospects January 2012

Latin America & the Caribbean Annex

improved modestly. Notwithstanding declining
commodity prices and weak external demand
trade balances in the region have improved inrecent months, as import growth decelerated
more sharply than export revenue growth.

suggest that domestic demand is slowing, due tothe lagged effects of policy tightening in the firsthalf of 2011.
In Chile economic performance is also showing
signs of moderating, with both domestic andexternal demand contributing to this moderation.
Quarterly GDP growth slowed to 0.6 percent (sa)in the third quarter, from 1.4 percent in the firstquarter. In contrast Peru’s economic
performance remained robust through the third
quarter, suggesting that there have been limited
spillover from increased global uncertainty andsofter external demand, in particular from China.
Growth eased down marginally, to 1 percent sa
in the third quarter, down from a very strong 1.7
percent in the second quarter, fueled by robust
growth in domestic-demand related sectors suchas retail and housing, and despite weak
performance in the industrial sector whichsuffered from weaker demand for Peru’s textiles
from Europe and the United States. Domestic
demand is starting to show signs of moderate
deceleration, however, reflected in weakening
import momentum. Similarly growth in
Colombia has seen little impact from a more
adverse external environment so far, with growthmoderating only marginally in the third quarterto 1.7 percent quarter-on-quarter from a verystrong 1.8 percent expansion in the second
quarter. Growth has been supported by very
robust domestic demand and very rapid credit
growth. Unlike in other countries in the region,
both industrial production and export volumes
have held up in the third quarter expanding at a

Reflecting moderating domestic demand, and toa some extent also weaker external demand,
industrial production declined 2 percent and 1.8
percent (saar) in the second and the third quarter
after a robust 9.2 percent expansion in the firstquarter. In Brazil, the policy-induced moderationin domestic demand in conjunction with astronger currency and weaker external demand
have caused industrial production to decline
more than 8 percent from the peak reached in
February 2011. In Mexico, the region’s second
largest economy, growth in industrial sector
eased in the third quarter to 2 percent quarter-onquarter (saar) from robust 7.8 percent expansion
pace in the first quarter, as growth inmanufacturing has moderated. Industrial output,
which is highly synchronized with developmentsin the U.S. industrial output, has dipped into
negative territory in the three months to October,and output was 1.2 percent lower than the peakrecorded in May. In other economies in theregion domestic demand continues to expand at
a robust pace as indicated by strong retail sales
supporting industrial output growth. In the caseof Colombia industrial production accelerated to
5.6 percent in the three months to October (saar),up from 1.8 percent in the second quarter.
Third quarter GDP data for some of thefinancially integrated economies in the region
reveals the effects of policy-induced moderationin domestic demand as well as of weaker
external demand (figure LAC.1). Brazil’s
economic growth came to a halt in the third
quarter, after growth decelerated to 0.7 percent
quarter-on-quarter (sa) in the second quarter -down from 0.8 percent in the first quarter. The
mild decline in GDP in the third quarter reflects
the combined effects of fiscal and monetary
policy tightening in the first part of 2011, theimpact of a still strong real, and the impacts of
the international financial turmoil since August
2011. Weaker retail sales and a drop in businessand consumer confidence in recent months

Figure LAC.1 Growth in Latin America and Caribbean is decelerating
GDP, q/q percent change, sa
432

Q1 2011
Q2 2011
Q3 2011

1
0
-1
-2
-3

Paraguay

BrazilMexicoSource: World Bank.

106

Chile

Costa Rica

Peru

Colombia Argentina

Global Economic Prospects January 2012

Latin America & the Caribbean Annex

3.8 and 9.4 percent annualized rate despite thedisruptions to global demand and investment
caused by the turmoil beginning in August.
Rising housing prices, lower unemployment andacceleration in inflation indicate that theeconomy is at risk of overheating.

on the upside in the third quarter, expanding 2.2
quarter-on-quarter (sa), up from 0.8 percent theprevious quarter, while investment growth
decelerated to 1.9 percent from 3.3 percent. In
Central America the recovery strengthened in thefirst half of the year, bolstered by solid domestic
demand. Growth in Panama was strong, fueledby construction work related to the expansion of
the Panama Canal. Growth in El Salvador wasdampened by weak external demand and theworst flooding in recent history that occurred in
October. Subdued expansion in all sectors,
except utilities, have kept growth below 2
percent in the first half of the year. Meanwhile
the Caribbean region struggles to recover from a
protracted recession, with growth weighed down
by high debt levels, fiscal consolidation, high oil
prices and weak performance in the tourism
sector, and a series of natural disasters. For
example, in the case of St Vincent and the
Grenadines torrential rains in April 2011 caused
major flooding and landslides that severely
damaged the country’s infrastructure. This cameon the heels of hurricane Tomas, which only six
month earlier had destroyed roads, bridges,
houses, and battered the agriculture sector. The
combined effect of these two natural disasters is
estimated at 3.6 percent of GDP.

Growth in commodity exporters that are lessintegrated financially with the global financial
system was very strong in the first half of theyear, boosted by high commodity prices andexpansionary policies, but they too show signs ofmoderating growth. Favorable terms of trade,significant monetary and fiscal stimulus, andstrong external demand supported above-trend
growth in Argentina in the first part of the year.
GDP growth started to decelerate in the second
quarter recording a still very robust 2.4 percent
growth (seasonally adjusted), down from 3.2
percent quarter-on-quarter (sa) growth in the firstquarter, before easing more markedly in thethird quarter to 1.1 percent. Venezuela’s
economy is finally staging a recovery from a
protracted recession, with GDP up close to 4.0
percent in 2011, supported in part by strong
government spending. Meanwhile Ecuador’s
economy grew strongly in the second quarter of
2011, on strong public spending financed fromthe oil windfall and Chinese loans, as well as
stronger private consumption before moderatingslightly to 1.7 percent in the third quarter.
Economic performance deteriorated markedly inParaguay in the second and third quarter of
2011, with GDP contracting 1.8 and 2.3 percent
quarter-on-quarter (seasonally adjusted),respectively, after growing 3.4 percent in thefirst quarter.

Despite moderationinflation remains highindomestic

demandDespite the recent moderation in domestic
demand inflation remained elevated in theeconomies that are continuing to grow at or
above potential and have positive output gaps.
Marked currency depreciations have also started
to fuel inflation via the import cost channel. At
regional level, inflation momentum (3m/3msaar) stayed above 8 percent for most of the year.
In Brazil inflation momentum continued toaccelerate through October, and annual inflation
barely met the upper inflation target limit of 6.5
as still robust domestic demand and a relatively
tight labor market put upward pressure on
service prices. In Argentina consumer priceinflation remains stubbornly high, with
momentum in excess of 8 percent for most of theyear, and little signs of easing. Meanwhile in
Peru and Colombia, strong economic expansion

In Mexico growth surprised on the upside in thethird quarter, and the economy expanded at a
relatively robust pace of 4.0 percent in the first
three quarters of 2011, notwithstanding tepid
growth in the United States. Growth accelerated
to 1.3 percent (sa), bolstered by strong
performance in the agriculture sector, and robust
growth in the service sector. In part the strong
performance also reflects a bounce back from theimpacts of the Tohoku which have negatively
affected growth in industrial output in the second
quarter. Private consumption growth surprised

107

Global Economic Prospects January 2012

Latin America & the Caribbean Annex

contributed to higher inflationary pressures. In
contrast inflation is less of a concern in othereconomies in the region such as Mexico, Chile,and some of the slow-growing Central American
economies.

percent in the first eight months of the year,
following a 10 percent expansion in 2010.2
Growth in tourist arrivals to South America has
benefited in part from strong income growth inBrazil, where expenditure on travel abroad
surged 44 percent, following on the heels of amore than 50 percent expansion in 2010. By
contrast spending by the United States on travel
abroad, grew at a much weaker 5 percent pace.

Strong commodity prices lifted trade balances incommodity exporters while tourism-dependent
economies still hurt
Strong commodity prices in the earlier part of2011, and in particular strong oil and metals andmineral prices have benefited commodity
exporters in the region. Notwithstanding recent
correction in prices triggered by concerns about
the strength of global expansion, cumulative
terms of trade gains remain sizeable so far thisyear. Gains are among largest in oil and natural
gas exporters such as Ecuador, Venezuela, andBolivia, but higher prices for commodities suchas maize, wheat, soybeans, and beef have helped
countries such as Argentina and Paraguay. In
contrast oil importers recorded the largest termsof trade losses as a share of GDP, exceeding 2
percent of GDP in some cases (figure LAC.2).

Migrant remittances have performed slightly
better, expanding an estimated 7 percent in theregion this year, with growth in countries mostdependent on migrant remittances (El Salvador,
Jamaica, Honduras, Guyana, Nicaragua, Haiti,
Guatemala) growing at a 7.6 percent pace,following growth of 6.3 percent in 2010. Morethan two thirds of the migrants from thesecountries are in the United States (67 percent,simple average).
Overall current account positions for commodity
exporters have benefitted from strong
commodity prices and solid external demand in
the first part of the year but they are likely todeteriorate following corrections in commodity
prices that occurred in recent months, andnotwithstanding deceleration in import growth.
Meanwhile oil importers which have been hit byhigher energy prices have seen some relief inrecent months.

Meanwhile soft growth in high-income countries
has constrained growth in tourism revenues in
the Caribbean and Central America. In the firsteight months of the year tourist arrivals were up
4 percent in Central America and the Caribbean,following growth of 4 and 3 percent in 2010.
Performance in these two regions has been
weaker than the rest of the world and than inSouth America were tourist arrivals grew 13

Most policy makers are on hold for now but
easing is expected going forward. Many central
banks in the region tightened monetary policy inthe first half of the year due to concerns about
inflation and overheating, but have now adopted
a wait-and-see attitude in the face of heightened
global uncertainties (figure LAC.3). Facing amarked slowdown in growth and inflation of
more than 3 percentage points above the upper
level of the target range, Brazil is the only major
central bank in the region to have cut the policy
rate (by 50 basis points in each of the last threemeetings, for a total reduction from 12.5 percent
to 11 percent), due to concerns that adeteriorating external environment willcontribute to a sharper deceleration in growth.
By contrast, open economies like Chile andPeru, which are more vulnerable to the external

Figure LAC.2 Terms of trade gains for commodity
exporters in 2011
Share of GDP
Paraguay
EcuadorVenezuela
Bolivia
Argentina
Peru
Chile
Colombia
GuyanaBelizeMexicoBrazilPanamaUruguay
GuatemalaSt. Lucia
Costa Rica
Nicaragua
Antigua and Barbuda
Dominican Republic
Jamaica
Dominica
El Salvador
HondurasHaiti
St. Vincet & Grenadines

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

Source: World Bank.

108

Global Economic Prospects January 2012

Latin America & the Caribbean Annex
the year. However, the US credit rating
downgrade in August and the subsequent
deterioration of market confidence in Europe has
resulted in a generalized increase in risk aversion
and contagion to the risk premia of countries in
the region. Regional equity markets suffered
substantial capital outflows in September,
forcing the depreciation vis-à-vis the US dollarof several currencies and causing Central Banks
to rapidly switch from being concerned about thevolatility and competitiveness effects caused byunwarranted appreciations to the risks that might
be associated with an uncontrolled depreciation.
The Mexican peso, Chilean peso, and theBrazilian real lost more than 10 percent of theirvalue, and the Colombian peso nearly 8 percent,between September 1st and December 13th. The
largest depreciations of the nominal effective
exchange rate in September were in Brazil (close
to 7.4 percent, month on month) and Mexico (9percent), and Chile (5 percent).
Severalcountries (including Brazil and Peru) dipped into
their foreign currency reserves in order to limit
depreciations.

Figure LAC.3 Most central banks in Latin America
on hold
short-term policy interest rates, percent
16
14
12

Colombia

Brazil1086Mexico

4
Peru

2
0

30-Aug30-Apr31-DecChile
31-Aug30-Apr

Source: National Agencies through Datastream.

environment should the crisis worsen, have yet
to cut rates. In Chile the central bank kept rates
unchanged as rising external uncertainties wereoffset by tight labor markets and strong credit
growth. Given weaker global growth prospects
countries that have well anchored inflation
expectations and that are more exposed to thedeceleration in global demand are likely to stateasing monetary conditions early next year.
Colombia is the first central bank to raise interest
rates (25 basis points to 4.75 percent) on
concerns about rising inflationary pressures,
rapid housing prices increases, on the backdropof robust domestic demand.

Regional equity markets fell close to 18 percent
between the end of July and the end of October,as compared with 19.6 percent for the broader
emerging market index, and although they haveretraced some of those losses remain nearly 15
percent below their July level. Paper losses forthe region are estimated at more than $530
billion between July and the end of September.3
Brazilian and Mexican equity markets wereamong the worst affected. Foreign selling of
fixed-income assets was particularly acute in
Latin America, with Brazil posting record levelof outflows through September (see the FinanceAnnex). In the case of Brazil the decline in thefirst part of the year was linked to the increase of
the IOF tax to 6 percent in April, although thecrisis in the Euro Area was behind the declines
in recent months. Reflecting these developments,
EMBIG sovereign bond spreads also widened
markedly between July and September, with the
sharpest deterioration occurring in the second
half of September. Spreads narrowed somewhat
in October only to approach September highs
again in November. The benchmark five-year
sovereign CDS spreads also rose, with the

Other policies to support growth. Brazil’s
central bank has started to reverse some of themacroprudential tightening policies implemented
during the course of 2010, in a bid to bolster
demand for durable goods. Brazil also imposed
an IPI tax (Imposto Sobre Produtos
Industrializados, sales tax on industrial goods)
for cars that are using less than 65 percent oflocally-produced parts, in a bid to bolster output.
Colombia and Panama signed free-trade
agreements with the United States, which should
boost exports going forward. In the case of
Panama the FTA will benefit mostly the services
sector, as Panama already had preferential accessto the United States market for various exports.
Signs of contagion. The sovereign debt crisis in
the Euro periphery had only a limited impact on
the region’s financial markets in the first half of109

Global Economic Prospects January 2012

Latin America & the Caribbean Annex

largest increases occurring in countries withclose trade and financial linkages with the euroarea (figure LAC.4).

associated equity-market sell-offs. Overall, short-term debt flows for the year as a whole also
declined 46.4 percent – partly because of slower
trade growth (and therefore less trade finance).
Meanwhile FDI flows grew a robust 29.2 percent
exceeding the levels recorded in the pre-2009crisis. The Latin America and Caribbean region
recorded the strongest FDI growth amongdeveloping regions due to relatively robust
growth, rich natural resources and a large
consumer base. (table LAC.1)

Overall net capital inflows decline an estimated
12.6 percent in 2011, to reach 5 percent of GDP,
with net private inflows down 10.1 percent to 4.8
percent of GDP. Of note is the large decline in
portfolio inflows (down 60 percent) which ispartly the result of the increased global market
volatility of the second half of 2011, andFigure LAC.4 CDS spreads continue to widen

Medium-term outlook

Basis points

400
350

1600

BrazilChile

Colombia

LAC

MexicoPeru

Argentina

Venezuela

300

1200

250

1000

200

800

150

600

100

400

50

200

0
Jul-11

Weaker global growth, in particular in theadvanced economies, and increased uncertainty
regarding the impact of the euro area debt crisis
are weighing on growth prospects in the Latin
America and Caribbean region. The weakening
in external demand coincides with a decelerationin domestic demand in some of the economies in
the region as the business cycle matures, whilein others it is complemented by policy-induced
moderation in growth. On the positive side,
commodity exporters will continue to benefit
from robust demand from emerging Asia,
although incomes will be affected by lower

1400

0Aug-11

Sep-11

Oct-11

Nov-11

Dec-11

Source: Datastream, World Bank.

Table LAC.1 Net capital flows to Latin America & the Caribbean
2004
Current account balance
20.2
as % of GDP
0.9
Financial flows:
Ne t private and official inflows
57.9
Ne t private inflows (e quity+private de bt)68.0..Net private inflows (% GDP)
3.1
Net equity inflows
66.3..Net FDI inflows
66.8..Net portfolio equity inflows-0.6
Net debt flows-8.1..Official creditors-10.1....World Bank
-1.0....IMF-6.3....Other official-2.9..Private creditors
1.7....Net M-L term debt flows
1.1......Bonds
2.5......Banks-1.2......Other private-0.1....Net short-term debt flows
0.6
Balancing item /a-52.7
Change in reserves (- = increase)-25.4
Memorandum items
Migrant remittances /b
43.4

2005
32.3
1.2

2006
44.2
1.4

2007
10.0
0.3

2008
-36.8
-0.9

2009
-22.8
-0.6

2010
-58.0
-1.2

2011e
-71.7
-1.3

2012f
-110.3-1.9

2013f-139.6
-2.2

93.8
125.2
4.8
85.8
73.5
12.2
0.8
-31.3
-0.7
-27.6
-3.0
39.4
19.0
21.6
-2.3
-0.3
20.4
-91.8
-34.4

68.7
88.6
2.9
83.0
72.0
11.0
-16.8
-19.9
-3.4
-12.1
-4.4
5.6
5.1
-11.2
16.9
-0.6
0.5
-57.4
-55.5

207.9
208.9
5.7
139.3
110.4
28.8
79.2
-1.1
-0.1
0.0
-1.0
69.7
46.7
12.6
34.6
-0.4
23.0
-80.0
-137.8

181.5
174.9
4.1
120.4
130.0
-9.7
59.0
6.5
2.4
0.0
4.1
54.6
48.9
9.0
40.4
-0.5
5.7
-94.5
-50.1

173.2
155.3
3.9
119.9
78.3
41.6
51.5
17.9
6.6
0.4
10.9
35.4
39.9
40.7
-0.3
-0.5
-4.5
-96.3
-54.1

319.8
298.4
6.0
153.9
112.6
41.3
70.5
21.4
8.3
1.3
11.8
144.5
77.3
48.8
27.4
1.1
67.2
-171.6
-90.2

279.5
268.3
4.8
162.0
145.5
16.5

240.9
4.1
153.9
134.4
19.5

278.7
4.3
173.7
151.7
22.0

11.2
2.0
2.7
6.5
106.3
70.3
46.3
24.0
0.0
36.0
-118.2
-89.6

87.0

105.0

49.8

58.9

63.0

64.4

56.6

57.3

61.3

66.0

71.2

Note :e = estimate, f = forecast/a Combination of errors and omissions and transfers to and cap ital outflows from develop ing countries.
/b M igrant remittances are defined as the sum of workers’ remittances, comp ensation of emp loy ees, and migrant transfers

Source: World Bank.

110

Global Economic Prospects January 2012

Latin America & the Caribbean Annex
fiscal and monetary policies which are expected
to bolster domestic demand, although persistentglobal uncertainties will continue to weigh on
investment. Despite recent signs of moderation,
household demand is expected to remain strong
over the forecasting horizon supported by anemerging middle class, an expanding labor force,
rising real wages , and solid credit expansion –growing faster than overall GDP -- suggesting
limited relief from inflationary pressures and afurther deterioration in the current account which
is projected to reach a deficit of 3.4 percent of
GDP in 2013. The 13.6 percent increase in theminimum wage at the beginning of 2012 should
boost income and support private consumption.
Investment growth is expected to decelerateslightly in 2012, in part due to confidence effects
stemming from the Euro area financial crisis,
before picking up again in 2013, boosted byfiscal spending ahead of the 2014 presidential
elections, investments in infrastructure,including in preparation for the World Cup, andby investments to develop the pre-salt oil
reserves and in refineries. In Mexico, GDP iscommodity prices.
Following several years of above average growththat have successfully closed output gaps opened
up by the global financial crisis and evengenerating signs of overheating in several
economies, growth in Latin America and the
Caribbean is expected to decelerate to 3.6
percent in 2012 from 4.2 percent in 2011, before
picking up once again to 4.2 percent in 2013(table LAC.2). Softer global growth, and inparticular weaker demand from high-income
countries but also slower growth in China, will
hurt exports, and increased risk aversion, tighter
external financing conditions, and negative
confidence effects are projected to slow
investment and private consumption demand.
GDP in Brazil is projected to accelerate slightly
in 2012 to 3.4 percent from 2.9 percent in 2011,
roughly in line with estimates of its underlying
potential growth rate, before picking up in 2013
to a 4.4 percent pace (table LAC.3). The slightacceleration in growth reflects the reversal in

Table LAC.2 Latin America and the Caribbean forecast summary(annual percent change unless indicated otherwise)
98-07a

2008

2009

Est.
2010

Forecast
2011
2012

2013

GDP at market prices (2005 US$) b
GDP per capita (units in US$)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 (%)

2.9
1.6
2.9
3.2
2.2
3.4
5.2
5.5
-0.1
-0.9
5.8
-2.9

4.1
2.8
4.3
5.1
3.0
8.7
1.4
7.7
-1.7
-0.9
8.7
-0.9

-2.0
-3.2
-1.6
-0.4
3.9
-9.7
-10.1
-15.0
1.6
-0.6
4.2
-4.0

6.0
4.7
6.1
5.5
2.5
10.5
13.6
19.0
-1.4
-1.2
5.2
-2.6

4.2
2.9
4.3
4.4
2.8
6.3
6.7
8.1
-0.5
-1.3
5.8
-2.6

3.6
2.3
3.6
3.7
3.3
6.1
5.6
7.5
-0.7
-1.9
6.3
-2.7

4.2
2.9
4.2
4.1
3.3
8.1
6.4
8.3
-0.8
-2.2
5.8
-2.4

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

3.1
3.5
4.4
2.6
3.4
3.0

3.9
1.8
3.6
5.2
1.5
6.8

-2.2
-5.5
0.6
-0.2
-6.1
0.9

5.7
5.3
3.7
7.5
5.5
9.2

3.9
4.0
4.0
2.9
4.0
7.5

3.6
3.3
3.9
3.4
3.2
3.7

4.1
3.8
4.0
4.4
3.7
4.4

a. Growth rates over intervals are compound average; growth contributions, ratios and the GDP deflator are
averages.
b. GDP measured in constant 2005 U.S. dollars.
c. GDP measured at PPP exchange rates.
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: Belize, Dominica, Dominican Republic, Haiti, Jamaica, St. Lucia, St. Vincent and the Grenadines.
g. Estimate.
h. Forecast.

Source: World Bank.

111

Global Economic Prospects January 2012

Latin America & the Caribbean Annex

also projected to slow by around 0.8 percentage
points reflecting weaker exports and investment
as global demand for Mexico’s imports slows by
about 1.4 percentage point. Notwithstanding
some trade diversification lately, Mexico’s
economic fortunes are closely tied todevelopments in domestic demand in the UnitedStates. Given the United States supercommittee’s failure to agree a deficit reduction
plan, substantial short-term fiscal tightening islikely, with negative consequences for domestic
demand that will feed through to affect Mexican
exports. Weak consumer confidence, moderate
job growth, and limited real-wage increases will
limit the gains in private consumption to about
3.5 percent. Lower transport cost and rising
wages in China should make Mexico a more
attractive investment destination over theforecasting horizon, with evidence that some
Chinese firms are setting up factories in Mexico.
Furthermore the ongoing re-industrialization in
the U.S. is likely tobenefit Mexico’s
manufacturing industry. Restructuring of the
U.S. automotive industry expected to take placeover the forecasting horizon is also expected tobenefit Mexico’s manufacturing sector.

remittances to the sub-region are projected toincrease about 7.6 percent and tourism revenues
can expect to remain relatively weak. In Central
America (excluding Mexico) strong growth inPanama, and the reconstruction-led expansion in
Haiti will support growth of around 3.7 percent
in 2012, as relatively subdued performance inthe United States and a high debt burden willaffect private consumption and investment.
Growth in El Salvador is expected to accelerate
only marginally to 2 percent in 2012, on the backof reconstruction spending in the wake of themassive flooding in October while growth in the
agriculture sector will be very weak as a result of
the heavy losses suffered during the recent
flooding. Growth is expected to accelerate to 3.1
in 2013, on the back of stronger domestic andexternal demand, and an improved external
environment, however El Salvador will continue
to have among the weakest economic
performance in Central America. Confidence
effects and soft growth in the United States will
also weigh on growth in Costa Rica, where GDP
growth is expected to inch down to 3.5 percent
in 2012. Domestic demand will be one of themain engine of growth in 2012 before stronger
external demand and a pick-up in investment
associated with the DR-CAFTA free trade
agreement, particularly in the high-tech sector
and business services, will boost growth to 4.5
percent in 2013. Growth in the Caribbean willhover around 4 percent over the forecastinghorizon supported by sustained growth in the
Dominican Republic. Growth in the
Organization of Eastern Caribbean States willremain weak over the forecasting horizon, withhigh public debt burdens crowding out private
investment and constraining growth. Slightly
higher remittances should provide some relief toprivate consumption, while continued highunemployment in the United States will limit therecovery in the tourism sector. Increased risk
aversion internationally and the confidence
effects associated with the Euro area financial
crisis will weigh on foreign direct investment(FDI) inflows, which account for a particularly
large share of the national income in the OECS.
In Saint Vincent and the Grenadines theconstruction of the Argyle International Airport
and terminal building is expected to bolster

In Argentina growth will decelerate markedly in2012 on weaker external demand along with an
expected deterioration in the terms of trade, thewithdrawal of policy stimulus in the wake of thepresidential and congressional elections, andweaker private consumption growth due tocontinued decline in consumers’ purchasing
power. Furthermore large capital outflows andmonetary tightening will constrain growth inprivate consumption and investment. The
AR$4.7 billion cut in subsidies of gas, water andelectricity indicates that fiscal tightening will be
pursued in 2012. Growth is projected todecelerate to 3.7 percent in 2012, from 7.5
percent in 2011, and to rise only moderately in
2013, as high inflation is taking a toll oncompetitiveness and high interest rates stifle
investment.
Relatively subdued demand in the United Stateson account of high unemployment and weak
consumer confidence will weigh on growth in
the Caribbean and Central America. Migrant112

Global Economic Prospects January 2012

Latin America & the Caribbean Annex
close to 20 percent, after having plunged 60
percent in 2011. Net private inflows are expected
to recover in 2013, rising 15.7 percent to 4.3
percent of GDP, still below the levels recorded
in 2010. before recovering in 2013. Net FDI andprivate debt flows are expected to recover in
2013, rising 12.8 percent and 20.7 percent
respectively.

growth somewhat over the forecasting horizon.
Softer growth and lower commodity prices
should help bring down inflation,
notwithstanding the depreciation of many
currencies in the region. Inflation will remain
however close to the upper limit of the target
range in some of the larger economies, althoughwith growth moderating overheating is less of aconcern, reflected also in the more dovish stanceof most central banks in the region. In Brazil
labor markets will remain relatively tight despite
the marked moderation in growth, but continued
moderation in credit, lower commodity prices,
and a lower pass-through of the currency
depreciation to local prices will help bringconsumer price inflation towards the upperbound of the target range of the central bank.
Furthermore a downward trend in manufacturing
operating rates should help ease inflationpressures in goods prices. Inflation in Argentina
will continue to run high, as expected currency
devaluation over the forecasting horizon willraise prices of imported goods. Inflation should
begin to slow in the second half of 2012
however, as economic growth eases.

Transmission channels, vulnerabilities &risks
The region enters the current global downturnwith still relatively strong fundamentals.
However, should conditions in Europe
deteriorate sharply countries in the region would
be adversely affected –potentially exposing
vulnerabilities that have so far remained latent.
As is the case in other regions, countries haveless fiscal space available now than they had at
the onset of the 2008/9 crisis, while the kind of
sharp deterioration in commodity prices thatmight accompany the kind of small or large
crisis outlined in the main text would further
reduce fiscal space in commodity exporting
countries (notably Venezuela, Ecuador, andArgentina) – while at the same time placing theircurrent account and external financing needs
under stress. Bolivia’s fiscal revenues would
also be affected by lower commodity prices,4
however the country has fiscal savings in excess
of 20 percent of GDP following 6 years of fiscal
surpluses.

Weak external demand and declines in the termsof trade will result in deterioration in the balanceof payments, which in some cases will reverse
BOP surpluses into BOP deficits. Current
account should deteriorate to an estimated 1.9
percent of GDP in 2012 in Latin America andthe Caribbean on account to negative terms oftrade, and weaker external demand, deteriorating
further to 2.2 percent of GDP in 2013.

As compared with other regions, monetary
authorities in Latin America & the Caribbean dohave some room to ease, having tightenedmonetary policy in the first half of the year.
Furthermore inflation expectations in mostinflation-targeting economies are well anchoredand monetary policy rates are close to neutral inmost of these economies. However, inflation
remains a problem in selected economies in theregion, suggesting that even if global growth
weakens – monetary policy may have to remain
relatively tight to bring inflation back down toacceptable levels.

Fiscal positions are also likely to deteriorateslightly to 2.7 percent of GDP in 2012 as weaker
growth will work through the automaticstabilizers, improving slightly in 2013 as
economic growth accelerates.
Net private inflows are expected to decline afurther 10.2 percent to 4.1 percent of GDP, as
net FDI inflows are expected to decline 7.6
percent respectively, while debt flows fromprivate creditors are projected to decline close to
20 percent in 2012. In contrast portfolio inflows
are expected to partially recover this year, rising

The region is also exposed to deterioration in the
global climate through trade linkages. Although

113

Global Economic Prospects January 2012

Latin America & the Caribbean Annex

most at risk economies in Europe account for
only a small 4.2 share of regional exports, thelarger Euro Area – which could become
embroiled in a crisis if conditions worsen -accounts for 14.8 percent of total Latin
American and Caribbean exports. Exports to theeuro area amount to nearly 20 percent of the totalin Brazil and Chile, and almost 15 percent inArgentina and Peru, and these countries could
see sharper deceleration in growth on account of
weaker export performance in a scenario in
which demand from Euro area contracts as aresult of the deterioration in the financial crisis.
The second and third round effects would bemarkedly larger for the region in the case of a
sharp slowdown in import demand, which isvery likely in a scenario of market-induced credit-event in high-income Europe. Nevertheless theregion will still have one of the smallest overall
impacts relative to other developing regions.

remittances (Central America). In an adverse
scenario of a contained Euro area crisis
remittance growth to the region would decline
by 3.5 percent relative to the baseline. Countries
where remittances represent a large share of
GDP like El Salvador, Jamaica, Honduras,
Guyana, Nicaragua, Haiti and Guatemala would
be at risk (the impact of the decline in migrant
remittances could be as large as 0.6 percentage
points relative to the baseline on average in these
economies), with the risk more pronounced incountries that rely on remittances from the Euroare countries.
Another possible transmission mechanism is thatof consumer and business confidence effects on
private consumption and investment. These
confidence effects could be quite large as
indicated by previous financial crisis episodes,
with countries at the epicenter of the financial
crisis experiencing median declines in private
consumption of 7 percentage points and declines
in investment of 25 percentage points. Highvolatility in financial markets would increase thecost for firms, directly, through higher
borrowing costs, and indirectly through budget
uncertainty. Increased financial market volatility
will also translate into increase volatility inexchange rates, with additional negative
consequences for trade. The presence ofsignificant foreign exchange structured orderivative products could lead to overshooting ofcurrencies, as was the case with the Brazilian
real and the Mexican peso in 2008, althoughmore restrictive regulatory policies havemarkedly reduce their volumes in these twocountries since then.

The region is perhaps more vulnerable todeterioration in terms of trade, which would beparticularly pronounced in a scenario involving amajor credit event in high-income Europe. In
such a scenario incomes of countries heavily
reliant on commodity exports would be hit
hardest, while gains for commodity importing
countries would be of lesser magnitude. Given
that oil demand is relatively demand inelastic
incomes would be hit harder than GDP in oil
producing countries. Oil exporting countries
like Venezuela, Ecuador, and gas exporting
countries like Bolivia5 could see the largest hits,
while exporters of agricultural commodities thathave a high correlation with oil prices(Argentina, Brazil) could also be negatively
affected. Metal exporters (Brazil, Chile) would
suffer losses from sharply lower metal prices.
Government balances in commodity exporting
countries are also likely to be negatively affectedby large swings in commodity prices. Among thecountries where government balances are hit themost are Bolivia, Argentina, Ecuador, andVenezuela.

Should financial conditions deteriorate markedly
with any deepening of financial stress in the euroarea countries with relatively high externalfinancing needs are more vulnerable to sudden
reversal in capital flows, a drying up in credit orsubstantially higher interest rates. Countries like
Guyana, Jamaica, Nicaragua and Panama haveestimated external financing needs in excess of
15 percent of GDP in 2012. In the event of sharp
contraction in capital flows these countries may
be forced to sharply reduce their externalfinancing gap by adjustments in the current

Migrant remittances, although expected toremain more stable relative to other flows, arealso likely to suffer, putting pressure on current
account position in countries that rely heavily on

114

Global Economic Prospects January 2012

Latin America & the Caribbean Annex

account, and/or close the external financing gap
through depletion of foreign exchange reserves
and increased reliance on foreign aid. Argentina
is perhaps also vulnerable. The cost of four-year
credit default swaps has almost tripled since2007 (reaching 1,025 basis points), andinsurance against a default within the next five
years has risen 423 basis points to 1033
(suggesting a 51percent chance of non-payment).
The expected large financing gap in 2012 will bedifficult to meet, since the country’s access tointernational markets is limited and the available
options for garnering more resources
domestically have mostly been utilized: thegovernment has already relied on nationalizing
the pension funds to raise financing and on thecentral bank reserves to pay debt, and has
recently increased requirements on oil, gas, andmining exporters to repatriate export revenues
from as little as 30 percent to 100 percent ofexport receipts in order to increase foreignexchange liquidity. Most other countries should
not have great difficulties in meeting externalfinancing requirements through FDI, remittancesand official aid flows, which tend to be morestable.

are complex. Spanish banks have one of themost significant presence and highest levels of
foreign claims in Latin America. However the
Spanish banks are mostly decentralized in theircross-border operation with independently
managed affiliates in the region. Their claims
are mostly in local currency/locally funded withsome exceptions.6 Indeed, average loan todeposit ratios in the region are at or below 100
percent, with few exceptions including Chile(107 percent). As a result, the financial systems
in these countries would not be excessively
exposed to a sharp reduction of inflows offunding from European banks (except throughthe trade finance channel). As long as this kindof deleveraging occurs gradually, domestic
banks and non-European banks should be able totake up the slack – as appears to be taking placein Brazil (see the Finance Annex). If parents areforced however to liquidate their assets torecapitalize parent banks or offset losses
elsewhere in their portfolio, they could be forced
to sell off assets in Latin America withpotentially significant impacts on equity
valuations – which in turn could affect capital
adequacy of regional banks – generating a credit
crunch even among otherwise health local banks
that have strong local deposit bases (figure
LAC.6).

Financial vulnerabilities are not negligible. Overthe past decade the region has become morefinancially open (figure LAC.5). Capital controls
have been relaxed, foreign ownership expanded– including in the banking, insurance andpensions sectors, while foreign investors are
increasingly active in local debt and equity
markets. Here, potential transmission channels

Countries with highly dollarized financial
systems could also be exposed through currency
risks. These risks are somewhat mitigated incountries that have large stocks of international
reserves, which would allow central banks to

Figure LAC.5 Financial openness in Latin
America and the Caribbean

Figure LAC.6 Foreign claims of Euro area banks
on the rest of the world
share of GDP

Chinn-Ito financial openness index

3

100
90

2

80
70

1

60

Greece, Ireland, and Portugal
Italy
Spain
Other Euro Area

50

0

40

30

-1

20

-2
-3
1990-94

1995-99

Argentina
Chile
Peru
2000-04

10

BrazilColombia

0EuropeAsia EM
MiddleEast andAfrica EM

2005-09

Latin
America

Source: World Bank.

Source: Chinn-Ito 2009.

115

TurkeyPolandHungary

BrazilMexicoGlobal Economic Prospects January 2012

Latin America & the Caribbean Annex

inject liquidity into the banking system in theevent of a credit crunch and to stabilize thecurrency in the event of excessive exchange rate
volatility.

double digits in Brazil, Colombia, and El
Salvador. Credit growth has eased in Peru andChile due to the recent tightening of lending
standards and other prudential measures, but thelevel of real domestic credit remains above thepre-crisis level. In the case of Brazil, medium
and small banks have increased lending
aggressively, without matching this by higher
deposit base, increasing their vulnerability to asituation of tighter liquidity. Regional banks
increasingly rely on wholesale funding (rather
than deposits) to finance their lending
operations, which could spell trouble if financing
conditions tighten suddenly. On the bright side,
nonperforming loans remain at low levels,
although they have risen modestly of late, andbanks have maintained conservative provisions.
However, in the event of a sharp slowdown ingrowth the nonperforming loan ratio could rise
sharply.

Foreign bank ownership in the Caribbean is alsohigh and banks there could be vulnerable –especially given the specialization of some banksin high-risk and relatively weakly regulated
hedging and derivatives activities. Financial
sector indicators in the Eastern Caribbean
Currency Union are deteriorating, having been
hit hard by the 2008-2009 crisis and the slow
economic recovery, with some banks alreadyfacing solvency issues that could require further
intervention.
Although the region is now relying less on
external debt, increased foreign participation in
local currency debt markets represents a
potential source of vulnerability. Increased riskaversion from the part of international investors
could lead to increased borrowing costs in thedomestic debt markets, should large withdrawals
from foreign investors occur. Countries withdeeper and more liquid markets are better able toaddress these vulnerabilities.

In light of these risks countries in the region
should evaluate their vulnerabilities and preparecontingencies to deal with both the immediateand longer-term effects of an economic
downturn.
Most countries in the region have less fiscal
space available for counter-cyclical policies tocope with a sharp deterioration in global
conditions as compared with 2008/09. In such
eventuality, where fiscal space exists,
governments could use countercyclical policy tosupport growth, by increasing spending on social
safety nets that would limit poverty impacts, andon infrastructure projects that would benefit
growth. Countries with limited fiscal space could
increase the effectiveness of countercyclicalfiscal policy, improving the targeting of social
safety nets and prioritizing infrastructure
programs necessary for longer-term growth. In
such situation, monetary policy could also
become more accommodative provided that
inflation expectations remain anchored.

The rapid growth in domestic credit from the
beginning of the global recovery through thefirst half of 2011 is an additional source offinancial vulnerability. Real domestic credit
growth remains high in most countries (figure
LAC.7). It expanded more than 20 percent saarin Argentina, Bolivia, Ecuador, and Panama inthe three month to September, and remains in the
Figure LAC.7 Real domestic credit growth
remained robust in Latin America
3m/3m %, real credit growth
60
50
40

30
20
10

Financial oversight should continue to be
improved, building on the progress made so far
in many countries in the region. The countries
could also benefit from further financial
deepening, increased maturities of fixed-income
debt, and increased local currency debt issuance.

0
-10

-20
-30
Jun-08Argentina

Jan-09Peru

Aug-09Bolivia

BrazilMar-10Colombia

Oct-10May-11

Source: World Bank and IMF.

116

Global Economic Prospects January 2012

Latin America & the Caribbean Annex

Countries where credit has increased rapidly inrecent years should engage in stress testing of
their domestic banking sectors. A much weaker
external environment could result in sharply
lower domestic growth and falling asset pricesthat could result in a rapid increase in thenumber of non-performing loans and domesticbanking stress.

spending.
With growth in high-income countries likely toremain subdued for an extended period,
countries in the region may need to identify new
drivers of growth and to address structuralproblems that negatively affect competitiveness.

Countries with large external financing needs
should pre-finance these needs to avoid abrupt
and sharp cuts in government and private sector
Table LAC.3 Latin America and the Caribbean country forecasts(annual percent change unless indicated otherwise)
Argentina
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
BelizeGDP at market prices (2005 US$) b
Current account bal/GDP (%)
Bolivia
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Brazil
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Chile
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Colombia
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Costa Rica
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Dominica
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Dominican Republic
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
EcuadorGDP at market prices (2005 US$) b
Current account bal/GDP (%)
El Salvador
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
GuatemalaGDP at market prices (2005 US$) b
Current account bal/GDP (%)
GuyanaGDP at market prices (2005 US$) b
Current account bal/GDP (%)
Honduras
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Haiti
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Jamaica
GDP at market prices (2005 US$) b
Current account bal/GDP (%)

117

98-07a

2008

2009

Est.
2010

Forecast
2011
2012

2.2
1.3

6.8
2.1

0.9
2.7

9.2
0.8

7.5
0.2

3.7
-0.4

4.4
-0.5

5.4
-13.1

3.8
-10.7

0.0
-6.1

2.7
-3.2

2.1
-3.3

2.3
-3.3

2.9
-4.1

2.8
0.8

6.1
12.0

3.4
4.7

4.2
4.4

4.8
5.8

4.1
5.0

3.8
3.8

2.8
-1.2

5.2
-1.7

-0.2
-1.5

7.5
-2.3

2.9
-2.5

3.4
-3.2

4.4
-3.4

3.4
0.3

3.7
-1.9

-1.7
1.6

5.2
1.9

6.2
-0.4

4.1
-0.9

4.4
-1.4

3.1
-1.4

3.5
-2.8

1.5
-2.2

4.3
-3.1

5.6
-3.1

4.4
-3.2

4.2
-3.3

4.7
-4.6

2.6
-9.4

-1.5
-2.0

4.2
-4.0

3.8
-5.2

3.5
-5.1

4.5
-5.4

1.6
-19.0

7.8
-25.6

-0.7
-21.3

0.3
-21.7

0.9
-21.9

1.6
-20.5

2.2
-18.9

4.9
-1.4

5.3
-9.9

3.5
-4.6

7.8
-8.7

4.9
-8.2

4.4
-7.5

4.5
-7.4

3.1
-0.1

7.2
2.0

0.4
-0.5

3.6
-3.4

6.1
-2.5

3.3
-3.5

3.4
-4.4

2.5
-3.2

1.3
-7.1

-3.1
-1.5

1.4
-2.3

1.5
-3.8

2.0
-3.6

3.1
-2.7

3.4
-5.4

3.3
-4.5

0.5
-0.1

2.6
-2.1

2.8
-2.2

3.1
-3.5

3.5
-4.2

0.6
-8.7

2.0
-10.0

3.3
-7.7

4.4
-9.1

4.6
-10.6

5.1
-15.8

5.6
-19.2

4.0
-6.7

4.0
-15.3

-1.9
-3.6

2.6
-6.2

3.4
-6.4

3.3
-5.9

4.0
-5.1

0.6
-22.4

0.8
-11.9

2.9
-9.7

-5.1
-12.0

6.7
-13.4

8.0
-10.6

8.3
-11.0

1.6
-7.8

1.7
-19.8

-2.5
-8.9

-1.0
-7.4

1.3
-9.8

1.8
-9.1

2.2
-8.6

2013

Global Economic Prospects January 2012

Latin America & the Caribbean Annex(annual percent change unless indicated otherwise)
Mexico
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Nicaragua
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
PanamaGDP at market prices (2005 US$) b
Current account bal/GDP (%)
Peru
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Paraguay
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
St. Lucia
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
St. Vincent and the Grenadines
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Uruguay
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Venezuela, RB
GDP at market prices (2005 US$) b
Current account bal/GDP (%)

98-07a

2008

2009

Est.
2010

Forecast
2011
2012

2013

2.8
-1.9

1.5
-1.5

-6.1
-0.7

5.5
-0.5

4.0
-0.8

3.2
-1.4

3.7
-1.6

3.5
-21.3

2.8
-24.6

-1.5
-13.4

4.5
-14.8

4.1
-16.3

3.3
-18.3

4.0
-18.4

4.8
-5.5

10.1
-11.8

3.2
-0.2

7.5
-11.0

8.1
-12.3

6.1
-10.5

6.3
-9.3

4.1
-1.1

9.8
-4.2

0.9
0.2

8.8
-1.5

6.3
-2.7

5.1
-3.1

5.6
-3.1

1.9
-0.1

5.8
-1.8

-3.8
0.3

15.3
-3.3

4.8
-3.1

3.9
-2.5

4.5
-2.0

2.0
-18.5

5.8
-28.4

-1.3
-12.7

4.4
-12.5

2.7
-21.4

2.7
-21.9

3.5
-20.4

4.2
-20.5

-0.6
-32.9

-2.3
-29.4

-1.8
-31.1

-0.2
-29.1

1.9
-26.5

3.3
-25.5

0.8
-1.0

7.2
-5.7

2.9
-0.4

8.5
-1.2

5.5
-2.0

4.0
-2.2

5.1
-3.4

2.8
8.5

4.8
12.0

-3.3
2.6

-1.9
4.9

3.8
9.7

3.1
6.6

3.4
5.1

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.
Barbados, Cuba, Grenada, and Suriname are not forecast owing to data limitations.
a. Growth rates over intervals are compound average; growth contributions, ratios and the GDP deflator are
averages.
b. GDP measured in constant 2005 U.S. dollars.
c. Estimate.
d. Forecast.

Notes:
1

2

Ecuador has entered into forward oil sales
contracts with China. Therefore, some ofthe oil shipped to China in the third quarter
were actually recorded as exports in theprevious quarters.
Unit ed Nat ion Wor ld T ouri sm
Organization, World Tourism Performance2011 and Outlook 2010, November 2011
Volume9, Issue 2.

3

Calculations based on World Federation of
Exchanges data.

4

Banks controlled by Europeans (largely
through equity investment in domestic
banks, but also through affiliates) accountfor 18.5 percent of the banking system’s
net worth, 25.7 percent of total lending,and 14.1 percent of total assets.

118

5

In the case of Bolivia the lagged moving
average formula used to price gas export
prices to Brazil and Argentina may cushion
to some extent revenues.

6

Brazil depends on substantial cross-border
lending from European banks, and some
European affiliates fund a substantial
portion of loans from foreign, rather thandomestic, deposits (IMF 2011).

References:
International Monetary Fund, 2011, Regional
Economic Outlook:Western Hemisphere,
September 2011.
United Nation World Tourism Organization,
World Tourism Performance 2011 and Outlook
2010, November 2011 Volume9, Issue 2.

Global Economic Prospects January 2012

Middle East & North Africa Annex

Middle East and North Africa Regionsocial tensions in several countries. Developing
oil exporters (if not in internal conflict) are better
situated to withstand the brunt of the crisis, on
the assumption that oil prices do not fall
substantially in the face of declining demand.

Overview
The dramatic political changes in the Middle
East and North Africa of the last year havedisrupted economic activity substantially, but
selectively across the region. The area is now
facing two sets of tensions anduncertainties―the more important of which iscontinuing domestic disturbance and local
challenges affecting countries already taking
steps toward political and economic reform (andfor countries in internal conflict). At the sametime a deteriorating external environment(largely in Europe) is amplifying adverse effects
on goods trade, commodity prices, tourism andother critical export receipts. Though several
countries in the region—including Tunisia,
Morocco, and Jordan—appeared to be on thecusp of positive or improved growth in late2011, the onset of financial crisis in the highincome countries may come to delay that event.

Domestic challenges are difficult andwidespread. Ten months after the Arab Spring,
political unrest and political economy issues
continue to determine in good part economic
policies and prospects for growth. Thoughelections held in Egypt, Tunisia and Morocco
went smoothly, a degree of underlying
dissension remains. A failure to achieve politicaland macroeconomic stability would extend
uncertainties, keeping investment and economic
activity at low levels for several countries,
potentially for an extended period of time.
Underlying demographic pressures remain
unabated as well, and with prospects of slower
gains in employment ahead, this becomes
another area of uncertainty and vulnerability.

For the developing net-oil importing countries asa group, initial conditions going into the current
period of turmoil are weak: including a lack ofmeaningful fiscal space, dampened economic
activity, depletion of reserves and continuing
Figure MNA.1 "Snap-back" dynamics affect industrial
production in Egypt and Tunisia
industrial production, ch% 3m/3m saar
50

200

40
160
30
20

120

10
80
0
-10

40

-20
0
-30
-40
2009M01-40
2009M06

2009M11

Tunisia [L]2010M04

2010M09

Jordan [L]2011M02

2011M07

Egypt [R]

Source: National Agencies through Thomson-Reuters Datastream

119

The Middle East and North Africa isprospectively entering a ―third‖ crisis episode insuccession, following on the ―great recession‖,and importantly for the region, the ―food price‖crisis of 2007-08, under which substantial hikes
in grains prices took a toll on terms of trade forall countries in the region. To a degree, today‘s
weak fiscal positions in a number of oil
importing countries, which will play a role indevelopments over the next two years, have theirsource in that period.
The region will feel the bulk of effects of slower
European—and global—growth largely throughthe trade channel, notably oil but also
manufactured goods, rather than the financial
channel, given relatively weak links in this area.
On balance, with the already difficult conditions
being experienced by many countries in theregion because of recent output disruptions, a
global downturn will be felt more severely now
than in 2008-09, when economic growth in theregion was relatively robust.

Global Economic Prospects January 2012

Middle East & North Africa Annex

GDP for the developing countries of the Middle
East and North Africa region1 is estimated tohave increased 1.7 percent in 2011, down fromthe 3.6 percent gain of 2010 (table MNA.1).
Growth is likely to remain subdued in 2012 (2.3
percent), as external conditions join uncertain or
adverse developments on the domestic side to
make recovery more difficult—in particularconstraining a needed pick-up in investment
outlays. Growth is expected to rise to 3.2 percent
by 2013, as FDI and investment finally revive,
traditional revenue streams (tourism andremittances) begin to normalize, and civil unrestin several countries is assumed to be resolved.
Growth in 2012 is projected to be subdued inboth oil exporters (partly reflecting weaker oil
prices) and oil importers – many of which(Morocco, Tunisia, Egypt) have very close
economic ties to high-income Europe, and others(Jordan and Lebanon) with closer links to theGulf Cooperation Council (GCC) GCC
economies.

Recent developments
One source of strength in the broader Middle
East and North Africa economy is the large oiland natural gas windfalls being generated by theregion‘s exporters. This has provided substantial
funding for exporters to support subsidies andjob creation programs as well as infrastructurerelated projects which have served to quell agood portion of social uncertainty in thesecountries as a group. The developing oil
exporters and the high-income GCC economies
benefitted substantially from the rise in oil pricesof 2010 and the first half of 2011, and several(e.g. Saudi Arabia, Kuwait) have increased
production on the margin to cover for the earlier
loss of Libyan crude oil on the market.
Overall Middle East and North Africahydrocarbon revenues totaled $785 billion in2011 with the developing oil economies(Algeria, Iran, Syria and Yemen) absorbing $50

Table MNA.1 Middle East and North Africa forecast summary(annual percent change unless indicated otherwise)
98-07aGDP at market prices (2005 US$) b
4.2
GDP per capita (units in US$)
2.7
PPP GDP c
4.3
Private consumption
4.4
Public consumption
3.2
Fixed investment
6.0
Exports, GNFS d
5.2
Imports, GNFS d
7.1
Net exports, contribution to growth-0.2
Current account bal/GDP (%)
7.5
GDP deflator (median, LCU)
4.7
Fiscal balance/GDP (%)
-1.0

2008
4.1
2.4
4.1
5.2
8.6
7.6
4.6
11.4
-2.2
7.4
14.6
-0.3

2009
4.0
2.3
4.0
5.0
7.0
2.9
-6.3
-1.8
-1.7
-0.7
2.0
-3.4

Est.
2010
3.6
1.9
3.7
3.8
4.0
1.8
3.0
2.7
0.1
2.8
9.6
-2.9

Forecast
2011
2012
1.7
2.3
0.1
0.7
1.6
2.2
1.7
2.8
9.7
7.8
-0.4
3.0
-1.4
1.3
1.1
4.2
-0.9
-1.0
3.7
2.4
7.5
8.5
-2.6
-2.3

3.8

4.7

1.9

3.3

2.4

3.2

3.8

Resource poor- Labor abundant

4.1

6.6

5.9

4.5

1.8

3.4

4.6

Resource rich- Labor abundant

4.2

2.6

2.3

2.1

0.1

2.2

3.0

3.4
4.3
4.9
3.5

5.3
7.5
2.3
2.4

-0.5
4.9
3.5
2.4

3.3
5.1
3.2
1.8

4.6
1.8
2.5
3.0

3.7
3.8
2.7
2.7

4.5
0.7
3.1
2.9

2013
3.2
1.6
3.2
3.6
6.2
5.0
3.0
5.8
-1.0
1.1
6.0
-2.1

Memo items: GDP
MENA Geographic Region e

Selected GCC Countries f
Egypt g
IranAlgeriaa. Growth rates over intervals are compound average; growth contributions, ratios and the
GDP deflator are averages.
b. GDP measured in constant 2005 U.S. dollars.
c. GDP measured at PPP exchange rates.
d. Exports and imports of goods and non-factor services (GNFS).
e. Geographic region includes high-income countries: Bahrain, Kuwait, Oman and Saudi
Arabia.
f. Selected GCC Countries: Bahrain, Kuwait, Oman and Saudi Arabia.
g. Egypt growth presented on Fiscal Year basis.
h. Forecast.

Source: World Bank.

120

Global Economic Prospects January 2012

Middle East & North Africa Annex

billion of the $200 billion increase in the year
(figure MNA.2). While fiscal positions in thesecountries remain sustainable (0.6 percent of
GDP for developing oil exporters and 12 percent
for the GCC economies), should oil prices
decline sharply, governments could be forced to
cut into spending in a pro-cyclical manner.

GDP, coincident indicators dropped 12 percent
between late 2010 and August 2011.
Data on industrial production suggest that
Tunisia and Egypt have taken a very hard hit
from residual domestic unrest, uncertainties overpolitical outcomes and the onset of financial
turmoil in Europe. In Jordan, after an initial post-crisis spurt, production dropped from a 44
percent annual gain in the three-months ending
June to decline of 5 percent in the third quarter.
In Egypt production snapped back sharply to 180
percent annualized during the second quarter,
only to fall to a 40 percent decline in thefollowing quarter. And in Tunisia, developments
have been similar, though much less volatile,
with production standing some 6 percent higher
during the third quarter vis-à-vis the second(figure MNA.1 earlier).

Several of the net oil-importing developing
countries―Egypt, Tunisia, Jordan and Morocco―saw declines in industrial output or GDP
during the first quarter of 2011, which impaired
business and household sentiment after a periodof greater ebullience. These led to a nearcollapse in investment and sharp falloff inconsumer and government spending. GDP
contracted by more than 6 percent in the firstquarter of 2011 (q/q) (25.8 percent annualizedpace in Egypt and 24.2 percent in Tunisia) due inlarge measure to dislocations and disturbances of
the initial weeks of protests. As the situation on
the ground began to stabilize, GDP snapped
back, placing Egypt‘s decline for the first threequarters of 2011 at a much more moderate 1.2
percent (saar), with similar outturns for Tunisia.

Unemployment in Egypt jumped from 8.9
percent in December 2010 to 11.8 percent byJune 2011. Economic turbulence has taken a tollon confidence within and outside of the region,in particular increasing the already high risk
aversion of international investors. Indeed,spreads on regional sovereign debt stand higher
than those of any other developing region at the
moment.

GDP declines were less dramatic for countries
not experiencing large protest movements. In
Jordan for example, GDP dropped by 1.3 percent(q/q) in the first quarter and 0.7 percent in thesecond (or 5.2 and 2.7 at an annual rate).
Morocco‘s GDP advanced at a strong 4.2 percent
clip during the second quarter (saar). And
through Lebanon does not publish quarterly

Merchandise export volume growth was weak allyear (particularly for the oil-importing countriesof the region), reflecting the influence of thebroader disruptions linked to the Arab Spring,
the less direct influence of the Tohoku
earthquake in Japan; and most recently thefinancial turmoil in Europe and associated weak
import demand. Still, recent export performanceshows improvement, on the grounds of stronger
oil exports, up 14 percent as of August (saar) as
well as a fillip for net oil importers, pushinggoods exports to a 17 percent annual pace in thesame month, led by strong gains in phosphates
from Morocco and Jordan (figure MNA.3).

Figure MNA.2 Oil exporters enjoy windfall $785 billion
in 2011 revenues
800

Developing exporters

700

600
500
400
300

GCC

200

The net oil importers are particularly vulnerable
to changes in European import demand. Tunisia
ships fully 80 percent of its manufactured goods
exports to the EU-25, Morocco more than 65
percent and Egypt almost 40 percent. In contrast

100
0
2006

2007

2008

2009

2010

2011

Source: U.N COMTRADE, IEA, OPEC.

121

Global Economic Prospects January 2012

Middle East & North Africa Annex

Jordan has a sizeable share of trade destined for
the United States (under a FTA signed in the
1990s) (figure MNA.4).2 But average data onexport volumes masks varying conditions acrosscountries, where stronger performance in dollarbased trades for Morocco and Jordan has been
grounded in phosphates and fertilizers (facing
robust global demand), while Egypt and Tunisia
have been subject to more substantial volatility
and decline in demand from Europe and theUnited States.

markets (notably Libya), but also because
violence disrupted day to day economic
business. Not only has there been substantial lossof life and property in these encounters, but also
uncertainty concerning the region has been
amplified on account of these situations. In
Libya, private sector analysts suggest that GDP
may have fallen by a cumulative 30-50 percent
during the course of the conflict, with non-oil
output declining 20 percent. Reconstruction, unfreezing of the regime‘s assets and resumption ofoil production will be the priorities of thetransition government—likely over-shadowing
the formation of economic policy in the nearterm. Resolution to the conflict andimprovements in overall security conditions,
could generate a rebound in activity. In
particular, the possible return of migrant workers
could help restore production and demand within
the country, while also reestablish remittanceflows to varying countries of origin. In Syria, theUnited Nations estimates that 2,200 people havedied since violence broke out, but public dissent
seems unabated, prompting segments of theinternational community to call for regimechange. New sanctions may begin to bite shortly,with the Arab League having joined bilateralparties in demands for various measures ofchange in late November 2011.

Economic growth of economies in internal
conflict deteriorated in 2011, both as armed
confrontations denied firms access to export
Figure MNA.3 Oil importing economies' exports hit
hard in 2011, but signs of rebound accruing
export volumes, ch% 3m/3m saar
120
100
80
60
40
20
0
-20
-40
-60
-80
2009M01

2009M06

2009M11

2010M04

Dev Middle East & North Africa

2010M09

2011M02

Oil exporters

2011M07

In Yemen, negative growth in 2011 is likely,
despite a recent step up in hydrocarbons output.
The outlook for countries in conflict isdependent on the speed and efficiency withwhich protests, disruptions to civil life and larger
scale conflict can be resolved and new plans andreforms put in place. This is clearly achallenging and lingering uncertainty for theregion.

Net oil importers

Source: National Agencies through Thomson-Reuters Datastream
Figure MNA.4 Oil importers carry elevated exposures toEuropean demandshares of manufactures exports to EU-25 and USA (percent)100

80

Developing oil exporters (considering here just
Algeria and Iran, as Syria and Yemen areoccupied with their respective internal conflicts)
and the GCC benefitted from a sharp rise in
crude oil prices (World Bank average) toward
the end of 2010 and into 2011. Prices peakednear $120/bbl in April, when the loss of 1.4mb/dof Libyan oil exports significantly tightened
light/sweet crude markets, particularly for
Europe where much of Libya‘s crude was sold.

Mfgr exports to EU+US
60

Mfgr exports to EU-25

40

20

0

Tunisia

MoroccoEgypt

JordanLebanonSource: U.N COMTRADE.

122

Global Economic Prospects January 2012

Middle East & North Africa Annex

Subsequently prices eased, mainly because ofslowing global growth (global oil consumption
increased only 1/mbd in 2011), but also
reflecting a drawdown on International Energy
Association strategic reserves and risingproduction outside of OPEC.

the developing oil exporters (Iran excluded) havestrong export links with the European Union,
notably Syria, with 80 percent of fuels shipments
destined for the EU-25, and Algeria, where
substantial movements of natural gas and oil
through pipeline and ships comprise 48 percent
of hydrocarbons shipments; the United States
absorbs another 30 percent of the country‘s
output (figure MNA.5).

GDP in Algeria is estimated to have increased by
3 percent in 2011, on high oil prices and strong
advances in the non-oil sector. Oil and gas
revenues jumped 25 percent, reaching $44
billion (or 26 percent of GDP), part of which thegovernment used to raise public-sector wages,
support employment and housing, and to
mitigate the pressure on living standards fromescalating food and fuel prices. The increased
expenditures amounted to some 0.6 percent of
GDP in 2011, and with a fiscal deficit of 1.1
percent of GDP are unlikely to be sustainable
unless the price of oil remains at today‘s highlevels.

Figure MNA.6 highlights the sources of the 2010
and 2011 increase in revenues for oil exporters
in the larger geographic region (including the
GCC countries): in 2010 production increased
moderately and the global oil price rose by $18/
bbl; and in 2011, regional production increased
by about 28kbl/d, together with a $24/bbl rise in
price. Still, fiscal vulnerability has increased as aconsequence of the substantial buildup in
spending packages implemented in the last three
years. In particular, the fiscal break-even oil
price—price levels that ensure that fiscal
accounts are in balance at a given level of
spending—have been trending up for mostcountries, and are gradually approaching the spot
market price.

In Iran, despite the introduction of internationalsanctions, rising oil prices and a good crop
helped to support growth of about 2.5 percent incalendar year 2011. A revision to the system ofsubsidies and cash transfers to better balance
reimbursements and fiscal accounts has been
looked upon favorably by outside analysts. But
severe difficulties in the non-oil sector(manufacturing and services) persist.
As is the case with the oil-importing economies,

Tourism, migrant remittances and capital flows
are important sources of income and foreign
currency in the region, particularly for the net oil
importers. In Egypt for example, during 2010
(before the ―Arab Spring‖), tourism revenues
amounted to about $12.2 billion or 5.6 percent of

Figure MNA.5 Dev oil exporters reliant on Europe andUSA

Figure MNA.6 Oil output gains and higher prices leadto 2011 windfall

shares of fuels exports to EU-25 and USA (percent)oil price, $/bbl

output mbbl/d

100

24

110

20

100

16

90

12

80

8

70

4

60

80
60
Fuels exports to EU+US

40

Fuels exports to EU-25

20

0

50
2007

0
Syria

Algeria

Iran

2008

Production DEV-X [L]Source: U.N COMTRADE.

2009

2010

Production GCC [L]2011

Oil price [R]Source: International Emergy Agency, World Bank.

123

Global Economic Prospects January 2012

Middle East & North Africa Annex

GDP; for Tunisia and Jordan the figures were
$2.6 billion (5.7 percent of GDP) and $4 billion(14.8 percent), respectively.
The decline in tourism arrivals to the region has
been unprecedented, according to estimates fromthe United Nation‘s World Tourism
Organization (UNWTO). Syria was hardest hit(figure MNA.7), with the number of visitors
dropping by 80 percent in 2011, followed by
Jordan (57 percent), Tunisia (55 percent) andEgypt (30 percent).3 UNWTO estimates that
arrivals to Morocco increased as visitors chose it
over some of its less stable neighbors. Once
more, the underlying cause of the falloff intourism is deep uncertainty about the set ofdomestic conditions across the region.

In contrast, migrant remittances held up
relatively well in 2011, increasing by some 2.6
percent. While weaker conditions in European
labor markets would have been expected toreduce income transfers to home countries
notably in the Maghreb) data suggest that the
dollar value of these flows increased by $500
million for Morocco, a like amount in Egypt, and$100 million in Lebanon. Jordan and Tunisia
suffered only moderate declines. The increase inflows likely reflects a conscious effort by
expatriates to increase support during thepolitical difficulties faced by these countries. At
the same time oil revenues have powered the
GCC economies to robust GDP gains in 2011,
helping to underpin activity, employment andremittance outflows (figure MNA.8).

Figure MNA.7 The falloff in tourism--key factor inlower growth

Figure MNA.8 Remittances have held up better than
expected

Tourist arrivals, index 2007=100

Worker remittances, USD, millions

180

25,000160
20,000140
120

15,000100
80

10,000

60
40

5,000

20
2007

2008

2009

2010

2011

MoroccoTunisia

Egypt

JordanSyria

2007=100

0
2007

2008

Egypt

Source: U.N. World Tourism Organization; World Bank
estimates.

Morocco2009

Jordan2010 eLebanon2011 fTunisia

Source: World Bank.

Table MNA.2 Foreign Direct Investment flows, 2007 through 2011(e)
2007

2008

2009

2010e

2011f

FDI Inflows $bn
Egypt
LebanonTunisia
MoroccoJordan
Total
ch%

11.57
3.37
1.62
2.80
2.62
22.00
-2.1

9.50
4.33
2.78
2.48
2.83
21.90
-0.4

6.71
4.80
1.69
1.95
2.43
17.59
-19.7

6.38
4.98
1.51
1.30
1.70
15.86
-9.8

2.22
3.96
1.12
1.09
1.16
9.56
-39.7

FDI outflows $bn
Saudi Arabia
KuwaitUAE
Qatar
Bahrain
Total
ch%

-0.1
9.78
14.58
5.16
1.69
31.12
52.3

3.49
9.09
15.82
6.03
1.62
36.54
17.4

2.18
8.64
2.72
11.58
-1.79
23.40
-36.0

3.91
2.07
2.01
1.86
0.33
10.51
-55.1

4.10
1.00
1.81
1.49
-0.1
8.64
-17.8

Source: UNCTAD, International Investment database (update November 2011).

124

Global Economic Prospects January 2012

Middle East & North Africa Annex

Box MNA.1 FDI links and aid flows: developing MENA and the GCC
This year‘s fall off in FDI extends a medium-term trend that began in 2009. Flows to developing Middle East andNorth African (MENA) economies dropped by 40 percent in 2011, on the heels of a cumulative 25 percent decline
over 2009 and 2010—notably for Egypt (65 percent in 2011) and Jordan (30 percent). On the ―investor side‖, from
GCC members UAE, Qatar and Kuwait investment abroad has fallen sharply, by 18 percent during 2011, on theheels of a 70 percent retrenchment over 2009-10. Part of this earlier decline is related to the restructuring of balance sheets in the wake of the financial crisis in Dubai (table MNA.2).
A downward trend is in force for both inflows and outflows –increasing amounts of which had been directed at thedeveloping MENA region from the GCC. This development will take some time to turn around, as though GCC
economies are enjoying strong oil windfalls and boosting non-oil growth through government outlays, recovery in
FDI will require a rebuilding of confidence in FDI destination countries, so that for the near-term, investment outlays in the region may be difficult to restart.
A counterpoint to this trend is recent GCC actions in Morocco. Despite the uncertain domestic and external environments facing countries in the region, Morocco (the economy is experiencing solid growth of late), has been thebeneficiary of several GCC investment proposals related to development projects (Qatar and Kuwait), and notably
in new tourism facilities (UAE and others at $2.5 billion).
Following several years of reduced aid flows during the early 2000s, 2011 saw a surge in donor flows from Arabnations. Saudi Arabia and other GCC members stepped up aid to the developing countries of MENA in an effort toensure that transitioning and other economies in the region are able to respond to demands for change.
Overall, aid from Saudi Arabia and the GCC for developing MENA is expected to reach $15 billion for 20122015, with the bulk to be furnished by Saudi Arabia. The aid should enable Egypt, Jordan, and to a lesser degree,
Morocco, to shore up balance sheets and increase subsidies to ameliorate food price and other pressures on the
population. Jordan is likely to benefit the most, having already been recipient of a $400 million cash grant from
Saudi Arabia; and another $1 billion came through on July 28, 2011.
The GCC has also established a new Development Program to support Bahrain and Oman, the two GCC countries
which experienced protests and popular calls for reform. The program should provide $10 billion in investment
funding over ten years, focused on housing and infrastructure, and akin in function to earlier EU Cohesion Funds.

External capital flows to developing countries in
the region declined sharply during the course of
the year, with FDI (mainly from the GCC) downnearly 40 percent, while equity and bond flows
are estimated to have dropped in the third andfourth quarters to levels only half as high as in2010. However, official aid from the GCC andothers is restoring a good portion of (and insome cases more than 100 percent of) lost
liquidity to several economies in the region –and helping some of the transitioning economies
to meet fiscal shortfalls (box MNA.1).

2011, net portfolio equity investment dropped
effectively to nil in 2010 and $500 million
during 2011 (table MNA.3). However, net
private debt flows rose from $2.3 billion in 2010
to $4.8 billion in 2011 due to increased bankborrowing.
Moreover, bond spreads for Tunisia, Lebanon
and Egypt have widened, and banking sector
balance sheets in some countries are expected todeteriorate. It is likely that under baseline
conditions, the transitioning economies will
require extensive external financing in 2012,
which the International Monetary Fund places atsome $50 billion.4

Capital flows, aside from foreign direct
investment, have traditionally been small in thedeveloping Middle East and North Africa region,
though equity inflows into Egypt, Lebanon and
Morocco, and bond issuance by Tunisia andLebanon had built some momentum before theglobal financial crisis of 2009. Accompanying
the notable decline in FDI during 2010 and

Inflation eases on international developments
and government intervention A stabilization, andsubsequent modest decline in world food prices
contributed to ease inflationary pressures in theregion over the course of 2011. Regional food125

Global Economic Prospects January 2012

Middle East & North Africa Annex

prices were rising at a 20 percent annualizedpace in the first quarter – pushed by risinginternational food prices. However, as global
prices stabilized and even declined, the pace ofregional food inflation eased to an 8 percent
annualized pace as of July (latest data available).
Inflation is a particular worry for developing oil
exporting countries, where for Algeria and Iran it
exceeds 10 percent (at seasonally adjusted
annualized rates, or ―saar‖).5 In net oil importing
countries a combination of very weak growthand food and fuel subsidies have attenuatedinflationary pressures, although at large
budgetary cost in most cases (figure MNA.9).
Inflation has fallen in Egypt from a peak of 20
percent in October 2010 to 4.6 percent as of
October 2011, and in Jordan from 11.3 percent
during the final quarter of 2010 to 2 percent by
October. Iran has made important efforts toreform its income support system away fromsubsidies and toward better targeted social safety
nets, and this has brought down the pace of price

Figure MNA.9 Subsidies work to reduce inflation for oil
importers

Figure MNA.10 Iran's reform program dominates oilexporter CPI landscapeHeadline CPI, ch%, 3m/3m saar

20

Headline CPI, ch%, 3m/3m saar

35

15

30
25

10

20
15

5

10

0

5

-5

-5

0
Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11

Egypt

JordanJan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11

Tunisia

GCC

Algeria

Iran

Source: World Bank.

Source: World Bank.

Table MNA.3 Net capital flows to Middle East and North Africa
Net capital flows to MENA
$ billions
Current account balance
as % of GDP
Financial flows:
Ne t private and official inflows
Ne t private inflows (e quity+private de bt)..Net private inflows (% GDP)Net equity inflows..Net FDI inflows..Net portfolio equity inflows
Net debt flows..Official creditors....World Bank....IMF....Other official..Private creditors....Net M-L term debt flows......Bonds......Banks......Other private....Net short-term debt flows
Balancing item /aChange in reserves (- = increase)
Memorandum items
Migrant remittances /b

2004
0.1
0.0

2005
19.9
3.6

2006
30.6
4.8

2007
24.3
3.2

2008
19.2
2.1

2009
-20.8
-2.3

2010
-9.6
-0.9

2011e
39.8
3.4

2012f
27.8
2.2

2013f
13.6
1.0

12.9
16.4
3.4
10.4
9.7
0.7
-8.1
-3.4
-0.6
-0.5
-2.3
6.0
2.7
2.8
0.0
0.0
3.2
1.7
-14.7

19.4
22.5
4.1
19.2
16.8
2.4
0.8
-3.2
0.0
-0.7
-2.4
3.4
3.1
2.5
1.3
-0.8
0.3
-0.3
-38.9

14.5
25.7
4.0
28.2
27.2
1.0
-16.8
-11.3
-0.8
-0.2
-10.3
-2.5
-1.7
0.8
-1.3
-1.2
-0.8
-7.2
-37.8

28.5
27.4
3.6
25.5
27.6
-2.1
79.2
1.1
1.0
-0.1
0.2
1.9
-1.6
0.7
-1.3
-1.1
3.5
-4.8
-48.0

19.7
21.5
2.3
29.6
29.2
0.4
59.0
-1.8
-0.3
-0.1
-1.4
-8.2
-4.0
-0.8
-1.8
-1.3
-4.2
4.5
-43.4

28.3
25.9
2.8
27.3
26.1
1.2
51.5
2.4
0.9
-0.1
1.6
-1.4
-3.0
0.1
-2.1
-0.9
1.6
16.7
-24.2

25.4
24.2
2.4
22.7
22.7
0.0
70.5
1.2
0.8
0.0
0.4
1.5
0.4
3.2
-1.9
-0.8
1.1
8.3
-24.1

24.6
23.3
2.0
19.0
19.0
0.5

15.1
1.2
13.9
13.9
0.6

22.2
1.6
19.9
19.9
1.0

1.3
0.5
0.0
0.8
4.3
2.3
1.8
0.5
0.0
2.0
-65.8
1.4

1.2

2.3

23.2

25.1

26.5

32.1

36.0

33.6

34.7

35.6

37.4

39.4

Source: The World Bank
Note :e = estimate, f = forecast/a Combination of errors and omissions and transfers to and cap ital outflows from develop ing countries.
/b M igrant remittances are defined as the sum of workers‘ remittances, comp ensation of emp loy ees, and migrant transfers

Source: World Bank.

126

Global Economic Prospects January 2012

Middle East & North Africa Annexchanges into a range of 15-20 percent. Further
pursuance of these reforms will need to be madeto bring Iran‘s inflation solidly into single digits(figure MNA.10).

There is a clear medium term shift in monetary
policy toward loosening, as evidenced by
reductions in policy rates across all groups forwhich data exist. The more impressive
compression of interest rates has occurredamong the oil importers (150 basis points (bps)between 2007 and 2011), with larger countries
averaging closer to 200 bps. GCC rates are
exceptionally low, but have also registered a
reduction of some 165 bps. Lower inflation(regardless how measured), weaker growth and a

Policy developments
Fiscal policy has been strongly expansionary inmuch of the region; for example, fiscal deficitsof the net oil importers rose to 7.3 percent of
GDP in 2011 from 6.2 percent in 2010 and 4.4
percent in 2007, before the financial crisis(figure MNA.11 and table MNA.4). In several
countries with declining fiscal space, including
Jordan and Morocco, expansion of social
programs in response to popular demand has
occurred at the expense of public investment
programs. A sharp decline in revenues among
the oil importing countries is mainly cyclical innature, but the increase in social spending andtransfers has a large permanent (structural)component and will be difficult to maintain. And
the fiscal deficit of countries in conflictballooned in 2011 to 6.5 percent of GDP,
exacerbated by the need to procure supplies,
weapons and etc., for armed forces involved in
the conflicts.

Figure MNA.11 Fiscal costs are substantial
fiscal balance as a share of GDP, %

2
1
0
-1
-2
-3
-4
-5
-6
-7
-8
Net oil importers

Conflict countries

2009

2010

2011

2012

Other DEV Oil excl
conflict countries

2013

Source: World Bank.
Table MNA.4 Economic outturns and policy developments 2011
Fiscal balance%GDP

Reserves inmonths ofimports

Policy interest
rate (basis
points)Headline CPI,
ch% 3m/3m
saar

CAB %GDP

2007

2011

2007

2011 /*

2007

2011 /*

2007

2011 /*

2007

2011

-4.4

-7.3

8.3

8.4

7.50

6.00

12.5

2.5

-5.2

-5.6

Egypt

-7.8

-9.5

10.0

5.5

10.28

8.25

18.3

4.8

0.5

1.8

Tunisia

-0.7

-5.1

4.6

4.7

5.25

3.50

4.9

5.1

-3.8

-5.8

Jordan

-4.1

-5.7

5.3

7.0

6.70

4.50

13.9

4.1

-9.3

-8.5

Morocco

0.2

-5.5

8.8

6.0

3.32

3.25

3.8

-3.0

-0.1

-6.7

Lebanon

-9.6

-5.5

12.7

18.6

12.00

10.00

3.4

-1.8

-9.1

-20.6

Conflict

-0.3

-6.5

10.6

5.2

….

….

….

….

-2.0

1.5

Syria

2.7

-7.1

9.6

7.3

…..

…..

…..

…..

0.1

-2.2

Net oil importers

Yemen

-3.2

-8.0

11.5

3.1

…..

…..

…..

…..

-4.1

9.6

DEVOil-X

4.5

0.9

23.1

25.2

….

….

15.9

15.8

14.3

8.5

Algeria

9.1

-1.1

35.0

37.9

…..

…..

4.4

14.5

20.2

10.8

Iran

0.0

2.8

11.2

12.5

…..

…..

25.6

17.0

8.5

8.9

GCC

19.3

8.5

12.0

10.0

3.00

1.35

10.0

6.8

26.2

24.4

Saudi Arabia

35.4

11.7

31.9

27.3

5.07

2.00

9.9

7.6

27.8

20.6

Kuwait

19.9

17.2

5.3

7.0

1.00

0.75

10.6

4.2

40.5

33.5

Bahrain

4.9

-2.4

4.1

3.5

2.19

0.50

3.5

6.0

10.2

5.9

Oman

17.2

7.6

6.4

5.7

3.70

2.00

12.5

6.2

8.3

11.0

Source: World Bank.

127

Global Economic Prospects January 2012

Middle East & North Africa Annex

foreseen need to loosen financial conditions with
tougher economic times on the horizon has
yielded an acceleration in policy interest ratecuts within the region. A notable exception, once
more, is Egypt, which on November 30, 2011
raised its benchmark policy rate by a full 100
basis points to 9.25 percent, the first tightening
move for the country since 2008, to easepressure on the pound amid tense politicalconditions.

impact of this year‘s disruptions on economic
activity begins to wane by 2013. Reduced
political instability could be accompanied by an
improved business climate, higher investment
and stronger FDI flows– all contributing to
improved economic conditions.
However, that recovery will be less marked andbuoyant than otherwise because European
economic turmoil will reduce demand for theregion‘s exports, diminish the availability ofcommercial finance and lower commodity
prices. Thus while domestic conditions would
point to a relatively strong rebound in activity by
2013, actual outturns and the baseline forecast is
for more muted improvement, with growth in oil
importing countries accelerating from 1.8
percent in 2011 to 2.5 and 3.6 percent in 2012
and 2013 (figure MNA.12 and table MNA.1
earlier). Recovery is anticipated to be slower
among countries still in conflict, but neverthelessa rebound should be more vigorous by 2013
given the extent of output losses anticipated over2011 and 2012.

In aggregate, developing countries of the region
saw an increase in current account surplus
positions from $27 billion in 2010 to $41 billion
in 2011, due in the main to higher revenues foroil exporters. This enabled a modest build up ofreserves of some $2.4 billion (Iran not includedin this tally). In contrast, the oil importers saw
their reserves fall by 17 percent ($13 billion) to$67 billion, though at 6.4 months of imports and
200 percent of short-term capital and maturingdebt, they remain ample at present. The notable
exception is Egypt, where capital outflow andpressure on the exchange rate compelledauthorities to draw some $11 billion of the $13
total in reserves for the oil-importing group to
support the pound. This represents 4.5 percent of
Egypt‘s GDP leaving reserves representing just
4.8 months of imports.

The region will feel the bulk of effects of slower
European—and global—growth through thetrade channel, especially oil, but also in
manufactured goods rather than the financial
channel, given relatively weak links in this area.
Oil exporters will face reduced demand andlower prices. Oil importers with EU links will
feel the weakness mainly through goods trade,
and in some case through remittances. And oil

On balance, with the already difficult conditions
being experienced by many countries in theregion because of recent uprisings, a global
downturn will be felt more severely now than in
2008-09, when economic growth in the region
was relatively robust.

Figure MNA.12 By 2013 reforms should be bearing fruit

Medium-term outlook

5.0

Even if the external environment for growth
were not as sobering as it is, the ongoing
political tensions in the region would likely haveconstrained outturns over the next few years.
Though the negative economic effects of theacute phase of transition may have begun to passfor Egypt, Tunisia, and Libya, they may continue
to weigh on growth in Syria and Yemen. In the
projections outlined below, intra-country
conflicts are assumed to stabilize in one form or
another during the course of 2012, so that the

2.5

0.0

-2.5

-5.0
Dev Middle East & Net oil importers
North Africa

2010

Source: World Bank

128

2011

Conflict

2012

2013

Other Dev Oil excl
conflict countries

Global Economic Prospects January 2012

Middle East & North Africa Annex

importers with GCC links (Jordan, Lebanon)
will be more shielded, but will still feel indirect
effects from lower activity in the GCC.

infrastructure projects with lifespan extending 3
to 5 years.

Risks and vulnerabilities

Prospects for a return to the growth rates that
Egypt and Tunisia experienced in the previous
decade are slim over the period through 2013,
with weak European demand and necessary
fiscal consolidation (given weak externalfinancing conditions) expected to weigh on
growth. Nonetheless, GDP gains for thesecountries are expected to improve from 0.3
percent in 2011 to 3.1 percent by 2013—still
well below potential and trend growth rates,
implying an output gap of close to 5 percent of
GDP in 2013. Morocco and Jordan have beenless affected by protest. Implementation of selectreforms in both countries, and the holding ofparliamentary elections (Morocco) have been
important elements in tying social fabric tighter.
Growth in Morocco is projected to slow to 4
percent in 2012 from a 4.3 percent gain in 2011,reflecting weaker European demand; but gains
are expected to strengthen to 4.2 percent by 2013
as global recovery emerges. Jordan is anticipated
to follow a similar growth path, but at a slower
pace, with GDP expanding 1.7 percent in 2012,
and accelerating to 3 percent by 2013, restrained
to a degree by still lackluster exports to theUnited States, offset by stronger conditions
among the GCC economies at that time (table
MNA.5).

Extreme uncertainties face the region, in having
to address both the continuing threats of protest
and slower movement on political economy
reforms, at the same time as facing a real crisisin the Euro Area. Within the Middle East andNorth Africa, an important risk is that armed
violence in countries– notably Syria and Yemen– is not resolved in 2012. A differentiating factor
between Yemen and Syria at this juncture is theexistence of a ‗road map‘ for the former in theform of the GCC-inspired Transition Agreementof November 23, with which a large part ofsociety appears to be willing to work with. But,
should unsettled conditions extend for a longer
period despite bilateral and multilateraldiplomatic efforts to bring conflicts to closure,
uncertainty will continue to cloud the region,
likely restraining an anticipated rebound inactivity in 2013.
The Middle East and North Africa is highly
exposed to an exacerbation of the European
crisis, with strong and broad links through trade,
tourism arrivals, migrant remittances, and to alesser degree, finance.6 With the advent of the―Arab Spring‖, policy decision making had
become exceptionally more difficult. And
policies may now have to shift once more tofend off the adverse effects stemming from thesituation in Europe and potential alternate
courses toward eventual closure of the crisis
there—though room for maneuver is slim for oilimporters (and some oil exporters) in the region.

For developing countries in conflict, here Syria
and Yemen, ongoing social and military
disruptions are expected to continue to weigh on
activity during 2012, but as conditions stabilize,
growth should pick up to a 2.9 percent pace by
2013. And for the remaining developing oil
exporters, Algeria and Iran, growth is projected
to pick-up modestly from 2.7 percent in 2011 to
3 percent by 2013. Slow growth reflects in partmoribund export market growth, weakening
revenues as oil prices ease and continued highleakage in the form of imports as populations
continue to spend oil revenues in the form ofgovernment transfers or subsidies. Offsetting
external drag, stronger developments in non-oil
sectors should help to underpin GDP gains―on
outlays of planned large-scale social andAs a major trading partner for Europe, exports
would be directly affected, while a serious crisis
in Europe would likely also be accompanied by asignificant tightening of global financial
conditions and importantly a drop in commodity
prices – potentially placing strains on countries
with large fiscal and current account deficits(though the distinct mix of oil exporters and oil
and food importers in the region would yield
mixed results for terms of trade and fiscal
effects—positive for the transitioning

129

Global Economic Prospects January 2012

Middle East & North Africa Annex

economies, not favorable for the developing oil
exporters).

deteriorate most sharply could be forced to cut
more deeply into spending (additional fiscal
shortfalls could exceed 3 percent of GDP in
Egypt, Jordan and Tunisia).

On the fiscal side, oil-importers within theregion might see fiscal shortfalls increase
substantially in the case of a significant
slowdown; while oil exporters would be affectedby both weaker demand but also lower revenues
due to lower prices. Assuming that financial
shortfalls can be met through international
capital markets GDP impacts could range
between -0.8 and -1.2 for oil importers and -0.2
and -0.6 percent for oil exporters. If financing is
not forthcoming, countries where current
accounts and government deficits are expected to

And countries with high-levels of indebtedness
would be particularly vulnerable to a tighteningof international credit conditions. Lebanon could
be exposed to this channel because of relatively
high external financing needs (reflecting shortand medium-term debt repayments and and/or
large current account deficits).
On balance, risks are to the downside for theregion, given the extensive exposures of so many

Table MNA.5 Middle East and North Africa forecast summary(annual percent change unless indicated otherwise)
98-07aAlgeria
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Egypt, Arab Rep.
GDP at market prices (2005 US$) c
Current account bal/GDP (%)
Iran, Islamic Rep.
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Iraq
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
JordanGDP at market prices (2005 US$) b
Current account bal/GDP (%)
LebanonGDP at market prices (2005 US$) b
Current account bal/GDP (%)
Morocco
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Syrian Arab Republic
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Tunisia
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Yemen, Rep.
GDP at market prices (2005 US$) b
Current account bal/GDP (%)

2008

2009

Est.
2010

Forecast
2011
2012

3.5
28.9

2.4
20.0

2.4
0.1

1.8
8.1

3.0
10.8

2.7
8.9

2.9
6.3

4.3
0.9

7.5
-0.9

4.9
-2.0

5.1
1.6

1.8
1.8

3.8
1.8

0.7
1.6

4.9
10.3

2.3
15.2

3.5
4.6

3.2
6.5

2.5
8.9

2.7
6.6

3.1
4.2

9.5
19.2

4.2
-13.8

0.8
-3.2

9.6
-1.5

12.6
-4.5

10.2
6.0

5.6
-2.3

7.6
-9.0

5.5
-4.4

2.3
-4.8

2.5
-8.5

1.7
-6.9

3.0
-5.2

2.8
-17.5

9.3
-13.6

8.5
-19.7

7.0
-20.9

3.0
-20.6

3.8
-17.2

4.4
-14.6

3.7
1.4

5.6
-5.2

4.8
-5.4

3.7
-4.3

4.3
-6.7

4.0
-7.3

4.2
-6.7

3.3
3.0

4.5
0.1

6.0
-2.3

3.2
5.1

-3.0
-2.2

-1.5
-5.0

2.5
-7.0

4.5
-2.8

4.6
-4.2

3.1
-2.7

3.0
-4.6

-0.5
-5.8

2.5
-5.8

3.2
-6.0

3.5
2.5

3.6
-4.6

3.8
-8.3

8.0
7.6

-6.0
9.6

-2.6
5.5

3.6
2.4

World Bank forecasts are frequently updated based on new information and changing (global)
circumstances. Consequently, projections presented here may differ from those contained inother Bank documents, even if basic assessments of countries’ prospects do not significantly
differ at any given moment in time.
Djibouti, Libya, West Bank and Gaza are not forecast owing to data limitations.
a. Growth rates over intervals are compound average; growth contributions, ratios and the
GDP deflator are averages.
b. GDP measured in constant 2005 U.S. dollars.
c. Egypt growth presented on Fiscal Year basis.
d. Forecast.

Source: World Bank.

130

2013

Global Economic Prospects January 2012

Middle East & North Africa Annex

countries to Europe and a dependence oncommodity prices. Countries will need to takedecisive action to formulate a broad reform
agenda—aimed at fostering inclusive growth—
while maintaining economic stability, to build
confidence, anchor expectations and reap thelonger- term benefits of the historicaltransformation.

Europe.

Notes:
1

2

The low and middle income countries of theregion included in this report are Algeria, theArab Republic of Egypt, the Islamic
Republic of Iran, Jordan, Lebanon, Morocco,
the Syrian Arab Republic, Tunisia andYemen. Data is unfortunately insufficient for
the inclusion of Djibouti, Iraq, Libya and theWest Bank and Gaza. The high-income
economies included here are Bahrain,
Kuwait, Oman and Saudi Arabia. Data is
insufficient for the inclusion of Qatar and theUnited Arab Emirates. The group of
developing oil exporters includes Algeria,
the Islamic Republic of Iran, the Syrian Arab
Republic and Yemen. The diversified
economies of the region (net oil importers—with Egypt included in this group due to thesmaller share of hydrocarbons in its exportmix), can be usefully segmented into twogroups: those with strong links to the GCC(Jordan and Lebanon), and those with tightties to the European Union (the Arab
Republic of Egypt, Morocco and Tunisia).
Further groups of interest are the Resourcepoor-labor abundant countries: Egypt,
Jordan, Lebanon, Morocco and Tunisia; andResource-rich labor abundant economies:
Algeria, Iran, the Syrian Arab Republic, andthe Republic of Yemen.
It should be noted, that in contrast with, forexample, the East Asia and Pacific region,
the share of exports in GDP for the oil
importing economies of the MENA region isquite small, which would have the effect of
mitigating adverse impacts on growthattendant with slower goods shipments to

131

3―UNWTO Tourism Barometer‖. United
Nations World Tourism Organization.
November, 2011. Madrid.

4Regional Economic Outlook. ―Middle East
and Central Asia‖. World Economic andFinancial Surveys. October, 2011.
Washington DC. The International Monetary
Fund.

5

Inflation rates are here expressed atseasonally adjusted annualized rates or―saar‖. That is, a ratio of rolling three-monthmoving averages of consumer price indexes
is raised to the fourth power (so at ―quarterly
rates‖). This provides a clearer view ofcurrent developments and potential turning
points for the data series contrasted with―year over year‘ growth rates—especiallyavoiding biases of exceptionally high or low
base period values. A warning that readers
may find the CPI figures as ―out of line‖with the more-broadly used y/y measure.

6

In 2008 roughly half of oil importer‘smerchandise exports were sent to EU
markets, contrasted with 65 percent in 1998.
And migrant remittances from expatriate
workers in Europe are much larger for
Morocco and Tunisia than for other MENA
countries—data for 2000 suggests that about
75 percent of Morocco and Tunisia‘simmigrants settle in the EU, contrasted with
10 percent for Egypt.

Global Economic Prospects January 2012

South Asia Annex

South Asia Region
some local factors (e.g., policy uncertainty,
stalled reforms, and deteriorating political andsecurity conditions) contributed to a fall-off ininvestment growth. While there‟s been someslippage on fiscal consolidation efforts, theimpulse from the fiscal-side has been generally
less expansionary than in 2010.

Recent developments
Following a vibrant 9.1 percent growth rate in2010 (calendar year), South Asia‟s real GDP
growth decelerated to an estimated 6.6 percent in2011 (table SAR.1). A slowdown in activity
became strongly apparent late in the year with apronounced fall-off in industrial production, well
below most other developing regions. (figure
SAR 1). The slowdown reflects numerous
headwinds, both internal and external.
Nevertheless, growth is estimated to haveexceeded the long-term average of 6 percent(1998-2007), led by above trend activity in
Bangladesh, India and Sri Lanka. On thedomestic front, more restrictive macroeconomic
policy stances—aimed at reducing stubbornly
high inflation and unsustainably large fiscal
deficits—have contributed to weaker domestic
demand growth. Consumer spending fordurables has been constrained by higher interest
rates, and real disposable incomes have beeneroded by sustained high food and fuel prices
that, along with administered price increases,
have contributed to slower private consumption
growth. Higher borrowing costs, elevatedinflation, moderating economic activity andAside from domestic factors contributing to a
slowdown in South Asia‟s real GDP growth in2011, the external environment had become
increasingly challenging and uncertain. While
direct financial linkages, such as exposures toEuro Area banks, are limited compared withother regions, contagion from Euro Area debt
woes has contributed to the fall-off in South
Asian investment growth. (figure SAR 2). In
particular, equity finance has been hit, with
regional stock markets retreating in concert withthe rest of the world during the second half ofthe year. Deteriorating international bankfunding conditions have also led to a fall-off inforeign bank lending, beginning mid-2011.
Reflecting these developments, local currencies
depreciated sharply against the dollar in thesecond half of 2011, as investors retreated into
safe-haven assets, prompting some monetary
authorities in the region to defend their
Figure SAR.2 South Asia's exposure to a sudden
withdrawal of European bank assets is relatively small,and limited to 'core' countries

Figure SAR.1 Activity in South Asia decelerated sharply
in late-2011
Industrial production, y/y growth, seasonally adjusted%
25

South Asia
Europe & Central Asia
Middle East & N. Africa

20

European Bank foreign claims on selected regions and countries

East Asia & Pacific
Latin America & Caribbean
Sub-Saharan Africa

Europe Middle East and Af rica EM
Latin America

South Asia

15

Hungary

10
Poland5

Sri Lanka

0

India

-5

Pakistan

Rest of High-income European banks

Spain
Italy

Bangladesh-10

Greece, Ireland, and Portugal

Nepal

-15
2010M01

2010M04

2010M07

2010M10

2011M01

2011M04

2011M070

2011M10

10

20

30

40

50

%-Share of GDP

Sources: BIS, JP Morgan and World Bank

Sources: Thomson Datastream and World Bank

133

60

70

80

90

100

Global Economic Prospects January 2012

South Asia Annex

currencies and draw down international foreignexchange reserves. In particular, India, which
had benefitted from strong inflows, saw
pronounced depreciation as foreign investors
reduced exposures in countries with twin deficits(as witnessed in Turkey, among other morefinancially integrated developing countries).
Slack growth in Europe and the United States
contributed to a fall-off in export growth that
became strongly evident in October. This
followed relatively strong export growth in thefirst half of the year, which partly reflected acontinued reorientation of export markets toward
dynamic developing East Asia (underway atleast since early-2000). Worker remittances
inflows to South Asia proved relatively resilientin 2011, buoyed in part by a revival in job
growth in the high-income Arabian Gulf
economies (important host countries for South
Asian migrants), supported by high energy
prices and related fiscal spillovers. Nevertheless,the pace of remittances growth moderated viz-aviz 2010, especially in the second half of 2011.
Despite tighter macroeconomic policy andstrong exports, the regional current accountdeficit is expected to widen in 2011 to an
estimated 3.0 percent of GDP in 2011 from 2.6
percent in 2010, due to higher import prices(notably sustained high fuel prices), continued
strong import demand and currency depreciation.

growth in India, which accounts for about 80
percent of South Asia‟s GDP. Overall, GDP
growth at market prices for the fiscal year
(ending March 2012) is expected to have slowed
2.2 percentage points from 8.7 percent in
FY2010/11. On a calendar year basis, India‟s
GDP growth slowed to an estimated 7.0 percent
in 2011 from 10 percent in 2010.1 The
weakening in activity reflects a significant
moderation in domestic demand, led by adeceleration in investment activity that has faced
headwinds of rising borrowing costs, high input
prices, slowing global growth and heightened
uncertainty. Delays and uncertainty surrounding
the implementation of policy reforms have also
hindered investment. Household spending has
been curbed by persistently rising prices cutting
into real incomes and higher borrowing costs. A
tightening of monetary policy and some
reduction in the fiscal deficit contributed to theslowdown. On the supply-side, an improved
2011 monsoon supported stronger agricultural
output in the second-half of 2011 (coming in theaftermath of a weak base tied to low rainfall in2010). Industrial output, however, significantly
decelerated from mid-2011, in part reflecting a
sharp fall-off in capital goods output andmoderating domestic demand. (figure SAR 3).
Producer sentiment was down markedly in thesecond half of the year, albeit a pick-up was
evident in December. (figure SAR 4). Indian
merchandise export volume growth was vibrantthrough most of 2011—recording gains as much

The deceleration in regional economic growth in2011 to a large extent stems from slowing
Figure SAR.3 Deceleration in South Asia's industrial
production has been led by India, while Pakistan recovered after flooding

Figure SAR.4 Purchasing manufacturers index for
manufacturing output
seasonally adjusted
Expansion>50

3m/3m growth, seasonally adjusted, annualized rates

%
60

65
India

50

India

Global60

Sri Lanka
40

Pakistan

30

Developing countries (excl. South Asai)

55
50

20

45

10
0

40

-10

35

-20

30
Apr-05-30
Jul-10

Sep-10Nov-10Jan-11Mar-11

May-11

Jul-11

Sep-11

Jan-06

Oct-06

Jul-07

Apr-08Jan-09Oct-09

Nov-11

Sources: Thomson Datastream and World Bank

Sources: Haver Analytics and World Bank

134

Jul-10

Apr-11

Global Economic Prospects January 2012

South Asia Annex

as 54 percent above year-earlier levels in July(seasonally adjusted)—supported by resilient
external demand from developing countries andemerging East Asia, in particular. However,export volume growth slowed sharply to 0.5
percent (y/y) in October—despite real tradeweighted depreciation of the rupee of 6.5 percent
in October (real effective exchange rate, y/y).
Robust merchandise import growth (from ahigher base level than exports) and adeterioration in the terms of trade contributed toan expansion of the current account deficit,
which is projected to have reached 3.4 percent of
GDP in 2011, up from 3.2 percent in 2010.

second largest economy (representing about 15
percent of regional GDP), continues to markedly
lag outcomes elsewhere in the region.
Nevertheless, it firmed in the second half of2011. Industrial production surged to grow at arobust 32.1 percent annualized pace during thethree months ending in October (3m/3m, atseasonally adjusted annualized rates), after
falling at 9.1 and 10.1 percent rates during thefirst and second quarters, respectively. Part ofthe strengthening in growth reflects base effects
due to the widespread flooding that had
hampered activity in the second half of 2010.
Indeed, because the floods occurred in July andAugust 2010, GDP growth on a fiscal year basis(ending June-2011) slowed to 2.4 percent from

Economic activity in Pakistan, South Asia‟s
Table SAR.1 South Asia country forecasts(annual percent change unless indicated otherwise)
98-07a

2008

2009

Est.
2010

Forecast
2011
2012

5.0
0.2

6.3
1.4

6.0
3.5

5.9
2.6

6.5
0.7

6.1
0.5

6.3
-0.2

6.4
-0.3

6.2
-2.7

6.8
-2.0

10.0
-3.2

7.0
-3.4

6.0
-2.4

7.5
-2.3

3.4
-1.7

4.8
3.2

5.3
-1.8

4.5
-2.9

4.0
-2.9

3.5
-2.7

3.8
-2.3

5.0
-0.8

3.7
-9.6

1.7
-2.5

3.8
-0.9

3.1
0.5

4.0
-0.2

4.2
-0.7

4.4
-3.2

6.0
-9.8

3.5
-0.7

8.0
-3.0

7.7
-3.8

6.8
-3.9

7.7
-4.2

5.0

6.2

5.7

6.1

6.7

6.0

6.4

6.2
-

4.9
6.8

9.1
8.0

8.7
8.5

6.5
6.8

6.5
6.8

7.7
8.0

3.1

6.1

4.4

4.6

3.5

3.6

4.0

4.7

1.6

3.6

4.1

2.4

3.9

4.2

2013

b

Calendar year basis
Bangladesh
GDP at market prices (2005 US$) c
Current account bal/GDP (%)
India
GDP at market prices (2005 US$) c
Current account bal/GDP (%)
Nepal
GDP at market prices (2005 US$) c
Current account bal/GDP (%)
Pakistan
GDP at market prices (2005 US$) c
Current account bal/GDP (%)
Sri Lanka
GDP at market prices (2005 US$) c
Current account bal/GDP (%)
Fiscal year basis b
Bangladesh
Real GDP at market prices
India
Real GDP at market prices
Memo: Real GDP at factor cost
Nepal
Real GDP at market prices
Pakistan
Real GDP at market prices

World Bank forecasts are frequently updated based on new information and changing (global)
circumstances. Consequently, projections presented here may differ from those contained inother 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. Growth rates over intervals are compound average; growth contributions, ratios and the GDP
deflator are averages.
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 in calendar years (CY) based on quarterly history for India. For
Bangladesh, Nepal and Pakistan, CY data is calculated taking the average growth over thetwo fiscal year periods to provide an approximation of CY activity.
c. GDP measured in constant 2005 U.S. dollars.
d. Estimate.

Source: World Bank

135

Global Economic Prospects January 2012

South Asia Annex
Bangladeshi migrant workers are based, led to a
slowdown in the pace of growth. At the sectorallevel, rising agricultural output reflected good
harvests, which also supported householdspending. Strengthened industrial production has
been buoyed by booming garment exports,
which represent over two-thirds of Bangladesh‟smerchandise exports.

4.1 percent in FY2009/10.
Pakistan‟s weak growth outturns are also tied toworsening security conditions, accompanied bygreater political uncertainty and a breakdown inpolicy implementation. Infrastructure
bottlenecks, including disruptions in power
delivery, remain widespread. A notable brightspot has been a strengthening of exports, evident
particularly in the first half of 2011, led by
textiles that surged 39 percent in the first half ofthe year (y/y). However, like India, Pakistan‟sexport volume growth saw a sharp fall-off in
October. Indeed, Pakistan‟s export volumes fell
to a minus 46 percent rate in the three-months
ending October (3m/3m, at seasonally adjusted
annualized rates). Along with an upswing inworker remittances inflows, robust exports havesupported Pakistan‟s external positions andcontributed to an improvement in the current
account from a deficit of 0.9 percent of GDP in2010 to a surplus of close to 0.5 percent of GDP
in the 2011 calendar year.

Despite a waning of the post-conflict reboundeffects, GDP in Sri Lanka is estimated to havegrown 7.7 percent in the 2011 calendar year,
slightly below the 2010 pace of 8 percent.
Domestic demand growth has been vibrant,
supported by strong credit expansion. Strong
export growth, led by a surge in textile exports,
was more than offset by the rise in imports, andthe trade deficit rose. Remittances, tourism andport services grew strongly, which helped tocontain the deterioration of the current accountbalance. While growth was strong at the start of2011, a deceleration became apparent in thesecond half of the year, on heightened
uncertainty and weakening external demand, as
reflected in a modest slowdown in industrial
production growth.

GDP growth in Bangladesh strengthened to a
projected 6.7 percent in FY2010/11 (ending June2011), firming from the 6.1 percent outturn in
FY2009/10. Growth has been supported by an
expansion in private consumption, buoyed by an
upswing in government subsidies and transfer
payments. While export activity surged, strong
import growth (from a higher base), contributed
to a deterioration in the trade deficit and thecurrent account surplus narrowed markedly.
Elevated oil prices led to a widening of the trade
deficit as well, and weighed on fiscal balances
through increased fuel subsidies to the private
power plants. CPI inflation remained close to 10
percent during much of the year, tied to rapid
credit expansion, administered price increases
and depreciation of the Bangladeshi taka. The
combination of high import demand, elevatedinternational oil prices and taka depreciation(against the dollar) over recent months has led toa significant drawdown in international reserve
holdings to below the equivalent of three months
import cover (a threshold of comfort for
liquidity). While worker remittances inflows
continued to expand in 2011, disruptions in the
Middle East and North Africa, where many

Afghanistan‟s real GDP growth (on a fiscal year
basis) slowed markedly from an unsustainable
20 percent in FY2009/10 to 8.4 percent in
FY2010/11 (ending March 2011).2 Economic
activity in Afghanistan remains highly
dependent on donor aid inflows andreconstruction efforts, as the ongoing fighting
continues to impede private sector economic
activity. The still strong FY2010/11 outturnreflected the continued expansion of foreignassistance and spending on security. On the
supply side, both services and mining showedstrong growth. Activity has remained relatively
strong in the early months of FY2011/12, on
sustained reconstruction (transport services andconstruction activity remain buoyant).
Inflationary pressures rose sharply, reaching
13.3 percent for the fiscal year, reflecting an
upswing in international oil and food prices.
Nepal has also experienced a slowdown in
activity, given ongoing political uncertainty as
the post-conflict transition to a new government

136

Global Economic Prospects January 2012

South Asia Annex

has extended well into its fourth year since thecomprehensive peace agreement was reached in
November 2006. Law and order problems, andpersistent and extensive infrastructure
bottlenecks (electrical shortages are reflected inwidespread load-shedding and unreliable
delivery), reduced real GDP growth to 3.5
percent in FY2010/2011 (ending June-2011)
from 4.6 percent in FY2009/10. Despite somemoderation in domestic demand, inflation
remains elevated (averaging 8.7 percent in thefirst four months of the fiscal year—July throughOctober). The upswing in prices reflects highinternational food and fuel prices, and imported
inflation from India (as Nepal‟s local currency ispegged to the Indian rupee). Tourism arrivals
remained strong, which, along with strengthened
growth of remittances inflows, largely offset arise in the trade deficit tied to deterioration in theterms of trade. The current account deficit
remained steady as a share of GDP of close to
2.9 percent.

Activity has been buoyed by strong growth intourism arrivals, led by vibrant growth ofarrivals from Asia—as China surpassed the U.K.
in 2010 as the largest country of origin for
tourists in the Maldives. Reflecting highinternational commodity prices and strong GDP
growth, inflationary pressures have become
more elevated in both Bhutan and the Maldives.
Inflation remains a serious regional challenge.
Although inflation eased in South Asia during
2011, it has fallen less than in other developing
regions and remains very high (figure SAR 5).
Headline inflation rates were close to or
exceeded double-digit levels throughout much of
the region in 2011. Rather than being a one-off
event, current high inflation reflects years of
rising inflation that has contributed to a gradualentrenchment of high inflation expectations thatis complicating efforts to bring inflation undercontrol.
As elsewhere, high international fuel and foodprices contributed significantly to price pressuresin late 2010 and early 2011, but their influence
was fading by the second quarter of 2011 wheninternational prices were stabilizing or evenfalling. Food prices are of particular importance,
as food represents about 40 percent of theregional household consumption basket.
International prices are particularly relevant for
Afghanistan and the Maldives—where 30
percent to 50 percent of domestic consumptionof grains (including rice, wheat, pulses) is
projected to be imported for the 2011/2012 crop
year.

Among the smaller South Asian economies,
GDP growth decelerated slightly in Bhutan to astill buoyant 8.1 percent in FY2010/11 (ending
June-2011), down from 8.7 percent in
FY2009/10, supported by ongoing constructionof additional hydropower projects, and to alesser extent by largely sustained strong tourism
activity. The Maldives posted a strong recovery
in GDP growth to 9.9 percent in 2011, following
a contraction of 6.5 percent in the previous year.
Figure SAR.5 While easing in South Asia, inflationarypressures remain sharply elevated compared with otherdeveloping countries
median CPI, y/y %-change, seasonally adjusted%

For India, Pakistan, Bhutan and Bangladesh,however, domestic crop conditions and pricecontrols are more important determinants ofdomestic food price inflation. These factors havecontributed to inflationary pressures in theregion in 2011, including floods in Sri Lanka
early in the year and increases in the minimum
domestic support prices in India for rice, wheat,pulses and oil-seed to bring them more in linewith costs and international prices (to reduce
fiscal outlays and market distortions). 3
Administered fuel price increases in Bhutan,
India, the Maldives, Nepal and Pakistan have

12
11

10
South Asia

Developing Countries

9
8
7
6
5
4
3
2

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011p

Source: World Bank

137

Global Economic Prospects January 2012

South Asia Annex

Figure SAR.6 Actual and expected short-run inflation inSouth Asia

Figure SAR.7 Exchange rates depreciated across muchof South Asia since end-2010

Consensus surveys for current year CPI (month published) and quarterly
actuals, annual percent change, medians and trendlines

nominal LCU/$, Depreciation > 100 < appreciation

15

Index Dec-2010 = 100125Consensus Survey

120

Actual115

Linear (Consensus Survey)
10110Linear (Actual)

105
100
95
5

90

Bangladesh

Sri Lanka

85

Maldives

India

80

Pakistan750

Jun-08Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11

Dec-08Jun-09Dec-09Jun-10Dec-10Jun-11

Dec-11

Sources: Consensus and World Bank

Sources: IMF and World Bank

also contributed to price pressures, although passthrough of international price increases has been
incremental and partial, such that some targeted
local food and fuel prices remain subsidized tovarying degrees (and below international levels).
For Bhutan and Nepal, with local currencies
pegged to the Indian Rupee, sustained highinflationary pressures in India have been an
important driver of local inflation. Sustained
elevated inflationary pressures have also led to arise in inflation expectations (figure SAR 6).

since March 2010 to 8.5 percent as of endOctober 2011. As a result, implicit real lending
interest rates in India shifted into positive
territory from early-2011, although at about 1.5
percentage points they are not particularly high(compared with about 4 percentage points in
Brazil). Monetary tightening in Pakistan brought
about positive real lending rates in early 2011 as
well, the first time since late 2009 (figure SAR
8).
South Asia’s general government fiscal deficit—
projected at 8.3 percent of GDP in 2011 andsignificantly higher than in most other regions—is down only slightly from 8.8 percent in 2010.

Regional monetary policy authorities face
several challenges in reducing inflation. Morerecently, currency devaluation has contributed toinflation as well (figure SAR 7). In Bangladesh
and Pakistan, monetary authorities have also
been monetizing the deficit, complicating theefficacy of other monetary policy efforts to
reduce inflation. A key factor working against
monetary policy efforts is the overall stance offiscal policy, which despite some consolidation,
remains very loose.

Figure SAR.8 Real lending rates became positive again
in India and Pakistan, reflecting monetary policy
tightening
lending interest rate minus CPI annual, percent
20
Bangladesh
15

India
Pakistan
Sri Lanka

10

Monetary authorities in Bangladesh, India,
Pakistan, and Sri Lanka have responded topersistent price pressures by raising policy
interest rates and/or introducing higher reserve
requirements. The Reserve Bank of India wasamong the first developing countries to begin
tightening after the global crisis, and has hiked it
key policy rate by a cumulative 375 basis points

5

0

-5

-10
Jun-09Sep-09Dec-09Mar-10Jun-10

Sep-10Dec-10Mar-11

Jun-11

Sources: Thomson Datastream, EIU and World Bank138

Sep-11

Global Economic Prospects January 2012

South Asia Annex

Targeted reductions in budget deficits were
missed in a number of countries in the region fora variety of reasons in 2011. In India,
privatization proceeds have been markedly
below target (reflecting equity market volatility
and poor returns) and subsidy outlays haveexceeded targets (particularly due to an upsurgein oil subsidies tied to the sharp devaluation of
the rupee since mid-2011 and sustained high oil
prices). With the slowdown in activity, tax
receipts have failed to meet expected levels. The
shortfall prompted the government to announce
an increase in borrowing for the second half ofthe fiscal year (ending March 2012), which inturn led to a rise in government bond yields,
raising the burden of interest payments. Slower
revenue growth has contributed to larger fiscal
deficits in Bhutan, Nepal and Pakistan. On the
expenditure side, fertilizer, food and fuelsubsidies (on and off-budget) remain asignificant burden on regional fiscal coffers. In
Bhutan, a rise in capital expenditures was a key
factor behind the expansion of the fiscal deficit.
Other structural factors are at play across theregion, including rising debt-servicing charges ina number of countries, while the region‟s low tax
base makes consolidation especially challenging.

toward higher-growth developing countries(China) and away from traditional export
markets in slower-growing Europe and theUnited States. While export activity wasespecially robust in the first half of 2011, as
demand from abroad faltered it lost significant
momentum later in the year. (figure SAR 9).
Regional merchandise import volume growth
remained robust as well, reflecting strong
domestic demand, which combined withdeterioration in the terms of trade increased theregional current account deficit. Terms of tradelosses are estimated at about 1.9 percent of GDP
for the region in aggregate, led by a 4.3 percent
of GDP decline for Nepal, while Bangladesh and
Sri Lanka saw a smaller negative impact of close
to 1.5 percent of GDP, and India and Pakistan
saw negative impacts of close to 1.8 percent of
GDP (estimated January through September
2011 terms of trade impacts relative to 2010).
Worker remittances remain a critical source of
foreign exchange in South Asia.4 Remittances
inflows rose in US-dollar terms by 10.1 percent
in 2011 to an estimated $90 billion, which
helped to offset large trade deficits. This is aslight acceleration from the 9.5 percent
expansion of remittances inflows in 2010,reflecting strengthened activity in host countries,
particularly in the high-income oil exporting
countries of the Arabian Gulf, where highpetroleum prices have supported strengthened
GDP outturns (through fiscal expenditures andincreased social spending). While India and
Nepal are estimated to have recorded a slowing
in the pace of growth in remittances inflows,
remittance inflows to Pakistan rose by an
estimated 25 percent in 2011, partly in responseto the widespread flooding in the second half of2010. When measured in local currency terms,
given the appreciation of the dollar, remittances
inflows to the region grew by a more vibrant 13
percent in 2011 (median rate). Adjusting for
inflation, worker remittances inflows to theregion grew by a less robust 5.8 percent (medianrate) in local currency terms.

Trade faltered late in 2011 following an upsurge.
Regional export volumes grew by roughly onefourth in 2011, buoyed by healthy textile exports
and tourism receipts in particular. External
demand firmed, supported especially by a shift
in export market composition in recent years
Figure SAR.9 The pace of export volume growth fell-off
sharply in late-2011
3m/3m saar-%
200
India
Sri Lanka
Pakistan

150

Developing excl. South Asia

100

50

0

-50
Jan-10

Apr-10Jul-10

Oct-10Jan-11

Apr-11

Jul-11

Oct-11

Sources: Thomson Datastream, IMF and World Bank

139

Global Economic Prospects January 2012

South Asia Annex

Table SAR.2 Net capital flows to South Asia
$ billions
Current account balance
as % of GDP
Financial flows:
Net private and official inflows
Net private inflows (equity+private debt)..Net private inflows (% GDP)Net equity inflows..Net FDI inflows..Net portfolio equity inflows
Net debt flows..Official creditors....World Bank....IMF....Other official..Private creditors....Net M-L term debt flows......Bonds......Banks......Other private....Net short-term debt flows
Balancing item /aChange in reserves (- = increase)
Memorandum items
Migrant remittances /b

2004
-1.0
-0.1

2005
-14.8
-1.5

2006
-16.5
-1.4

2007
-17.1
-1.2

2008
-49.3
-3.3

2009
-26.9
-1.7

2010
-52.7
-2.6

2011e
-64.7
-3.0

2012f
-54.8
-2.3

2013f
-65.2
-2.5

21.2
21.5
2.4
16.8
7.8
9.0
4.4
-0.3
2.3
-0.3
-2.3
4.7
4.0
3.9
0.5
-0.3
0.7
7.5
-27.6

28.6
25.7
2.5
23.6
11.2
12.4
4.9
2.9
2.3
0.0
0.6
2.1
-0.2
-2.8
2.8
-0.2
2.3
-7.0
-6.8

77.1
73.5
6.4
36.5
26.1
10.4
40.2
3.5
2.0
-0.1
1.7
37.1
20.2
6.4
13.6
0.2
16.8
-18.9
-41.7

116.4
111.9
7.6
66.7
32.7
34.0
49.3
4.4
2.0
-0.1
2.5
45.2
32.3
10.7
21.5
0.1
12.9
4.5
-103.8

64.8
55.9
3.7
35.2
51.1
-15.8
28.5
8.8
1.4
3.2
4.2
20.7
12.8
1.7
11.2
0.0
7.9
-41.8
26.3

86.2
75.2
4.6
59.9
39.4
20.5
18.8
11.0
2.4
3.6
5.0
15.2
12.6
1.9
10.8
-0.1
2.6
-20.0
-39.3

111.5
101.9
5.0
67.4
28.0
39.4
21.1
9.6
3.3
2.0
4.4
34.5
22.8
10.1
12.8
-0.1
11.7
-36.5
-22.3

90.4
83.9
3.9
43.9
34.9
9.0

78.2
3.3
45.2
32.2
13.0

99.2
3.7
53.2
35.2
18.0

6.5
2.0
0.5
4.0
40.0
30.0
5.0
25.0
0.0
10.0
-5.2
-20.5

33.0

46.0

28.7

33.9

42.5

54.0

71.6

75.1

82.2

90.5

97.2

105.0

Note : Only for Afghanistan, Bangladesh, Bhutan, India, M aldives, Nepal, Pakistan and Sri Lanka.
e = estimate, f = forecast/a Combination of errors and omissions and transfers to and capital outflows from developing countries.
/b M igrant remittances are defined as the sum of workers‟ remittances, compensation of employees, and migrant transfers

Source: World Bank.

International reserve positions in South Asia
have generally improved since mid-2008. Latest
readings of foreign currency holdings wereequivalent to at least three-months ofmerchandise imports in India, Pakistan and Sri
Lanka, and rose in all cases with the exceptionsof Bangladesh (where they have fallen in recent
months to bellow three months import-cover)and India (where they remain comfortably highat close to eight months). (figure SAR 10).
External liquidity positions, however, arerelatively more exposed than other developing
countries when measured against short-term
debt. In India, short-term external debt has risen
significantly since late-2010, likely reflecting arise in trade finance with the rapid trade growth
witnessed in the first half of 2011. However, thebuild-up in short-term debt has coincided with
monetary policy interest rate hikes, and Indian
corporations have also apparently sought
external financing to avoid higher domestic
borrowing costs. Measured as a share of foreignexchange reserves, many countries in South Asia
report significantly higher ratios of short-term

Capital flows
As witnessed in most developing regions in
2011, net private capital inflows (excluding
official inflows) to South Asia declined in 2011
to $83.9 billion, largely driven by declines in net
portfolio equity inflows to $9 billion and in net
international private bond issuance to $5 billion(table SAR.2). The retreat in portfolio flows
from the high level of 2010 reflects a generalheightened degree of risk aversion byinternational investors in the second half of theyear.
In contrast, FDI inflows to South Asia
strengthened markedly in 2011, to a projected$34.9 billion from $28 billion in 2010. The risein net FDI inflows was largely due to a recovery
of inflows to India, which accounts for the lion‟sshare of FDI in the region and had recorded a
sharp fall-off in 2010. Despite the rebound in
India, FDI inflows to the region in aggregate
remain down by nearly one third from the 2008
peak of $51.1 billion.

140

Global Economic Prospects January 2012

South Asia Annexdebt than other developing countries (which
averaged 17 percent in the second quarter of2011). Short-term debt in India represented 41
percent of foreign exchange reserves in thesecond quarter of 2011, followed by 37 percent
in the Maldives and 36 percent in Bangladesh(figure SAR 11). To the extent that short-term
debt obligations are not tied to trade finance,
countries with elevated levels could facechallenges in rolling over debt, should global
financial conditions suddenly deteriorate.

Medium-term outlook
South Asian GDP growth is projected to ease to
5.8 percent in 2012 from an estimated 6.6
percent in 2011, before strengthening to 7.1
percent in 2013 (in calendar year terms). The
slowdown in growth in 2012 reflects continued
deceleration in investment growth tied to avariety of factors, including domestic policy
paralysis and uncertainty about regulatory
reforms, deterioration in international investor
sentiment, heightened uncertainty and weaker
external demand from high-income Europe anddeveloping countries.

Figure SAR.10 Reserves in months import cover havegenerally improved since mid-2008, but latest readings
dipped below 3-months in Bangladesh and Maldives

The projected deceleration in economic activity
also reflects the anticipated deepening traction of
the more restrictive monetary policy conditions
introduced over the course of 2011 andcontinued progress (albeit gradual) toward
programmed fiscal consolidation. Higher interest
rates and increases in regulated prices areprojected to induce a slowing in consumer
demand, while high interest rates and a more
somber business outlook are expected to slow
investment growth—contributing to significantly
weaker imports during 2012. Meanwhile demand
for the region‟s exports is projected to slow in2012 and lead to a near halving of export growth
to 11.6 percent in 2012 from 21 percent in 2011,
due to stagnant GDP in the European Union andthe projected global slowdown—including theinfluence of tighter monetary policy in China
and fiscal consolidation in Europe (which will
particularly hit South Asia‟s tourism receipts).

months12108Jun-08
MRV-2011

6

3-months equivalent

4

2

0
India

Bangladesh

Maldives

Sri Lanka

Pakistan

Sources: IMF, Thomson Datastream and World Bank
Figure SAR.11 South Asia's short-term debt relative toreserves is elevated compared with other developing
countries
Short-term debt as a %-share of f oreign currency reserves
Q2-2011, LMICs=Low and Middle Income Countries, SA=South Asia%

Regional inflationary pressures are projected tocome down over the forecast horizon, assuming
continued expansion of crop production (India,
Pakistan, Sri Lanka) and a decline ininternational fuel prices (reflecting weakerglobal activity in 2012). A good crop year
(2011/2012) in much of the region and sustained
high regional stocks are providing a buffer for
grain prices and import demand in 2012.5 (table
SAR.3) Lower inflation should provide a
relatively limited impetus to household spending
because the deceleration in price pressures is
expected to be halting and incremental. A
projected slow moderation in inflation reflects

45
40
35
30
25
20
15
10

5
0

India

Maldives

Bangladesh

Sri Lanka

Pakistan

LMICs excl. SA

Sources: Bank for International Settlement and World Bank

141

Global Economic Prospects January 2012

South Asia Annex

Table SAR.3 South Asia's grain supply and demand balances
1,000 metric tons, unless otherwise noted

Production
y-o-y % growth

2004/2005

2005/2006

2006/2007

2007/2008

2008/20092009/20102010/20112011/2012p

280,608

286,947

296,253

315,659

323,189

325,141

345,942

357,831

-2.4

2.3

3.2

6.6

2.4

0.6

6.4

3.4

18,71020,72923,117

26,13440,76745,391

48,60849,233y-o-y % growth

-20.6

10.8

11.5

13.1

56.0

11.3

7.1

1.3

% share of use

7.4

8.1

8.8

9.5

15.0

16.8

16.9

16.6

251,320

255,843

262,345274,532

272,303

270,787

287,354295,888

-0.2

1.8

2.5

4.6

-0.8

-0.6

6.1

3.0

Ending stocks

Domestic consumption *y-o-y % growth

Countries = Bangladesh, India, Nepal, Pakistan, Sri Lanka.

*Excluding feed consumption.
Sources: United States Department of Agriculture (1 November 2011) and World Bank.

the still incomplete pass-through of higher
international commodity prices and entrenchedinflationary expectations. With respect to thelatter, inflation expectations in India haveremained at double digit rates since the fourth
quarter of 2009—with „one-year ahead‟ expected
rates at 12.9 percent in the third quarter of 2011.6
This 3.8 percentage point wedge above theactual 9.1 percent rate reported for the quarter
underscores the degree to which higher pricepressures have become entrenched. (figure SAR
12).

Figure SAR.12 India's household inflation expectations
increased mid-2011, despite fall in the actual inflation
ratemean inf lation rates for given survey quarter
17
Current perceived

15
1-Year Ahead
13

Actual CPI
Linear (Current perceived)

11

Linear (1-Year Ahead)
Linear (Actual CPI)

9

7

5

Despite slowing exports (see above), lower
import demand and lower import prices should
reduce the region‟s current account deficit to an
estimated 2.3 percent of GDP in 2012 from 3.0
percent in 2011. Nevertheless, while oil prices
are projected to moderate over the forecasthorizon, they are expected to remain relatively
high—falling incrementally only to $100.8/bbl
in 20137—and thus the regional oil import bill is
expected to remain a significant burden on
external balances.

3

Q3-2006

Q2-2007

Q1-2008

Q4-2008

Q2-2009

Q1-2010

Q4-2010

Q3-2011

Sources: Reserve Bank of India and World BankSouth Asia from the GCC, where most of theregion‟s estimated 9 million migrants are based(3.3 million in Saudi Arabia and 2.9 million in
the U.A.E.), are projected to remain fairly
resilient however, tied to Arab Spring related
stimulus measures (social spending).8 For
example, Saudi Arabia‟s increased nonhydrocarbon spending (on public employment,
unemployment benefits, etc.) is estimated toequal about 11 percent of GDP in FY2011/12.
This is likely to be reflected in higher remittanceoutflows, particularly to Pakistan, India and
Bangladesh. Saudi Arabia is host to 21.5 percent,12.8 percent, and 8.3 percent of the total
emigrant population, respectively, from
Pakistan, India and Bangladesh.9 The countries
facing ongoing political upheaval in the Middle
East (Egypt, Libya, Syria, Tunisia, and Yemen)

Remittances inflows to South Asia are projected
to rise 7.4 percent in 2012 in US dollar terms
and continue to represent significant support toregional current account positions. This
deceleration in the pace of growth from anestimated 10.1 percent rise in remittances
inflows in 2011 reflects a projected slowing inhost country activity, particularly in high-income
Europe and the Gulf Cooperation Council (GCC)
countries (Saudi Arabia, the U.A.E, Kuwait,
Qatar, Bahrain and Oman). Worker transfers to142

Global Economic Prospects January 2012

South Asia Annex

do not represent large migrant host countries forSouth Asia.10

2013, rising by a projected 26.8 percent
following a projected contraction of 6.8 percent
in 2012 (reflecting continued relatively highinvestor uncertainty in 2012 tied to ongoingdeleveraging in high-income countries).

GDP growth in South Asia is projected
strengthen in 2013 to 7.1 percent from a
projected 5.8 percent in 2012 (in calendar year
terms), led by firming private sector activity, as
inflationary pressures recede sufficiently toallow monetary authorities to pursue lessrestrictive stances (table SAR.4). In particular,
acceleration of investment growth is forecast to
be supported by lower inflation and some
improvement in fiscal balances, which will
support cheaper access to credit. Additionally,
programmed large investment and reconstruction
projects in Afghanistan, Bangladesh, Bhutan,
India and Sri Lanka should contribute to stronger
growth outturns in 2013, boosting productivity
and potential output. External demand is
expected to revive in 2013, which along withimproved international investor sentiment is
expected to support stronger regional growth.

Risks and vulnerabilities
As discussed in the main text, the risk of aserious downturn in the global economy is high.
Downside scenarios suggest the possibility ofmuch lower growth outturns globally and for theregion. Should external demand falter
appreciably, South Asia‟s capacity to respondwith countercyclical measures has been greatly
reduced, with government deficits in 2011 at 8.3
percent of regional GDP versus 4.1 percent in2007 before the onset of the crisis in 2008
(figure SAR 13). Given high inflation, the scopefor monetary policy easing is also limited,
although this could be tempered by easing
inflationary pressures should the externalsituation deteriorate sharply, as the downside
scenarios described in the main text would also
result in a significant decline in oil prices.

Net foreign private capital inflows to South Asia
are forecast to support investment activity in
Table SAR.4 South Asia forecast summary(annual percent change unless indicated otherwise)
98-07aGDP at market prices (2005 US$)GDP per capita (units in US$)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 (%)

b,fMemo items: GDP at market prices fSouth Asia excluding India
India
at factor cost
Pakistan
Bangladesh

2008

2009

Est.
2010

Forecast
2011
2012

2013

6.0
4.4
6.0
4.9
3.8
8.9
14.0
9.2
-0.1
-0.4
5.7
-7.0

6.0
4.5
6.0
7.2
16.9
5.7
14.9
25.8
-3.3
-3.3
7.8
-9.9

6.1
4.7
6.1
6.5
12.3
3.5
-7.1
-6.5
0.3
-1.7
6.9
-9.4

9.1
7.7
9.1
8.2
3.6
12.1
12.8
10.4
-0.2
-2.6
11.3
-8.8

6.6
5.3
6.6
5.3
7.1
6.0
21.0
13.4
0.8
-3.0
9.9
-8.3

5.8
4.5
5.8
4.9
7.1
5.6
11.6
8.5
0.3
-2.3
8.9
-7.9

7.1
5.8
7.1
5.7
5.2
11.1
17.6
16.3
-0.4
-2.5
7.7
-7.2

4.5
6.2
5.0
5.0

4.8
4.9
6.8
1.6
6.2

3.9
9.1
8.0
3.6
5.7

5.1
8.7
8.5
4.1
6.1

5.1
6.5
6.8
2.4
6.7

4.8
6.5
6.8
3.9
6.0

4.8
7.7
8.0
4.2
6.4

a. Growth rates over intervals are compound average; growth contributions, ratios and the GDP
deflator are averages.
b. GDP 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 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.

Source: World Bank

143

Global Economic Prospects January 2012

South Asia Annex

A deepening of the Euro Area crisis would leadto weaker exports, worker remittances andcapital inflows to South Asia. The EU-27
countries account for a significant share of South
Asia merchandise export markets, although not
as much as for some developing regions. (figure
SAR 15). The Euro Area represents about onefourth of South Asia’s merchandise export
market, of which Germany and France accountfor 40 percent and 20 percent, respectively.
Moreover, export financing from Europe, an

important component of the region’s trade credit,
is particularly vulnerable to drying up, as was
the experience during the 2008 financial crisis.
At the country level, Bangladesh, the Maldivesand Sri Lanka are particularly exposed to adownturn in European demand for merchandise.
(figure SAR 16). With respect to services,
tourism sectors could be especially hard hit in
Sri Lanka and the Maldives, although greater
diversification (with booming arrivals fromAsia) should provide a buffer. However, there
could be some countercyclical benefits for goods
exporters ("Walmart effect") for some sectors(e.g., for Bangladesh's garment industry).
Additionally, a slowdown in global activity
would likely translate into lower oil prices that

Figure SAR.13 Fiscal space has diminished acrossmost of South Asia compared with 2007

Figure SAR.15 The EU-27 countries represent
over one-fourth of South Asia's export market(figure SAR 14). A sharp fall in fuel prices
would also help reduce pressure on fiscal
balances, given remaining administered pricecontrols and fuel subsidies.

Merchandise exports to EU, share of total, 2008-2010
averages

General government balance as percent share of GDP
060%
EU-27 Total
50%-2High-spread EU (Greece, Italy, Ireland, Portugal, Spain)

-4

40%

-6
30%

-8
-10

2007

-12

2011e

20%

10%

-14
0%

-16
Maldives

India

Sri Lanka

Pakistan Bangladesh

Nepal

Latin America& Caribbean

Afghanistan

East Asia &Pacif ic

Sub-SaharanAf ricaSouth Asia

Middle East &Europe &North Af rica Central Asia

Sources: IMF and World Bank

Sources: World Bank and UN COMTRADE (WITS)

Figure SAR.14 Real interest rates indicate somescope for easing, and much improved positions inPakistan and Sri Lanka since 2008

Figure SAR.16 Maldives and Bangladesh havehighest exposure to EU-27
Merch exports to EU, share of total, 2008-2010 averages

Lending interest rate minus annual CPI growth rate (%-pt difference)60%

8EU-27 Total

650%

High-spread EU (Greece, Italy, Ireland, Portugal, Spain)

4
40%

2
0

30%

-2

Real interest rate 1H-2008-4

Real interest rate 1H-2011

20%

10%

-6
-8

0%

Bangladesh

India

Pakistan

Sri Lanka

BhutanSources: EIU, Thomson Datastream and World Bank

Afghanistan

Nepal

India

Pakistan

Sri Lanka

Maldives Bangladesh

Sources: World Bank and UN COMTRADE (WITS)

144

Global Economic Prospects January 2012

South Asia Annex

would ease pressures on current account andfiscal balances for the oil import-dependent
region.

The delay in adjusting prices has resulted insome slippage in fiscal consolidation and will
require monetary policy to maintain a restrictive
posture for a longer period than otherwise might
have been required (had pass-through been more
immediate). Sustained higher policy interest
rates could hinder investment activity, attract
large capital inflows and complicate monetary
policy—further emphasizing the need for fiscal
consolidation—although in the current
environment (favoring low-risk assets and aflight-to-safety) this is less of a risk.

Worker remittances inflows—which wereequivalent to 5 percent or more of GDP in 2010
in Nepal (20 percent as of 2010) Bangladesh (9.6
percent), Sri Lanka (7 percent) and Pakistan (5percent)—could slow markedly through second
round effects of weakened domestic demand in
migrant host-countries, largely located in the
Arabian Gulf.
The rise in South Asia‟s financing needs (current
account financing and debt repayment)—
projected at 8.4 percent of GDP in 2012, up from
5 percent in 2007 (the only region to post an
increase over the period)—increases the region‟svulnerability to a rise in global risk aversion.
India is particularly vulnerable within SouthAsia, as it is the most integrated with global
financial markets. India‟s short-term external
debt (with remaining maturity of less than oneyear, according to the Bank of International
Settlements) rose to $128 billion (6.8 percent ofGDP) in the second quarter of 2011, and total
external financing needs are projected to reach
9.8 percent of GDP in 2012. The Maldives and
Sri Lanka, with external financing needs
projected at 18 percent and 7.0 percent of GDP
in 2012, respectively, are also highly exposed.
Countries heavily reliant on foreign assistance,such as Afghanistan, Nepal and Pakistan, could
be hit hard if fiscal consolidation in high-income
countries were to result in cuts to overseas
development assistance.

While there has been some progress towardfiscal consolidation, large regional fiscal deficits
continue to pose important downside risks togrowth, by crowding out private investment(particularly given shallow domestic financial
markets) and contributing to excess demand thathas translated into sustained high import growthand expanded regional current account deficits.
In other words inadequate progress in fiscal
consolidation focused on recurrent expenditures
reduces the capital stock over time, undermining
growth prospects. Reductions in fiscal deficits
have been less than programmed. Additional
fiscal slippage could trigger higher thanprojected inflationary pressures and constrain
policy options further in the event of future
crises. At one extreme, the Maldives‟ general
government fiscal deficit is unsustainably high(projected at 15.5 percent of GDP in 2011),
which has led to an upsurge in public debt andrequires vigilant fiscal consolidation. While
much less severe, India‟s fiscal deficit, and theconcomitant rise in short-term external debt,
appears to be placing continued pressure on
domestic financial intermediation and increasing
the country‟s vulnerability to a sudden tighteningof international credit markets.

Other risks are also prominent in South Asia.
Continued large inflation differentials with othercountries would put upward pressure on realeffective exchange rates, undermining
competitiveness, discouraging foreign
investment and slowing productivity growth.
International commodity prices—albeit easingfrom early-2011 highs—also remain elevatedand continue to represent an important negativerisk factor for South Asia. Given politicalresistance to reducing subsidies, governments
have postponed the pass-through of higher
international prices over the past couple of years.

Policy options
While South Asia is relatively insulated frominternational financial market turbulencecompared to other more integrated regions, theweak global economic trajectory will
nonetheless likely have an adverse impact on theregion. Given the lack of fiscal space in SouthAsia, inflationary pressures and consequent145

Global Economic Prospects January 2012

South Asia Annex

limited room for monetary policy easing, fiscal
consolidation through greater revenue
mobilization (particularly in Pakistan, Sri Lanka,
Bangladesh, and Nepal) and expenditure
rationalization (especially in India) could play a
key role in helping to protect critical social
programs. Governments should also look atfurther improving the targeting of its safety nets
and capacity to respond to a crisis to improve
efficiency of social safety net programs.
Expanding the drivers of growth also holds
potential. With markets in the United States andEurope expected to experience prolonged
weakness, South Asian countries have theopportunity to re-think and pursue new sourcesof growth for their countries. Unlike East Asia,
which has depended greatly on developed
country markets for its export-led growth, South
Asia faces less adjustment costs fromrebalancing demand sources, and can more
readily look for new growth drivers in both
domestic and external markets. This may include
focusing on export growth toward faster growing
emerging markets, as well as internal market
enhancements through structural and governancereforms. Such actions would help boost export
demand, help raise investment, provide better
jobs and generate an environment for more
inclusive growth.

See Global Economic Prospects, June 2010
“Box SAR 1 GDP reporting practices—market price versus factor cost and calendar
year versus fiscal year”, p. 116: http://
siteresources.worldbank.org/INTGEP/
Resources/335315-1307471336123/7983902-1307479336019/SA-Annex.pdf.

2

The exceptionally strong FY2009/10 outturnreflected a record harvest and rebound froma severe and extended period of drought.
Additionally, aid inflows rose sharply in the
year.

3

In the event that domestic market prices fall
below the government‟s minimum price, thegovernment provides payments to producers.

Nepal, Bangladesh, and Sri Lanka, wereamong the top 15 recipients of remittances in
2010—with inflows representing theequivalent of 20 percent of GDP in Nepal,
9.6 percent in Bangladesh, 6.9 percent in Sri
Lanka, 5.0 percent in Pakistan and 3 percent
in India.

5

U.S. Department of Agriculture, PSD(Production, Supply, Demand) database.

6

The public's expectations for inflation, basedon surveys conducted by the Reserve Bankof India.

7

World Bank crude oil price, which is a
simple average of the prices for Brent, Dubai
and West Texas Intermediate.

8

Institute of International Finance, Global
Economic Monitor, November 2011.

9

World Bank, Development Economics,
Migration and Remittances, Prospects Group(see http://go.worldbank.org/JITC7NYTT0).

10 The net impact of the Arab Spring on
external demand for labor appears positive,
with the main migrant host countries in the
GCC benefitting from production stoppages
that have contributed to elevated oil prices.
The related increase in social spending has
also buoyed local activity.

Notes:
1

4

146

Global Economic Prospects January 2012

Sub-Saharan Africa Annex

Sub-Saharan Africa Region
As has been the case in recent years, domestic
demand was the main source of growth, withexternal demand - supported by higher
commodity prices - also providing a strong
impetus, notwithstanding the perturbations to theglobal economy.

Recent developments
Despite multiple shocks - heightened uncertainty
and slowdown in the global economy, volatileand high fuel and food prices, disruptions to
supply chains from the Tohoku earthquake, andbad weather conditions for some countries in theregion - growth in Sub-Saharan Africa continued
briskly in 2011.

The rebound in merchandise exports was
supported by higher commodity prices. Export
values in the region were up some 38 percent for
the first seven months of 2011 compared withthe same period in 2010. In recent years, trade
growth has been supported by the increasing
diversification of trading partners (box SSA.1)
and commodity prices. In 2011, much of theincrease was due to higher commodity prices.
With commodities dominating their exports,
most Sub-Saharan Africa countries, benefitted
from the surge in commodity prices in the earlier
half of 2011, particularly oil exporters (figure
SSA.3). Metal and mineral exporters in theregion also benefitted from the recovery inindustrial production at the global level andcotton exporters were also net gainers. However,
not all Sub-Saharan Africa economies benefitted
from a positive terms of trade. Indeed, several
predominantly agricultural exporters and oil
importers saw a deterioration in their terms ofContinuing on its post-crisis recovery trajectory,
GDP in Sub-Saharan Africa is estimated to have
expanded 4.9 percent in 2011, slightly fasterthan the 4.8 percent recorded in 2010, and justshy of its pre-crisis average of 5 percent (20002008, (figure SSA.1). Excluding South Africa,
which accounts for over a third of the regions
GDP, growth in the rest of Sub Saharan Africa
was stronger at 5.9% in 2011. Indeed, growth in2011 was more than a percentage point higher
than the developing country average excluding
China (4.8%), making it one of the fastest
growing developing regions in 2011. Overall,over a third of countries in the region attained
growth rates of at least 6%, with another forty
percent of countries in the region growing
between 4-6% (figure SSA.2 and table SSA.3).

Figure SSA.2 Fastest Growing Sub Saharan Africa economies in 2011

Figure SSA.1 Growth in Sub Saharan Africa closes
in on pre-crisis average…
Percent growth in GDP
8.0

Ghana

7.0

Rwanda6.0

Eritrea

5.0

Ethiopia

4.0

Mozambique

Sub Saharan Africa

Nigeria

3.0

Sub Saharan Africa ex. South Africa

2.0

Sub Saharan Africa pre-crisis average

1.0

2011

Angola2010

Democratic Republic Of Congo

Developing countries average ex. China

Zambia0.0

Botswana-1.0

Tanzania

-2.0
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

0

2011

Source: World Bank

Source: World Bank.

147

2

4

6

8

10

12

14

16

Global Economic Prospects January 2012

Sub-Saharan Africa Annex

Box SSA.1 Changing dynamics of trading partners
Growth in Sub-Saharan Africa exports has been supported by strong demand from other developing countries, inparticular China, given its relatively high resource intensity in production and its fast growth rate. Though highincome countries are the destination for some 57 percent of the exports originating from Sub-Saharan Africa, weakgrowth means that their contribution to the total growth of the sub-continent‘s exports is much smaller. As a result,the share of high-income countries in total Sub-Saharan exports is falling. For instance in 2002, the EU accounted
for some 40 percent of all exports from Sub-Saharan Africa, but by 2010 that share had fallen to about 25 percent– while China‘s share has increased from about 5 percent to 19 percent over the same period. For the first sevenmonths of 2011, growth in exports destined for China from Sub-Saharan Africa was 10 percentage points higher
than those destined for high-income countries.
Further, even though intra-regional trade in Sub-Saharan Africa remains well below potential due to weak infrastructure, lack of harmonization of trade policies and cumbersome border procedures, recent efforts to addressthese deficiencies are beginning to bear fruit. In East Africa where trade integration is more advanced, intraregional trade has been expanding relatively rapidly. According to data from the Central Bank of Kenya, exports toother East African Community members (Uganda, Tanzania and Rwanda), during the first seven months of 2011,
exceeded its combined exports to traditional trading partners such as the U.K, Netherlands, Germany, France, as
well as the US.

trade. For a number of countries, these shocks
c o mpr o mi se d t h e r e l at i vel y st a bl e
macroeconomic environment they had hitherto
enjoyed (e.g. Ethiopia and Kenya).

mine, and Liberia and Sierra Leone commenced
iron-ore exports.
Services exports, mainly tourism, also picked up.
According to the World Tourism Organization,international tourist arrivals were up 7 percent in
Sub-Saharan Africa for the first eight months of
2011, compared with the same period in 2010.
The slower growth in Europe does not appear tohave limited tourism arrivals, in part because
tourist arrivals to competing destinations inNorth Africa were hurt by the Arab Spring
uprisings. In addition, a number of tourist
destinations in the region were successful inattracting new tourists from Asian countries. For
example, in Mauritius, where European tourists
account for some 64 percent of tourist arrivals,
arrivals from Europe grew at 3.8 percent,whereas arrivals from Asia increased by 21.7
percent (53.6 percent increase from China)
during the first half of 2011.

Though commodity prices were the main driverof the increase in export values, thanks toincreased exploratory activities, new mineralexports continue to come on stream in several
countries, augmenting volumes and boosting
growth. Ghana, the region‘s fastest growing
economy in 2011, benefitted from thecommencement of oil exports. Mozambique alsobegan exporting coal from its large Moatize
Figure SSA.3 Oil Exporters benefit the most fromTerms of Trade changes
Terms of Trade changes as share of GDP (%) , January -September 2011.
Equatorial Guinea
Congo, Rep.

Gabon
AngolaNigeria

Increased export earnings provided the needed
foreign exchange to boost capital goods imports.
The value of capital goods imports increased by
32.2 percent during the first seven months of
2011, compared with the same period in 2010.
With infrastructure a binding constraint andobsolete machinery impairing productivity, theability to obtain capital goods is critical for
growth over the long term. Indeed, several
studies on the determinants of long-run growthZambiaBenin
Mali
Malawi
Sierra Leone
Mauritius
SenegalEritrea
Kenya
LesothoCape Verde
Seychelles
-15

-10

-5

0

5

10

15

20

25

Source: World Bank

148

Global Economic Prospects January 2012

Sub-Saharan Africa Annex

in Sub-Saharan Africa countries findinfrastructure investment to be a robust
determinant.1of the economy, and with the capital intensive
nature of investments, this likely means limited
job creation.

Foreign direct investment flows to Sub-SaharanAfrica picked up in 2011. According to WorldBank estimates (table SSA.1), FDI flows to SubSaharan Africa increased by 25 percent in 2011
following two years of decline (declines wereconcentrated among the region‘s three largest
economies - Angola, Nigeria, and South Africa with the rest of the region experiencing gains).
Supported by high commodity prices andregulatory improvements, the extractive sector
has attracted much of the increase in the value of
FDI flows to Sub-Saharan Africa. For many
countries in the region, FDI in the oil, basemetals, and minerals sectors underpins much of
the strong GDP growth in recent years (e.g.
Angola, Congo Republic, and Niger).

However, foreign investment (mainly private
equity—see box SSA.2) in the non-extractive
sector has also picked up in recent years –reflecting opportunities opened up by strong
growth in the region, improved regulation, agrowing middle class with higher discretionary
income ($275 billion by one estimate), the fast
pace of urbanization which makes it easier toreach consumers, and one of the highest rates ofreturn globally (UNCTAD, World Investment
Report, 2008).
Government public investment projects,
sometimes in partnership with others, continued
to support Sub-Saharan Africa growth in 2011.
With weak infrastructure identified as one of themain binding constraints and with an estimatedinfrastructural funding gap of some $32 billion
p.a (World Bank 2009), recent public
investments have focused on power,

Unfortunately, the enclave nature of extractive
activities, means that such FDI flows to thesector have generated fewer linkages to the rest
Table SSA.1 Net capital flows to Sub-Saharan Africa$ billions
Current account balance
as % of GDP
Financial flows:
Ne t private and official inflows
Ne t private inflows (e quity+private de bt)..Net private inflows (% GDP)Net equity inflows..Net FDI inflows..Net portfolio equity inflows
Net debt flows..Official creditors....World Bank....IMF....Other official..Private creditors....Net M-L term debt flows......Bonds......Banks......Other private....Net short-term debt flows
Balancing item /aChange in reserves (- = increase)
Memorandum items
Migrant remittances /b

2004
2.2
0.4

2005
19.4
3.1

2006
19.8
2.7

2007
-0.9
-0.1

2008
-11.9
-1.2

2009
-28.1
-3.0

2010
-37.7
-3.5

2011e
-5.8
-0.5

2012f
-11.1
-0.9

2013f
-13.0
-0.9

24.2
21.9
4.0
17.8
11.2
6.7
6.4
2.3
2.5
-0.1
0.0
4.0
2.7
0.6
2.4
-0.3
1.4
-4.7
-21.6

33.6
34.5
5.4
26.6
18.6
8.1
6.9
-0.9
2.4
-0.4
-2.9
7.9
4.9
1.3
3.8
-0.3
3.0
-33.1
-20.0

38.4
40.4
5.4
33.0
16.2
16.8
5.4
-1.9
2.2
-0.1
-3.8
7.4
-2.0
0.3
-1.7
-0.7
9.4
-25.8
-32.4

52.6
49.8
5.8
38.4
28.3
10.1
14.6
2.8
2.4
0.1
0.3
11.3
7.1
6.5
1.3
-0.8
4.3
-24.8
-26.9

42.6
37.6
3.8
31.8
37.5
-5.7
10.0
4.9
1.9
0.7
2.3
5.9
1.4
-0.7
2.2
-0.1
4.5
-19.8
-10.9

47.2
37.4
4.0
43.0
32.8
10.2
5.1
9.8
3.1
2.2
4.5
-5.6
4.3
1.9
1.6
0.8
-9.9
-16.4
-2.7

53.5
40.5
3.7
36.5
28.5
8.0
16.3
13.0
4.0
1.2
7.9
3.9
2.5
1.4
0.7
0.4
1.5
-17.6
1.8

62.8
48.2
3.9
39.5
35.6
3.9

45.8
3.5
40.3
35.8
4.5

60.0
4.4
52.0
47.0
5.0

14.6
4.2
1.0
9.4
8.7
10.7
7.2
3.5
0.0
-2.0
-40.2
-16.7

5.5

8.0

8.3

9.6

12.8

18.8

21.7

20.2

21.1

22.7

24.1

25.7

Source: The World Bank
Note :e = estimate, f = forecast/a Combination of errors and omissions and transfers to and capital outflows from developing countries.
/b M igrant remittances are defined as the sum of workers‘ remittances, compensation of employees, and migrant transfers

Source: World Bank.

149

Global Economic Prospects January 2012

Sub-Saharan Africa Annex

Box SSA.2 Recent private equity activity in Sub-Saharan Africa
In 2010, ECP Africa Fund raised the then record amount of $613m for an Africa focused fund, however in 2011,
the London-based Helios Investment Partners announced that it had succeeded in raising $900 million (the fund
was oversubscribed by a $1 billion) for its Africa dedicated fund. Several other Africa dedicated funds continue
to be launched, including from the Carlyle Group – the second largest private equity fund globally - which planson raising a reported $750 million fund.
Further evidence of increased private equity investment in the region is the 21.9 percent increase in cross-bordermergers and acquisitions during the first nine months of 2011, according to estimates from UNCTAD. Significant transactions in 2011 included the $2.4 billion purchase of the South African retail giant Massmart (which
has operations in over a dozen countries in the region) by Walmart – the world‘s largest retailer.
Firms from Sub-Saharan Africa are also participating in cross-border equity investments. In the retail sector
South African mega retailers (Massmart, Shoprite etc) have been very active in carrying out acquisitions or
greenfield investment in several countries in the region; Nigerian bankers have set up branches across West Africa and are increasing their foot prints elsewhere; and in East Africa firms can now cross-list across the different
bourses in the region.

transportation, and port infrastructure facilities.
Though a past legacy of low returns on public
investment raises questions on its efficacy, a
recent study (Gupta and others, 2011) suggeststhat the productivity of public capital in low andmiddle income countries is significantly
improved once adjustments are made forshortcomings in the investment process (e.g.
bidding processes). Thus, given recent
improvements in governance that have occurredin recent years, the productivity and ultimately
the social benefits of public capital spending in
Sub-Saharan Africa may have improved.

agreement with the Government of Ghana (gaspipeline, mineral processing, agro-industrial
ventures); and a $1 billion agreement with the
Tanzanian Government (gas pipeline). The
Forum on China-Africa Cooperation estimatesthat since 2000, some 2000 Chinese companies
have built 60,000km of road in Africa and 3.5
million KW in power generation.
Changes in fiscal balances depended on thecomposition of exports. The direction of shifts infiscal balances in 2011 depended on thecomposition of exports (figure SSA.4). Prudent
macroeconomic management over the past
decade has underpinned the robust growth
performance in Sub-Saharan Africa. However,

Increasingly, in addition to development financeinstitutions and donor-supported programs, SubSaharan Africa governments are issuing longterm debt instruments (mainly local and foreign
sovereign bonds). For example, Namibia madeits first entry into the offshore bond market in
October 2011, issuing $500 million in 10-yearbonds. And in Ghana, which has already issued
Euro bonds, the government is extending theyield curve of its local bonds by planning on
issuing 10-year fixed rate bonds to financeinfrastructure projects contained in its 2012budget. Further, governments in many resourcerich Sub-Saharan Africa countries are leveraging
their resources in support of infrastructuralprojects. Some prominent reported loan
agreements at various stages of ratification
involving China in 2011 include: a $5.8 billion
agreement with the Governments of Guinea(alumina refinery, power plants, port); $3 billion

Figure SSA.4 Fiscal balances deteriorate for nonresource rich and improve for oil exporters(% share of GDP)
14.0
12.0

10.0
8.0
6.0

2007

2008

2009

2010

2011

4.0
2.0
0.0
-2.0
-4.0
-6.0

-8.0

Non-resource rich

Non-oil resource rich

Oil Exporters

Source: IMF WEO database and World Bank

150

Global Economic Prospects January 2012

Sub-Saharan Africa Annex

the implementation of countercyclical fiscal
policy by some countries in the region in
response to the financial crisis, and the rise infuel and food prices in 2011 (which was
mitigated in some Sub-Saharan Africa countries
by increased subsidies) has reduced their fiscal
buffers in the event of a significant downturn inthe global economy. The situation however
differs by country. On the one hand, oil
exporters had a fiscal surplus of 5.4 percent of
GDP in 2011, up from 1.3 percent in 2010,
thanks to the higher oil prices. However, non-oil
exporter‘s fiscal balances deteriorated further in2011 to a deficit of 5.3 percent from 4.3 percent
in 2010. Even among the non-oil exporters there
were differences in performance; with resourcerich non-oil exporters, mostly metal and mineralexporters keeping their deficits steady, while forother non-oil and non-mineral exporters the
deficits widened by 1.7 percentage points to 5.7
percent in 2011, thus giving them limited fiscal
space to maneuver in the event of anothersignificant global downturn.

SSA.5). It fell with the 2008/9 crisis and has
averaged 4.2 percent during 2009-2011 and is
projected to pick-up over the forecast horizon.
Survey data on retail spending are unavailable
for many countries in the region, making it
difficult to gauge recent developments in private
consumption. Data on car imports (excluding
trucks and buses) suggest strong growth, at least
among wealthier consumers. Imports of cars roseby 31.2 percent in the first seven months of 2011
compared with the same period of 2010. The
strength of consumer spending in 2011 was
supported by a variety of factors, including
rising incomes, improved access to credit, real
wage increases and historically low interest rates(e.g. South Africa).
Inflation picked up in a number of Sub-SaharanAfrica countries. Median headline inflation in
the region rose from 4.3 percent by the end of2010 to 7.0% within the first five months of
2011, and after a few months of slow down in
inflationary pressures picked up again in
September to 7.2 percent (figure SSA.6).
However, the situation across countries in theregion reflects significant differences.

Private consumption expenditures, which
accounts for some 60 percent of Sub-SaharanAfrica GDP, has picked up in recent years. This
rise in consumption has been supported byrecent robust GDP growth rates (box SSA.3).
Using three-year moving averages to smooth thevolatility in data, private consumption growth
has picked up from a low of 0.1 percent in 1994
to a pre-crisis peak of 6.3 percent in 2007 (figure

Median inflation in Sub-Saharan Africa oil
exporters remained unchanged during the firstsix months of 2011. However, due to theescalation in oil and food prices during thisperiod, inflation picked up among non-oil
exporters in the region, with land-locked non-oil
Figure SSA.6 Inflationary pressures pick-up in
Sub Saharan Africa…

Figure SSA.5 Growth of Private Consumption in
Sub Saharan Africa(%,ch)

3-year moving average of real private consumption

8.0

7.0

7.0

6.0

5.0

6.0

4.0

5.0
3.0

4.0
2.0

Private consumption (3 yr moving
average)

1.0

3.0

Trend line
0.0

2.0
2010M01

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

2010M05

2010M09

Source: World Bank

Source: World Bank

151

2011M01

2011M05

2011M09

Global Economic Prospects January 2012

Sub-Saharan Africa Annex

Box SSA.3 Consumer demand in Sub-Saharan Africa rises
Improved economic governance, a more stable political environment, and increased investments in infrastructureand human capital has supported growth, and rising employment opportunities in Sub-Sahara Africa over the past
decade. The robust growth and job creation is thereby supporting consumer spending. A recent study by the African Development Bank (2011) finds that between 1990 and 2008, the number of people in Sub-Saharan Africawith incomes between $2-$20 per day almost doubled (rising from 109 million to 206 million).
Typically, middle income consumers demand better governance and are more active in civil society. They also
have the means to demand better services including financial services (e.g mortgages), telecommunication (mobile
phone subscriptions), education and healthcare, and discretionary incomes to purchase durable consumer products(Banerjee, A and Duflo, 2008).
Notwithstanding recent gains, the African Development Bank study shows that for Sub-Saharan Africa, some 33
percent of the middle class ($2-$20) remain vulnerable to slipping back in to poverty in the event of exogenous
shocks, because the bulk of these households have per capita incomes just above the $2 poverty line (between $2
and $4). Further, World Bank projections show that by 2015 between 38.0 percent and 43.8 percent of SubSaharan Africa‘s population will still be living below the $1.25 poverty line – a shortfall of 9 to 14 percent above
Millennium Development Goals, but an improvement from the 2005 level of 50.9 percent.

exporters experiencing the highest increase inheadline inflation (from 8.7 percent in 2010 to
13.8 percent). East African economies wereparticularly hard hit, not only because of the risein food and fuel prices but also due to the very
poor rains and harvest earlier in the year. In
Ethiopia, inflation peaked at 40.1 percent (inSeptember) from 14.5 percent at the beginningof the year; in Kenya, it reached 19.7 percent inNovember; and in Uganda, it hit 30.5 percent in
October. High levels of inflation, particularly
above the 10% threshold are noted in a numberof studies to be inimical to the growth process(IMF, 2005). Hence, the recent episodes of highinflation in these economies, if not reined in,threatens to curtail the robust growth that has
occurred in these countries. In this regard, themoderate decline in inflation in Kenya (18.9
percent) and Uganda (27.0 percent)inDecember 2011 is a step in the right direction.

time and much worse outcomes could arise if
conditions in high-income Europe deteriorate.
Assuming a muddling through in the highincome world, GDP in Sub-Saharan Africa
should expand by around 5.3 percent in 2012and by 5.6 percent in 2013 (table SSA.2).
However, excluding South Africa, the largest
economy in the region, GDP growth would bemuch higher in 2012 (6.6 percent) and 6.4
percent in 2013. This anticipated acceleration in2012 reflects new oil and mineral capacity
coming on stream in 2012 and increased
investments in these sectors in several countries
including: Congo, Guinea, Lesotho, Liberia,
Madagascar, Mauritania, Mozambique, Niger,
and Sierra Leone; as well as the projected robust
bounce back in Cote d‘Ivoire, which contracted
by 6 percent in 2011. Under our baseline
scenario, in 2012, a third of countries in theregion will grow by at least 6 percent (similar to2011), another third will grow between 4.7
percent and below 6 percent, and the remaining
third will grow by less than 4.7 percent (table
SSA.3).

Medium-term outlook
The underlying factors supporting growth
dynamics in Sub-Saharan Africa are expected tocontinue over next several years. However,considerable headwinds from slower growth in
the global economy, lower commodity prices,heightened uncertainty in global financial
markets, and monetary policy tightening insome countries, could dampen prospects.
Moreover, as emphasized in the main text, theglobal outlook is particularly precarious at thisGrowth prospects in the largest economies.
Supported by historically low interest rates, andabove-inflation wage increases, the South
African consumer will continue to remain thedominant driving force for GDP growth.
However, the contribution of consumer spending152

Global Economic Prospects January 2012

Sub-Saharan Africa Annex

to GDP growth is projected to wane over theforecast horizon as household debt remains highand the recent pick-up in inflation reduces
purchasing power. The boost to growth fromincreased government spending will remainstrong in 2012, but is likely to wane as stimulus
gives way to consolidation. Private investment
growth, which picked up in 2011, is projected toease due to the uncertain global recovery, lowbusiness confidence, low capacity utilization in
manufacturing, labor disputes, and the strong
rand. Reflecting many of these same factors, net
exports will continue to drag on GDP growth. As
a result, GDP in South Africa is projected to
expand a modest 3.1 percent in 2012 before
strengthening somewhat in 2013 at a relatively
subdued level of 3.7 percent, as the global
economy picks up.

has been the case in recent years, growth will belargely driven by the non-oil sector. The
consumer services sector (financial,telecommunication, wholesale and retail) one of
the main targets of private equity investors in
Sub-Saharan Africa‘s most populous economy,
will continue to provide a strong impetus to
growth and job creation. Favorable weather
conditions and targeted interventions in the
agricultural sector should also support growth
there. However, uncertainty in the global
economy and domestic production challenges in
its oil sector, which accounts for some 15% ofGDP, will continue to limit the sector‘scontribution to GDP growth.
Angola’s growth prospects continue to hinge on
its fortunes in the oil sector. Though Angola
benefitted from higher oil prices in 2011,technical glitches prevented any significant
expansion in output. These problems should be
resolved by 2012, paving the way for an increase

Growth prospects in Nigeria, the region‘s second
largest economy, remain robust (7.1 percent and7.4 percent for 2012 and 2013 respectively). As
Table SSA.2 Sub-Saharan Africa forecast summary(annual percent change unless indicated otherwise)
GDP at market prices (2005 US$) b
GDP per capita (units in US$)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 (%)

98-07a

2008

2009

Est.
2010

Forecast2011 2012

2013

4.2
1.9
4.4
2.2
5.4
8.0
4.0
6.5
-0.7
-0.8
6.1
-0.6

5.1
3.1
5.6
3.7
7.5
11.6
4.2
6.6
-1.1
-1.5
11.0
1.0

2.0
0.0
2.5
1.6
5.8
4.3
-6.4
-3.8
-0.7
-3.7
4.6
-5.5

4.8
2.8
5.1
5.3
6.6
12.0
6.3
7.9
-0.9
-3.3
6.9
-4.4

4.9
2.9
5.2
5.0
5.6
7.7
10.3
10.4
-0.6
-0.3
5.5
-3.4

5.6
3.6
5.9
4.7
4.9
10.0
9.5
8.8
-0.2
-0.8
6.2
-2.3

5.3
3.3
5.6
4.3
4.2
6.2
9.7
5.8
0.9
-0.7
6.2
-2.9

Memo items: GDP
SSA excluding South Africa
4.5
6.0
4.2
5.9
5.9
6.6
Oil exporters e
4.9
6.7
4.7
5.7
5.8
6.7
CFA countries f
3.5
4.1
2.7
4.0
2.8
4.8
South Africa
3.7
3.7
-1.8
2.8
3.2
3.1
Nigeria
5.0
6.0
7.0
7.8
7.0
7.1
Angola9.7 13.8
2.4
2.3
7.0
8.1
Source : World Bank.
a. Growth rates over intervals are compound average; growth contributions, ratios and the GDP deflator
are averages.
b. GDP measured in constant 2005 U.S. dollars.
c. GDP measured at PPP exchange rates.
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.
g. Estimate.
h. Forecast.

Source: World Bank.

153

6.4
6.9
4.9
3.7
7.4
8.5

Global Economic Prospects January 2012

Sub-Saharan Africa Annex

in output from 1.65 million bpd to 2.1 million
bpd over the forecast horizon – reflecting both
new wells and increased production from the
Pazflor deepwater field. Gas output is also likely
to rise as the $9 billion liquefied natural gas
project gets underway. However, developmentsin the hydrocarbons sector have limited linkages
with the rest of the economy. Government
efforts to support the non-oil sector, willcontinue to be hindered by high transactions costand a difficult business environment. GDP
growth is projected to reach 8.1 percent and 8.5
percent in 2012 and 2013 respectively.

though Lesotho and Cape-Verde, both middleincome economies, also remain vulnerable tosharper than anticipated aid cuts (figure SSA.7).
With fiscal space much more restricted, and in acontext where external financing may well not
be available, governments may be forced to cut
deeply into spending – thereby exacerbating thedownturn. However, reduced fiscal space during
a downturn need not translate into higher
poverty levels if mechanisms are already in place
to help protect targeted spending on the mostvulnerable groups. One such successful programin Sub-Saharan Africa is Ethiopia‘s Productive
Safety Net Program, which delivers socialtransfers through public work activities (food for
cash, cash for work etc), as well as direct support
to households that are labor constrained. Besides
fiscal policy, in economies that have inflationary
expectations under control and that havemonetary policy space, loosening policy rates tostimulate domestic demand could support
aggregate demand in the face of declining
external demand. However, given structural
rigidities and limited links between interest rates
and credit in low-income Sub-Saharan African
economies, monetary policy tends to be lesseffective than fiscal policies in these economies.

Risks and vulnerabilities
Slowdown in global economy. In the current
global context, the risk of a serious downturn inthe global economy is very real and would carrywith it serious implications for Sub-SaharanAfrica, reducing global demand for the region‘sexports, yielding potentially sharp declines incommodity prices and ,therefore, government
revenues, and potentially large declines inremittance and tourism flows.
In the small contained European crisis outlinedin the main text, growth in Sub-Saharan Africa
could decline by 1.3 percentage points comparedto the current forecasts for 2012, with oil andmetal prices falling by as much as 18 percent andfood prices by 4.5 percent. Indeed, the fiscal
impact of commodity price declines could be as
high as 1.7 percent of regional GDP (see maintext). In 2008, several Sub-Saharan Africa
countries had the fiscal buffers to make up theseshortfalls. Governments in the region had much
healthier fiscal balances in 2007 and thus could
undertake expansionary fiscal policies (e.g. in
Kenya, Tanzania and Uganda) to compensate forthe fall in external demand. In 2011, however,
the aggregate fiscal deficit in Sub-SaharanAfrica is estimated at 3.4 percent of GDP, andnot many countries in the region are well placed
to carry out countercyclical fiscal policies, if the
global downturn worsens significantly. The
situation could become even more difficult if
donors cut aid flows to low-income countries
receiving high levels of budget support (e.g.
Burundi, São Tomé and Príncipe, Rwanda),

Fall in trade. The trade impacts of a sharp
slowdown in Europe could significantly impact
Figure SSA.7 SSA economies with the highest
budgetary support (grants) as a share of GDP.
Grants as share of GDP (average, 2009-2011)
UgandaSeychelles
Mali
Eritrea
Ethiopia
Gambia, The
Tanzania
Central Af rican Rep.
Niger
Cape VerdeBurkina Faso
Lesotho
Sierra Leone
MalawiMozambiqueCongo, Dem. Rep. ofComoros
Guinea-Bissau
Rwanda

(%)
0

5

10

15

Source: IMF WEO database and World Bank Staff
calculations

154

Global Economic Prospects January 2012

Sub-Saharan Africa Annex

Sub Saharan African economies given that
European Union member states account for 37
percent of the regions non-oil exports. And for
tourism dependent economies in the region (e.g.
Cape Verde, Gambia, Kenya, Tanzania,
Mauritius, Seychelles, etc), arrivals fromEurozone member states constitute the bulk of
total tourist arrivals. Impacts will differ, though,depending on individual countries‘ exposure to
the hardest hit European economies as well as
the composition of exports. While merchandise
exports to the high-spread Euro Area economies
account for only 9 percent of total Sub-SaharanAfrican non-oil merchandise exports, in Cape
Verde some 92 percent of merchandise exports
are destined for these economies (figure SSA.8).
However, for Cape Verde‘s service-oriented
economy outturns from tourism flows will be ofmore importance than merchandise exports.
Other economies with high exposure export
demand from high-spread Euro Area economies
include Guinea and Mauritania where some 25
percent and 19 percent respectively of their nonoil exports are destined.

other countries in the region) should, over the
longer term, help Sub-Saharan Africa economies
become less vulnerable to shocks originatingfrom specific regions (see Trade Annex).
Fall in commodity prices. A fall in commodity
prices is likely to reduce incomes and slow
investment flows to the resource sector—an
important growth sector for many economies.
The slowdown in export revenues is likely to bestronger in the lesser diversified economies in
the region, and in particular in those whose
exports are dominated by oil, minerals andmetals, since, during a slow down in the global
economy these commodities are more likely tobe negatively impacted than agricultural exports.
Indeed, some 70 percent of Sub-Saharan Africa
export revenues come from agricultural
products, oil, metals and minerals. In Angola andthe Republic of Congo, where the oil sector
accounts for over 60 percent of GDP, a 10
percent decline in oil prices could translate into a
2.7 percent and 4.4 percent decline in GDP,
respectively. In Nigeria, where the oil sector
accounts for 15.9 percent of GDP, a similar
decline in oil prices could reduce its GDP by 1.8
percent.

Indeed, if the current concerns were to escalate
and encompass some of Sub-Saharan Africa‘smajor trading partners in the Euro Area, thiswould significantly dampen Sub-Saharan Africa
exports. Further diversification of export
composition and trading partners (including with

Further, for many economies in the region that
operate a flexible exchange rate regime, adverse
terms of trade shocks translate to depreciation in
their currencies, with potential for increased
macroeconomic instability. For instance, during
the downturn in 2009, a third of local currencies
in the region depreciated by over 10% (figure
SSA.9). However, on the upside, a more
pronounced decline in oil prices would provide
a welcome relief for the region‘s oil importersthat were hard hit by the spike in oil prices
earlier in 2011 (Ethiopia, Kenya, Malawi,
Mauritius, Swaziland, Sudan, and Uganda).

Figure SSA.8 SSA economies with the highest
share of exports destined to Portugal Greece, Ireland, Italy and Spain
Malawi

UgandaEthiopia
Madagascar
Seychelles
Cote d'Ivoire
SenegalNigeria

Fall in capital flows. With financial markets
underdeveloped in many Sub-Saharan Africa
countries, the region is the least integrated with
global financial markets. As a result, the direct
impact on the region‘s banking sector, in theevent of a worsening of the Euro Area debt crisis
would be rather limited in terms of thedeterioration in asset quality, non-performing

Gabon
Mauritius
Namibia
Cameroon
Mauritania
GuineaCape Verde
0.00

0.20

0.40

0.60

0.80

1.00

Source: UN Comtrade database and World Bank staff

155

Global Economic Prospects January 2012

Sub-Saharan Africa Annex
fell by a cumulative 24% over the 2008-2010
period.

Figure SSA.9 A fall in commodity prices, as occurred in 2009, could contribute to significant
depreciation of local currencies in the region.

Heightened financial market uncertainty could
affect participation in bond issuance– both local
and foreign. For instance, plans by a number of
Sub-Saharan African countries (Kenya,
Tanzania, Zambia) to issue international bonds
may be further postponed if the premiums
required remain high due to elevated investor
risk averseness related to the Euro debt situation.
This could therefore delay the prospect ofaddressing some of the binding infrastructural
constraints to growth in these countries.

Congo, Dem. Rep.
ZambiaGhana
Nigeria
Ethiopia
Gambia, The
Madagascar
Mauritius
UgandaKenya
Sierra Leone
Mozambique
Tanzania, United Rep.

Depreciation in nominal exchange rate to US
dollar (2009)

Mauritania
Sudan

Fall in remittances. Another channel oftransmission that a slowdown in the global
economy could engender is a fall in remittanceinflows. With remittance flows supporting
household spending and local currencies, a sharp
decline in remittances could dampen growthprospects. World Bank estimates that
remittances to Sub-Sahara Africa will rise to $24
billion and $26 billion in 2012 and 2013
respectively. Given that remittance flows wereresilient during the 2008/09 crisis (falling byonly 4.6% in 2009), they are likely to holdsteady in the medium term. However, in theevent of a sharper slowdown than anticipated in
the baseline, remittances could deviate fromcurrent projections by declining between 2.8% to
6.2%, depending on the severity of thedownturn. The effects among Sub-SaharanAfrica countries would however differ. As ashare of GDP, Cape Verde, Senegal and GuineaBissau are the most dependent on remittanceflows from the high-spread Euro Area countries(figure SSA.10), thus likely to be the mostvulnerable through this channel.

Angola
CFA economies
0

5

10

15

20

25

30

35

40

45

50

Source: World Bank.

loans etc. Nonetheless, there are other subchannels through which countries in the region
could be affected in a non-trivial way.
Heightened uncertainty in global financial
markets will adversely impact short-term
portfolio equity and investment in bonds.
Indeed, between April and October 2011, while
the MSCI World Index fell by 23%, indices inthe three most liquid stock exchanges in theregion fell sharply: South Africa by 24%,
Nigeria by 21%, and Kenya by 43%. Hence for
economies in the region with more liquid
financial markets (stock and bond markets), thedownturn could lead to destabilizing capital
flows with negative consequences on exchange
rate volatility. Indeed, in the aftermath of theturmoil in financial markets in August 2011, theSouth African rand was one of the currencies tohave depreciated the most globally.

Internal risks. While external risks are mostprominent – a number of domestic challenges
could also cause outturns to sour. Indeed,disruptions to productive activity in theaftermath of elections are important potential
downside risks, as investment, merchandise
trade and tourism receipts, all important growth
drivers, are likely to suffer. The 6 percent
contraction in output in Cote d‘Ivoire in 2011
was due to the civil unrest following the

However, for most countries in the region,
private capital flows are in the form of foreign
direct investment, which is less volatile thanother types of capital flows and hence aresomewhat shielded from sudden capital flights.
Nonetheless, an intensification of the Euro Area
debt crisis could well result in a fall in foreign
direct investment as occurred during the 2008/09
financial crisis when foreign direct investment

156

Global Economic Prospects January 2012

Sub-Saharan Africa Annex

Figure SSA.10 Sub Saharan Africa countries withhigh remittances from high-spread Euro Area
countries

References:
African Development Bank (2011), The Middleof the Pyramid: Dynamics of the Middle Class inAfrica, Market Brief April 2011.

Cape Verde
SenegalGuinea-Bissau
Nigeria

Banerjee, A and E., Dufflo (2008), ―What is
Middle Class about, the Middle Classes Around
the World?‖, Journal of Economic Perspectives,
Vol. 22, No. 2.

Togo
Mozambique
Gambia, The
Mauritius
Benin

Kenya
LesothoCalderon, C., and L. Serven, (2008).
"Infrastructure and Economic Development in
Sub-Saharan Africa," Policy Research Working
Paper Series 4712, The World Bank.

Niger
RwandaSierra Leone

Remittances as a share of GDP (%)

Seychelles
Côte d'Ivoire
0.0

0.5

1.0

1.5

2.0

2.5

3.0

Estache, A., B. Speciale, and D. Veredas,(2006). How Much Does Infrastructure Matter toGrowth in Sub-Saharan Africa? The World
Bank, Washington, D.C.

Source: World Bank

elections in 2010. In 2012 about a sixth of SubSaharan Africa countries have scheduledpresidential elections.

Estache, A. and Q. Wodon, (2010).
Infrastructure and Poverty in Sub-SaharanAfrica, Forthcoming.

Another downside risk stems from adverse
weather conditions. With the agricultural sector
accounting for about 20 percent to 40 percent of
GDP in most Sub-Sahara African countries, andwith much of it dependent on good rains, theimpact of poor rains on GDP growth in theregion can be significant, not just to theagricultural sector but also for services andindustries as they depend on the generation of
power from hydroelectric sources. In 2011,
lower food production in parts of Kenya, due topoor rains led, to an escalation of food prices anda contraction in the electricity and water supply
sector (by 12.1%, y/y, in the third quarter); andin Tanzania extensive power rationing due tolower water levels cut into manufacturing
output.

Gupta, S., A. Kangur, C. Papageorgiou, and A.
Wane (2011). ―Efficiency-Adjusted Public
Capital and Growth,‖ IMF Working Paper(forthcoming).
International Monetary Fund (2005), ‗Monetaryand Fiscal Policy Design Issues in Low-Income
Countries‘, IMF Policy Paper , August 2005.
UNCTAD (2008), World Investment Report
2008: Transnational Corporations and theInfrastructure Challenge, New York and Geneva:
United Nations.
UNCTAD (2011), Global Investment Trends
Monitor No. 7, October, New York and Geneva:
United Nations.

Notes:
1. Estache et. al (2006) demonstrate that
infrastructure investments accelerated
growth convergence in Africa by over 13
percent. And Calderon (2008) estimates that
infrastructure contributed 0.99 percentage
points to per capita economic growth during
the 1990-2005 period.

World Bank (2010), Global Monitoring Report
2010: the MDGs after the Crisis, The World
Bank, Washington DC.

157

Global Economic Prospects January 2012

Sub-Saharan Africa Annex

Table SSA.3 Sub-Saharan country forecasts(annual percent change unless indicated otherwise)
98-07a 2008 2009
AngolaGDP at market prices (2005 US$) b
Current account bal/GDP (%)
Benin
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Botswana
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Burkina Faso
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
BurundiGDP at market prices (2005 US$) b
Current account bal/GDP (%)
Cape Verde
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Cameroon
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Central African Republic
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Chad
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Comoros
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Congo, Dem. Rep.
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Congo, Rep.
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Cote d Ivoire
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Equatorial Guinea
GDP at market prices (2000 USD) 2
Current account bal/GDP (%)
Eritrea
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Ethiopia
GDP at market prices (2005 US$) b
Current account bal/GDP (%)

158

Est. Forecast2010 2011 2012 2013

9.7
-0.9

13.8
2.4
8.5 -10.0

2.3
-1.8

7.0
7.0

8.1
8.0

8.5
9.2

3.8
-7.7

5.1
-9.3

2.7
-9.2

2.6
3.4
4.3
-10.2 -14.2 -11.8

4.8
-6.9

4.7
9.2

2.9
3.5

-4.9
-4.5

7.2
-6.0

6.8
-2.9

6.2
2.5

5.0
11.4

4.8
5.0
3.5
-14.0 -24.8 -19.4

7.9
-10.6

5.8
-6.1

5.2
-6.8

5.4
-5.5

1.8
4.5
3.5
-20.5 -30.2 -12.3

3.9
4.4
4.7
4.9
-10.8 -13.4 -13.0 -12.9

5.9
6.2
3.6
-10.8 -13.3 -15.1

5.4
5.8
6.4
6.6
-18.1 -16.7 -15.6 -14.4

3.4
-2.4

2.9
-1.9

2.0
-5.0

2.6
-3.8

3.8
-2.9

4.1
-3.3

4.6
-3.2

0.8
-4.6

2.0
-9.7

1.7
-8.0

3.3
-8.8

4.0
-7.8

3.0
-7.8

3.5
-6.9

8.0 -0.4 -1.6
-36.5 -19.8 -28.9

5.1
6.0
5.5
-24.3 -14.4 -13.0

4.0
-5.5

1.9
1.0
-4.0 -10.5

1.8
-5.9

2.1
-8.2

2.3
-8.7

2.5
-9.6

2.8
-9.9

1.9
6.2
2.8
-3.6 -17.5 -10.5

7.3
-6.8

6.5
-2.8

6.0
-0.7

8.0
0.6

2.9
5.6
7.5
1.2 -18.3 -10.6

8.8
3.9

5.1
10.2

5.5
7.1

5.0
6.5

0.0
0.7

2.3
1.9

3.8
7.2

2.4
6.9

-5.8
2.3

4.9
0.6

5.5
-0.8

20.7
6.7

10.7
5.3
10.2 -18.0

0.9
-5.9

2.8
-9.4

4.1
-7.5

4.5
-6.0

-0.1
-18.9

-9.8
-6.2

3.9
-6.5

2.2
-2.7

8.2
-3.0

6.3
-3.4

7.0
-3.6

6.5
-5.3

10.8
-6.8

8.8
-6.8

10.1
7.7
7.2
7.8
-9.6 -10.6 -11.6 -12.4

Global Economic Prospects January 2012

Sub-Saharan Africa Annex(annual percent change unless indicated otherwise)
98-07a 2008 2009
Gabon
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Gambia, The
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Ghana
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
GuineaGDP at market prices (2005 US$) b
Current account bal/GDP (%)
Guinea-Bissau
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Kenya
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Lesotho
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Madagascar
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
MalawiGDP at market prices (2005 US$) b
Current account bal/GDP (%)
Mali
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Mauritania
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Mauritius
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Mozambique
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Namibia
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Niger
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Nigeria
GDP at market prices (2005 US$) b
Current account bal/GDP (%)

0.4
10.9

2.3
22.2

-1.4
13.5

5.7
11.4

6.0
15.0

5.1
12.1

4.1
11.3

3.4
-9.4

5.4
0.4

6.2
4.0

5.6
2.1

5.3
1.9

5.4
1.3

5.8
0.8

4.6
8.4
-6.4 -12.4

4.7
-3.6

6.6
-7.2

13.6
-7.0

9.0
-5.9

8.0
-4.4

2.8
4.9 -0.3-6.1 -11.6 -10.1

1.9
4.3
4.5
5.0
-13.1 -14.2 -12.2 -13.6

1.8
3.2-7.3 -11.0

3.0
-8.5

3.5
4.8
4.7
5.0
-11.1 -11.4 -10.6 -10.3

3.4
-4.9

1.6
-6.6

2.6
-5.7

5.6
4.3
-7.7 -10.0

2.9
-3.5

4.7
9.0

3.1
-0.1

3.3
3.1
5.1
4.9
-19.7 -24.5 -17.8 -13.5

5.0
-6.6

5.5
-5.9

3.2
7.1 -4.6-9.5 -17.5 -15.4

1.6
-8.1

2.6
-8.5

3.0
-8.3

4.5
-8.3

2.8
-4.7

8.6
-7.1

7.6
-9.6

6.7
-2.7

5.6
-4.7

5.0
-5.1

5.6
-5.5

5.1
5.0
-7.9 -12.2

4.5
-7.3

4.5
-7.6

5.4
-8.0

5.1
-8.1

5.9
-7.8

4.1
3.5 -1.2-5.8 -12.6 -13.2

5.2
5.1
5.7
6.0
-10.1 -11.2 -11.7 -12.2

3.6
5.5-1.2 -10.1

3.0
-7.4

4.0
4.1
3.3
4.3
-8.2 -11.1 -11.2 -10.2

6.8
6.8
6.4
-14.6 -11.9 -11.8

7.2
7.4
7.6
8.5
-15.4 -13.6 -12.4 -11.1

4.4
4.0

4.3
0.5

-0.8
-1.2

2.7
8.7 -1.2-7.4 -12.1 -19.3
5.0
11.0

159

Est. Forecast2010 2011 2012 2013

6.0
13.6

7.0
7.8

6.6
-0.7

3.9
-0.5

4.2
-1.5

5.1
-2.4

8.8
6.0
8.5
6.8
-18.8 -19.2 -16.7 -14.4
7.8
1.5

7.0
14.3

7.1
13.3

7.4
11.4

Global Economic Prospects January 2012

Sub-Saharan Africa Annex(annual percent change unless indicated otherwise)
98-07a 2008 2009

Est. Forecast2010 2011 2012 2013

RwandaGDP at market prices (2005 US$) b
6.8 11.2
4.1
7.5
8.8
7.6
Current account bal/GDP (%)-6.0 -5.3 -7.2
-6.0 -6.1 -4.3
SenegalGDP at market prices (2005 US$) b
4.0
3.3
2.2
4.2
4.2
4.4
Current account bal/GDP (%)-7.0 -14.3 -12.9 -13.2 -13.4 -14.1
Seychelles
GDP at market prices (2005 US$) b
2.1 -1.3
0.7
6.2
4.0
4.7
Current account bal/GDP (%)-16.4 -44.2 -32.1 -51.6 -25.4 -17.6
Sierra Leone
GDP at market prices (2005 US$) b
7.5
5.5
3.2
4.9
5.6 44.0
Current account bal/GDP (%)-12.2 -15.3 -15.7 -13.1 -12.6 -12.2
South Africa
GDP at market prices (2005 US$) b
3.7
3.7 -1.8
2.8
3.2
3.1
Current account bal/GDP (%)-2.1 -7.1 -4.1
-2.8 -3.0 -3.7
Sudan
GDP at market prices (2005 US$) b
5.9
6.8
4.0
4.5
5.3
5.8
Current account bal/GDP (%)-7.1 -2.3 -7.7
-1.9 -7.2 -7.3
Swaziland
GDP at market prices (2005 US$) b
3.1
2.4
0.4
2.0 -2.1
0.6
Current account bal/GDP (%)-1.3 -8.1 -14.4 -15.2 -15.8 -13.1
Tanzania
GDP at market prices (2005 US$) b
5.9
7.4
6.0
7.0
6.4
6.7
Current account bal/GDP (%)-5.8 -12.9 -9.0
-8.6 -9.1 -10.4
Togo
GDP at market prices (2005 US$) b
1.9
2.4
3.2
3.4
3.7
4.0
Current account bal/GDP (%)-9.5 -6.9 -5.6
-5.9 -4.6 -4.9
UgandaGDP at market prices (2005 US$) b
6.4
8.7
7.2
6.4
6.3
6.2
Current account bal/GDP (%)-5.4 -9.1 -6.7 -10.1 -12.1 -15.3
ZambiaGDP at market prices (2005 US$) b
4.2
5.7
6.4
7.6
6.8
6.7
Current account bal/GDP (%)-13.7 -9.3
1.9
2.5
3.5
2.4
Source : World Bank.
World Bank forecasts are frequently updated based on new information and changing (global)
circumstances. Consequently, projections presented here may differ from those contained in other
Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any
given moment in time.
Liberia, Somalia, Sao Tome and Principe are not forecast owing to data limitations.
a. Growth rates over intervals are compound average; growth contributions, ratios and the GDP deflator
are averages.
b. GDP measured in constant 2005 U.S. dollars.
c. Estimate.

160

7.0
-2.1
4.4
-14.6
5.0
-15.4
13.0
-11.9
3.7
-4.1
5.8
-7.4
1.5
-12.1
6.9
-11.8
4.1
-4.9
7.0
-11.2
6.0
2.1

www.worldbank.org/globaloutlook