Global
Economic
Prospects

Volume 5 | June 2012Managing growth
in a volatile
world

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Global Economic Prospects
Managing growth in a volatile world

June 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 led by Theo Janse van
Rensburg assisted by Irina Magyer, Sabah Zeehan Mirza and Muhammad Adil Islam. The projections, regional
write-ups and subject annexes were produced by Dilek Aykut (Finance, Europe & Central Asia), John Baffes &Shane Streifel (Commodities) Sanket Mohapatra (South Asia and Exchange Rates), Allen Dennis (Sub-SaharanAfrica and 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 Dilip K. Ratha and Ani Silwal. Simulations were performed by Theo van
Rensburg, Irina Magyer and Sanket Mohapatra.
The accompanying online publication, Prospects for the Global Economy, was produced by a team comprised ofSarah Crow, Sanket Mohapatra, Sabah Mirza, Muhammad Adil Islam, Betty Dow, Vamsee Krishna Kanchi, andKatherine Rollins with technical support from David Horowitz, Ugendran Machakkalai, and Malarvishi Veerappan.
Roula I. Yazigi and Sabah Zeehan Mirza were responsible for the cover artwork.
Indira Chand, Cynthia Case-McMahon 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 Inger Andersen, Ulrich Bartsch, Maria
Teresa Benito-Spinetto, Fabio Bittar, Zeljko Bogetic, Otaviano Canuto, Shubham Chaudhuri, Jeff Chelsky, Punam
Chuhan-Pole, Tito Cordella, Jorg Decressin, Augusto de la Torre, Shantayanan Devarajan, Tatiana Didier, Pablo
Fajnzylber, Manuela V. Ferro, Caroline Freund, Bernard G. Funck, David Michael Gould, Marcelo Giugale, Bert
Hofman, Zahid Hussain, Elena Ianchovichina, Kalpana Kochhar, Auguste Tano Kouame, Roumeen Islam, Jeffrey
D. Lewis, Philippe H. Le Houerou, Jose R. Lopez Calix, Ernesto May, Alexey Morozov, Antonio M. Ollero, Samuel Pienknagura, Bryce Quillin, Christine M. Richaud, Sudhir Shetty, Vijay Srinivas Tata, Phil Suttle, Anthony G.
Toft, Yvonne M. Tsikata, Willem van Eeghen, Jan Walliser.

4

Table of Contents
Main Text …………………………………………………………………………..…... 1
Topical Annexes
Industrial production ………………………………………………………………….....31
Inflation. ………………………………………………………………………………....37
Recent developments in financial markets ……………………………………………....43
Trade …………………………………………………………………………….…….....53
Exchange rates ……………………………………………………………………..….…59
Prospects for commodity markets ……………………………………………….….…...67
Regional Annexes
East Asia & the Pacific ………………………………………………...…...…..…….…79
Europe & Central Asia …………………………………………………..………..…..…89
Latin America & the Caribbean ……………………………………...……………..….101
Middle East & North Africa ………………………………………………………..…..115
South Asia ………………………………………………………….………………......127
Sub-Saharan Africa ……………………………………………….…………………....143

The cut off date for information included in this edition of the Global Economic Prospects
reflects data as of June 8, 2012.

5

Global Economic Prospects June 2012:Managing growth in a volatile world
Overview & main messages
Economic developments of the past year havebeen volatile, punctuated by natural disasters,
large swings in investor sentiment, and periodsof relative calm and improving prospects. Output
in the second half of 2011, was particularly
weak, buffeted by flooding in Thailand, thedelayed impact of earlier policy tightening and a
resurgence of financial market and investor
jitters.
In contrast, economic news during the first fourmonths of 2012 was generally positive.
Significant structural, fiscal and monetary policy
steps in high-income Europe during the fourth
quarter of 2011 and the first quarter of 2012
contributed to a significant improvement inmarket sentiment, and less constraining financial
conditions. This combined with monetary policy
easing in developing countries was reflected in astrengthening of real-side economic activity inboth developing and high-income countries.
Annualized growth rates for industrial
production, import demand and capital goods
sales returned to positive territory with
developing countries leading the rebound.
Increased Euro Area jitters have reversed
earlier improvements in market sentiment
Most recently, market tensions have jumped up
again, sparked by fiscal slippage, banking
downgrades, and political uncertainty in theEuro Area. The renewed market nervousness hascaused the price of risk to spike upwards
globally. In the Euro Area, measures of financial
market tension, such as Credit Default Swap
(CDS) rates, have risen to levels close to theirpeaks in the fall of 2011. In other high-income
countries, CDS rates have risen somewhat lesssharply. Among most developing countries, CDS
rates are currently about 65 to 73 percent ofpeak levels, and between 77 and 90 percent for
countries in the Europe & Central Asia region.

Other financial market indicators have also
deteriorated, with developing– and high-income
country stock markets losing about 10 percent(at their recent trough) since May 1st, giving up
almost all of the gains generated over thepreceding 4 months. They have since recovered
about half that value. Yields on high-spread
economies were also driven upwards, while
those of safe-have assets declined. Virtually all
developing economy currencies have depreciatedagainst the US dollar, while industrial
commodity prices such as oil and copper havealso fallen sharply (19 and 14 percent
respectively).
Renewed tensions will add to pre-existing
headwinds to keep GDP gains modest
Assuming that conditions in high-income Europe
do not deteriorate significantly, the increase intensions so far can be expected to subtract about
0.2 percentage points from Euro Area growth in2012. The direct effect on developing country
growth will be smaller (in part because there has
been less contagion), but increased market
jitters, reduced capital inflows, high-income
fiscal and banking-sector consolidation are all
expected to keep growth weak in 2012. These
drags on growth are expected to ease somewhat,
and global growth strengthen during 2013 and2014, although both developing-country andhigh-income country GDP will grow less quickly
than during the pre-crisis years of this century.
Taking these factors into account, global GDP is
projected to increase 2.5 percent in 2012, withgrowth accelerating to 3.0 and 3.3 percent in2013 and 2014 (table 1). Output in the Euro Area
is projected to contract by 0.3 percent in 2012,reflecting both weak carry over and increased
precautionary saving by firms and households in
response to renewed uncertainty. Overall, highincome GDP is expected to expand only 1.4
percent this year weighed down by bankingsector deleveraging and ongoing fiscal

Table 1 The Global Outlook in summary(percent change from previous year, except interest rates and oil price)
2010
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

2011 2012e

2013f

2014f

13.0

6.1

5.3

7.0

7.7

1.2
1.6

2.4
3.1

1.9
2.6

1.8
2.4

2.0
2.5

22.5
79.0
28.0
3.3

20.7
104.0
31.6
8.9

-8.5
106.6
2.5
0.9

-2.2
103.0
-3.4
1.2

-3.1
102.4
-0.6
1.5

0.5
1.0

0.5
1.6

0.7
1.0

0.8
1.1

1.1
1.4

5.8
5.4
5.9
4.9
6.1
2.3
5.2
3.6

4.6
4.4
4.9
4.4
4.8
0.0
3.7
3.4

3.3
3.1
3.3
2.6
3.9
1.0
2.8
2.6

3.6
3.4
3.4
3.7
3.9
1.7
3.0
3.3

3.8
3.7
3.5
3.9
4.0
2.2
3.5
4.3

4.1
5.1
3.0
2.9
1.8
4.5
3.0
7.4
7.4
9.7
10.4
6.2
7.8
5.4
4.3
9.2
-1.6
6.1
7.5
5.5
9.2
3.8
5.0
2.9
3.3
8.6
9.6
4.1
6.1
5.0
2.9
7.9
3.4

2.7
3.7
1.6
1.4
1.6
-0.7
1.7
4.8
6.1
8.3
9.2
6.5
0.1
5.6
4.3
8.5
2.5
4.3
2.7
3.9
8.9
1.0
1.8
2.0
2.5
7.1
6.9
2.4
6.7
4.7
3.1
7.4
3.4

2.5
3.3
1.4
1.3
-0.3
2.4
2.1
3.6
5.3
7.6
8.2
6.0
4.3
3.3
3.8
2.9
1.2
3.5
2.9
3.5
2.2
0.6
2.1
-1.0
2.6
6.4
6.6
3.6
6.3
5.0
2.7
7.0
8.1

3.0
3.9
1.9
1.8
0.7
1.5
2.4
4.3
5.9
8.1
8.6
6.5
5.2
4.1
4.2
4.0
2.8
4.1
4.2
4.0
3.7
2.2
3.1
-0.7
3.2
6.5
6.9
3.8
6.4
5.3
3.4
7.2
7.4

3.3
4.2
2.3
2.2
1.4
1.5
2.8
4.1
6.0
7.9
8.4
6.3
5.6
4.4
4.0
5.0
3.4
4.0
3.9
3.9
4.1
3.4
4.2
1.5
3.6
6.7
7.1
4.1
6.5
5.2
3.5
6.6
6.8

India 7, 8
Pakistan 7
Bangladesh 7
Sub-Saharan Africa
South Africa
Nigeria
AngolaMemorandum items
Developing countries
excluding transition countries
7.8
6.4
5.5
6.1
6.2
excluding China and India
5.6
4.4
3.6
4.3
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.
Aggregates that 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, canvary significantly 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 FY2010-11 are 8.4, 6.5, 6.9, 7.2, and 7.4 percent – see Table SAR.2 in the regional annex.

2Global Economic Prospects June 2012

Main Text

consolidation. As these pressures ease in 2013
and 2014, rich-country GDP growth is projected
to firm to what will still be a modest 1.9 and 2.3
percent pace in each of 2013 and 2014.

by Greek banks affecting Bulgaria, Macedonia
and Serbia the most.
A return to more neutral macroeconomic policies
would help developing countries reduce theirvulnerabilities to external shocks, by rebuilding
fiscal space, reducing short-term debt exposuresand recreating the kinds of buffers that allowed
them to react so resiliently to the 2008/09 crisis.
Currently, developing country fiscal deficits areon average 2.5 percent of GDP higher than in
2007, and current account deficits 2.8 percent of
GDP higher. And short-term debt exceeds 50
percent of currency reserves in 11 developing
countries.

GDP in developing countries is projected to
expand 5.3 percent in 2012. Still weak, but
strengthening high-income demand, weak capital
flows, rising capital costs and capacity
constraints in several large middle-income
countries will conspire to keep growth fromexceeding 6 percent in each of 2013 and 2014.
The projected recovery in the Middle-East &North Africa is uncertain and is contingent on
assumptions of a gradual easing of social unrest
during 2012 and a return to more normal
conditions during 2013 and 2014.

A more neutral and less reactive policy stancewill help even if a crisis is averted

In the baseline, the slower growth in developing
countries mainly reflects a developing world thathas already recovered from the financial crisis.
Several countries are rubbing against capacity
constraints that preclude a significant
acceleration in growth, and may even require a
slowing in activity in order to prevent
overheating over the medium run.

Even in the absence of a full-blown crisis,
elevated fiscal deficits and debts in high-income
countries (including the United States andJapan), and the very loose monetary policies
being pursued in the high-income world,suggests that for the next several years theexternal environment for developing economies
is likely to remain characterized by volatile
capital flows and volatile business sentiment.

Should global conditions deteriorate, alldeveloping countries would be hit — making thereplenishment of depleted macroeconomic
cushions a priority

As a result, sharp swings in investor sentimentand financial conditions will continue tocomplicate the conduct of macro policy indeveloping countries. In these conditions, policy
in developing countries needs to be less re-active
to short-term changes in external conditions, andmore responsive to medium-term domestic
considerations. A reactive macroeconomic
policy runs the risk of being pro-cyclical, with
the impact of a loosening (tightening) in
response to a temporary worsening(improvement) of external conditions stimulating(restraining) domestic demand at the same time
as external conditions recover (weaken).

The resurgence of tensions in the high-income
world is a reminder that the after effects of the
2008/09 crisis have not yet played themselves
out fully. Although the resolution of tensions
implicit in the baseline is still the most likely
outcome, a sharp deterioration of conditions
cannot be ruled out. While the precise nature ofsuch a scenario is unknowable in advance,developing countries could be expected to take alarge hit. Simulations suggest that their GDP
could decline relative to baseline by more thanfour percent in some regions, with commodity
prices, remittances, tourism, trade, finance andinternational business confidence allmechanisms by which the tribulations of thehigh-income world would be transmitted todeveloping countries. Countries in Europe andCentral Asia would be among the mostvulnerable to an acute crisis in high-income
Europe, with likely acceleration in deleveraging

For the many developing economies that have,or are close to having fully recovered from thecrisis, policy needs to turn away from crisisfighting and re-prioritize the kinds ofproductivity-enhancing reforms (like investment
in human capital and regulatory reform) that will
support a durable pickup in growth rates over the
longer term.

3

Global Economic Prospects June 2012

Main Text
As a result, the risk premia required of highspread economies declined from 7.2 to 4.1
percent in the case of long-term Italian bonds
and from 5.7 percent to 4.6 percent in the case of
Spanish bonds. CDS rates for high-spread
economies also declined, losing about 92 percentof the increases observed since July 2011.

Activity and sentiment improved inearly 2012
The first 4 months of 2012 started off relatively
well. Greece successfully completed a major
debt restructuring, and tensions in financial
markets eased. Responding to a loosening ofmonetary policy in developing countries, and asignificant improvement in sentiment, the pause
in global economic growth that occurred in thesecond half of 2011 gave way to renewed
expansion. Activity was aided by a relative
absence of the kind of major shocks thatcharacterized 2011 (earthquake and tsunami inJapan, flooding in Thailand), althoughgeopolitical tensions and trade sanctions did
initially push oil prices higher.

As market concerns eased, other financial market
indicators also improved. Equities in bothdeveloping and high-income countries recoveredmuch of the value lost during the second half of2011, rising by some 14 percent between midDecember and mid-May (figure 1) and bonds
spreads declined (figure 2). European bankfunding pressures also declined – in part becauseof access to cheap ECB money. Interbank andcentral bank overnight rate spreads (a measure of
the perceived riskiness of private banks)declined sharply.

Progress in high-income Europe reduced
financial market tensions during the firstquarter of 2011

Euro Area deleveraging cut into bank-lending
to developing countries

Market concerns about fiscal sustainability inEurope, although still present, declined in thefirst quarter of 2012, in the wake of major policy
initiatives, including: cross-party agreement tofiscal consolidation plans; the passage of farreaching structural policy reforms; the successful
restructuring of Greek debt; agreement of panEuropean fiscal rules and firewalls, and asignificant easing of borrowing conditions by theEuropean Central Bank (ECB) in the context of
its Long-Term Refinancing Operations(LTROs).

Easing risk aversion during the first quarter of
2012, and the lower borrowing costs that
accompanied it led to a resurgence in developing-country bond issuance through the first fourmonths of the year, with issuance standing 14
percent above the levels observed at the
beginning of 2011 — a period of robust capital
flows.
However, not all financial sector developments
were so positive. Tighter regulations in the EuroArea,1 and weak demand, contributed to asignificant decline in European bank lending

Figure 1. Equity markets recovered during the firstquarter of 2012, before weakening in May
Index Jan 2011 = 100

Figure 2. Emerging-market bond spreads were declining in the first quarter, before widening in May
Percent

110

8

105

Implicit Bond Yields

100

6Developed Markets

95
4

90

US 10-year Treasury Yields

85

Emerging Markets

2

80
75
Jan '11

Apr '11Jul '11

Oct '11Jan '120
Jan '11

Apr '12

Apr '11

Source: World Bank.

Source: World Bank.

4

Jul '11

Oct '11Jan '12

Apr '12Global Economic Prospects June 2012

Main Text

Figure 3. Weak growth and tighter regulations
contributed to a fall in European bank lending

Figure 4. A sharp decline in syndicated bank lending
was only partly offset by increased bond issuance

Percent change

Percent change
Source: Dealogic, World Bank.

20
Loans to Non-Financial Corporations

30

15
Bond Issues

25

10
20

Bank Loans

Loans to Euro Area Residents
5

15
10

0

-5

Equity Issues

5

Jan '08

Jan '10Jan '120

Source: ECB via Datastream.

beginning in the third quarter of 2011 (figure 3).
Deleveraging has continued into 2012, with theoverall stock of loans in the Euro Area declining
at a 2.3 percent annualized rate during the threemonths ending April 2012.

Jun '09

Nov '09

Apr '10

Sep '10

Feb '11Jul '11

Dec '11 May '12

underway. For example, both high-income anddeveloping stock markets lost around 10 percent
during May (though they have rebounded 2.7
percent), giving up much of their 2012 gains.
Capital outflows and increased risk aversion are
also likely responsible for the 10 or more percent
depreciation of many developing economy
currencies (somewhat less than 4 percent on
average) and for the sharp drop in commodity
prices since May 1st (figure 5).

Although the impacts for developing countries
are difficult to quantify, syndicated bank-lending
declined markedly during the fourth quarter of2011 and into 2012 (figure 4). This, coupledwith a sharp decline in new equity offerings,
more than offset the increase in bond issuance bydeveloping countries in early 2012.

Gross capital flows shrank some 44 percent inMay, led by an 62 percent decline in bondissuance and a 53 percent decline in equity
issuance (figure 4 shows the 3 month moving
average of these flows, and therefore visually

The deterioration of several high-frequency
indicators in May (see following discussion ofheadwinds) suggest that a re-tightening ofdeveloping country financial conditions is likely

Figure 5. Renewed financial turmoil hit a wide range of indicators in May
Percent change since May 1stchange basis points (reverse axis)

2
0
-2
-4
-6
-8
-10
-12
-14

-20
0
20
40
60
80
100
120
140
vs USD

Nominaleffective

High-income Developing

Developing country
Equity market losses sinceexchange rate
May 1
depreciation since May 1

Oil

CopperCommodity Prices

Source: World Bank, Datastream.

5

High-income Developing High-income Developing

CDS rates increase since
May 1

CDS rates increase since
July 2011

Global Economic Prospects June 2012

Main Text

Table 2. Net capital flows to developing countries$ Billions
Current account balance

2008
410.2

2009
243.3

2010
185.9

2011e
97.8

2012f
109.7

2013f
94.9

2014f
63.1

Capital Inflows

830.9

674.2

1131.21038.5

818.1

994.8

1198.1

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

801.4
570.7
624.1
-53.4
230.6
26.7
213.1
-4.4
-4.8
29.5
7.2
10.8
11.5

593.7
508.7
400.0
108.8
85.0
51.1
20.2
14.7
-1.1
80.5
18.3
26.8
35.4

1059.9
634.1
506.1
128.4
425.8
111.4
44.3
268.5
1.6
71.2
22.4
13.8
35.0

989.0
649.1
624.6
24.5
339.9
109.1
67.1
163.2
0.5
49.5
12.0
8.0
29.5

775.4
533.6
517.7
15.9
241.8
113.8
15.1
115.0
-2.1
42.7

953.2
647.0
593.6
53.4
306.2
119.8
40.3
145.0
1.1
41.6

1152.1
774.9
684.9
90.0
377.2
108.6
66.9
200.0
1.7
46.0

Capital Outflows/a-311.7-168.8-291.1-369.1-387.0-372.0-417.0-214.5
-19.8
-78.3
1.0

-148.2
-65.6
50.7
-5.7

-217.2
-24.3
-57.3
7.7

-238.1
-40
-81.0
-10.0

-220.0-45.0-110.0-12.0-250.0
-50.0
-65.0
-7.0

-300.0
-57.0
-54.0
-6.0

Net Capital Flows (Inflows+Outflows)

519.2

505.5

840.0

669.4

431.1

622.8

781.1

Net Unidentified Flows/a-109.0-262.2-654.2-571.6-321.4-527.9-718.0

FDI outflows
Portfolio equity outflows
Private debt outflows
Other outflows

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

mutes the decline in May). Encouragingly, banklending was relatively resilient, declining byonly 7 percent. Overall, despite the improvementin flows during the first four months, total grossflows to developing countries were down 22
percent during the first 5 months of the year.
Given the further tightening of financial
conditions, net capital flows (which comprise alarger set of flows) are projected to decline about
21 percent for the year as a whole (table 2).

first quarter of 2012—growing at a 9.4 percent
annualized pace.
The pickup in activity was broadly based andevident in high-, middle-, and low-income
countries alike (figure 6 and table 3). Even theEuro Area, which saw 6 months of declining
activity in the second half of 2011, had begun toaccelerate. The strengthening in industrial
production data was partially reflected in firstquarter GDP data for the Euro Area. Area-wide,
GDP was stagnant, reflecting relatively robust
growth in Germany and Greece (respectively 2
and 2.9 percent saar), and less robust growth inBelgium and France. These expansions wereoffset by continued contraction elsewhere,
including in Italy, the Netherlands, and Spain.

Real-side activity strengthened in early 2012
but it shows signs of renewed weakness
Improved conditions in financial markets during
the first four months of the year may havereflected (and have contributed) to a turnaroundin the real side of the economy. Global industrial
production, which had been very weak throughmuch of the second half of 2011 (partly due tosupply disruptions from the earthquake andtsunami in Japan and from extensive flooding in
Thailand), started expanding once again in theDeveloping-country demand appears to have
led the rebound in activity
The resurgence of industrial activity wasstrongest among developing countries. It partly

6

Global Economic Prospects June 2012

Main Text
Table 3. Comparing regional industrial production in
2011H2 versus Q1 (or MRV) whereavailable.

Figure 6. Industrial production picked up markedly inearly 2012
Industrial production growth, 3m/3m saar

Industrial production(saar)
2011H2
2012Q1

20
15
China

High income
Eas t As ia and Pacific
Europe and Central As ia
Latin America and Caribbean
Middle Eas t and N. Africa
South As ia
Sub-Saharan Africa

10
Other High Income (exc. Japan)

5

Brazil0Developing Other

-5
-10

0.5
8.2
1.8
-0.1
-3.8
-2.4
0.4

8.0
17.4
5.1
4.4
11.9
10.0
-4.7

Euro Area-15
Jan '11

Apr '11Jul '11

Oct '11Jan '12Source: World Bank.

Apr '12

sharply in the fourth quarter of 2011, even as
Euro Area import demand continued to decline(figure 7). And it was this boost in demand that
fueled the uptick in the exports of bothdeveloping and developed economies.

Source: Dealogic, World Bank.

reflected steady growth in China, but also a
return to expanding output among many of thelarger middle-income countries that had seen
activity stagnate or decline in the second half of2011 (for example India and Turkey), and abounce back in activity levels in Thailand
following last year’s flooding. Data throughApril are available for only a few countries, andshow mixed trends. Growth in China has
softened, while in Brazil the contraction shows
signs of ending. Box 1 and the industrial
production appendix provide additional detailregarding recent developments in each of the six
developing regions.

The rebound partly reflects a sharp accelerationin developing country capital goods imports,
which were expanding at an annualized rate of
35.6 percent (3m/3m, saar) during the threemonths ending January 2012 — versus a 3.7
percent rate of decline in the third quarter of
2011. The increased demand was particularly
supportive of the foreign sales of capital goods
exporting countries like Germany, Japan and theUnited States and augurs well for future activity.

The firming of growth in the first four months of2012 appears to have been mainly due tostrengthening demand in developing countries.
Developing-country import demand accelerated

Overall global trade, which was falling at a 12
percent annualized pace in November 2011 wasgrowing at a 14 percent annualized pace during
the first quarter. Even Euro Area imports, which
had been falling at a 30 percent annualized pace

Figure 7. Developing countries lead rebound inimports

Figure 8. Outside the Euro Area business sentiment
picked up in early 2012.
Index, > 50 implies increased activity, < 50 slowing growth

Import volume growth, 3m/3m saar
40

60

Low Income
2055High Income Non-EU

0
Middle Income
Other High Income

Developing countries excl. China
China

50

Euro Area

-20

World

Euro area-40
Jan '10May '10

Sep '10Jan '11

May '11

Sep '1145

Jan '12Jan '10

Jul '10Jan '11Jul '11Jan '12Sources: World Bank, Markit and Haver Analytics.

Sources: World Bank, Datastream.

7

Global Economic Prospects June 2012

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Box 1. Data suggest a pickup in activity in all regions following a weak second half of 2011
Industrial activity in East Asia & Pacific has accelerated sharply, and was growing at a 14 percent annualized pace during the three months to April 2012, led by a sharp rebound of activity in Thailand following months of disruption due toflooding. Restoration of disrupted supply chains has also seen activity surge in the Philippines. Despite the recovery inactivity, industrial production in Thailand has recovered year-earlier levels and is only 5 percent higher in the Philippines. Activity in China has strengthened, although most recently it slowed to an 10.7 percent annualized rate — slightly
below its average rate of growth over the preceding 10 years of 13.1 percent. Regional trade has also picked up, with
import volumes expanding at a 32 percent annualized pace in the first quarter and exports rising at a 8 percent annualized pace. A few countries in the region are showing signs of rising inflationary pressures but overall at 2 percent regionwide inflation remains under control.
Developing Europe and Central Asia recorded strong industrial production growth earlier in the year, but was showing
signs of slowing down by April. During the first quarter, growth was concentrated in oil and gas producing regions like
Russia and Kazakhstan. While Turkey and Latvia also had strong IP growth, activity in other countries in the region like
Bulgaria, Romania, and Serbia was very weak or declining in sync with high-income Europe. Among the countries reporting data for April, industrial production growth slowed down in Russia, Ukraine and Kazakhstan. Regional tradealso accelerated sharply in the first quarter, with import demand expanding at a 42 percent annualized pace and exports
at a 17 percent annualized pace with Russia leading the way in exports and Russia and Lithuania in imports. Inflation
region-wide is easing although it remains above 7 percent in Armenia, Belarus and Turkey.
After several months of weakness, Latin American and the Caribbean is benefitting from a firming of U.S. auto andother durables demand. For the region as a whole, industrial output was growing at an 4.4 percent annualized pace during the first quarter of 2012, despite weak industrial activity in Brazil and Argentina. Trade is up sharply, reflecting
strong U.S. auto sales and robust demand from East Asia. Overall regional import demand was growing at a 16 percent
annualized pace and exports by 14 percent (3m/3m saar). Inflation pressures are also easing in response to a stabilization
in food price inflation, but prices were rising at a more-than 5 percent annualized pace (3m/3m saar) by April 2012 inseveral countries (Argentina, Honduras, Jamaica, Panama, Uruguay, St. Vincent, and R. B. de Venezuela).
In the Middle East & North Africa, industrial production growth turned positive toward the end of 2011, as the disruptions associated with the ongoing social unrest began to dissipate, at least in some countries. Among those countries forwhich data are available, industrial production was expanding at a 12 percent annualized pace in the three months to
February, but nevertheless remained 6 percent below its year ago level. Through the three months to February (the mostrecent observation for the region) exports were still declining at an 20 percent annualized pace even as import demand
was declining at an 16 percent pace, with weak domestic production playing a role in both phenomenon. Regional inflation is declining, thanks mainly to the stabilization in international food prices (the region is a major food importer), withannualized quarterly inflation in excess of 5 percent in Iran, Jordan, Syria and Tunisia.
Output in South Asia shows signs of a relatively weak pick up in 2012 after a prolonged slump. Trade and industrial
production data suggest that a sharp uptick in activity in early 2012 has since faltered, with regional industrial activity
slowing from an annualized pace of 18.8 percent during the three months ending January 2012 to 10.3 percent in March.
Similarly, regional export (import) volumes surged 22.6 percent (40.3 percent) in February, but weakened to 13.1 percent (2.5 percent) by April. Imports in US dollar terms have outpaced exports during the last 12 months ending April(partly due to higher crude oil prices), which has put current account positions under considerable stress. Inflation pressures in the region remain strong despite easing in India in early 2012, with inflation picking up to a more-than 10 percent annualized quarterly pace in India, Pakistan and Sri Lanka by April 2012.
In Sub-Saharan Africa, high-frequency data are more sparse. For the 4 countries where monthly industrial production
data are available, the extent of the slowdown in 2011 was less marked than elsewhere and so too are indications of arebound. Data suggest that aggregate activity eased slightly most recently — mainly reflecting production declines in
Nigeria through the end of 2012. More timely data for South Africa suggest a strengthening of growth to 7.7 percent
annualized pace in the third quarter. Trade data for the region lag however by February 2012, exports were declining at a
12 percent annualized pace and imports was expanding at a 21 percent pace. Unlike other regions, inflation seems to beon the rise, particularly in Burundi where it has reached 23 percent and Nigeria where annualized quarterly inflation
exceeded 15 percent in early 2012.

8

Global Economic Prospects June 2012

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in the fourth quarter returned to positive
territory.

Caribbean, and the Middle East and North
Africa.

Business sentiment also picked up through April(figure 8), suggesting that growth was likely tocontinue — albeit at a more modest pace thanduring the pre-crisis period. Data for May,
however, shows a marked downturn reflecting
the dampening influence of the uptick infinancial market turmoil as well as evidence thatthe pace of expansion in the United States andChina may be slowing. How durable this change
in sentiment proves to be and its impact on
investment expenditure will be a critical
determinant of the strength of activity going
forward (see following discussion ofheadwinds).

Despite the welcome normalization of domestic
food price inflation, domestic food prices indeveloping countries remain 25 percent higher
relative to non-food consumer prices than they
were at the beginning of 2005. While incomes indeveloping countries have continued to rise, thesharp increase in food prices will have limited
gains for many households, such as the urban
poor, where food often represents more-than one-half of their total expenditures.
Global imbalances appear to have stabilized
at new lower levels
The steady decline in global trade imbalancesthat has characterized the past 5 years, appears tobe slowing, with the aggregate absolute value ofcurrent account balances having declined from ahigh of 5.7 percent to about 4 percent of global
GDP in 2011 (figure 10).

Lower food-price inflation has translated into
a decline in headline inflation
Inflation in developing countries has eased
substantially since 2011 with prices now rising
at a 5.4 percent annualized pace during the 3months ending April 2012. The decline in total
inflation mainly reflecting an easing in domestic
food inflation in developing countries to below 5
percent in the three months to February 2012
(3m/3m saar) (figure 9). Food price inflation is
now 0.4 percentage point below headline
inflation. Food price inflation decelerated inSouth Asia, while in Europe and Central Asia
consumer food prices have actually declined. In
contrast, food price inflation accelerated in SubSaharan Africa and Latin America and the

Much of the decline to date reflects a fall in the
U.S. trade deficit and in China’s trade surplus
following the financial crisis. In the UnitedStates, while cyclical factors are still at play,
longer-term factors have been important as well.
In particular, the bursting of the housing bubble
saw spending levels fall back in-line withproduction and the U.S. personal savings rate
move from negative territory to 4.6 percent in2011. As a result, import growth slowed, and the
U.S. current account deficit declined from 6

Figure 9. Inflation in developing countries has
stabilized, due in part to a stabilization of food prices

Figure 10. Global imbalances have narrowed and are
expected to remain much lower than in the mid 2000s

Food and overall inflation, % change 3m/3m saar

Percent of world GDP

25

6

20
4

Developing Countries, Food Inflation

15

2

10

5

0

Developing Countries, Total Inflation0
Jan '06

Jan '08

Jan '102006
United States
Developing Oil exporters
Developing Oil importers

Jan '12Source: World Bank, ILO.

Source: World Bank.

9

2008

2010

High-income oil exporters
High Income Oil importers

2012
Germany
China

2014

Global Economic Prospects June 2012

Main Text

percent of GDP in 2006 to 3.1 percent of GDP in
2011.

Netherlands; banking downgrades andnationalizations elsewhere in the Area,
uncertainty and financial market tensions haveincreased sharply yet again — with financial
markets openly discussing the possibility andimplications of a Greek exit from the Euro Area
and the need for a bailout of some Spanishbanks.

At the same time, China’s surplus narrowed from
more than 10 percent of GDP in 2007 to 2.8
percent in 2011, as the country regained andeven surpassed full-employment levels of output.
The decline in China’s surplus partly reflects
reduced high-income import demand, but also a
post-crisis growth strategy in China that hasemphasized domestic sources of growth, notably
investment, which has raised imports faster thanexports.

Financial indicators have deteriorated markedly.
Credit Default Swap (CDS) rates throughout theEuro Area have increased, recouping almost all(90 percent) of the earlier declines (panel A,
figure 11). CDS rates in most non-European high-income countries (and developing Europe andCentral Asia) are also up, reaching between 60
and 90 percent of their earlier highs (panel B,
figure 11). CDS rates in most developing
countries have risen by about 30 and 50 percent
of earlier declines. Spreads on long-term bondsof Spain have reached 555 basis points, a record
high. Those of Portugal, Ireland, and Italy havealso risen by 276, 158, and 68 basis points,
respectively, but remain below earlier peaklevels.

Looking forward, global imbalances are expected
to remain broadly constant. Declining surpluses
among oil exporters, where windfall oil revenues
are projected to continue fueling import demand
growth in excess of export growth for several
years (a modest projected decline in global oil
prices will also play a role) are projected to beoffset by an increase in deficits among highincome countries. As domestic demand
recovers, their current account deficits are
expected to expand through 2014 (to 3.6 percent
in the case of the United States). China’s surplus
is projected to rise to about 3.6 percent of its
GDP as efforts to reduce its current reliance on
investment spending reorient demand toward lessimport-intensive consumer goods.

It is too soon to observe the impact of the recent
resurgence in financial market turmoil on the real-side of the economy, but it is almost certain to
be negative — particularly in high-income
Europe. How negative is extremely uncertain. Asof early June, financial market uncertainty inhigh-income Europe (as proxied by CDS rates)
was about the same level as in the fall of 2011.
However, because European CDS rates never fellback to their pre-crisis July 2011 levels, thedeterioration in European CDS rates from their2012 lows is only about 1/3 to 1/2 as much as it
was in the fall. This suggests that the hit on
activity (assuming no further deterioration)
would be between 1/3 and 1/2 as large as the one
endured in the fall of 2011, when Euro Areaquarterly growth rates declined by about 0.8
percentage points relative to expectations in June
2011 (subtracting about 0.4 percent of annual
growth). Elsewhere the extent of contagion has
been less severe.

Significant headwinds imply
moderate growth going forward
Notwithstanding that activity in both developed
and developing countries picked up in early
2012, growth for the year is likely to be modest
because of uncertainty in Europe, ongoingbanking-sector deleveraging, fiscal consolidationin high-income countries, and capacity
constraints in developing countries.
Renewed uncertainty in the Euro Area has
resulted in a sharp deterioration in financial
conditions
The situation in the Euro Area (and highgovernment debt and deficit levels in the UnitedStates and Japan) remain central elements thatwill shape global prospects over the next several
years. With inconclusive elections in Greece,changes of government in France and theOverall, although CDS rates are as high as they
were in the fall of 2011, because they did not fall
all the way back to their July 2011 levels, they
have increased only between 1/3 and 1/2 as muchas they did in the fall of 2011 — suggesting that

10

Global Economic Prospects June 2012

Main Text

Figure 11. Credit default swap rates have surged once again
A.

High-income country CDS rates, basis points
800
600
400
200
0
USA

Norway800

Great
BritainIcelandSwedenJapan

IsraelCzech
Republic

600

PolandBosniaHungary

2000

Most Recent ValueX

Denmark

2012 Minimum value

1500

Post July 2011 maximum

800 bpsJuly 2011 level

400

1000

200

500

0
Germany

B.

Netherlands

FranceAustria

Slovakia

Belgium

Slovenia

0
Spain

Italy

Ireland Portugal

Developing country CDS rates, basis points
800
600
400
200
0
ThailandChina

Malaysia PhillipinesIndonesia

RussiaTurkey800

LatviaLithuania

1500

600
July 2011 level

1000

400
500

200

0

0
Peru

Chile

BrazilMexico ColombiaUruguay

Morocco Egypt

Venezuela

Argentina

Source: World Bank, Datastream.

the direct impacts of the increase in turmoil may
be more muted than in 2011.

in the range of a 0.1 percentage point reduction
in growth rates in 2012.

In the baseline, the recent uncertainty and market
turmoil is assumed to endure for several months
without precipitating a disorderly resolution ofcurrent tensions, as policymakers are assumed tosucceed in re-working existing frameworks to thesatisfaction of financial markets.

Banking-sector deleveraging is cutting into
growth and developing country capital flows
Even before the latest bout of risk aversion,pressure on European banks to deleverageintensified in the second half of 2011. Faced withrising funding costs, increased counter-party risk
assessments, deteriorating bank-asset-quality,and growing concerns over the adequacy of
capitalization, European banks started to reduce
their loan books in the second half of 20113 (seeearlier figures 3 and 4).

The increased uncertainty is expected to cause
firms to delay investments and households tohold back on major expenditures. This is
assumed to slow second and third-quarter growth
rates in the Euro Area by some 0.4 percentage
points (0.2 percent for the year as a whole),roughly similar to the impacts observed in thesecond half of 2011.2 Impacts for the rest of theworld are assumed to be relatively muted, with
impacts for developing countries estimated to be

For the moment, data do not permit a fullaccounting of the extent of spillover effects todeveloping countries. However, the quantity ofsyndicated bank loans to developing countries

11

Global Economic Prospects June 2012

Main Text
finance remains lower than in the third quarterof 2011.

Figure 12. Sharp decline in trade finance in late 2011,
early 2012
Syndicated trade-finance, % of merchandise trade1210

2011Q1

2011Q2

2011Q3

2011Q4

According to the International Chamber ofCommerce 2012 Survey which covers a widerrange of trade finance activities, trade financelevels started to rise again in 2012, reflecting
improved trade and financial market conditions.
The surveys suggest that trade finance shortfalls
were sharpest for SME trading companies andlow-income countries, partly because higher risk
ratings under Basel III rules have reduced theattractiveness of such lending for banks. The
World Bank Group has increased its support for
trade finance in low income countries throughthe IFC’s Global Trade Finance Program, and a
new program to support commodity traders from
low income countries.

2012Q18
6
4
20
East-Asia &Pacific

Europe &Central Asia

Latin America Middle-East && Caribbean
North Africa

South Asia

Sub-SaharanAfricaSource: World Bank, Dealogic.

organized and led by European banks (notincluding interbank and bilateral loans) fell byalmost 40 percent during the 6 month period
October 2011-March 2012 compared with thesame period a year earlier. Almost all developing
regions were affected, with the biggest
percentage declines among projects in South
Asia (down 72 percent) partly reflecting adeterioration of investment conditions in India.
European-led lending to Russia and Turkey
plunged by 50 and 56 percent, respectively.

While the pace of deleveraging is expected toslow, lending conditions are likely to remaintight in years to come. Partly because markets
will demand higher interest rates for a given
level of risk, but also because of tighter
regulation. Market regulators indicate that many
European banks have already met the new capitalrequirements for July 2012, and most U.S. banks
passed recent stress tests. However, banks will
start operating under Basel III in 2013, with arange of provisions being gradually phased inthrough 2019–implying continued tightening ofconditions. Some European regulators haveproposed more stringent capital requirements
than the Basel III minimum, which may kick inearlier.

Partial data on mainly syndicated trade finance,suggest that trade finance delivered by European
banks (major players in this market) also
declined in the fourth quarter of 2011 (latest data
available). However, anecdotal evidence
suggests that lenders from other regions (mainly
Asian financial institutions) may have partly
filled the funding gap.

Figure 13. Fiscal consolidation to remain a drag on
growthEstimated and expected change in structural deficit, percent of GDP

Overall, syndicated trade-finance declined from apost crisis high of 2.8 percent of developing
country exports to a post-crisis low of 1.4
percent in the first quarter of 2012 (figure 12).
Declines were concentrated in Europe andCentral Asia, but felt everywhere. Among
regions with first quarter 2012 data, there has
been some recovery in East Asia & Pacific, Latin
America & the Caribbean, but further
compression in Europe and Central Asia andSouth Asia. Moreover, even in regions where
losses have been made up the share of regional
exports being covered by syndicated trade

1.0
0.5

0.0
-0.5
-1.0

-1.5
2011

-2.0
Euro Area

2012
United States

Sources: World Bank. IMF.

12

2013
Japan

Global Economic Prospects June 2012

Main Text

Figure 14. Most developing countries outside Europe& Central Asia have little spare capacity
Positive gap, slowing growth
Slowing to sustainable growthrate

8Output gap relative to potential in 2011

6

Figure 15. Capacity constraints and limited policy
space in many large middle-income countries

Positive output gap, accelerating
growthRisks of overheating

4
2

Debt/GDP (/10)

0
-2
-4
-6
-8

-8

Negative output gap,
slowing growth

Negative output gap,
accelerating growth

Deepening
recession

Economy recovering-6

Output Gap
12
10
8
6
4
2
0
-2
-4

Current acct Bal.
(reverse axis)
China
BrazilTurkey
India

-4

-2

0

2

4

6

8

Gov't bal. (reverse
axis)

Growth acceleration in 2012 (% points)
Latin America & Caribbean
East Asia & PacificSouth Asia

Indonesia
Inflation

Zero

Europe & Central Asia
Middle-East & North Africa
Sub-Saharan Africa

Source World Bank.

Source: World Bank.

Even tougher capital requirements may be
imposed further down the line. In an effort tomitigate the impact on Central and Eastern
European economies, officials, international
financial institutions, and private banks signed
the Vienna Initiative II in March 2012 ensuring
supervisory and fiscal cooperation between home
- and host-country authorities. Overall, banklending for developing economies is expected tobe less abundant and more expensive in coming
years – with negative implications for FDI,
investment and potential growth.

The pace of fiscal consolidation in the Euro Area
is expected to ease in 2013 and 2014 as efforts toreturn to pre-crisis deficits levels are welladvanced in many countries. In the United States
and Japan, however, the drag on growth isexpected to intensify in part because disasterrelated spending in Japan actually increased
structural deficits in 2011, while in the UnitedStates the pace of fiscal consolidation so far has
been modest.
Capacity utilization may become a binding
constraint in major developing countries

Fiscal consolidation in high-income countries
will remain a drag on growth

Developing countries have been important
motors of global growth in the post-crisis period,
generating about 50 percent of the increase inglobal import demand and GDP growth. Whilethey are expected to continue to play animportant role, many of the larger and fastergrowing economies are close to or above
potential (figure 14), which suggests that they
will not be able to provide as much an impetus toglobal growth as before.

Ongoing fiscal consolidation will also continue
to hold back high-income growth over theforecast period. Whereas increased government
spending in 2009 (up about 5½ percent of GDP)at the height of the financial crisis supported
GDP growth in high-income countries, the partial
withdrawal of that stimulus is estimated to have
reduced GDP growth by around 1 percent in eachof 2010 and 2011.

Outside of Europe and Central Asia and the
Middle-East and North Africa—regions hard-hit
by either the financial crisis or domestic turmoil—about 65 percent of developing countries forwhich data are available are operating at close toor above potential (output gaps greater than –1
percent).

This net drag on high-income countries’ growth
will be even stronger in 2012. The International
Monetary Fund estimates that structural deficits
in the United States and the Euro Area will
decline by about 1.5 percent (of GDP) during
2012 (figure 13). Although such steps are
essential to put these countries’ fiscal positions
back on a sustainable fiscal path, they will be a
drag on GDP growth in 2012.

In some of these countries, capacity constraints
are generating inflationary pressures in either
goods or asset markets, or raising current account13

Global Economic Prospects June 2012

Main Text

Box 2. Emerging capacity constraints suggest that policy will have to tighten if medium-term inflationarypressures are to be avoided and policy buffers re-stocked
Outside of Europe and Central Asia and the Middle-East and North Africa — regions hard-hit by either the financial crisis ordomestic turmoil —about half of the developing countries for which data are available are operating at or above potential. In
several of these countries, macroeconomic policy is relatively loose and indicators are pointing towards developing tensions
and imbalances.
Box figure 2.1 Higher than normal inflation
Percent

Box figure 2.2. Deteriorating current accounts
Percent of GDP

20

10

15

5
10

Argentina
Thailand

Pakistan
China

5

China

0

Indonesia
0

Argentina

-5
-5
-10
Jan '08

RussiaThailandJan '09

Jan '10

TurkeyJan '11-10

Jan '12Source: World Bank.

2000

2002

2004

2006

2008

2010

2012

Source: World Bank.

Inflation is above long term averages in Argentina, China, Pakistan and Thailand (box figure 2.1). In many countries, domestic Box figure 2.3. Historically, low real interest rates
demand has been expanding more quickly than domestic produc- Percent
tion – resulting in deteriorating current account balances in
10
Argentina, China, Indonesia, Russia, Thailand and Turkey (boxfigure 2.2). In the case of China, this may reflect a welcome5
Chinareorientation of production toward domestic demand. Elsewhere,
South Africa
rising current account deficits may represent weakening com0
petitive positions—albeit partly related to undervalued develMexico
oped countries’ currencies.
-5
Russian Federation

BrazilTurkeyIn some of these developing countries, monetary policy re-10
Indonesia
mains very loose (albeit also partly reflecting low real rates
elsewhere). In Brazil, China, Indonesia, Mexico, Russia, Turkey-15
Jan '08
Jan '09
Jan '10Jan '11Jan '12and South Africa real interest are below normal (box figure 2.3).
While some of these economies are slowing, which should reduce tensions (notably in Brazil), in others output is projected to Source: World Bank.
accelerate in 2012 and 2013, raising the possibility that tensions
will rise further or that opportunities to rebalance policy and regenerate policy buffers that were consumed by the crisis are notbeing exploited.

imbalances (box 2). In some, fiscal and ormonetary policy remains very loose, raising thepossibility that financial tensions will intensify
and suggesting that opportunities to rebalance
policy and regenerate policy buffers that wereconsumed by the crisis are not being exploited.

inflation is high, and fiscal and current accountdeficits elevated (figure 15).

The outlook : weak growth in 2012,a modest acceleration in 2013 and2014

Domestic tensions appear to be particularly acutein countries like Turkey and India where

The baseline forecast projects that the global
economy will expand 2.5 in 2012, before picking

14

Global Economic Prospects June 2012

Main Text

Box 3. Weak growth in the second half of 2011 means that 2012 carry over is unusually low — implying
slow annual growth in 2012

-2
-4
-6

10
8
6

4
2

JordanGeorgia

China

Sri Lanka

Indonesia

Paraguay

Costa Rica

Colombia

Russian Federation

Peru

Chile

Philippines

LatviaMalaysia

India

Argentina

Lithuania

Tunisia

MexicoTurkeyUkraineSouth Africa

BrazilBulgaria-4

Bolivia0-2

ThailandTake two examples. Growth in the United States wasstronger in the second half than in first half of 2011,
while in Brazil the opposite was true. Thus, eventhough annual growth in the U.S. in 2011 was only
1.7 percent (vs 2.7 percent for Brazil), growth accelerated during the course of the year and was strongest in the third and fourth quarters. As a result, it willcontribute a full 0.9 percentage point to 2012 annual
GDP growth. In contrast, in Brazil, growth wasstrong in the first half and stagnant in the second
half. As a result, the carry over into 2012 will besmall, i.e. 0.18 percentage points.

GreecePortugal
Netherlands
Slovenia
Italy
Taiwan, China
Malta
Singapore
Ireland
Croatia
Spain
SwedenDenmark
Czech Republic
Austria
Belgium
United Kingdom
FranceGermany
New ZealandHong Kong SAR, China
Estonia
Finland
Hungary
Luxembourg
Switzerland
CanadaJapan
United States
Korea, Rep.
IsraelSlovak Republic
Australia
NorwayPolandThe quarterly pattern of growth in the previous year Box figure 3.1 Poor growth in the second half implies historipartially determines the annual growth rate of the cally low carryover for 2012
following year. This phenomenon, called carryover Contribution of past year’s growth to next year’s growth, percent
by economists,5 is of more than academic interest
8(see Tödter, 2010 for a derivation of this relation6ship). When growth is relatively steady during thecourse of the two years, carryover has relatively little
4
impact. However, it can have a strong influence on
2annual growth in following years when quarterly
growth is either unusually strong or weak at the end
0of the year preceding year.

Because growth in most countries followed a similar-6
Historical average carry over +/- 1/2 std. deviation
pattern to Brazil last year, the carryover for 2012 is2012 carry over-8much lower than normal—falling outside the one-10
standard deviation range of historical experience inmost high-income countries and in the lower range
for most developing countries (box figure 3.1). Source: World Bank.
Overall, the carryover for 2012 will be 0.5 percentage points lower than usual for developing countries, and 0.3 percentage points lower for high-income countries. Meaning forany given quarterly profile of GDP growth during 2012, annual GDP will be about 0.3 and 0.5 percentage points lower in 2012
than it would have been had growth in 2011 followed a more normal pattern.

up to 3.0 and 3.3 percent in 2013 and 2014 (3.3,
3.9 and 4.2 percent when calculated usingpurchasing power parity weights).
Outside of the Euro Area, the slowdown inannual growth between 2011 and 2012 (from 2.8
to 2.4 percent) is to a large extent a statisticalreflection of slow growth in the second half of2011 (box 3). Quarterly growth rates during
2012 are expected to be stronger than in 2011 formost developing and many high-income
countries. By the same token, the apparent
acceleration in annual growth in 2013, mainlyreflects the expected strengthening of quarterly
growth during 2012—which increases thecontribution of carry-over to annual growth in2013.

GDP in high-income countries is projected torise 1.4 percent in 2012. As with developing
countries, weak carryover will mask an expectedgradual strengthening of quarterly growth inmost countries in the annual numbers. In highincome Europe, 2nd and 3rd quarter growth isprojected to be negative due to increased
precautionary saving in the face of turmoil.
Combined with weak carry over, this will resultin an annual GDP decline of 0.3 percent. Annual
growth in high income countries is projected topick up to 0.7 and 1.4 percent in 2013 and 2014,
partly reflecting a return of carryover to morenormal levels. While headwinds are projected toease, they will remain and continue to preventthe kind of robust growth that would see output
gaps close more quickly.

Weak, but strengthening growth in highincome countries

Annual growth in the United States is projectedto accelerate from 1.7 percent in 2011 to 2.1

15

Global Economic Prospects June 2012

Main Text

percent in 2012,
but quarterly growth isexpected to display a somewhat different
pattern. Already, quarterly GDP growth has
slowed from 3 percent in the fourth quarter of2011 to 1.9 percent in the first quarter —reflecting in part a tightening of fiscal policy.
Going forward, quarterly growth in the U.S. is
expected to remain relatively modest as
continued fiscal consolidation cuts into
government spending, which will only bepartially offset by strengthening private sector
demand and improving net exports. GDP growthis expected to strengthen only modestly to 2.4
and 2.8 percent in 2013 and 2014 respectively.

Figure 16. Further required deficit reductions for fiscal sustainability
2011
Philippines
Thailand
MexicoArgentina
Kenya
Malaysia
MoroccoPakistanBrazilIndia
JordanGermany
United Kingdom
FranceBelgium
IcelandUnited States
Ireland
Portugal
Italy
Japan
GreeceAfter the profound negative impact that theearthquake and tsunami (and the disruptions
emanating from the Thai floods) had on theJapanese economy, growth is forecast to reboundto 1.5 percent over 2013-14, boosted in part bycontinued reconstruction-related fiscal spending.

0

50 100 150 200

Gross debt (% of GDP)

Following a weak 2012, developing country
growth is projected to pick up in 2013 before
easing in 2014

-5

0

5

10

15

20

Required adjustment (% GDP)

Source: IMF Fiscal Monitor, 2012high-income countries, the developing world
will still account for more than half of global
growth throughout 2012/14.

The regional annexes to this report and box 4 containmore detailed accounts of regional economic trends,
including country-specific forecasts.

The outlook remains fragile

Developing country GDP is expected to expandby 6 percent in each of 2013 and 2014,
somewhat slower than the 6.3 percent averagepace during the first 7 years of this century. For
2012, weak carryover from the year before will
be reflected in a deceleration of annual growth in
all regions despite firming quarterly growth, but
subsequent developments diverge across regions.

Financial market uncertainty and fiscal
consolidation associated with the high deficits
and debt levels of high-income countries arelikely to be recurring sources of volatility forseveral years to come. Given current government
deficit and debt levels (figure 16), it will takeyears of concerted political and economic effort
before debt to GDP levels of the United States,
Japan and many Euro Area countries are brought
down and on a path to stabilize at 60 percent of
GDP (IMF, 2012).

In South Asia, growth is anticipated to remain
subdued, as growth in India settles at around 7
percent over the 2012-14 period. Elsewhere, theacceleration in 2013 and 2014 is expected to bestrongest in the Middle-East & North Africa as
the conflicts that are currently disrupting activity
in several countries in the region are assumed togradually resolve during the course of 2012.
Growth in several large middle-income countries(notably, Brazil and China) is expected tomoderate somewhat in 2014 as countries bumpup against capacity constraints.

Although debt levels in developing countries arelower, several countries (notably Jordan, India
and Pakistan) would have to reduce theirstructural primary deficits by 5 or more percent
of GDP if they are to reduce debt to 40 percent
of GDP by 2020 (or prevent debt-to-GDP ratiosfrom rising further). Others like Brazil andPhilippines require little additional adjustment.
The metric for high-income country debt
stability is more generous (60 percent of GDP).
Nevertheless, the amount of structural

Despite the slower growth projected fordeveloping countries, and the acceleration in

16

Global Economic Prospects June 2012

Main Text

Box 4. Regional outlook
The regional annexes to this report contain more detailed accounts of regional economic trends, including countryspecific forecasts (for more details, www.worldbank.org/globaloutlook)
GDP growth for the East Asia and the Pacific region slowed to 8.3 percent in 2011, much slower than the post-crisis recovery
pace of 9.7 recorded in 2010. The slowing was more marked for those countries outside of China, whose aggregate growth rate
slowed by a full 2.5 percentage points to 4.5 percent in the year, in large part due to a decline in Thailand under massive flooding conditions. East Asia is projected to slow further to growth of 7.6 percent in 2012, as domestic demand in China cools in
response to earlier policy actions and relatively weak demand from high-income countries. Against this background, Chinese
policy has recently turned more accommodative. Regional outturns will be boosted as global trade growth firms, regional GDP
is expected to strengthen over 2013 and 2014, growing during each of the two years by about 8 percent for the region, 8.5 percent for China, and 5.8 percent for East Asia excluding China.
GDP in developing Europe and Central Asia increased an estimated 5.6 percent in 2011, despite the renewed financial turmoil
and weakening Euro Area demand in late 2011. The growth in 2011 was supported by the robust domestic demand and good
harvests in countries such as Russia, Romania and Turkey. Bad weather earlier this year, renewed tensions in Euro-area, capacity constraints in some countries and deleveraging by European banks are projected to slow regional GDP growth to 3.3 percent
in 2012, before a modest recovery begins in 2013 and 2014 with growth of 4.1 percent and 4.4 percent, respectively. Domestic
demand is expected to remain robust in most resource-rich economies benefiting from still high commodity prices, but capacity
constraints will hold growth back in Russia over the medium-term. Among regional oil importers, high commodity prices willcontribute to slower growth, deteriorating current accounts and fuel inflation. Upcoming elections are expected to delay progress in fiscal adjustment in several middle income countries in the region while monetary policies are likely to remain loose
given still ample spare capacity in most economies.
Growth for the Latin America and the Caribbean region is projected to slow to 3.5 percent in 2012, from 4.3 percent in 2011,
due to a weaker global external environment, high oil prices, capacity constraints in selected economies and weak carry-overeffects following the slowdown in the second half of 2011 in some of the largest economies in the region. Renewed tensions in
the global financial markets and risk aversion since May 2012 and marked declines in commodity prices and weaker capital
flows means the region is facing renewed headwinds. Better financial conditions and firming growth outside the region should
contribute to a modest acceleration of growth to 4.1 percent in 2013 before easing modestly in 2014. The recent volatility ofinternational confidence and capital flows has complicated macroeconomic policy in the region, perhaps prompting policy
makers to switch course more often than domestic conditions warrant as activity reacts to large swings in external conditions.
Economic developments in the Middle East and North Africa region continue to be heavily influenced by the disruptions
caused by the social unrest that started more than 18 months ago. In addition to the challenges posed by societal violence insome cases and sometimes fundamental political change, the external environment for the region is weak because of its close
ties with high-income Europe. GDP growth for the aggregate of the developing region eased to 1 percent in 2011 from 3.8 percent in 2010, on weaker outturns for Egypt and Tunisia; and declining output for those countries in civil conflict. Output isprojected to strengthen in 2013 and 2014 on the back of increased political stability, improved conditions in Europe, portending a return of FDI and tourism flows. Nevertheless, regional GDP is projected to rise by only 2.2 and 3.4 percent in 2013 and2014 – well below the 4.8 percent average growth recorded during 2000-2008.
GDP growth in South Asia slowed to 7.1 percent in 2011 from 8.6 percent in 2010, as headwinds from the Euro Area crisis
caused a deceleration in exports and a reversal of portfolio capital. Growth in India was particularly weak due to monetary
policy tightening, stalled reforms, electricity shortages, which, along with fiscal and inflation concerns, cut into investment
activity. Relatively resilient remittances and good agricultural harvests have supported consumption demand in the region. Sri
Lanka’s growth further benefitted from reconstruction spending. Regional GDP growth is expected to slow further to 6.4 percent in 2012, reflecting weak carry over from the sharp deceleration in the second half of 2011 and the fragile external environment. Fiscal deficits, entrenched inflation, and electricity shortages continue to weigh negatively on investment activity and are
expected to limit regional growth to a relatively modest 6.6 percent annual average during 2013 and 2014.
Despite the turbulent global economic environment in 2011, growth in Sub-Saharan Africa remained robust, steadying at 4.7
percent in 2011 - just shy of its pre-crisis average of 5 percent. Excluding South Africa, which accounts for over a third of theregions GDP, growth in the rest of Sub Saharan Africa was stronger at 5.5 percent in 2011, making it one of the fastest growing
developing regions. Looking forward, still high commodity prices, ongoing investments in new mineral discoveries, policy
loosening in some countries, and lower inflation rates, should support robust domestic demand, with GDP growth projected at 5
percent in 2012, with a pick up expected in 2013 as the global economy rebounds. Nonetheless risks to these forecasts remaintilted to the downside, as the global economy remains fragile, and weaker growth in China could curtail growth in the resourcedependent Sub Saharan economies.

17

Global Economic Prospects June 2012

Main Text

adjustment required is much larger in manycases — with the United States and Japanrequiring steeper cuts in spending than any EuroArea economy.

predictive, but rather illustrative of themagnitude of impacts that might be envisaged if
the situation in high-income Europe were to
deteriorate sharply. They are presented, in thespirit of recent stress-tests of banking systems, asa tool that could help policymakers indeveloping countries prepare for the worst, andthey are presented with full recognition of thelimitations of the tools that underpin them. If adownside scenario actually materializes, its
precise nature, triggers, and impacts will
doubtless be very different from these
illustrations.

In the immediate term, tensions emanatingfrom the Euro Area are the most serious
potential risk for developing countries
Significant progress has been made in Europe on
the policy front both in terms of the domestic
structural and fiscal policies of high-spread
European economies; and at the level of EuroArea institutions (renewed commitments to panEuropean fiscal rules; enhanced Euro Area and
IMF firewalls; and a more pro-active stancetaken by the ECB).

With these caveats in mind, these simulations
suggest that if there were a major deterioration in
conditions, GDP in developing countries could
be much (4.0 percent) weaker than in thebaseline.

Nevertheless, policy makers have yet to find theright mix of structural and macroeconomic
policies to turn the vicious circle (whereby
market-driven cuts in fiscal spending so dampen
growth that they worsen fiscal sustainability andrequire even more cuts to spending) into avirtuous circle where reduced tensions yield
lower interest rates — and deficits— that allow
for stronger private-sector growth and even more
rapid progress toward fiscal sustainability. As aresult, even if the current bout of tensions pass as
is assumed in the baseline, markets are likely toremain nervous and further bouts of turmoil andpolicy reaction may be in store.

Transmission
countries

channelsfordeveloping

Countries with strong reliance on external
remittances, tourism, commodities or with highlevels of short-term debt or medium-term
financing requirements are likely to be hardest
hit.

Current conditions in the Euro Area areworrisome. Bond yields on the debt of several
countries have reached levels that, in the past,
have been associated with interventions byinternational agencies. At the same time,
deposits withdrawals from banks speak to a
weakening of domestic confidence in thefinancial systems of some countries.
As discussed in the January 2012 edition of
Global Economic Prospects (World Bank,
2012), if conditions in high-income Europe
deteriorate sharply such that one or morecountries found themselves frozen out offinancial markets, global economic
consequences could be severe.
Box 5 updates two scenarios that were presented
in the January 2012 edition of Global Economic
Prospects. The scenarios are not meant to be18



Remittances to developing countries could
decline by 5 percent or more, representing as
much as 3 or more percent of GDP decline
in incomes among countries heavily
dependent on remittances.



Tourism, especially from high-income
Europe would be impacted with significant
implications for countries in North Africa
and the island economies of the Caribbean.

Many countries have reduced short-term
debt exposures, partly because of Euro Areadeleveraging. Nevertheless, many countries
continue to have high levels of short-term
debt and could be forced to cut sharply into
both government and public spending if
global finance were to freeze up as it might
do in the case of a severe crisis (seediscussion below).

In the instance of a serious recession,commodity prices could fall precipitously,
cutting into government revenues. For
example, a 20% fall in oil prices could
reduce fiscal balances by 1.2 percent of GDP

Global Economic Prospects June 2012

Main Text

Box 5 A downside scenario4
As discussed in the previous edition of Global Economic Prospects (GEP), the form that an escalation of the crisis might takein the current economic context, should one occur, is very uncertain — partly because it is impossible to predict what exactly
might trigger it, and partly because the powerful forces unleashed could easily take a route very different from the one foreseen
by standard economic reasoning. 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 theassumptions that the scenario makes about the nature and strength of precipitating events, and as to the path and magnitude of
their impacts). The approach taken here follows closely scenarios
Box table 5.1 A relatively orderly crisis in a few
outlined in the January GEP (World Bank, 2012).
small countries

The first scenario assumes that one or two small Euro Area
2012
2013
2014
economies face a serious credit squeeze (box table 5.1). An inability World
-1.2
-1.0
-0.5
High Income countries
-1.2
-1.0
-0.5
to access finance that extends to the private sectors of these
Other High Income
-1.1
-0.9
-0.5
economies causes GDP in the directly affected countries to fall
Euro area (17)
-1.6
-1.2
-0.4
(broadly consistent with what has been observed when other highDeveloping countries
-1.2
-0.9
-0.4
income economies that have faced financial crises — see Abiad and
Low Income
-0.6
-0.5
-0.3
Middle Income
-1.3
-1.0
-0.5
others, 2011). Other (mainly European) economies are affected
through reduced exports (imports from the directly affected countries
Developing Oil exporters
-1.4
-1.1
-0.4
fall by between 6 and 10 percent). It is assumed in this scenario that
Developing Oil importers
-1.2
-0.9
-0.5
although borrowing costs in other European economies rise and banks
tighten lending conditions due to losses in the directly affected
East Asia & Pacific
-1.2
-0.8
-0.4
Europe & Central Asia
-1.5
-1.1
-0.4
economies and uncertainty, the banking-sector stress in Europe isLatin America & Caribbean
-1.4
-1.1
-0.5
contained and does not spread to the rest of the high-income world.
Middle East & N. Africa
-1.1
-0.8
-0.2
However, uncertainty and concerns about further credit squeezes
South Asia
-0.9
-0.9
-0.7
induces increased precautionary savings among both firms and
Sub-Saharan Africa
-1.2
-0.8
-0.3
households worldwide.1 While this scenario does not envisage an exit
Source: World Bank.
of the countries from the Euro Area, it is felt that the modeled effects
would capture the bulk of impacts for developing countries should Box table 5.2 A disorderly crisis involving several
such an event occur.
countries
Overall, GDP in the Euro Area falls by 1.6 percent relative toWorldbaseline, and by 1.1 percent in the rest of the high-income world.
High Income countries
Developing countries are also hit. Direct trade and tighter global
Other High Income
Euro area (17)financial conditions plus increases in domestic savings by firms andDeveloping countries
households as a result of the increased global uncertainty contribute
Low Income
to a 1.3 percent decline in middle-income GDP relative to baseline in
Middle Income
2012. The decline among low-income countries (0.6 percent) is less
Developing Oil exporters
pronounced reflecting weaker financial and trade integration. Weaker
Developing Oil importers
global growth contributes to a 8.3 percent decline in oil prices and a
1.6 percent drop in internationally-traded food commodity prices.
In the second scenario (box table 5.2) 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 EuroArea, global financial systems and precautionary savings are much

East Asia & Pacific
Europe & Central Asia
Latin America & Caribbean
Middle East & N. Africa
South Asia
Sub-Saharan Africa

2012
-2.0
-2.1
-1.4
-3.9
-1.8
-1.0
-1.8

2013
-4.5
-4.7
-3.3
-8.5
-4.0
-2.3
-4.0

2014
-3.7
-3.9
-2.9
-6.5
-3.2
-2.0
-3.2

-2.0
-1.7

-4.4
-3.8

-3.3
-3.1

-1.8
-2.4
-1.7
-1.9
-1.2
-1.7

-3.9
-5.2
-3.8
-4.1
-3.1
-3.7

-3.0
-3.9
-3.2
-2.9
-3.2
-2.7

Source: World Bank.

1.

The shock 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 the baseline). The effects on consumer
and investment demand are drawn as the midpoint between the median and mean values derived from an analysis of financial
crises over the past 20 years. Confidence effects in other countries are modeled as a 1.0 percentage point increase in household savings and a 2.5 percent decrease in investment growth, with impacts doubled in high-income Europe, and halved in
low income countries (due to weak global financial integration). Confidence effects are assumed to be relatively short-lived,(Continued on page 20)

19

Global Economic Prospects June 2012

Main Text(Continued from page 19)

larger because the shock is about 8 times larger.2 Euro Area GDP falls by 8.5 percent relative to the baseline in 2013, andbecause confidence effects are bigger. GDP impacts for other high-income countries (-3.3 percent of GDP) and developing
countries (-4.0 percent ) are less severe but still enough to push them into a deep recession. Overall, global trade falls by 10
percent (relative to baseline) and oil prices by 25 percent (5 percent for food).
significantly fading after 6 months.
2.
Scenario 2 assumes that two larger European economies are also frozen out of capital markets and subjected to a 7 percent
cut in consumer spending and a 25 percent fall in investment. Confidence effects in other countries are still 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). Confidence effects are
assumed to last 12 months in this scenario.

in oil exporting countries, but help tocushion the blow among oil importing
economies (see discussion below).


external vulnerability has increased as well.
Developing country current account deficits
have deteriorated by an average of 2.7 percent ofGDP, with most of the deterioration having beenamong oil importing and non-oil commodity
exporters. Especially if international financial
markets close up, in an acute crisis countries
may find themselves unable to respond as
forcefully as they did in 2008/09 and may findthemselves forced to cut back on government
spending and or imports in a way that they did
not at that time.

A disorderly unwinding of sovereign debt
obligations could force a much accelerated
process of bank-deleveraging in Europe witheconomies in Europe and Central Asia, andto a lesser degree Latin America, among thehardest hit.

Macroeconomic buffers have been depleted
since 2007, increasing developing country
vulnerabilities.

Currency reserves remain elevated at theaggregate levels, suggesting that most countries

Unlike 2008/09, growth in developing countries
would probably not bounce back as quickly
because economies enter into this crisis in much
weaker positions than in 2008/09. On averagedeveloping country government deficits are 2.5
percent of GDP higher than in 2007—
suggesting they will be less able to respond to adownturn with fiscal stimulus (table 4). Their

Figure 17. High levels of short-term debt make countries vulnerable to a freezing of international capitalflows
Short-term debt as share of international reserves, Percent
TurkeyEl Salvador
Chile

Vietnam
Dominican Republic
GuyanaTable 4. Macroeconomic vulnerabilities have increased on balance
Fiscal Balance,% of GDP
2007
2011 Change

Vanuatu
Costa Rica
EcuadorCurrent AccountBalance, % of GDP
2007
2011 Change

Short-term debt >50% of reserves

Uruguay
Albania
Macedonia, FYR
India

All Developing
Oil exporters
Other resouce richCommodity importers

0.0
1.3
5.3
-1.0

-2.0
-0.6
-0.3
-2.8

-2.0
-1.9
-5.6
-1.8

3.2
4.7
2.8
2.4

0.5
3.5
-2.4
-0.8

-2.7
-1.2
-5.2
-3.2

Romania

2011Q4

Indonesia

2010Q4

SerbiaVenezuela, RB
Egypt, Arab Rep.

All Developing
Commodity exporters
Commodity importers

Short-term debt toreserves ratio, %2007
2011 Change
26.4
18.4
-8.0
26.0
13.9 -12.0
26.4
18.4
-8.0

Reserves, months ofimport cover
2007
2011 Change
4.9
5.1
0.2
6.5
6.5
0.0
4.7
4.8
0.1

0

10

20

30

40

50

60

70

80

90

Note: Cross-border short-term debt stocks calculated using
the BIS consolidated database. Numbers reflect short-termcross-border and local claims in foreign currency of foreignbanks reporting to BIS (with an original maturity of one year
or less). BIS data may differ from those reported by national
authorities.

Note: Fiscal Balance and Current Account Balance are GDP weighted averages.
Debt data are expressed as medians of country-level data.

Source: World Bank and Bank for International Settlements.

Source: World Bank.

20

Global Economic Prospects June 2012

Main Text

Box 6. Impact of higher oil and commodity prices on GDP, current accounts and fiscal balances
Oil remains a central commodity in the world economy and outturns could be significantly affected if global supply were to beinterrupted. The most notable risks currently stem from political instability in the Middle-East and North Africa and geopolitical tensions surrounding Iran.
Box table 6.1 reports results from a simulation that assumes that a significant disruption to global oil supply causes world
prices to rise by about $50 per barrel beginning in the middle of this year and stay at that level for about 12 months (modeled asa $25 shock in each of 2012 and 2013). Notwithstanding the slower growth that higher oil prices would induce, metal- andfood prices would also rise by 9.1 and 4.6 percent respectively Box table 6.1. Impact of a sustained $50 increase inabove the baseline. The combined impact of this upward ad- the price of oil
Real GDP
Current Account (%justment in commodity prices could shave off 0.5 and 0.6 perFiscal Balance (% GDP)(% deviation from baseline)
GDP)
centage points from global output in 2012 and 2013 respec2012
2013
2014
2012
2013
2014
2012
2013
2014
tively, with GDP in developing oil importing countries re- World
-0.5
-0.6
-0.2
0.0
0.0
0.0
0.0
0.0
0.0
duced (relative to baseline) by 0.9 and 1.3 percentage points
High income
-0.5
-0.6
-0.2
-0.1
-0.1
-0.1
-0.3
-0.3
0.0
over the two years.
Oil importers
-0.6
-0.8
-0.3
-0.5
-0.6
-0.2
-0.7
-0.6
0.1
Commodity exporting countries see a gain in real income as
the prices of their exports rise, with the income effect strongest
in countries where exports represent a large share of GDP —notably oil exporting countries in the Middle-East and SubSaharan Africa, and metal exporters such as South Africa.
Countries with significant export links to countries experiencing strong terms of trade adjustments (such as those between
oil-importers countries in Europe and Central Asia and Russia)
will benefit from increased import demand which attenuates
the impact on their GDP.

Oil exporters

0.2

0.4

0.4

2.1

2.3

0.6

1.8

1.3

-0.7

-0.5

-0.7

-0.3

0.2

0.2

0.0

0.3

0.0

-0.3

Oil importers

-0.9

-1.3

-0.5

-0.4

-0.4

0.0

-0.6

-0.6

0.1

Oil exporters

0.4

0.6

0.3

1.4

1.2

0.0

2.1

1.2

-1.2

Middle income

-0.5

-0.7

-0.3

0.2

0.2

0.0

0.3

0.0

-0.3

Low income

-0.7

-1.0

-0.4

-0.3

-0.3

-0.1

-0.7

-0.6

0.0

East Asia & Pacific

-1.0

-1.4

-0.5

-0.3

-0.4

-0.1

-0.5

-0.4

Oil importers

-1.1

-1.5

-0.5

-0.4

-0.5

-0.1

-0.6

-0.5

0.0

Oil exporters

-0.6

-0.7

-0.2

0.1

0.1

0.0

0.2

0.1

-0.1

Europe and Central Asia

-0.1

-0.1

0.0

1.4

1.0

0.0

2.1

1.4

-0.9

Oil importers

-1.0

-1.3

-0.6

-0.5

-0.6

-0.4

-0.6

-0.5

0.2

Oil exporters

0.6

1.0

0.6

2.3

1.8

0.2

3.3

2.1

-1.7
-0.2

Developing countries

Latin America and Caribbean

For commodity importers, higher commodity prices reducereal-income and demand directly, but also indirectly throughhigher inflation and higher interest rates. Oil and food importing nations in the Middle East and North Africa region areamong those hardest hit.

0.1

0.1

0.1

0.3

0.5

0.3

0.4

0.2

Oil importers

-0.6

-0.8

-0.4

-0.4

0.0

0.6

-0.3

-0.2

0.1

Oil exporters

0.6

1.0

0.5

1.1

1.0

0.0

1.0

0.5

-0.6

Middle East and North Africa

Current account balances of oil exporters are expected to riseby up to 4.5 percent of GDP in Sub Saharan Africa, and by
about 2.8 percent in the Middle East and North Africa in 2012.
In the East Asia and the Pacific region, external balances may
decline by about 0.5 of GDP.

0.0

0.3

0.2

-0.3

1.5

1.0

-0.5

2.1

0.8

-1.4

Oil importers

-0.7

-1.1

-0.5

-0.4

-0.7

-0.5

-1.2

-1.3

-0.1

Oil exporters

0.7

0.8

-0.3

2.0

1.4

-0.6

2.8

1.1

-1.9

South Asia

-1.0

-1.3

-0.5

-0.6

-0.8

-0.3

-1.6

-1.5

0.1

Sub-Saharan Africa

-0.1

-0.2

-0.2

0.5

0.8

0.2

2.4

1.3

-1.5

Oil importers

-0.1

-0.2

-0.1

0.0

0.0

0.1

0.0

-0.1

-0.1

Oil exporters

0.0

-0.2

-0.4

1.0

1.4

0.2

4.5

2.1

-3.3

Source: World Bank.

will be able to deal with short-term fluctuations
in capital flows. However, in several countries
they are low both with respect to imports andshort-term debt. Eleven developing countries forwhich data exist have short-term debt levels thatexceed 50 percent of their reserves and in 10 ofthese short-term debt to reserve ratios have been
increasing (figure 17).
But a stronger recovery in demand is also
possiblea result would be unambiguously welcome, andcould derive from an improvement in market
sentiment, perhaps due to additional progress on
the reform agenda or because of better than
anticipated outturns. Improved sentiment could
help create the kind of virtuous circle, where
lower interest rates reduced borrowing costs,
improved fiscal prospects and reduced the needfor growth sapping expenditure cuts without
affecting the overall improvement in the region’s
fiscal trajectory.

While a less likely outcome than it was just a
few months ago, a stronger recovery thancurrently embedded in the baseline forecast is ofcourse possible. For high-income countries such

For developing countries where some post-crisis
slack remains (notably many of the economies ofCentral and Eastern Europe and the Middle-East& North Africa), a stronger than expected21

Global Economic Prospects June 2012

Main Text

recovery in demand would also be welcome andcould be relatively easily absorbed andconverted into improved living conditions andlower unemployment.

In particular, a prolonged blockage of the Straitof Hormuz, although a low probability event,could send oil prices soaring. Some 17 mb/d ofcrude and products transit the strait (an average
14 crude tankers daily, with another 14 returning
empty). Although alternative routes for some
Middle-East oil could be found and any
disruption is likely to be temporary (seeCommodity Annex for more details), a net 13
mb/d or 15 percent of global demand could be
disrupted for several months and would likely be
only partially offset by release of strategicreserves.

However, for those developing countries
operating close to, or above potential output (likeBrazil, China, India and Turkey), a pick up in
demand (domestic or external) could intensify
capacity constraints unless it is met withsignificant progress on the supply side. If excess
demand were to build up, it could stoke
inflationary pressures and/or result in a further
deterioration in current account balances, which
could increase the vulnerability of these
economies to a future domestic or external
shock. Such countries would likely have totighten policy much more severely than in thebaseline — potentially resulting in an increase in
unemployment and economic disruption in theouter years of the projection period.

Evaluating what price oil might reach under sucha scenario is highly uncertain, but economic
impacts would be serious – even if peak prices
are short-lived and adequate supply is restored.
World Bank Group simulations suggest that asustained $50 increase in oil prices could reduce
global GDP by around 1.3 percent in oilimporting countries (figure 18). A more detailed
discussion on the impact of higher oil prices ispresented in box 6.

Geopolitical and regional tensions could
disrupt oil supply with potentially serious
downside risk for developing countries

But lower commodity prices are also possible,
with potentially serious consequences forcommodity exporting countries

The baseline scenario assumes that the recent
declines in oil prices do not reverse themselves
and that oil prices gradually move toward a longterm level of about $80 dollars at today’s prices.

The recent decline in commodity prices (oil andmetals are down 8.4 and 4.7 percent in the lastmonth) attests to the possibility that commodity
prices come down sharply in the projection
period. The price rises of the past decade reflect
the influence of a wide range of factors (see the2009 edition of Global Economic Prospects
http://go.worldbank.org/G8LVQDRH70 for a detailed

However, if international tensions (or internaltensions within an important oil exporter)
intensify and a serious disruption to global
supply ensues, prices could rise much higher,
with potentially significant impacts on output.
Figure 18. A major oil shock could cut sharply into
global growth

Figure 19 Falling natural gas prices have createdlarge new arbitrage opportunities

Simulated impact of a $50 increase in oil prices

25

Deviation from baseline, % of GDP

1.50

High-income countries

Developing countries

20

1.00
0.50
Oil exporters

Oilimporters

Oil importers

Crude Oil

15
Japan LNG

0.00
Oil
exporters

-0.50

10

-1.00

Europe Natural Gas
5

-1.50
Coal

-2.00
-2.50

2012

0
Jan '00

2013

Jan '02

Jan '04

Source: World Bank.

Source: World Bank.

22

Jan '06

Jan '08

US Natural Gas
Jan '10Jan '12Global Economic Prospects June 2012

Main Text

discussion), but may have reached unsustainablelevels.

If commodity prices were to come off theircurrent highs there could be potentially serious
consequences for the external and internal
imbalances of commodity exporting economies,
who depend upon commodity revenues tofinance a large share of their imports andgovernment expenditures.

Notwithstanding the sharp declines in May,
since 2000, oil prices have increased by 268
percent, metals and minerals prices by 245
percent and agricultural prices by 165 percent.
While demand for these products can be inelastic
in the short run, such large price swings unleash
very powerful economic forces, in the form of
substitution on the demand side, increased
supply (via increased exploration andinvestment), and technological change.

Table 5 reports the simulated impact on
developing country commodity exporters of a 20
percent decline in commodity prices. The first
three columns of the first set of simulations
show the impact on: the level of GDP (after two
years); the government balance as a percent of
GDP; and the current account balance as apercent of GDP, under the assumption that oil
prices fall by 20 percent and that othercommodity prices fall according to their own
sensitivities to the fall in oil prices (oil prices are
an important determinant of other commodity
prices). The fourth through sixth columns report
the impacts from a simulation that assumes oil
prices do not change, but that other commodity
prices decline by 20 percent.

All of these forces are at work currently (see box
Comm.1 in the commodity annex), mostobviously in the energy sector where OECD oil
demand has declined 8 percent over the past 5
years, and where new technologies (such as
shale gas and liquids extraction techniques) havebrought large new supplies to market. These new
supplies have opened up large and potentiallydestabilizing price differentials between natural
gas and crude oil (figure 19) that could
contribute to a longer-term fall in oil and othercommodity prices.

In the first set of simulations, alternative
financing is assumed to be found so that the
government revenue shortfalls caused by thecrisis are made up for via borrowing (external ordomestic). In the second set of results, revenue
shortfalls are assumed to be binding such thatgovernment expenditure must be cut by the
decline in government revenues from the earlier
simulation.

Table 5. Impact of lower commodity prices ondeveloping country GDP, current and government
accounts
Impact of a 20% fall in
Oil prices
Current
accountbalance

GovernmentGDPbalance(% of(% of GDP) (% of GDP)baseline)
Developing countries
Oil exporters
Oil importers
East Asia & Pacific
Europe & Central Asia
Latin America & Caribbean
Middle East & N. Africa
South Asia
Sub-Saharan Africa

0.9
-0.4
1.5

-0.1
-1.2
0.4

Non-oil commodity prices
Current
Government
account
GDPbalancebalance(% of(% of GDP) (% of GDP)baseline

No financing constraints
-0.1
0.1
-1.3
-0.2
0.5
0.3

-0.1
-0.4
0.0

In the first scenario government deficits rise byclose to 1 percent of GDP in the Middle-Eastand North Africa because of lower oil prices.
However, GDP effects are relatively small —inpart because the government is assumed tocontinue to maintain spending at earlier levels
via increased borrowing. Impacts in the non-oil
commodity price simulation are smaller because
these commodities tend to be much lessimportant sources of revenue for governments at
the aggregate level.

0.1
-0.1
0.2

1.6

0.4

0.3

0.5

0.2

0.2

0.3
0.2
0.0
1.4
0.0

-0.9
-0.4
-0.8
0.8
-0.9

-1.4
-0.2
-1.0
1.3
-1.7

0.5
-0.6
0.5
0.3
-0.7

-0.1
-0.7
0.4
0.2
-0.5

-0.1
-0.1
0.4
0.4
-0.2

0.3
0.3
0.3

Government budget financing constraint
Developing countries
Oil exporters
Oil importers

0.2
-1.5
1.0

0.1
-0.3
0.3

0.1
-0.5
0.5

-0.8
-1.3
-0.6

-0.1
-0.1
-0.1

East Asia & Pacific

1.1

Europe & Central Asia
Latin America & Caribbean
Middle East & N. Africa
South Asia
Sub-Saharan Africa

-0.8
-0.6
-1.0
1.0
-0.8

0.3

0.4

-0.4

0.0

0.3

0.3
-0.2
-0.2
0.6
-0.9

-0.7
0.0
-0.5
1.2
-1.3

-0.1
-2.1
-0.5
-0.2
-1.8

0.0
-0.3
1.0
0.0
-0.6

-0.1
0.3
0.9
0.3
0.1

In the second set of results, all of the lost
government revenues from the first are assumed
to be deducted from government spending. HereGDP effects are much larger, but because of
demand compression current account effects are
more muted. Impacts for individual countries are

Source: World Bank.

23

Global Economic Prospects June 2012

Main Textof course larger, with GDP in Paraguay,
Uruguay, Argentina, Kyrgyz Republic, Belize,
Chile, and Uzbekistan (all important extractive
commodity exporters or countries with close
links to commodity exporters) projected to
decline relative to baseline by more than 2
percent in the non-oil with government budget
constraint scenario.

decade than they did during the pre-crisis boom
period (see Global Economic Prospects 2010A).
The current process of consolidation in highincome banking and household sectors andregulatory reform should yield a more stable andultimately more robust global financial
environment. However, it is also likely to be
one characterized by less liquid and more
expensive financing conditions, with important
real-side implications for developing countries.

Evolving policy challenges for developing
countries

For low-income countries with relatively weakdomestic financial sectors and binding capitalconstraints, weaker bank finance and FDI flows
will be particularly challenging. In some of thesecountries FDI inflows represent more than 40
percent of total investment, while in middleincome countries with access to international
financial markets and better developed domestic
markets, the main impact is likely to be throughthe increased cost of borrowing over the mediumterm.

For most developing economies the crisismanagement challenges of the great recession
have passed and output gaps have been closed.
In part, because the international environment
remains volatile and high-income countries arestill struggling with the aftermath of the crisis,
policy in many developing countries remains
focused on crisis-fighting. Given the sharp shifts
in market sentiment that have been observed anddeveloping country vulnerabilities, such a focus
is understandable, but focus needs to shift
toward the longer-term and policy needs toguard against maintaining a loose stance too
long.

Simulations performed for the 2010 edition of
Global Economic Prospects (World Bank,
2010A) suggest that if these tighter conditions
result in an increase in developing country
capital costs of between 30 and 310 basis points,
potential growth rates in developing countries,
could be reduced by between 0.2 and 0.7
percentage points for an extended period of
between 5 and 7 years.

This is particularly the case for the many
developing countries already operating at or
above capacity. In these countries, policy should
work to strengthen prudential frameworks, andavoid further stimulus. Instead the authorities
should rebuild fiscal and monetary-policy space
so that they can respond forcefully should asecond global (or forceful domestic) crisis
emerge (see earlier discussion).

The same study showed, however, that reducing
financial sector inefficiencies within developing
countries could more than offset these impacts— suggesting that developing countries should
redouble efforts to strengthen domestic
regulatory frameworks to facilitate the expansionof a healthy domestic financial sector to partially
offset the likely reduction in external capital
flows.

Moreover, policy needs to start re-investing inhuman and physical capital to ensure rapid andsustainable growth in a post-crisis world where
high-income fiscal and monetary policy havereturned to a more sustainable stance and someof the conditions (such as inexpensive andabundant capital) that have driven the very highgrowth rates of the past decade may no longer
hold.

The transition to tighter capital conditions
may generate significant challenges todeveloping countries that have had very rapid
credit growth during the recent past

Developing countries face a more constrained
financial environment in the post crisis period

While increased financial intermediation has
been closely associated with increased growthand income gains, the very rapid expansion of
credit in past years in some countries may have

Independent of short-term outcomes, developing
countries are likely to face a much moreconstrained financial environment over the next24Global Economic Prospects June 2012

Main Text

increased their vulnerability either to tighterinternational conditions or domestic shocks.

debt. The Government has the fiscal resources tosupport the banks if and when needed.

Loan to GDP ratios increased by more-than 10
percentage points between 2005 and 2010 inBrazil, China and Nigeria (figure 20). In thesecountries loan performance could deteriorate
markedly in in the face of slowing growth,heightened risk aversion and restricted access tofinance. For example, partly because of theseverity of the growth slowdown in the Europe
and Central Asia region, non-performing loans(NPLs) increased from 3.8 percent of banking
assets in 2007 to 12 percent in 2010. NPLs in
Vietnam have risen from 2.1 percent of bankingsector assets in 2010 to 3.4 percent last year
according to official data, but the level of bad
debt is believed to be 2-3 times higher if
measured by international standards.

Managing macroeconomic policy and capitalflow volatility is especially challenging for
middle-income countries
In the current volatile international environment,
portfolio equity flows have fluctuated wildly inreaction to global macro developments, affecting
exchange rates in middle-income countries
where these markets are relatively welldeveloped. With interest rates in high-income
countries at all-time lows, corporate profits atrecord levels, and private balance sheets healthy,
investors are both nervous and hungry for yield.
Given the sheer size of global international
capital markets, changes in sentiment can, andhave had, disruptive short-term impacts on thecurrencies of middle-income countries (impacts
are mainly restricted to those middle-income
countries with relatively deep markets thatprovide investors with some security that they
will be able to exit).

In China, concern centers around both the speed
at which credit has expanded and the absolute
quantity of credits relative to the size of theeconomy. To-date the state-owned dominatedbanking system has been stable. However, there
is growing concern regarding the long-term
viability of the banks’ $1.4 trillion in loans tolocal government, much of which was
accumulated over the past two years in thecontext of the country’s post-crisis stimulus
program. Indeed, the non-performing loans ofChina’s third largest bank rose sharply in thefirst quarter of 2012. So far, however, NPL
levels remain modest in part due to a central
government supported policy of rolling overproblem loans, plans to reduce repayment
burdens, and pledges to stand behind some of the

While a steady inflow of external portfolio
investments can be extremely beneficial to adeveloping economy, when they are volatile orattracted by speculative motivations, as in recent
years, they can be disruptive. Of particularconcern is the challenges that they can pose forthe conduct of macroeconomic policy —especially when countries are operating at orclose to full capacity as are most of the major
recipients of portfolio flows. For these countries,
the kind of sharp increase in inflows that has
been associated with declines in the international

Figure 20. Several middle-income countries have seen a rapid expansion in credit over the past several years
Loan to GDP ratio (%)
Loan to GDP ratio (%)
180

80

Malaysia
150

Indonesia

60

120

India

China

40

90

Turkey60
20Brazil30

MexicoNigeria

0

1992

1996

2000

2004

0

2008

Source: World Development Indicators

25

1992

1996

2000

2004

2008

Global Economic Prospects June 2012

Main Text

Box 7. Capital controls part of policymakers’ toolkit for managing risks from volatile flows
International capital flows can be an important determinant of a developing countries exchange rate, with positive inflows pushing a currency toward appreciation and negative flows toward depreciation. International capital flows can reflect the actions offoreign investors or domestic investors. When increases (decreases) in capital flows are more or less permanent –reflecting achange in international perceptions of returns in a country, then the resulting exchange movement is part of the normal equilibrating mechanisms and probably should not be resisted. Increases in foreign direct investment or long-term bond lending might
fit this category.
However, when fluctuations in flows reflect more temporary and or speculative ―hot money‖ flows, they can be disruptive.
During the inflow stage they can erode short-term competitiveness and give rise to credit and asset price booms, whose subsequent collapse during the withdrawal phase can devastate local balance sheets.
As a result, there is an emerging consensus that that when currency movements are driven by (identifiable) speculative capital
flows that are temporary in nature, capital controls and prudential regulations can be used to lean against the wind. These should
complement, rather than substitute for, appropriate monetary, exchange rate, and foreign reserve management (G20 2011).
Capital controls can limit excessive borrowing by sovereigns and firms and prevent the buildup of risky financial structures,
thereby enhancing resilience during busts when foreign capital dries up (Ostry and others 2011). Capital flow management
measures should be transparent, properly communicated, and be targeted to specific identified risks.
Capital controls can be complemented by domestic macro-prudential regulations that do not discriminate on the basis of currency or residency. Such prudential measures may include limits on domestic credit growth, credit concentration in certain sectors as well as reserve requirements. Such controls should reduce the likelihood of credit booms associated with speculative
inflows, and in turn the adverse consequence of rapid withdrawals.
However, identifying short-term speculative rather than more patient capital inflows is not straight forward. In commodity exporting economies, capital inflows attracted by real-side opportunities coincide with strong export revenues making it difficult
to identify the relative contribution of each as opposed to more speculative flows attracted by the appreciation of the currency.
Moreover, capital controls introduced to manage short-term capital flow volatility risk becoming ―sticky‖ even when the shortterm surge fades, introducing production and capital allocation distortions.
1.

Emerging market countries with economy-wide capital controls/restrictions on inflows and foreign-exchange related prudential regulations (e.g. limits on banks’ open foreign exchange positions) experienced 2.5 to 3.5 percentage points smaller decline
in growth during the 2008-09 Lehman crisis (Ostry and others, 2011).

price of risk can exacerbate existing goods andasset-price inflation. In a worst-case scenario, thesudden discontinuation or withdrawal of capitalfrom developing countries (running current
account deficits) could result in a financial and/or balance of payments crisis.6

form of limited capital controls to reduce thevolatility of flows (box 7). However, care must
be exercised to ensure that restrictions do not
impede more stable and desirable flows and toensure that restrictions are not put in place tocounteract appreciations that are due to longerterm factors such as permanent or durable termsof trade improvements, such as those enjoyed bycommodity exporters.

Orthodox policy options include allowing
exchange rate appreciation, or following asterilization policy. But both options can be
neutralized in the face of large flows. If flowsinduced appreciation induces further flows totake advantage of the exchange rate appreciation,a speculative exchange rate bubble can develop
to the detriment of local industry (which is madeuncompetitive — perhaps temporarily) and theeconomy as a whole when it bursts. Attempting
to prevent such a bubble through conventionalmonetary instruments can be both very expensive
and unsuccessful if interest rate hikes just fueladditional carry-trade related capital inflows.

Concluding remarks
Developments, during the first four months of2012 were generally positive and in line with the
expectations that underpinned the projections in
the January 2012 edition of Global Economic
Prospects (World Bank, 2012). High-income
Europe appeared to be stepping back from thebrink. However, the situation has soured
significantly, with financial market tensions in
the Euro Area approaching the levels observed in
the fall of 2011, although so far there has beenless contagion to developing countries.

In the context of these kinds of temporary
disruptive flows, countries may wish to use some26

Global Economic Prospects June 2012

Main Text

The renewed tension compounds the headwinds
facing developing countries going forward andincreases the likelihood of a serious deteriorationof conditions in high-income Europe, to whichdeveloping countries remain vulnerable. Whilecountries must be prepared to react to asignificant downturn should it arise, they mustalso be careful to ensure that policy does not
become too re-active, but is directed by mediumterm domestic priorities.

versus the earlier episode (proxied in thiscase by the ratio of the increase in CDS rates
in 2012 divided by maximum increaseduring the second half of 2011).
3. In October 2011 the European Banking
Authority required banks to value theirsovereign bond holdings at September 2011
market values and raise capital ratios to 9
percent by June 2012. EBA estimatessuggest that banks needed an additional €115
billion of capital to fulfill these requirements.
Although most banks indicated that theywould meet these objectives without reduced
lending, credit growth in the Euro Area
eased noticeably, and was falling at a 2.8
percent annualized pace during the threemonths ending February 2012.

Even if the current phase of tensions passes, theexternal environment for developing countries islikely to remain volatile and challenging. Loose
monetary policies, and, as yet, unresolved fiscal
and banking-sector problems in high-income
countries are likely to keep international capital
flows and business confidence volatile.

4. The scenario underlying the simulations issimilar to that outlined in the January 2012
edition of Global Economic Prospects(World Bank, 2012). It is assumed thatcurrent market tensions escalate, freezing
Greece out of international capital markets.
In the scenario, market confidence is shaken
resulting and contagion to at least four otherEuro Area economies ensues. The acutecredit squeeze in directly affected economies
denies finance that extends to the private
sectors of these economies whose GDP
declines sharply (broadly in line withobservations during previous financial crises
in high-income countries (see Abiad andothers, 2011). Other, economies are affected
through reduced exports (imports from thedirectly affected countries fall by between 6
and 10 percent), and by increased
uncertainty, which raises borrowing costs
and increases precautionary savings byhouseholds and firms.

If a close to capacity economy finds demandfalling (accelerating) at an unexpectedly rapid
pace due to changes in global animal spirits,
macroeconomic policy can potentially find itself
following a similarly volatile path ofpermanently trying to catch up to what for many
developing countries are entirely external andlargely unforeseen developments.
In such an environment, perhaps the optimal
strategy is to follow a steadier course, keeping
policy instruments focused on the domestic
forces that policy can expect to influence, whileallowing automatic stabilizers such as exchange
rates and the tax system to deal with the constantchanges of a still febrile international
environment.

Notes
1. In October 2011, the European Banking
Authority passed regulations requiring
European Banks to restate the value of theirsovereign bond holdings to their market
value as of September 2011 and to increaserisk-weighted capital adequacy ratios to 9.0
percent by July 2012.

Direct trade and tighter global financial
conditions plus increases in domestic savings
by firms and households as a result of theincreased global uncertainty impact activity
worldwide, with Euro Area GDP falling by
8.5 percent relative to the baseline in 2013.
GDP impacts for other high-income
countries (-3.3 percent of GDP) anddeveloping countries (-4.0 percent ) are lesssevere but still enough to push them into a

2. Estimating the effects of recent events isfraught with error. The impacts assumed in
the baseline were derived by estimating theimpact of the turmoil in 2011 on Euro Area
activity and scaling it by the relative size ofthe increase in financial uncertainty in this27

Global Economic Prospects June 2012

Main Text

deep recession. Overall, global trade falls by
about 10 percent (relative to baseline) and oil
prices by 25 percent (5 percent for food.

unchanged from the level of the fourth
quarter of the previous year (equation 2). It
therefore measures the contribution to annual
growth in year t, of the quarterly expansion
during the previous year.

5. A brusque halt or reversal of capital inflows
can force economies to cover the outflow
through reserves, placing downward pressure
on the exchange rate (net reserves are amajor exchange rate determinant). In turn,the depreciation will increase the value of theforeign debt stock and debt servicing costs
and boost the cost of imported goods, raising
inflation and current account deficits placing
currencies under further pressure and cutting
into external competitiveness.

References
Abiad, Abdul and others. 2009. ―What’s theDamage? Medium-term Output Dynamics
After Banking Crises‖. IMF Working Paper.
WP/09/245
G20. 2011. G20 Coherent Conclusions for theManagement of Capital Flows Drawing onCountry Experiences. October 15, 2011.
( A v a i l a b l e
a t
h t t p : / /www.g20.utoronto.ca/2011/2011-financecapital-flows-111015-en.pdf)

6. Mathematically, the quarterly pattern ofgrowth during the preceding year has a direct
and measurable influence on the annual
growth rate in the current year. This arises
because annual growth rates are calculatedon the basis of the levels of GDP over eightquarters, four in the preceding year and fourin the current year (equation 1).

International Monetary Fund. (2012) Fiscal
Monitor: Balancing Fiscal Policy Risks. April
2012.

If quarterly growth during the previous year
is positive, then fourth quarter GDP will behigher than the average for the year, andannual growth in year t will be positive —even if during the four quarters year t GDP
does not grow. More generally, the growthrate in any given year can be approximatedby a weighted average of the quarterly
growth rates over 7 quarters as in equation 3(Tödter, 2010 provides a more detailed
derivation of this relationship).

Ostry, Jonathon and others. (2010). ―Capital
Inflows: The Role of Controls‖. IMF Staff
Position Note. SPN 10/04.
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Crisis World, pp. 23-72. The World Bank,
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Carry over (or statistical overhang) isdefined as the rate of growth that would beobserved if quarterly GDP in year t remained
1
2
3
4

 
  qt  qt  qt  qt 
yt    1
 1 *100
2
3
4 
 q  q  q  q  
t 1
t 1
t 1 
  t 1
 4  4  4  4  
qt 1 qt 1 qt 1   1 *100
 qcarryovert    1t 1

2
3
4 

 q q q q  
t 1
t 1
t 1 
  t 1

4

yt =

3

Qureshi, M. S., J. D. Ostry, A. R. Ghosh and M.
Chamon. 2011. ―Managing capital inflows:
The role of capital controls and prudential
policies.‖ Working Paper 17363, National
Bureau of Economic Research: Cambridge
MA.

(1)
(2)

2

1

t 1

t 1

1 q
2 q
3 q
4 q
yt  * t31  * t21  * 1t 1  * 4t
16 q
16 q
16 q
16 q


t 1

t 1

2

3

4

t

t

t

3 qt 2 qt 1 qt
*
 *
 *
16 q1 16 q 2 16 q 3

Senhadji, A. S., & Montenegro, C. E. (1999).
―Time Series Analysis of Export Demand
Equations: A Cross-Country Analysis‖. IMF
Staff Papers. 46(3), 259-273.
(3)28

Global Economic Prospects June 2012

Main Text

Tötder, Karl-Heinz. 2010. ―How useful is the
carry-over effect for short-term forecasting?‖.
Deutsche BundesBanke Economic Studies, no.
21/2010.
World Bank. 2010A. Global Economic
Prospects: Crisis, Finance and Growth.
World Bank. Washington DC.
World Bank. 2011B. Global Economic
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Turmoil. World Bank. Washington DC.
World Bank. 2012A. Global Economic
Prospects: Uncertainties and Vulnerabilities.
World Bank. Washington DC.

29

Global Economic Prospects June 2012

Industrial Production Annex

Industrial Production
effects in the case of the former and very weakdomestic and external demand in the latter as aresult of the European economic crisis). Indeed
growth accelerated to 5.3 percent annualizedpace in Europe and Central Asia in the firstquarter of 2012, on very strong performance inTurkey, and it was expanding at more than 17
percent in East Asia and Pacific (figure IP.2).
However the second quarter started on a much
weaker note in both regions as growth in China
disappointed and growth in Russia weakened. In
South Asia data was suggesting a sharp
acceleration in Indian industrial production in
the earlier part of 2012, apparently reflecting
sharp increases in food and beverages output,
although growth in other industrial sectors
remains muted. The marked acceleration in
production observed in the first two months of2012 is in part attributed to a temporary increase
in before the anticipated increase in taxes in the
March budget. Activity in the Middle East andNorth Africa output was growing at an 12
percent annualized pace in the three months to
February 2012, as the effects of political turmoil
from Arab Spring faded. Despite this reboundeffect, output remained well below earlier peaklevels in several countries and ongoing tensions
in several countries along with weak European
demand are expected to weigh on activity overthe near term.

Recent economic developments
Following a weak second half of 2011
After a relatively robust first half of 2011 (global
output expended 2.7 percent) that helped close or
narrow significantly the gap with respect totrend, global industrial production growth
weakened in the second half of 2011 to 0.9
percent. The slowdown initially reflected apolicy induced slowing of demand in several
middle-income countries that were pushingagainst capacity constraints, but was exacerbatedby confidence effects and tightening financial
conditions and further bouts of fiscal contraction
in high-income Europe following the escalationof market turmoil in July 2011. Developments in2011 were also deeply influenced by theearthquake and tsunami in Japan (which cut
sharply into activity in Q2, but contributed torebound effects later in the year and by floodingin Thailand (which interrupted global supply
chains in the fourth quarter). More recent data
point to strengthening in industrial output growthin the first months of 2012 in most developing
regions as well as in high-income countries
outside the Euro area, with industrial output now
in line with long-term trend levels (box IP.1).
Activity has picked up in early 2012 but is once
again weakening
Industrial activity accelerated markedly toward
the end of 2011 and into the first quarter of
2012, reflecting strengthening demand in highincome countries outside Euro area and in large
developing economies, earlier reversals inmonetary policy tightening and rebound effects
as Thailand’s industrial production started
feeding into global supply chains once again.
However industrial production is once again
showing signs of weakness at the beginning of
the second quarter (figure IP.1).

Figure IP.1 Industrial output growth has accelerated inearly 2012 before softening again in April
Percent change, 3m/3m saar
30
20
10
0
-10
-20

A firm recovery was underway in regions thathave experienced sizeable supply or demand
shocks like East Asia and Pacific and Europe
and Central Asia (the Tohoku and Thai flooding-30-40
Jan-10

East Asia & Pacific
Europe & Central Asia
Latin America & Caribbean
Middle East & North Africa
South Asia
Sub-Saharan Afria
Jul-10Jan-11

Source: Datastream, World Bank.

31

Jul-11

Jan-12

Global Economic Prospects June 2012

Industrial Production Annex

Figure IP.2 With growth decelerating in East Asia &the Pacific and Europe & Central Asia
Percent change, 3m/3m saar
30

Figure IP.3 Industrial output growth in high-income
countries is also weakening, outside Japan andUnited States

China
EAP excl. China & Thailand
Europe & Central Asia
Mexico
LAC excl. Mexico

20

Percent change, 3m/3m saar
40
30
20

10

10
0

0

-10
Euro Area
USA
Japan
Other high income

-20

-10

-30

-20
Jan-10Jul-10Jan-11

Jul-11-40
Jan-10Jan-12

Jul-10Jan-11

Jul-11

Jan-12

Source: Datastream and World Bank.

Source: Datastream and World Bank.

Stronger demand in the United States and rapid
growth in industrial production in East Asia has
boosted industrial output growth in Latin
America and the Caribbean, with growth in
Mexico accelerating to the strongest pace inalmost a year (11.7 percent annualized pace inthe first quarter of 2012) – 4.4 percent
annualized for the region as a whole during thesame period. Growth in industrial production in
Brazil has disappointed, despite government
initiatives to shield domestic industries; output
contracted at a 3 percent annualized pace in thefirst quarter of 2012, after a very weak second
half of 2011. As of the end of the first quarter
Brazilian industrial output was back at the levels
recorded at the end of 2009. In Argentina thecontraction in industrial production worsened in
April.

here (figure IP.3). Industrial output, excluding
construction was down 1.7 percent andmanufacturing contracted at a 2.3 percent rate.1
Activity in Germany turned strongly positive inthe first months of 2012, supported by strong
pick-up in construction activity, capital goods
demand from developing countries, and real
wage increases, but production declined
markedly in April (2.2 percent month-onmonth). Italy, Portugal, Ireland and Greece
continued to register marked declines inindustrial activity during the first quarter.
However the recent deterioration in businesssentiment in Euro Area in March-April and thedecline in German industrial production suggest
the Euro area remains on the brink of recession
and that second quarter performance starts at a
weak pace, with tight financial constraints
weighing on activity.

Activity across high-income countries has
strengthened in early 2012, notably in core
European economies but is losing steam
In high-income countries, after a dismal
performance in the Euro area in the second halfof 2011, with output in the Euro area outside
Germany contracting for seven consecutive
months (-6.3 percent saar in the three-months toJanuary) there were some signs of stabilization
in industrial output (output expanded 0.9 percent
saar in the first quarter). Industrial production forthe sub-region as whole expanded at a 6.2
percent annualized pace in the first quarter of2012 – although weather effects played a role

Outside of Europe, the recovery in the UnitedStates has consolidated with industrial
production growing at 5.2 percent (saar) in thefirst quarter of 2012, boosted by stronger
employment growth in the last few months andimproving performance in the construction
sector. The March ISM manufacturing survey
points to sustained growth in the first quarter of
2012, with the production index up 3 points to58.3. Furthermore industrial production
expanded at a 1.4 percent monthly pace in April.

32

Global Economic Prospects June 2012

Industrial Production Annex

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

Growth expected to ease in the industrial sector
before strengthening again in late 2012 and into
2013
Globally business sentiment continued to
improve through April 2012, as indicated by therise in the world JPMorgan/Markit PMI to 53.1
in April, but it has taken a turn for the worse in
May, declining almost 2 points to near the
weakest level since late 2011. This suggests thatgrowth in global industrial production has
softened markedly during the second quarterand that for the remainder of the year will
growth will decelerate to a more sustainable pacethan the above-trend growth recorded in the firstquarter of 2012. Sentiment is relatively weak in
a historical perspective, and remains below thelevels recorded in May 2011, with the largest
gaps recorded for the E.U., notably in the EuroArea, suggesting industrial sector performance
there will remain lackluster (figure IP.6).
Expectations for the Euro Area deteriorated
further to 45.1 in May, the lowest since mid2009, as the Euro area remains on the brink ofrecession. One of the largest declines in PMI
was recorded in Germany (down 5 points since
the February 2012) as prolonged weakness inother Euro area countries is starting to take a toll
on business sentiment in the core Euro Area
countries which have so far proved more
resilient. Italy’s PMI dropped to a depressed
43.8 in April before recovering marginally inMay, while Spain’s PMI slid 3 points to 42 byMay. Meanwhile PMI readings for high-income
countries outside the Euro Area improved

Industrial growth among high-income countries
in East Asia remained robust and accelerated to
double-digit growth in the three-month to April(saar), after a very weak performance in thesecond half of 2011 – partly reflecting supplydisruptions from Thailand. The timing of the
Lunar New Year makes the interpretation of thestrength of the manufacturing sector moredifficult, with output proving very volatile in theearly months of 2012. Growth in China (animportant market for high-income economies in
the region) has been softer since the second halfof 2011, with industrial output growth
weakening to 10.7 percent pace (saar) in thethree months to April 2012, compared to 16.3
percent in the year-earlier period, as domestic
demand starts to soften and investment growthslows.

Table IP.1 Industrial output gap relative to levels
consistent with long-term growth

Developing countries
East Asia and Pacific
Europe and Central Asia
Middles East and North Africa
Latin America and the Caribbean
South Asia
Sub-Saharan Africa

1.0
1.9
-18.1
-18.5
0.3
2.1
-3.9

Source: World Bank.

33

Global Economic Prospects June 2012

Industrial Production Annex

through March, before weakening slightly in thefollowing months, pointing to sustained growthin the United States and Japan but weakening
growth in high-income East Asian countries(figure IP.5).

ground point to more subdued growth comparedto historical trends (figure IP.4).
Global industrial output growth is expected toease over the next couple of quarters, from an
above-trend pace in the first quarter (10 percentsaar) that was underpinned by the rebound fromrecent supply and demand shocks as well as
relatively robust domestic demand growth inselected high-income and large developing
economies. The main headwinds are high oil
prices, continued banking-sector deleveraging,
capacity constraints in several large emerging
economies, and high borrowing costs. Weakdemand in the Euro area will continue to affectcountries that rely on the Euro area as a major
export market. Global industrial production
growth is expected to firm somewhat towards

More notable however is the deterioration inbusiness sentiment in developing and merging
economies. By May PMIs readings were below
the 50-no-growth mark in East Asia and Pacificand Latin America and the Caribbean, while
stepping down markedly in the other regions.
This suggests growth will be losing steam in thedeveloping regions after the firming of growthobserved in the first quarter of 2012. Europe andCentral Asia is something of an outlier but
growth prospects there remain precarious, due to
weak demand in the EU. Indeed businesssentiment in Turkey has deteriorated throughout
the first quarter of 2012, suggesting industrial
production could falter, and was only slightly
above 50 by May. In contrast business sentimentin Russia has improved more in recent months.
In East Asia indicators are mixed, with Markit’s
PMI pointing to markedly weaker growth inChina. The gap between the more upbeat
national survey and the Markit PMI has
narrowed in May as the former moved closer tothe 50 growth-no-growth mark, pointing toweakening prospects. It remains however more
upbeat than the Markit PMI which dropped to48.4 in May. Differences in methodology(weighting and questions asked) explain the
difference, but recent developments on the

Figure IP.5 Business sentiment in high-income
deteriorated in the second quarter of 2012
Diffusion Index
64
60
56
52
48
44
40
Jan-1056

Jan-11Year-on-year

Jan-12February-to-date

Europe and Central Asia
Other high-income countries

54

East Asia and Pacific52

South Asia

50

Latin America and the Caribbean
Euro Area

48

Sub-Saharan Africa

46
44
Jan-10Jul-11Figure IP.6 Business sentiment is weaker than inearly 2011

BrazilChina
India
South Africa
Turkey50-line58

Jul-10Source: World Bank and Markit.

Figure IP.4 Business sentiment is deteriorating inmajor emerging and developing economies
Diffusion Index
60

Euro Area
USA
Japan
GermanyItaly
50-line-10
Jul-10Jan-11

Jul-11-5

Jan-12

Source: World Bank and Markit.

Source: Markit/ Haver Analytics, World Bank.

34

0

5

Global Economic Prospects June 2012

Industrial Production Annex

the end of 2012 as government policies inselected emerging economies, improved labormarkets, and rising purchasing power should
support global demand.

Risks and vulnerabilities
The world economy remains fragile, and risks to
the downside remain. Renewed deterioration of
conditions in Europe, financial flows volatility
due to very loose monetary policy in highincome countries and the risk of higher oil
prices, on account of geo-political tensions andsupply disruptions are among the most importantof these downside risks that could stall global
growth.

Industrial production growth in the Euro area islikely to stabilize towards the end of 2012, as themeasures put in place by European policy
makers (long term refinancing operations andfiscal consolidation programs) restore businessand consumer confidence and as demand fromdeveloping countries and other high-income
countries firms. In the United States industrial
output will benefit from improvements in thelabor markets and wealth gains, and there aresigns that industrial output in East Asia outside
China is also firming, supported by improved
performance in the tech sector on account ofstronger demand in the United States and larger
developing economies, as well as normalizationof supply chains. In Japan improvements in labormarkets and easier financial conditions areboosting consumer demand which will further
lift industrial production domestically as well as
demand for imports, benefitting Japan’s main
trading partners.

A potential 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, inparticular on sectors producing financingsensitive items such as auto’s and big-ticket
items such as electronics.
For countries tightly linked to the U.S. the riskof a political impasse and/or rapid unwinding ofstimulus measures represent a downside risk as it
would result in a sharp weakening in domestic
demand in the U.S. Mexico is particularly
vulnerable as close to 80 percent of its exports
are destined for the U.S.

In East Asia & Pacific in economies outside
China IP growth is likely to accelerate, as they
benefit from firming U.S. demand and some ofthe emerging economies. China’s industrial
production growth is likely to remain subduedby historical standards as the weaker real estatemarket continues to take its toll in spite ofsupportive government policy (structural tax cutsand targeted expenditure programs) andrelatively solid private demand. Growth incountries with tight trade ties with the U.S.
should benefit from firming demand there, andin particular Mexico should see sustained growthin its industrial output, with manufacturing
expected to expand at an above-trend pace in2012. Other countries in Latin America that rely
more on trade with China are likely to see a
deceleration in their export market growth overthe short-term.

Economies in Europe and Central Asia and Latin
America are vulnerable to possible deleveraging
by European banks. There are already signs thatmany merging country banks are tightening
terms and standards of lending across all regions,and all types of loans (business, real estate, andconsumer).
A sharp deterioration in conditions in Europe,
the U.S. or China would likely produce large
confidence effects for developing countries thatwould exacerbate the decline in demand forindustrial production, and for capital goods inparticular.

35

Global Economic Prospects June 2012

Industrial Production Annex

Notes:
1. Weak private consumption in the Euro areatranslated into a 7.7 percent saar decline in
consumer goods production in the firstquarter of 2012, the worst performing
category, while capital and intermediate
goods production declined an annualized 0.3
percent over the same period.

36

Global Economic Prospects June 2012

Inflation Annex

Inflation
declined on the back of improved crops
following drought in 2010. In contrast, foodprice inflation has accelerated in sharply in the
Middle East and North Africa, less so in SubSaharan Africa and Latin America and the
Caribbean (table INF.1). Despite the welcome
normalization of developing country food priceinflation, coming to stand at 4.8 percent over thethree months through February 2012, food prices
in developing countries stand some 25 percent
higher (relative to non-food consumer prices)
than they were at the beginning of 2005. This isa very large hit to real incomes especially amongpoor urban families where food often represents
more-than one-half of their total expenditures.

Global inflation eased substantially during
the second half of 2011 and into 2012.
Developing country inflation, which averaged
7.2 percent in 2011 eased to a 5 percent
annualized rate in the three months throughApril 2012 (saar). Among high-income countries
inflation decelerated as well but by much less,from 2.7 to 2.5 percent in the same period. For
emerging markets the decline in inflation mainlyreflected a sharp falloff in local food inflation,
relative stabilization of oil prices, a weakening in
the pace of global growth and general firming of
EM currencies (figure INF.1).

A decline in local food price inflation was
the main driver of lower inflation in mostdeveloping economies.

Local food price increases in developing
countries (and local food price inflation) wasmuch lower than the dollar price ofinternationally-trade commodities, in part
because of exchange rate effects (appreciation ofmost developing country exchange rates –seeexchange rate annex for more), but mainly
because most food consumed in developing
countries is produced locally, and therefore thepass-through of international prices to local
prices is weak – ranging between 0.1 and 0.3
percent (World Bank and figure INF.2).

Local food prices in developing countries
increased 8.9 percent in 2011, reflecting drought
conditions in several developing regions the year
before (notably in Europe and Central Asia andthe Horn of Africa) and a sharp 24 percent riseincrease in the dollar price of international foodcommodities. Domestic food price inflation
decelerated in South Asia, while in Europe andCentral Asia consumer food prices have recently
Figure INF.1 Inflation in developing countries has stabilized due in part to food prices

Figure INF.2 Pass-through of international foodprices to local food prices is small

Developing countries, total and food inflation (3m/3m saar)

price indexes, percentage change, year-on-year

14

75.0
12

62.5
50.0

10

37.5
8

25.0
6

12.5

4

0.0
-12.5

2
2010M01

2010M06

2010M11Developing Total CPI

2011M04

2011M09

2012M02-25.0

Developing Food CPI

2010M01

2010M06

Local Food CPI

Source: World Bank and U.N. Food and Agricultural
Organization.

2010M11

Source: World Bank, ILO.

37

2011M04

International Food

2011M09

2012M02

Developing CPI

Global Economic Prospects June 2012

Inflation Annex
the New Year); an easing in residential rentaland home purchase prices following new
regulations and prudential guidance, and more
broadly, the policy of maintaining a modest
rate of appreciation of the yuan vis-à-vis thedollar, averaging about 4 percent per annum,
serving to pressure international prices lower
in domestic terms. ASEAN-4 countries as agroup have seen prices ease from a 5 percent
pace to 3.5 percent during the first quarter of2012 on this measure, on increased stability infood prices and generalized exchange rate
appreciation. An exception is Indonesia,
where strong domestic growth is exerting
demand-pull pressures on headline inflation.

Regional inflation trends differ considerably
While the influence of weaker food priceinflation has played an important role in many
developing countries, regional (and country)
developments reflect a much wider range ofinfluences.
 Headline inflation in the East Asia and Pacificregion decelerated from a peak of 8 percent at
end-2010 to an impressive 1.6 percent byApril 2012 (3m/3m saar). Most of theregional decline has been driven by adramatic falloff in Chinese inflation (figure
INF.3) – reflecting among other things, foodprice declines (though subject to extremes ofvariability at times of National Holidays andTable INF.1 Headline inflation and domestic food prices by world region
2009
Headline Consumer Prices

2010

2011

Annual percentage change

Q1-2011

Q3-2011

Latest 2012

Annualized percentage change saar

World

1.3

2.8

4.0

5.1

3.4

3.2

High income countries

0.2

1.6

2.7

4.0

1.9

2.5

Developing countries

4.3

5.8

7.2

7.8

7.1

5.0

East Asia and Pacific

-0.2

3.5

5.5

5.4

5.5

1.6

EAP excluding China

2.8

4.4

5.8

7.4

4.4

3.2

Europe and Central Asia

8.9

7.1

8.1

7.4

7.1

3.1

Latin America

5.8

6.1

6.8

7.4

7.1

4.6

LAC excluding Argentina

5.8

5.7

6.6

7.3

6.8

4.2

Middle East and N. Africa

8.9

7.2

14.6

19.2

19.8

25.8

10.5

11.7

9.3

12.8

8.4

9.0

9.1

10.7

10.9

11.3

8.5

12.3

8.8

7.3

8.9

11.2

7.0

9.6

9.9

9.2

11.4

15.0

8.0

14.2

7.4

7.2

8.1

9.3

7.9

7.0

South Asia
SAS excluding India
Sub-Saharan Africa
SSA excluding South Africa
Memo item:
Developing excluding China
Domestic Food Prices

Annual percentage change

Annualized percentage change saar

World

3.1

3.2

5.0

6.0

4.6

3.7

High income countries

1.7

0.9

3.1

3.4

3.6

2.6

Developing countries

6.7

8.4

8.9

10.0

8.1

4.8

East Asia and Pacific

2.9

7.0

8.0

4.9

8.4

3.7

Europe and Central Asia

2.6

1.5

6.7

9.5

-6.6

1.9

Latin America

7.6

7.4

9.2

9.2

11.8

10.2
21.5

Middle East and N. Africa

10.4

7.2

13.6

22.2

1.7

South Asia

13.1

12.3

8.5

17.4

4.7

-2.9

Sub-Saharan Africa

-13.1

5.2

9.8

28.2

-0.7

22.5

Memo: Internationally traded commodity prices
Annual percentage change
EnergyCrude Oil (World Bank Average)
Food
GrainsAnnual percentage change (yr-on-yr)

-37.3

26.3

30.0

34.5

31.7

-3.2

-25.2

102.8

31.6

37.0

32.5

-2.2

84.9

11.2

23.9

36.8

18.8

-1.8

-24.1

1.5

38.9

48.9

31.4

-9.1

Source: World Bank, International Labor Organization.

38

Global Economic Prospects June 2012

Inflation Annex

Figure INF.3 Dramatic falloff in China's consumer
prices drives East Asia

Figure INF.4 Sharp turnaround in Russia andTurkey begin to carry Europe & Central Asia inflation
to more moderate rates

9.0

20

ECA

RussiaTurkey

7.5
15

6.0
10

4.5

5

3.0

1.5

0

price indexes, percentage change, 3m/3m saar

price indexes, percentage change, 3m/3m saar

0.0
2010M01

2010M06

2010M11

East Asia

2011M04

EAP x China

2011M09-5

2012M02

2010M01

China

2010M06

2010M11

2011M04

2011M09

2012M02

Source: World Bank.

Source: World Bank.

Figure INF.5 Latin America affected by complementarydevelopments in Brazil and Mexico

Figure INF.6 Egypt and other oil importers in
Middle East & North Africa see rising price pressuresin contrast with oil exporters

price indexes, percentage change, 3m/3m saar

price indexes, percentage change, 3m/3m saar

9

35
8

Oil exporters

Egypt

Other oil importers

30
7

25
6

20
5

15

4

10

3

5
0

2
2010M01

2010M06

2010M11

2011M04

2011M09

Latin America

BrazilMexico

2012M02-5
2010M01

2010M05

2010M09

2011M01

2011M05

2011M09

2012M02

Source: World Bank.

Source: World Bank.

 The decline in inflation in Europe and Central

within the region. Inflation in Brazil eased
significantly in line with weaker growth andthe policy tightening of 2011. And in Mexico
it had picked up, reflecting a spate of volatilefood prices. Price changes in Mexico havenow softened to 2.4 percent as of April, andexpectations for inflation appear to bemoderate. Recorded inflation in Argentina has
decelerated modestly in recent months butwith prices rising at a 9.5 percent annualized
pace, inflation poses a potentially serious
problem – all the more so if suggestions thatrecorded inflation is underestimating actual
price developments by a significant degree
are correct (figure INF.5).

Asia to 3.1 percent reflects a significant
reversal in food price inflation in Russia, theUkraine and several countries of Central Asia
as following the drought of 2010, crops weremuch stronger this year. Inflation in the
Russian Federation has eased to an annualized
rate of 0.2 percent as of the first quarter of2012. In Turkey inflation also slowed, but
strong domestic demand and persistentcapacity constraints mean inflation remains
just below 7 percent (figure INF.4).
 Latin America’s inflation had been elevated,reflecting diverging trends across countries

39

Global Economic Prospects June 2012

Inflation Annex

 In the Middle East and North Africa the(notably in Pakistan) is ranging within a 12
percent band. An upturn in Indian inflation in
March and April reflects strong wage growth.

disruptions of the transition in Arab countries
continue to drive economic and pricedevelopments. Developing oil exporters of theregion have seen headline inflation rise on theback of increased budgetary outlays insupport of social- and infrastructure
programs. And In the case of Iran, awholesale revision of subsidies and prices
was recently implemented affecting outturns
there (figure INF.6). Oil exporter’s CPI has
since dissipated to a degree, but remains
elevated at 30 percent (saar) at latest readings.
Oil importing countries (here classifying
Egypt as a non-oil dominant economy) haveseen consumer price changes accelerate on
the back of higher oil prices, substantial yearon-year increases in local food prices, plus theeffects of subsidies. Uncertainty continues forthe region with many political economy
decisions facing authorities in coming
months, importantly including questions on
subsidies.

 In Sub-Saharan Africa, South Africa has

witnessed a receding of inflation pressures to
5 percent as of April 2012, and for the region
excluding South Africa 14.2 percent, in thelatter tied to poor weather and high foodprices (figure INF.8). But an importantdifferential has emerged between oil exporters
and oil importers. The former group is using
available hydrocarbon resources to boost
investment and government outlays, helping
to underpin stronger rates of domestic
demand (examples include Ghana and Sierra
Leone both new to the oil market, andNigeria). CPI for Sub-Saharan Africa oil
exporters ramped up from 6.8 at mid-year2011 to 17 percent by early 2012 (saar). At
the same time inflation for oil importers has
been softening, as oil prices in this period
were fairly subdued: inflation moved from 10
to 7.2 percent over the same period. With data
timeliness problems for many Sub-SaharanAfrican countries, it is likely that oil
importers will show some pick-up in
inflation, exporters- some softening as further
data becomes available for analysis.

 SouthAsian inflation has declined
significantly grounded in improvements in
India. At the start of 2010, inflation in South
Asia was 18 percent (saar); as of March 2012that rate had halved to 9 percent. The bulk of
the improvement is tied to lower food prices,
easing economic activity, and price controlsthat have limited the pass-through of higher
energy prices in India (figure INF.7). Outsideof India, however, other South Asian inflation

Figure INF.7 A recent rebound in South Asian headline
inflation

Figure INF.8 Coming to convergence at higher CPI
rates in Sub-Saharan Africa
price indexes, percentage change, 3m/3m saar

price indexes, percentage change, 3m/3m saar
20

18

18

16

16

14

14

12

12

10

10

8

8

6

6

4

4

2

2
2010M01

2010M06

2010M11

2011M04

2011M090

2012M02

2010M01 2010M04 2010M07 2010M10 2011M01 2011M04 2011M07 2011M10 2012M01 2012M04

South Asia

India

Other South Asia

Sub-Saharan Africa

Source: World Bank.

Source: World Bank.

40

South Africa

SSA x South Africa

Global Economic Prospects June 2012

Inflation Annex

 Several

the series of liquidity injections to the economy,
higher landed crude oil prices have moved
quickly to the petrol pump, raising consumer
prices, but also underpinning substitution toalternate means of transport, and purchase of
more fuel efficient vehicles. Inflation based on
fundamental domestic factors is not a particularworry at the current interval with economic
activity on the weaker side.

In contrast with developing countries, highincome countries in aggregate witnessed aslight increase in headline consumer priceinflation

Core consumer prices (adjusted to remove theprices of food and fuel) have increased
moderately over the past 12 months (year-on–
year basis) in each of the United States, Japanand the Euro Area. The biggest acceleration incore CPI has been in the United States, movingfrom 1.3 percent to 2.3 percent over the year to
March 2012, as very gradual pass-through ofhigher imported raw materials costs, a pickup in
wage rates in selected overseas suppliers to theUnited States, and spillovers from increasing
prices of domestic services have likely served tounderpin this development.

Despite the generalized decline in inflation,
several countries continue to face high-or
accelerating inflation
countries are continuing to beaffected by high or accelerating inflation, andthis for a number of reasons. Some economies
continue to operate at or above potential GDP– raising concerns of “overheating” due todemand pressures and creating anenvironment where suppliers find it easier toraise prices, for example in Argentina, Brazil,
Ghana (new oil), India and Turkey.

Consumer prices increased from 1.9 percent in
September 2011 to 2.5 percent by April (saar),with a notable characteristic that deflation thathas characterized the Japanese economy since2010 has ended (figure INF.9). Several factors
have contributed to these overall developments,
including the large liquidity injections of highincome central banks in response to the crisis.
The depreciation of the euro during the recent
spite of financial weakness in the euro zone has
either augmented the upward movement oftraded commodity prices, or yielded higher
landed prices in local currency terms for a given
dollar price. In the United States, in addition to

Looking forward, inflation is likely to
encounter opposing forces over 2012 to2014.
The view for inflation moving into the projection
period is linked to the progress with which (forthe large part developing-) countries first
converge toward potential output growth by
2013. And thereafter, given expected morefavorable developments in the external
environment to grow at or about the pace ofpotential GDP. This would imply a modest reacceleration in inflation and inflation
expectations for developing countries, andeventually for the United States and Europe, tocarry global inflation back to modest gains in arange of 2 to 2.5 percent.

Figure INF.9 High-income inflation converging toward
a 2.5% rate (saar)
price indexes, percentage change, 3m/3m saar
6
5
4
3
2

On the downside, domestic demand could belackluster, mitigating chances of demand pullelements of inflation. The view for commodity
prices is for decline or small positive changes inthese years, meaning that base effects of highinternational prices will fall “out of calculation”
for headline inflation. In contrast, the potential
for faster growth in the United States-; for

1
0
-1
-2
-3
2010M01

2010M06

2010M11High Income

2011M04

United States

2011M09

2012M02

Euro Area

Japan

Source: World Bank.

41

Global Economic Prospects June 2012

Inflation Annex

headwinds from the oil markets-; and for a newflight to quality once the intensity of the global
crisis subsides are “real” risks to the upside for
inflation.

References
El-Arian, Mohammed. “Danger of Emerging
Market Inflation”. Financial Times. London.
May 31, 2011.
Loungani Prakash, and Philip Swagel. “Sourcesof Inflation in Developing Countries”. IMF
Working Paper WP/01/198. International
Monetary Fund. Washington DC. December
2001.
Oxford Analytica, various issues 2011-2012.
World Bank. a and b. Global Economic
Prospects, (a) January and (b) June 2010.
World Bank. c. “Transmission of Global Food
Prices to Domestic Prices in Developing
Countries: why it matters, how it works andhow it should be enhanced.” Note to G-20,
Commodity markets sub-Working Group.
April 2012.

42

Global Economic Prospects June 2012

Finance Annex

Recent developments in financial markets
After several months of heightened uncertainty,
conditions in financial markets improved
significantly during the first four months of2012. Relatively positive news on the real sideoutside Europe and ECB intervention
contributed to a marked improvement in market
sentiment. The spreads and credit default swap
rates paid on the sovereign debt of high-income
and developing countries declined markedly,with CDS rates in non-European high-income
and many developing countries returning toclose to their July 2011 levels (see discussion
and figure 3 in the main text).

currently), suggesting that banks still facefunding gaps.
The decline in global risk aversion during thesemonths also led to equity market rebounds with
global equity markets regaining almost all thelosses incurred during the second half of 2011
By late March, stock market volatility (proxiedby the VIX index) dropped to the lowest level
since 2007, plunging 64 percent between
October 2011 and March 2012.

Funding pressures on European banks have been
eased thanks in part to the ECB’s long-term
refinancing operations (LTRO) in late December
and end-February. The €1 trillion LTRO
operations have boosted confidence in theinterbank market and lowered the Euribor-Eonia
spread—a gauge of European banks’ willingness
to lend to each other in the unsecured interbank
market (figure FIN.1). US interbank spreads
have narrowed supported by the results of US
banks’ stress test. Despite improvements,
spreads for both markets are still well above precrisis levels (historical levels for these spreads
are around 10 basis points, versus 30 basis points

Tension returned to the markets during the firstweek of May. Market sentiment took a turn for
the worse driven by election outcomes, renewed
concerns about the health of the European
banking sector and discussions about Greece
leaving the Euro Area. Since the beginning ofMay, emerging equity markets (as measured by
the MSCI index) dropped 7.4 percent reversing
most of the 9.3 percent gain of the first fourmonths of the year (figure FIN.2). All
developing regions experienced price declines—
although these were much more marked (around
9.1 percent) in Eastern Europe, with the largest
drop in Russia. Developed country equity
markets also fell by 6.7 percent since May after
8.6 percent gain earlier in the year.

Figure FIN.1 Funding pressures for European banks
have eased in wake of LTORs

Figure FIN.2 Global equity markets lost almost allof their earlier gains in May 2012

1.2

MSCI Equity Index
Jan 2011 =100110Interbank-overight spreads, percent

1.0

MSCI Developed

105

EURIBOR-EONIA

100

0.8
US Libor-OIS

95

0.6

90
85

0.4

80
75

0.2
0.0
January-10

MSCI EM70
May-10January-11

Oct-10Mar-11

Aug-11

Jan-12January-12

Source: Bloomberg. Last observation is June 7th.

Source: Bloomberg. Last observation is June 7th

43

Jun-12

Global Economic Prospects June 2012

Finance Annex

The increased market volatility accelerated
outflows from Emerging Market (EM) equity
funds that started in mid-April. Outflows totaled$7.2 billion since April. While EM fixed income
funds have been more resilient, they posted
outflows during the last two weeks of May.
Despite the recent withdrawals, investors have
put $14.2 billion into the EM bond funds, withmost inflows going into hard-currency debt.

After increasing steadily during the first fourmonths of the year, gross capital flows todeveloping countries declined in May. Gross
capital flows (international bond issuance, crossborder syndicated bank loans and equity
placements) to developing countries totaled $184
billion during the first five months of 2012,
down 22 percent compared to the like period in2011 (figure FIN.5). Most of the decline was inbank lending and equity issuance, which fell 38
percent and 36 percent respectively, while bondissuance stood just 2.8 percent below last year's
levels.

Developing country sovereign bond spreads
have also started to widen after falling to longterm average rate in March. In tandem with the
decline in global risk aversion, developingcountry sovereign bond spreads narrowed by 165
bps to 316 bps—close to the long-term averageof 310 bps—in mid-March down from 481 bps
in October 2011 (figure FIN.3).

Gross capital flows actually increased steadily
during the first four months of the year
supported by a record level of bond issuance,
Figure FIN4. Implicit yield on EM sovereign bonds

After a temporary jump in March, spreads
widened again reaching to 422 bps in May—to
their January 2012 levels. Spreads narrowed
slightly to 398 bps by the first week of June
reflecting the easing in risk-aversion following
the announced extension of ECB’s short-term
lending operations as well as positive Spanish
bond auction.

Yield on 10-year US treasury note

Percent
12

Implicit yield on EM sovereign bonds

10
8
6

Bond spread(EMBIG composite index)

4

Implied developing country bond yields fell to
5.4 percent in April for the first time sinceNovember 2010 and remained low despite therecent widening in the emerging market spreads
as US treasury rates declined (figure FIN.4).

20
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

Source: JP Morgan and Bloomberg.
Figure FIN.5 Gross capital flows to developing
countries

Figure FIN.3 EMBIG Sovereign Bond Spreads

60

basis points$ billion (3-month moving average)
Syndicated bank lending

500

50

Bond Issuance
Equity Issuance

450

40

400

30

350
20

300
250
Jun-11

Sep 09-May 11
Average
Sep-11

Dec-11Mar-12

10

Jun-120
Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Source: Dealogic, World Bank. Last observation isMay.

Source: JP Morgan. Last observation is June 7th.

44

Global Economic Prospects June 2012

Finance Annex

which reached a historic high of $94.4 billion.
The boom reflected both a decline in investor
risk aversion, but also a desire by borrowers(mainly state-owned resource firms in Latin
America) to compensate for reduced banklending. Corporate issuers accounted for about
62 percent of total issuance. The biggest
corporate issuers were oil & gas and financial
companies, with about $28.6 billion of combined
bond issuance, including a record (fordeveloping country firms) $7 billion bondoffering by Brazilian oil company Petrobras inFebruary. Bond issuance totaled only $7 billion
in May partly reflecting increased market
volatility and higher cost—making its year todate value $101.7 billion.

Deleveraging by the European banks has
intensified since the second half of 2011.
Pressure on European banks to deleverageintensified in the second half of 2011 following
increased funding pressures and regulatory
requirements. Rising funding costs, increased
counter-party risk assessments, deterioratingbank-asset-quality (notably that of sovereign
bond holdings), and growing concerns over theadequacy of capitalization, all contributed
toward a deleveraging trend among European
banks in the second half of 2011. Thosepressures intensified in October 2011 when theEuropean Banking Authority (EBA) requiredbanks to mark-to-market (to the September 2011
market-value) their sovereign bond holdings andraise capital ratios to 9 percent by June 2012.
EBA estimates suggest that banks needed an
additional €115 billion of capital to fulfill theserequirements. While most banks indicated thatthey would meet these objectives without
reduced lending, credit growth in the Euro Area
eased noticeably, and actually began to fall at a2.3 percent annualized pace during the threemonths ending April 2012 (figure FIN.6).

Contrary to bond flows, equity issuance by- andsyndicated bank-lending to- developing
countries declined sharply in 2012. Equity
placements (a combination of IPOs and followon issuance) by developing countries remained
relatively subdued since summer 2011 but
slightly picked up in April due to strong activity
in China and Brazil. Following the weak May
issuance, total equity issuance reached only
$33.2 billion during the first five months of2012, 36 percent lower than the same period in
2011. Syndicated bank lending fell off sharply
totaling only $49.5 billion, only two-thirds of the2011 level for the same period partly reflecting
banking-sector deleveraging in high-income
Europe.

European banking-sector deleveraging has also
cut into trade finance flows. European banks
play a pivotal role in the provision of global
trade finance, and their funding problems, inparticular dollar liquidity constraints, negatively
affected the availability and pricing of tradefinance in 2011Q4. Anecdotal evidence showsthat lenders from other regions (mainly Asian

Figure FIN.6 Euro area lending: weak and weakening

Figure FIN.7 Recovery of trade finance flows todeveloping countries is mixed

Euro area bank loans (3m/3m saar)
20

25

15

$ billion

20

Loans to non-financial corporations
Loans to Euro area residents

10

15

5

2011Q1

2011Q2

2011Q3

2011Q4

2012Q1

10

0

5
-5

0
-10
Jan-07

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

East Asia&Pacific

Jan-12

Last observation is April 2012

Source: Datastream, World Bank

Europe and
Latin
Middle East South Asia Sub-SaharanCentral Asia America & and North
AfricaCaribbean
AfricaSource: Dealogic, World Bank.

45

Global Economic Prospects June 2012

Finance Annex

financial institutions) partly filled the funding
gap. Funding shortfalls have been sharpest for
SME trading companies, especially from lowervolume IDA countries, partly because higher
risk ratings under Basel III rules make theseinvestments less attractive than earlier. The
WBG has increased its support to trade financein low income countries, through the IFC’s
Global Trade Finance Program, and a recently
launched program to support commodity tradersfrom low income countries.

flows remain down. A recent ICC-IMF survey
suggests a net improvement in the outlook for
trade finance to developing regions for 2012. In
fact, preliminary data for April and May indicatethat global syndicated bank lending for tradefinance increased significantly in Europe andCentral Asia—especially to Turkey—reflecting
recovery in trade in the region.
The impact of deleveraging was also evident asinternational claims (earlier discussion was on
only syndicated loan sector) by BIS banks indeveloping countries declined sharply in thesecond half of 2011. International claims—
including all the cross-border claims and local
claims in foreign currency—by Bank forInternational Settlements (BIS) reporting banks
declined by $78 billion (3.3 percent) from Julyto December in 2011 (figure FIN.8). The impact
was much sharper in developed countries as theclaims by BIS banks fell by $1.7 trillion (10percent) during the same period. Amongdeveloping regions, the impact was the highest
in the Middle East and North Africa, Eastern
Europe and Central Asia and East Asia andPacific regions, where cross-border claims
dropped by $7.9 billion (13 percent), $32.6
billion (6 percent) and $37 billion (5 percent),
respectively. Other regions were hit less hard,falling slightly or remaining the same. Amongindividual countries the sharpest value declines
were in China, Malaysia, Turkey and Brazil with$18 billion (3.5 percent), $12 billion (17percent), $10 billion (7.8 percent) and $8 billion(3.4percent) declines in international claims in
2011H2.

The sharp decline in global syndicated banklending for trade finance purposes in 2012 Q1
indicates that the market was still under stress inearly 2012 (figure FIN.7). The year-on-year
volumes declined by 20 percent, with the largest
falls in Europe (includes both high-income anddeveloping European economies). Europe had
been hardest hit with Q1 2012 flows well below
the levels observed even in Q4 2011, when
European trade activity was falling at a 17
percent annualized pace. In developing regions
the story is mixed. In East Asia and Latin
America the data show some pick up perhaps
reflecting entry of regional banks into the tradefinance arena, and in the Middle East thedissipation of some of the turmoil associatedwith political change in North Africa has
supported flows. Trade finance flows to Africa
are slightly up, however in South Asia which
witnessed a sharper Q4 2012 trade contraction,
Figure FIN.8 Change in international short- andmedium&long-term claims by BIS banks in developing countries$ billion

The largest decline in international claims was inshort-term debt (debt with an original maturityof one year or less) confirming the tension intrade financing. Short-term debt in developing
countries—mostly trade finance—declined
significantly by $58 billion (5 percent) in thesecond half of 2011 totaling $1.1 trillion after
the sharp increase in the first part of the year.

250
200
150

100
50
0
-50
-100

-150

Medium and long term

-200

Short-term

While the accelerated phase of deleveraging by
European banks may have passed, deleveraging
pressures are expected to continue to be felt for
years to come. The speed of deleveraging is-250
2007Q1

2009Q1

2011Q1

Source: Bank for International Settlements, World
Bank.

46

Global Economic Prospects June 2012

Finance Annex

expected to slow (many banks have announced
that they have already reaching new required
capital ratios and restored their balance sheets),
but regulatory reform is ongoing and will likely
require further efforts. Beginning in 2013, banks
will start operating under Basel III, with a rangeof provisions being gradually phased in through2019—implying continued tightening ofconditions. A number of European regulators
have proposed to introduce capital requirementsthat are more stringent than the Basel III
minimum and which kick in earlier. Regulations
are not the only reason that banks have been
selling assets and certain lines of business.
Several banks are revising their business models.
Several Spanish and French banks have shedspecific assets, even though they had no shortfallof regulatory capital. Several market reports
estimate overall asset disposal by European
banks over the coming years will be in the rangeof €0.5-3 trillion.

slight decrease in the third quarter. The largest
increase was in the South Asia region —mainly
in India, where FDI inflows almost doubled due
to large deals in oil and gas sectors. The Middle
East and East Africa was the only region where
FDI declined, due to disruptions caused by the
Arab Awakening. Increase in FDI inflows in2011 partly reflects the pick-up in M&A activity
as a result of consolidation in many sectors. As
in previous years, reinvested earnings accounted
for around one-third of FDI inflows in 2011.
That said FDI inflows are expected to fall in2012 as the heightened uncertainty of the second
half of 2011 seems to have started to cut into
medium to long-term investments. FDI inflows
to selected developing countries with highfrequency data declined by 14 percent in the firstquarter of 2012 (figure FIN.9). Similarly, global
cross-border M&A activity in first quarter of2012 declined by 36 percent compared to thefirst quarter of 2011.

Foreign direct investment (FDI) inflows
remained relatively stable throughout 2011, but
declined in the first quarter of 2012

International capital flows to low-income
economies

FDI inflows rose by an estimated 23 percent innominal terms reaching $624 billion (2.7 percent
of GDP) in 2011 (figure FIN.9). FDI inflows
remained strong throughout the year with a

Low-income countries have weathered the recent
financial crises better than middle income
countries in terms of private capital inflows.
Private capital flows to low-income countries(LICs) have remained relatively stable compared
to flows to middle-income economies (MICs)
despite increased global financial market
volatility over the past three years. After the2008 crisis, private capital flows to LICs
declined by 20 percent compared with 30 percent
in MICs. In 2011 they actually increased by an
estimated 15 percent versus a 10 percent decline
in MICs. The relative resilience of flows to LICs
mainly reflects the high share of FDI (a morestable source of flows) in total flows. FDI to
LICs was supported by increased South-SouthFDI and resource-related investments.

Figure FIN.9 FDI inflows in selected developing
countries
140$ billion

130
120
110
100
90
80
70

FDI compensated for the sharp contraction in
short-term debt, mainly trade finance, whichreversed from a $1 billion inflow in 2008 to net$1 billion outflow in 2009. Similar contraction
was also experienced by middle income
countries in 2009, mainly associated with the

60
2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1

Source: World Bank staff estimates based on data from
central banks. Note: Countries include Brazil, Bulgaria,
Chile, China, India, Indonesia, Kazakhstan, Malaysia,
Mexico, Pakistan, Romania, Russia, Serbia, Thailand,
Turkey, Ukraine and Venezuela.

47

Global Economic Prospects June 2012

Finance Annex

significant fall in trade. Interestingly, private
debt flows from China compensated for the fallin debt flows to LICs from other sources for
economies such as Ethiopia. Most LICs have noaccess to international bond markets and receive
very limited portfolio equity flow.

declined. The outlook for aid looks gloomy as
many high-income countries continue to struggle
with fiscal sustainability and it is unlikely thatthey will be able to meet their Monterrey targets
of providing 0.7 per cent of their national
income in ODA—except in a few instances. For
2012, bilateral flows are expected to remain flatat best. Aid channeled through multilateralagencies might increase based on earlier
commitments (figure FIN.10).

On-going debt problem among high-income
countries has started to affect LICs through aid
flows that fell in 2011 for the first time in morethan a decade. Net overseas development
assistance (ODA) has been a stable source ofdevelopment financing for the poor economies
with limited or no-access to international capital
markets. ODA flows fell in 2011 for the firsttime in more than a decade. According to an
OECD report, net ODA flows were $133.5bn in2011, 2.7 per cent less in real terms comparedwith a year earlier. This reverses the rising aid
trend since 1997.1

The heightened uncertainty of 2011 is expected
to reduce FDI flows slightly in 2012, whichmight pose challenges for investment in the faceof projected declines in Official Development
Assistance flows.

Prospects: Short-term
medium-term expansion

adjustment,

Despite increased volatility in international
financial markets, medium-term prospects
remain strong for developing countries, asconditions that underpin capital flows todeveloping countries are strong. The risk profile
of emerging markets continues to improvecompared with high-income countries—
suggesting that they will continue to attract a
growing share of international capital flows.
Flows are also likely to be attracted by higher
growth prospects2 and risk-adjusted interest rates
as the stance of monetary policy in developing

The cut in the overall aid budget reflects a
reduction in bilateral aid, particularly steep
among some European countries (a 39 percent
fall in the case of Greece and 33 percent fallfrom Spain).
In 2011, aid flows increased to North Africa in
response to the Arab uprising, while funds to
Sub-Saharan Africa and other poor countries
Figure FIN.10 Overseas development assistance
ODA/GNI in 2011
Greece
Korea
Japan
Italy
United States
Austria
New Zealand
Spain
Portugal
CanadaAustralia
Germany
Switzerland
FranceIrelandFinland
Belgium
United Kingdom
Netherlands
Denmark
Luxembourg
NorwaySwedenFigure FIN.11 Capital flows to developing countries

TargetST Debt

Bank Lending

Bond Flows

Portfolio Equity

FDI Inflows$ trillion

0.0

0.2

0.4

0.6

0.8

1.0

9
8
7
6
5
4
3
2
1
0

1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
-0.2

1.2

2006

Source: OECD.

2008

Source: World Bank.

48

2010

2012f

2014f

Global Economic Prospects June 2012

Finance Annex

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

2008
410.2

2009
243.3

2010
185.9

2011e
97.8

2012f
109.7

2013f
94.9

2014f
63.1

Capital Inflows

830.9

674.2

1131.21038.5

818.1

994.8

1198.1

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

801.4
570.7
624.1
-53.4
230.6
26.7
213.1
-4.4
-4.8
29.5
7.2
10.8
11.5

593.7
508.7
400.0
108.8
85.0
51.1
20.2
14.7
-1.1
80.5
18.3
26.8
35.4

1059.9
634.1
506.1
128.4
425.8
111.4
44.3
268.5
1.6
71.2
22.4
13.8
35.0

989.0
649.1
624.6
24.5
339.9
109.1
67.1
163.2
0.5
49.5
12.0
8.0
29.5

775.4
533.6
517.7
15.9
241.8
113.8
15.1
115.0
-2.1
42.7

953.2
647.0
593.6
53.4
306.2
119.8
40.3
145.0
1.1
41.6

1152.1
774.9
684.9
90.0
377.2
108.6
66.9
200.0
1.7
46.0

Capital Outflows/a-311.7-168.8-291.1-369.1-387.0-372.0-417.0-214.5
-19.8
-78.3
1.0

-148.2
-65.6
50.7
-5.7

-217.2
-24.3
-57.3
7.7

-238.1
-40
-81.0
-10.0

-220.0-45.0-110.0-12.0-250.0
-50.0
-65.0
-7.0

-300.0
-57.0
-54.0
-6.0

Net Capital Flows (Inflows+Outflows)

519.2

505.5

840.0

669.4

431.1

622.8

781.1

Net Unidentified Flows/a-109.0-262.2-654.2-571.6-321.4-527.9-718.0

FDI outflows
Portfolio equity outflows
Private debt outflows
Other outflows

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

countries is expected to remain significantly
tighter than in high-income countries.

these types of uncertainties with a time-lag
because of a longer time horizon between thedecision and the actualization of the investment.
Medium and long-term bank-lending is also
expected to remain below its historically low
level as on-going deleveraging and tighter
regulations will continue to limit lending todeveloping countries.

Taken together, and assuming that ongoing
uncertainty will gradually recede toward the endof the year, private capital flows to developing
countries are projected to ease in 2012, before
strengthening in 2013 (figure FIN.11, table 1).
Net private debt flows (incoming disbursements
less principal repayments) and net equity inflows(FDI and portfolio inflows), are projected toremain at $775 billion in 2012, before jumping
to $1.2 trillion in 2014 around 3.7 percent ofdeveloping country GDP (figure).

By 2013, total flows are projected to increase,may be to a lesser degree in bond issuance, as
firms no longer need to compensate to the same
degree for strengthening bank lending picks. By
2014, if high-income countries start to shift
toward tighter policy, longer-term interest rates
may begin to rise—raising the cost of capital fordeveloping countries and likely weakening
portfolio investment flows, in particular those
attracted by interest-rate differentials.
Nevertheless, the strong growth fundamentals
and improving risk profile should continue to

All private capital flows except bond flows are
expected to contract in 2012. FDI is projected tofall in 2012 after a strong rebound last year as it
has been restrained by the heightened
uncertainty in the global economy since thesummer of 2011. FDI flows tend to respond to49

Global Economic Prospects June 2012

Finance Annex

attract other types of capital flows to thedeveloping world compensating for decline involatile capital flows.

likelihood of a disruptive transmission of such acrisis to the financial systems of developing
Europe and Central Asia by bolstering crossborder supervisory and fiscal cooperation
between home-host authorities. However, thesecond Vienna Initiative might be less effective
compared to the initial one as the health ofparent banks’ balance sheet is now weaker, andmany of the sovereigns of the banks have limited
ability to recapitalize their banks.

Despite the slight easing in 2012 and gradualimprovement projected in the baseline,
significant risks remain in the short-term, whichhave been accentuated by the recent
developments. First and foremost, further
deterioration of the European debt crisis or a
prolonged period of heightened market
nervousness would likely reduce flows(compared with the baseline) in the latter caseand could prompt broad-based risk-aversion in
global financial markets driving capital flows
toward safe-haven assets leading to a sharp
reversal in capital flows to developing countries
in the former case. The possibility of such an
event has increased following the events of May.
As discussed in detail in the January 2012
edition of Global Economic Prospects,
developing countries with relatively high private
debt levels and current account deficits would be
most vulnerable to such a generalized tighteningof financial conditions. In addition, countries
that have attracted significant level of hot money
flows would likely be hit sharply as these areamong the kinds of flows that tend to reverse
rapidly in times of acute market unease.

Medium-term considerations
Overall international debt will be less abundantand more expensive in coming years withconsiderable real-side effects for developing
countries. In the medium-term, emerging market
yields are expected to increase amid expected
policy tightening in high-income countries.
Spreads for developing countries might also
widen, as the trend decline in risk premiums
partly reflects the very low policy rates andquantitative easing in high-income countries.
These easy monetary conditions have suppressed
the price of risk in both developed anddeveloping countries, and prompted a search foryield similar to that observed in the pre-crisis
period. Policy tightening in high-income
countries together with on-going banking sector
deleveraging limiting the availability of funding,will put upward pressure on cost of cross-borderfinancing in coming years.

Another risk is the acceleration of deleveraging
by European banks. While the on-goingdeleveraging process has been orderly so far,cross-border implications might be moresignificant if it starts to accelerate and becomes
more abrupt in reaction to possible deteriorationof the European debt crisis and/or earlier andrapid implementation of tougher capitalrequirements. The recent developments in
Greece have put enormous pressure on an
already stressed Euro-area banking system.
Deleveraging by Greek-owned banks is likely toaccelerate, with possible spill-over effects toother Euro-area banks.

Higher capital costs and less abundant capital are
likely to cause firms to invest less, which will
reduce the amount of capital employed in theeconomy. During the transition period from ahigh capital usage regime to a lower capital
usage regime, potential growth rate will slow.
Global Economic Prospects 2010 estimated thatthe substitution away from capital intensive
techniques could reduce potential output indeveloping countries during the medium term by
between 3 and 5 percent and potentially by asmuch as 8 percent—depending on how muchlong-term interest rates rise. Developing
countries can mitigate the costs of a tightening of
global financial conditions through strengthening
regional and domestic institutions.
Improvements in the policies and institutions

In the case of a more-accelerated deleveraging,policy coordination will be crucial to restore
confidence. In this context, the second Vienna
Initiative of March 2012, like the earlier one in
the wake of the 2008/9 crisis seeks to reduce the50

Global Economic Prospects June 2012

Finance Annex

Figure FIN.12 Real domestic growth in selectedeconomies

Figure FIN.13 Emerging markets banking concentration
percent, five largest banks per sector

yoy %
35

30
25

BrazilChina
Colombia
Indonesia
India
Malaysia
TurkeyIn d ia
Ukrain e
In done…
RussiaCh in aArg en t…
Ro man ia
TurkeyCo lo m…
BrazilMalaysia
MexicoCh ilePeru
S.Africa

20
15

10
5
0

0

2009 Jan 2009 Jul 2010 Jan 2010 Jul 2011 Jan 2011 Jul

50

100

Source: IMF and World Bank.

Source: Fitch Ratings.

governing the financial sector can thus have asignificant impact on domestic borrowing andcapital costs in developing countries.

according to official data, but the real level ofbad debt is believed to be 2-3 times higher if
measured by global standards.

After strong credit growth for many years,
anticipated slower growth might underscore theidiosyncratic vulnerabilities in banking sectors
among other developing countries. Given rapid
credit expansion in recent years, commercial
banks could see a marked deterioration in loan
performance in the face of slowing growth(figure FIN.12). Although non-performing loans(NPLs) remain low in most developing regionsexcept Eastern Europe and Central Asia so far,they could shoot up in the event of a sharp
slowdown in growth. In some cases, the data do
not fully reflect the vulnerabilities of banking
system in developing countries. For example,
while the NPL ratio for China was only 1.1
percent in 2010 despite rapid credit growth since2009, signs of pressure continue to emerge in the
Chinese financial system as the first quarter’s
bad loan figures have shown a significant rise forthe third largest Chinese bank. In addition,
Chinese state banks have large exposures tolocal government debt which in the context of a
slowing of global activity could go into default,
threatening the solvency of some banks.
Similarly, Vietnam's banks have becomeburdened with rising bad debts after years ofcredit growth, much of which was channeled tostate-owned companies. The NPL ratio rosefrom 2.1 percent in 2010 to 3.4 percent last year,

In recent months, a number of developing
country banks were downgraded or have been
put under watch by one of three major rating
agencies. In some cases, subsidiaries andbranches were downgraded because of their
weakened parent institutions. In others theunderlying factors for the rating actions werestated as economic slowdown, weakening inasset quality and increased pressures on banks’profitability. Bank rating actions occurred in
Brazil, Chile, Argentina, Russia, and Bulgaria.
These individual bank downgrades may beparticularly important for certain countries wherebanking systems are highly concentrated in few
banks (figure FIN.13).

Notes:
1. Aid flows excluding one-off debt.
2. Developing countries growth (between 5 and
6%) is projected to be more than twice as
fast as in developed countries (around 2%)
over the medium-term.

51

Global Economic Prospects June 2012

Trade Annex

Trade Annex
percent in the three months ending in March(figure Trade.1).

Recent Developments
Recent financial market tensions in the EuroArea threaten to curtail the strong rebound inglobal trade that occurred in Q1.

The effects of the recent resurgence of financial
market tensions in the Euro Area on global tradeflows remain uncertain. Trade data still lags themore recent financial side data. It is however
most likely having a dampening effect on Q2
2012 global trade, as some pull back on business
investment and drawing down of inventory
levels is expected in this environment ofheightened uncertainty. However, the slowing
down of trade is less likely to be as steep as wasobserved in Q4 2011, as risk levels remain lesselevated than they were late last year (see maintext).

Heightened global uncertainty during the second
half of last year, disruptions to regional supply
chains from the floods in Thailand, lingering
effects of the earthquake and tsunami in Japan,
and policy tightening in some large developing
countries combined to significantly reduce
global demand in Q4 2011 – resulting in the
sharpest contraction in global merchandise trade
seen since June 2009. In contrast with global
industrial production, which continued
expanding albeit it at a much reduced rate in Q4
2011, global trade fell at a 9.5 percent
annualized pace in 2011Q4, reflecting among
other things rapidly falling European importdemand.

Performance across regions however differs
Partly reflecting differences in the relative
strength of domestic demand across countries,
import performance has diverged across major
trading blocs.

Since then merchandise trade flows haveaccelerated sharply – boosted by strengthening
domestic demand in the United States, arelaxation of monetary policy in large middleincome countries, and easing of financial market
tensions in early 2012. Indeed, global trade was
expanding at an above historical average of 14.4

An escalation of Euro Area sovereign debt
concerns in Q2 2012 is likely to havedampened import demand, not withstanding
the rebound in Q1 2012, following the steep
contraction in the latter half of 2011.
Ongoing fiscal consolidation, rising
unemployment and tight credit conditions
continue to weigh down demand in Europe. And
with intra-European Union (EU) trade being
about twice the size of extra-EU trade, therecessionary environment in the Eurozone
weighed heavily on trade outturns such that by
Q4 2011 trade was contracting at close to levels
last seen during the great recession in 2009.
With the European Union being the largest
trading bloc, this sharp contraction was theprincipal contributor to the decline in global
trade, deducting between 5-10 percentage points
each month from global trade growth between
September 2011 and January 2012. The
relaxation of financial market tensions, thanks to
the intervention by the European Central Bank’s

Figure Trade.1 Global trade begins to pick up after
recent deceleration(%ch, volumes, 3m/3m saar)

Developing

40

High-income
30

High-income (ex. Eurozone)

Global

20
10
0
-10
-20

-30
2011M03

2011M05

2011M07

2011M09

2011M11

2012M01

Source: Thomson datastream and World Bank .

53

Global Economic Prospects June 2012

Trade Annex

Long Term Refinancing Operation, supported
the pick up economic activity including EuroArea import demand, which was rising at a 8.2
percent annualized pace during the three months
ending March 2012.

percent annualized pace. However, unlike theEuro Area where surveys carried out in Q2 2012
show the plummeting of economic confidence
and business activity, the US economy has thus
far remained resilient. Confidence is hovering
around a four-year high and industrial activity
and production continues to expand including in
the beleaguered housing market where recent
signs suggest a nascent private sector led
recovery is underway. Consequently, US importdemand is likely to continue expanding throughQ2 2012.

However, given a resurgence in financial market
tensions in the Euro Area since April and withbusiness and consumer confidence in the EuroArea slumping to a two-and-a-half year low andbusiness surveys showing activity at near threeyear lows, import demand in Q2 2012 is likely to
be much weaker than Q1 2012.

Japan’s import demand has been buffeted by lastyear’s tsunami and earthquake as well as bothregional and global uncertainties. Because its
export-oriented automotive and electronics
sectors are dependent on Thai-made parts
Japanese imports and exports were significantly
affected by the floods in Thailand, with importdemand continuing to fall through January 2012(-6.8 percent, 3m/3m saar). The normalization of
production in Thailand, and strengthening US
and Asian economies has supported the reboundin Japanese trade, with imports rising at 7.6
percent annualized pace through March 2012
before stagnating in April 2012 perhaps
reflecting the waning influence of the bounceback from the restoration of Thai supply chains.

Among other high-income countries, signs ofrecovery are more robust. In the United States,
where the labor market has been recently
strengthening with 1.2 million jobs added
between September 2011 and April 2012, thepace of decline in import demand was lessmarked than in the Eurozone during the fall of
2011. U.S. firms reacted to the heightened
uncertainty in global financial markets bydrawing down inventories – rather thanimporting through November 2011, but amid
signs of strengthening in the US economy
toward the end of the year, import demand
picked up once again as firms sought to restore
inventories to more normal levels. During thethree months ending March 2012 U.S. importdemand was expanding at an 18-month high 17.6

Box Trade.1 Trade finance for firms in developing countries appears set to firm after recent weakness.
European banking-sector deleveraging cut into tradefinance flows as measured by Dealogic in the second
half of 2011. Europe and Central Asia faced the
sharpest decline, with Q1 2012 flows well below thelevels observed even in Q4 2011, when European
trade activity was falling at a 17 percent annualized
pace. In developing regions the story is more mixed.
In East Asia the data shows some pick up perhaps
reflecting entry of regional banks into the trade finance arena. In the Middle East and North Africa
trade finance flows remain volatile reflecting ongoing political upheaval there. Trade finance flows to
Sub-Saharan Africa are also up slightly and haveheld steady in Latin America. However, in SouthAsia, which witnessed a sharper Q4 2012 trade contraction, flows remain down. A recent ICC-IMF survey suggests an improvement in the outlook for
trade finance to developing regions going forward.

Box figure Trade 1.1 Recovery of trade finance flows
to developing countries is mixed$ billion

25

20

15

2011Q1

2011Q2

2011Q3

2011Q4

2012Q11050East Asia&Pacific

Europe andCentral Asia

Latin
America &Caribbean

Middle Eastand North
AfricaSource: Dealogic and World Bank.

54

South Asia

Sub-SaharanAfricaGlobal Economic Prospects June 2012

Trade Annex
Figure Trade.3 Exports from Eastern Europe, South
Asia have commenced recovering falling sharp
declines

Figure Trade.2 Rapid developing country imports
supports recovery in global economy(Import volumes, %ch, 3m/3m saar)(Export volumes, %ch, 3m/3m saar)

3540Developing (ex. China)

30

Developing25

30

Developing (ex. China and Thailand)20

Pre-boom average

20

10

15

10

0

5

-10

0

-20

-5

-30

-10
2011M03

2011M05

2011M07 2011M09-40

2011M11 2012M01

Eastern Europe
Eastern Europe and Central Asia
South Asia
Sub Saharan Africa
2011M03

2011M05

2011M07

2011M09

2011M11

2012M01

Source: Thomson Datastream and World Bank

Source: Thomson Datastream and World Bank

Developing country imports demand partiallymitigated the down turn in global trade in thelatter half of 2011 and has since accelerated
strongly through Q1 2012. Throughout thelatter months of 2011 and the initial months of2012, developing country imports, though also
impacted by the events in the latter half of 2011,
continued expanding. By March 2012, importdemand had accelerated to a 19.7 percent
annualized pace, up from 0.1 percent in
September 2011 (figure trade.2). Thisdevelopment continued the post-crisis trend
where import demand from developing countries
has been the most dynamic segment of global
trade. Indeed, while imports from high income
countries fell by some $52.7 billion (s.a,volumes) between September and February,developing country imports rose by some $9.5
billion, helping to partially mitigate the severityof the decline in global trade.

countries imports actually contracted in the
fourth quarter (-0.7 percent), but recovered
strongly to be expanding by 26.0 percent inMarch 2012.
Developing country exports were significantly
impacted by the slowing of global demand,but exports are now rebounding. The
European Union is the most important trading
partner for many exporters in developing regions(Eastern Europe, South Asia, North Africa, and
Sub Saharan Africa). As a result of thecontraction in the Euro Area in the fourth quarterof 2011, as well as banking-sector deleveraging(which reduced access to trade finance, box
trade.1) there developing countries with closer
trade ties experienced significant decline in theirexports. However with the stabilization of
economic activity in early 2012, this therefore
supported a rebound in those regions that had
been earlier affected.

China, which accounts for about a third ofdeveloping country GDP, was the main driver ofmost of the increase in developing country
imports over the past few months contributing
some $6.7 billion to the developing country
import increase during the September to
February period – this notwithstanding the lull inimports during the Lunar New Year holidays.
Indeed, for each month in the fourth quarter,
China was the sole large economy whose
imports were accelerating rapidly at an above 30
percent pace. Excluding China, developing

Stabilizing high-income European demand in
Q1 2012 has helped the recovery in exports from
Eastern European developing countries, manyof which are part of a Customs Union with theEuropean Union or benefit from various regional
trade agreements. Indeed, in the three months
ending in March exports expanded at a moderate
rate of 4.5% - the highest pace in four months.
With Russia and Turkey relatively lessdependent on the EU than Eastern European
economies, their strong export growth has driven

55

Global Economic Prospects June 2012

Trade Annex

overall exports from the Europe and Central
Asian region to 20.5 percent pace in March 2012
(figure trade.3).

Figure Trade.4 Latin American export expanded
through global slump and exports from East Asia
and Pacific have recovered from supply chaininteruptions

South Asia, where Europe accounts for some 27
percent of exports, was also hard hit, althoughpolicy tightening, Thai floods and a slump in
Indian activity also played a role. South Asia
exports dropped off precipitously in the fall,declining at a trough of –34.0 percent annualized
rate during the three months ending October
2011. Most recently, they have recovered, rising
at a blistering 30.9 percent pace in the threemonths ending March benefitting from thedemand pick up elsewhere in Asia and the US
and stabilization of Euro Area import demand(export volumes, %ch, 3m/3m saar)

40
30
20
10
0
-10
-20

Middle East and North Africa-30

Latin America and Caribbean-40

East Asia and Pacific2011M03 2011M05 2011M07 2011M09 2011M11 2012M01 2012M03

Data for Sub Saharan lags, but the latest
numbers suggest that Sub-Saharan Africancountries were also hard hit by the slump in
global import demand (about 26 percent ofregional exports are destined for the EU).
Exports were still contracting at a 15.3 percent
pace in January 2012 (latest data). ExcludingSouth Africa, the region’s largest economy,
whose exports actually expanded in Q4 2011 dueto the end of labor strikes, exports in the rest of
Sub Saharan Africa was contracting at an evenfaster 20.1 percent rate. Though March data is
not yet available for most countries in the region,
exports growth is expected to have recovered
somewhat given the earlier improving global
demand conditions. Secondly for a number ofcountries the coming on stream of new mineral
resources should help boost export output (e.g.
Sierra Leone and Mozambique) should boost
output. Nonetheless, the recent bout of market
tensions which has contributed to a the fall incommodity prices is likely to dampen exports in
Q2 2012.

Source: Thomson Datastream and World Bank

While the decline in European demand impacted
exports from East Asia and Pacific a
confluence of other factors were also at play.
The restoration of Japanese supply chains by the
Q3 2011 and the subsequent expansion in
Chinese import demand in Q4 was a positive forexports from other Asian economies. However,floods in Thailand disrupted electronic and some
automotive supply chains in the region thus
reinforcing the negative developments fromweak demand outside the region. In Thailand thecontraction was the sharpest among all
developing countries reaching -52.7 percent in
the three months to December. Excluding
Thailand from the East Asia and Pacificaggregate, exports was falling at a more modest
11.2 percent pace in November. However with
the normalization of Thai-linked supply chains
and strengthening demand elsewhere in the
global economy including within Asia (which
supports intra-Asian trade) and the US, by April
the acceleration in East Asian and Pacificexports had picked up to a robust 15.8 percent,the third successive month of expansion.

Beyond the weak demand from high-income
countries, disruptions from the Arab Spring
uprisings and tightening of sanctions on tradingwith Iran have conspired to curtail exports from
the Middle East and North Africa. Indeed forfive consecutive months through January 2012,
exports were contracting. A rebound is however
expected in 2012 as the situation there
normalizes.

The Latin American and Caribbean region is
the least dependent of developing regions on
European import demand. As a result, its exports
were least affected by the fall in European
import demand and was the only developing
region whose export growth remained positive56

Global Economic Prospects June 2012

Trade Annex

during the fourth quarter, growing at an
impressive 14.1 percent (figure trade.4). Thisrobust growth has continued through 2012, withan acceleration to 16.8 percent in the threemonths ending in February, before slowing to
12.4% in March. Part of the resilience in exports
from this region reflects a strengthening US
economy which is the most important trading
partner for many Central American countries.
And in South America, strong demand from
China boosted mineral exports from the subregion.

Even with the rebound in the outer years of theforecast above the historical average of 6.8
percent, global trade will remain significantly
below trend levels had the 2008/09 recession notoccurred.

Risks
Risks to global trade prospects remain weighted
on the downside. The projected expansion in
global trade is by no means guaranteed. Indeed,
the recovery in the global economy remains
fragile and vulnerable to significant downside
risks (see main text), all of which could dampen
future global demand and trade prospects. In theevent of a slower growth outturn than envisaged,
due to a further unraveling of the Euro Area debt
situation than considered under our baseline
assumptions, global trade is most likely to be
one of the biggest casualties on the real
economy .

Medium term outlook
Going forward global trade is expected tocontinue expanding, but annual growth rates
will remain well below historical standards in2012. Given the steady improvement in global
activity that underpins the baseline scenario (seemain text), including a return to modest growthin the European Union in the course of thesecond half of 2012 (even though annual growth
will be negative), strengthening recoveries in the
United States and Japan, global trade is projected
to slowly pick up pace. However, with
developing countries contributing some 50% of
the increase in global trade since 2009, global
trade outcomes will also be dependent on
developments in developing countries. Thoughdeveloping country cyclical trends are coupledwith that of developed countries their trend
growth is decoupled. GDP growth in developing
countries is projected at more than twice that ofdeveloped countries hence developing country
trade is expected to continue to serve as the mostdynamic engine of global trade growth over theforecast horizon.

The risks of weaker outturns in high-income
countries remains rather elevated with knock-on
effects to developing countries. Simulations
c o n d u c t e d o n t h e W o r l d B a n k’ s
macroeconometric model indicates that for every
1 percentage point decline in income in highincome countries, developing country exports
may fall by 2.2 percent, while output indeveloping countries is likely to decline by about
0.8 percent.
Another risk to global trade expansion that has
gained prominence in recent years is a disruption
to a global or regional supply chain network.
Given the vertically integrated nature of many
supply chains involving firms from multiple
countries and the just-in-time inventory
management systems employed, risks of
disruptions to trade are no longer limited to theshores of a single country. Disruptions to
production in even a “small country” that is thedominant producer of a critical component in a
supply chain implies production in the rest of thechain will also decline, thus amplifying theeffects of initial production disruption to othercountries. Countries in East Asia, Europe andNorth America remain the most susceptible asregional supply chains there are more advanced.

Overall, global trade is projected to expand at a
subdued 5.2 percent in 2012 rising to 7.0 percent
and 7.7 percent in 2013 and 2014 respectively.
As discussed in the main text, the weak annual
number for 2012 reflects an unusually weak
carryover for 2012 due to very weak trade
growth in the second half of 2011. Within theyear, quarterly growth rates are expected to bemuch higher – ending year at rates close to 7
percent .

57

Global Economic Prospects June 2012

Trade Annex

In 2011, this was demonstrated in both the
Tohoku disaster in Japan as well as the floods inThailand. The rising importance of production
networks could also help account for the risingsensitivity of trade flows to changes in global
GDP. For instance, Freund (2009) finds a
monotonic increase in the sensitivity of world
trade to global GDP changes over successive
decades: it has risen from 1.94 in 1960 to 3.69 in
the 2000’s. As a result, while a 1 percent drop in
global income would have led to a 1.9 percent
drop in world trade, today this same identicalpercentage drop in GDP will lead to almost a
two percentage point higher drop in global trade
than would have been the case in 1960.

58

Global Economic Prospects June 2012

Exchange Rates Annex

Exchange Rates
in early 2012 when the (partial) relaxation oftensions in high-income Europe and thestabilization of global financial markets resulted
in falling investors’ risk aversion. As a result,during the first two months of 2012, the tradeweighted real effective exchange rates of Brazil,
Turkey, India and South Africa appreciated by 5
percent or more, while higher internationalcommodity prices boosted the currencies ofcommodity exporters including Chile, Colombia
and Mexico. With resumption of Euro Area
uncertainties since early May and flight ofprivate capital to safer US financial assets — andweakening of commodity prices for commodity

Recent developments
In the year to the first week of June, the US
dollar strengthened from 1.44 to 1.25 per euro,with the bulk of the appreciation occurring post
July 2011 as the nominal (and real) trade
weighted US dollar appreciated by 6 percent,largely reflecting the US dollar’s safe-havenstatus at the onset of the Euro Area crisis and theflight to quality that ensued. To a large extent,these developments have also been mirrored inemerging market currencies as developments in
the US dollar continues to be a major
determinant of both the value and volatility ofemerging market currencies. But it is importantto realize that in spite of the US dollar’s safe
haven status, the average real trade weighted
emerging market currency has been less volatile
than the real US dollar trade weighted exchange
rate almost 70 percent of the time over the last
10 years (figure ExR.1).1

Figure ExR.2 Generalized appreciation of US dollar
relative to emerging market currencies
Inverted local currency/US$, Index, Jan. 1, 2012=100
115

110

105

Even so, and despite the improvement indeveloping countries’ relative macroeconomic
fundamentals vis-à-vis the U.S., some of thelarger emerging currencies still came undersignificant pressure at the onset of the Euro Area
debt crisis in the second half of 2011. Likewise,
partly because of the liquidity generated by veryloose monetary policy in high-income countries
several large financially-open emerging market
countries experienced a a surge in foreign capital

100

95

90

85
Jan-12

BrazilChina

Indonesia

India

Malaysia

RussiaTurkeySouth Africa

Feb-12Mar-12

Apr-12

May-12

Jun-12

Source: IMF International Financial Statistics, Datastream and World Bank.

Figure ExR.1 In real-effective terms developing currencies have been much less volatile than viz-à-viz the US dollar
Inverted USD exchange rates, index average 2005=100

Real-effective exchange rate, index average 2000-2005=100

170

230
210

150

190

130

170
150

110

130

90

110
90

70
India

Indonesia

Jan-06

Jan-07

South Africa

RussiaBrazilTurkey

70

China

50
Jan-05

India

Indonesia

Jan-06

Jan-07

South Africa

RussiaBrazilTurkeyChina

Jan-10Jan-11

Jan-1250

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

Jan-12Jan-05

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

59

Jan-08Jan-09Global Economic Prospects June 2012

Exchange Rates Annex
Figure ExR.3 Developing countries' real exchange
rates appreciated between 2003 and 2011

exporting developing countries — the US dollar
again experienced a generalized appreciation
with respect to emerging market currencies(figure ExR.2). Although central bankintervention in foreign exchange markets briefly
halted the slide in the Brazilian real in late May,other emerging market currencies showed signsof appreciation in early June, encouraged by
expectations of coordinated official actions todeal with the ailing Spanish banking sector,
reduction in borrowing costs in China, andpossibility of further stimulus measures.
Moreover, partly as a consequence of thebroader appreciation of the US dollar,
developing countries’ currencies measured
against a wider range of currencies havedepreciated less than against the US dollar inrecent months.

Real effective exchange rate, average (Jan. 2003=100)
135

130
125
120

115

Developing
Developing excl. China
High-income
Linear (Developing)Linear (Developing excl. China)
Linear (High-income)

110
105

100
95
90

Jan-12

Jan-11

Jan-10

Jan-09

Jan-08Jan-07

Jan-06

Jan-05Jan-04Jan-0385

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

While cyclical factors have played a role, to alarge extent the appreciation of the currencies ofmany of the larger middle-income countries
during the last decade has reflected long-term
fundamental factors including large changes incommodity prices, productivity differentials andin some cases domestic policy.

increases compared with high income countries.
Developing countries’ average annual real GDP
growth accelerated from 3.8 percent during 1994
-2002 to 6.4 percent over 2003-11. In the sametwo periods, high income countries’ average
growth declined from 2.8 percent to 1.6 percent.
Furthermore, developing countries’ total factor
productivity (TFP) rose 2.2 percent annually on
average during this period, more than double therate of increase for high income countries. Other
factors at play include improved macroeconomic
management in many developing countries, highcommodity prices (in commodity exporting
countries), and sustained inflows of private
capital and remittances in several middle- andlow-income countries. Importantly, the strong
appreciation of developing country currencies
after the Lehman crisis in 2008 mainly reflects areturn to pre-crisis levels and trend appreciationin line with underlying fundamentals – rather
than a significant deviation from earlier trends.

Exchange rates over the medium-term
Developing countries’ real exchange rates
have appreciated since 2003, with return totrend following crisis
In general, developing countries’ average tradeweighted real effective exchange rates have been
appreciating more or less steadily since 2003,
even as high income countries’ real exchange
rates depreciated (figure ExR.3). The average
GDP weighted real exchange rate of developing
countries (excluding China) appreciated by acumulative 25.7 percent (26.7 percent) between
2003 and the first quarter of 2012, or by about
2.6 percent (2.7 percent) annually, in spite ofsignificant real depreciations during the Lehman
crisis in 2008 and during the Euro Area
sovereign debt crisis in late 2011.

Rising commodity prices until April
supported commodity exporting currencies
Most commodity exporting countries haveexperienced (often significant) gains in theirterms of trade as commodity prices rose sharply
over the past decade. These improvements have

In general, the positive trend in developing
countries’ currencies since 2003 reflects a fasterpace of growth and higher rate of productivity

60

Global Economic Prospects June 2012

Exchange Rates Annex

Figure ExR.4 Real exchange rates of commodity exporters appreciated as their terms of trade improved with increase in international commodity prices up until April
BrazilColombia
Index (Jan 2005=100)

Index (Jan 2005=100)
220

120

200

110

180

Index (Jan 2005=100)
150

Index (Jan 2005=100)

140

140

100

140

90

120

140

110

130

100

120

90

110

200

160

140
120
100

REER

90
Terms of trade [right]

120

220

110

80

REER

150

Index (Jan 2005=100)

120

100

100

130

Nigeria

180

130

160

Index (Jan 2005=100)
160

REER [left]
Terms of trade [right]

80

70
80
Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12

Terms of trade [right]
80
80
Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12

60
100
Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12

MexicoRussiaSouth Africa
170

110

110

105
100

160

130

150 100
140
130

120

90

120

90

80

80

REER

75

100

100

Terms of trade [right]

70
Apr-06

Apr-07

Apr-08Apr-09Apr-10

Apr-11

Apr-12

120
100
80

90
80

60

110

110

85

Index (Jan 2005=100)

110

140

100

95

70
Apr-05

Index (Jan 2005=100) Index (Jan 2005=100)
180 120

Index (Jan 2005=100)
120 150

Index (Jan 2005=100)

Index (Jan 2005=100)
115

REER

90

Terms of trade [right]

80

70
90
Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12

70
60

REER

40

Terms of trade [right]

20
50
Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12

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

been reflected to varying degrees in realexchange rates – depending on the extent towhich the authorities have allowed the nominal
exchange rate to appreciate (or depreciate) in
response to international commodity priceshocks. For instance, South Africa’s flexible
exchange rate regime has allowed the realexchange rate to move closely with its terms oftrade, with the nominal exchange rate acting as
the economy’s main shock absorber andautomatic stabilizer. This phenomenon was also
observed to a more or lesser extent in other oiland commodity exporting countries such as
Brazil, Colombia, Nigeria, Mexico and Russia(figure ExR.4).

income commodity exporters. For instance, after
experiencing a steep depreciation in the second
half of 2011, Brazil’s trade weighted realexchange rate appreciated 5.2 percent between
December 2011 and February 2012 due to the
combined effect of high commodity prices and asurge in capital inflows. But measures to stem
the currency appreciation, including extension oftaxes on cross-border borrowing by local firms
to shorter-maturity loans, resulted in a
substantial nominal and real depreciation. Realexchange rates of commodity exporters with asignificant manufacturing export sector have also
been influenced by developments in trade
partner countries. Mexico’s trade-weighted realeffective exchange rate depreciated steeply
during the Euro Area debt crisis in late 2011
similar to that of other financially integrated
emerging markets; but it then appreciated 7.6
percent in the first quarter of 2012 asstrengthening demand and better employment

Notwithstanding their access to commodity
resources, exchange rates in these countries are
not only exposed to volatile commodity markets,
but this currency volatility is often exaggerated
by commodity related capital flows—
particularly for the larger, more open middle

61

Global Economic Prospects June 2012

Exchange Rates Annex

outturns in the U.S., its largest trade partner,translated into improved domestic prospects.

sovereign and corporate balance sheets (Ostry
and others 2011).

There is a widely held perception that theexchange rates of many commodity exporting
countries are extremely volatile. However, thesecurrencies are merely reflecting the underlying
volatility of commodity prices. Although adverse
exchange rate movements (and volatility) areoften painful to domestic industry in thesecountries, the (volatile) exchange rates often act
as an automatic shock absorber and stabilizer.

To the extent that shorter-term currency
movements are driven by (identifiable)
speculative capital flows that are temporary innature, there could be a rationale for ―leaning
against the wind‖. Some forms of controls on
foreign currency capital inflows or outflows andother prudential regulations may be justified in
the shorter-term to reduce excessive exchange
rate volatility and to provide space for domestic
manufacturers to adjust to a changing economic
environment.

Capital flows are an important driver ofshort-term movements in emerging market
currencies

There is a risk, however, that such short-term
measures may become ―sticky‖, and over time
introduce distortions in production and capital
allocation decisions, thereby hurting longer-term
growth prospects. Capital flow management
measures should therefore be reviewed regularly,
and capital controls should be adapted orreversed as destabilizing pressures abate (G20
2011). In particular, capital flow management
measures should not be used to avoid or unduly
delay necessary adjustments in the economy.

Capital flows continue to be a driver of shortterm movements in nominal and real exchange
rates. The rapid withdrawal of foreign capitalduring the Euro Area sovereign debt crisis in thesecond half of 2011 from several emerging
markets (including from some commodity
exporters) appears to have contributed to a steep
depreciation of their currencies, but theresumption of capital inflows contributed toappreciation of emerging market currencies,
including those of Brazil, Turkey, and India in
the first quarter of 2012.

Commodity importing countries’ realexchange rates depreciated as commodity
prices rose up until April

Permanent increases in the underlying capital
inflows (such as capital inflows responding tofaster potential growth) to a developing country
are likely to result in currency appreciation andvice versa. Apart from a once-off adjustment to
the new equilibrium capital inflows, this should
not raise currency volatility. When capital flows
are relatively permanent in nature and are likely
to contribute to increasing productivity andlonger-term growth, there is little rationale forpolicymakers to intervene or restrict these flows.

Several net oil- and commodity-importing
countries experienced terms of trade losses andreal exchange rate depreciation as the increase inimported commodities prices outpaced
manufacturing export prices. Real currency
depreciation appears to have been more
pronounced in countries with relatively weakercurrent account positions – which were more
exposed to foreign capital, such as India andTurkey (figure ExR.5). Currencies of several net
oil-importing Sub-Saharan African and South
Asian countries have faced depreciationpressures due to a combination of rising burdenof energy imports amid strong economic growth.
For instance, Bangladesh and Pakistan have
faced current account pressures and nominal
depreciation due to a rising import bill from highinternational prices of crude oil imports andrelatively weak export growth.

However, when these inflows are more related to
speculative ―hot money‖ flows, the flows can be
disruptive. Such hot money inflows canpotentially erode competitiveness, albeit
temporarily, and could give rise to credit andasset price booms. Rapid withdrawals of suchflows and the resulting nominal depreciation can
increase the burden of foreign currency debt on

62

Global Economic Prospects June 2012

Exchange Rates Annex

Figure ExR.5 Terms of trade losses and realexchange rate depreciation in India and Turkey

Figure ExR.6 Oil- and commodity-importing
developing countries experienced larger realdepreciation during recent crises

India
Index (Jan 2005=100)
115

Real effective exchange rate appreciation (%)

Index (Jan 2005=100)

0

100

-2

95

110

-4

90

105

-6

85
100

-8

80
95

90

July-Dec 2011
-12

REER

70

Terms of trade [right]
85
Apr-05-14

Developing oil-importers

65
Apr-06

Apr-07

July-Dec 2008

-10

75

Apr-08Apr-09Apr-10

Apr-11

Apr-12TurkeyIndex (Jan 2005=100)
115

Developing oil-exporters

Real effective exchange rate appreciation (%)
4

Index (Jan 2005=100)

110

105

120

2

110

0

100

-2

90

-4

100
95

85

-6

80

90
REER

July-Dec 2011
-870

Terms of trade [right]
80
Apr-05-1060
Apr-06

Apr-07

Apr-08July-Dec 2008

Apr-09Apr-10

Apr-11Other developing

Commodity-rich developing

Apr-12

Note: Charts exclude China
Sources: IMF International Financial Statistics, J. P. Morgan, and World Bank.

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

Net oil and commodity importing developing
countries as a group experienced significantly
larger depreciations during recent crises
compared to oil exporters. The GDP-weighted
average real exchange rate of oil importing
countries excluding China depreciated 12.2
percent during the Lehman crisis in the second
half of 2008 and 6.1 percent during the EuroArea debt crisis in the second half of 2011,
compared to 3.2 percent and 1.4 percent
declines, respectively, for oil exporting
developing countries (figure ExR.6). Even as
commodity exporters gained from high prices up
until April 2012, oil and commodity importing
developing countries, in particular those that are
relatively open to foreign capital and have
weaker current account positions, have faced
renewed depreciation pressures with resumptionof Euro Area tensions.

Prospects forexchange rates

developing

countries’

Developing countries’ currencies are likely
to appreciate in the longer term, but remain
under pressure in the near term
Exchange rates are extremely difficult to forecast
over the short run. However, in the longer term,
as discussed earlier—with a relatively weakgrowth outlook in high income countries,
continuation of improvement in developing
countries’ fundamentals, superior growth andtotal factor productivity differentials—
developing countries real appreciation is
expected to continue, albeit at a slower rate.
The discussion above suggests that the future
path of developing countries’ currencies will63

Global Economic Prospects June 2012

Exchange Rates Annexdepend on capital flows, commodity prices, andmost importantly, relative productivity increases.
Some developing countries currencies benefited
from falling risk aversion and a surge in capital
inflows in early 2012, partly reversing earlier
depreciation, as loose monetary policies andlower relative yields in high income countries
generated renewed interest in emerging market
assets.

Figure ExR.7 Current account surpluses have fallen
and deficits widened in developing regions
Current account balance as a share of developing countries' GDP, Percent
4.0
3.5
3.0
2.5
2.0
1.5
1.0

Going forward, however, developing countries’
currencies could come under even greaterpressure if current Euro Area tensions escalate
and private capital flows become more volatile;
if the pace of European banking sector
deleveraging accelerates (see Finance Annex);
and if the US dollar continues to appreciate withrespect to emerging market currencies given its
safe haven status. Commodity exporting
countries’ currencies gained from highinternational prices in early 2012, but weakening
global demand and the resulting lower
commodity prices are leading to depreciationpressures. On the other hand, commodity
importers among developing countries could
also face worsening trade and current accountpositions if weak global demand keeps
manufacturing exports below the longer term
trend. Moreover, renewed geopolitical tensions
in the Strait of Hormuz could result in a spike incrude oil prices, further exacerbating strains on
oil importing countries.

0.5
0.0
-0.5
-1.0
2003

2004

2005

2006

China
Latin America & Caribbean
Sub-Saharan Africa

2007

2008

2009

EAP excl. China
Middle East & N. Africa

2010

2011

2012

Europe & Central Asia
South Asia

Source: World Bank.
Figure ExR.8 Reserve cover has fallen in more than 75
percent of middle-income developing countries since
January 2010
Percent change in international reserves in months of mechandise imports
AngolaPhilippines
LebanonMexicoAlgeria
Peru
Chile
BrazilMalaysia
Indonesia
Honduras
Paraguay
Albania
China
Moldova, Rep.
RomaniaSouth Africa
ZambiaPakistan
Dominican Republic
Mauritius
Azerbaijan
ThailandBolivia
Jamaica
Colombia
Nicaragua
TurkeyGuatemalaLithuania
MoroccoSri Lanka
Russian Federation
VietnamArmenia
Kazakhstan
Ukraine
Gabon
Ghana
India
Yemen, Rep.
Cameroon
Argentina
LatviaNigeria
JordanEcuadorVenezuela, RB
Egypt, Arab Rep.

Current account and trade balances ofdeveloping regions have deteriorated in recent
years (figure ExR.7), in large measure due to thedecline in East Asia and Pacific region’s current
account surplus. China’s surplus fell from over
10 percent of GDP in 2007 to 2.8 percent in2011, reflecting weakening export demand and ashift towards domestic sources of growth, which
has resulted in imports growing faster thanexports. In other developing regions, however,widening trade deficits and deteriorating current
account balances, especially in commodity- andoil-importing countries, suggest that developing
countries’ exchange rates are likely to remain
under strain. International reserves expressed asshare of merchandise imports fell in 76 percentof middle-income developing countries between-80% Increase between
Jan. 2010 and MRV

-60

-40

-20

0

20

40

60

80

100

Note: MRV = Most recent value
Source: IMF International Financial Statistics and World
Bank.

64

Global Economic Prospects June 2012

Exchange Rates Annex

January 2010 and the most recent available datein 2012, by 26 percent on average (figure
ExR.8). Reduced international reserves available
for meeting short term obligations can increase
vulnerability of developing countries to external
shocks, in particular if external financing
conditions were to deteriorate further and capital
flows retreat.

policies.‖ Working Paper 17363, NBER:
Cambridge MA.
Williamson, J. 2008. ―Exchange Rate
Economics.‖ Open Economy Review, Vol. 20,
pp.123-146

In the longer term, real exchange rates ofdeveloping countries are likely to revert to the
upward trend. Developing countries will need tolearn to live with real currency appreciation andinstead focus on maintaining favorable
productivity trends and competitiveness.
Developing countries with relatively good
growth prospects will need to adapt to gradualreal appreciation over the foreseeable future.

Notes
1. Using 12-month rolling standard deviations,the average real trade weighted developing
country exchange rate had a lower volatility
than the same measure for the US dollar 68.8
percent of the time.

References
De Mello, L., P.C. Padoan, and L. Rousová(2011). ―The Growth Effects of Current
Account Reversals: The Role ofMacroeconomic Policies.‖ OECD Working
Paper 871, OECD: Paris
G20 2011. ―G20 Coherent Conclusions for theManagement of Capital Flows Drawing onCountry Experiences.‖
Adopted at G20
Summit, Cannes, November 3-4, 2011.
Ricci, L.A., G.M. Milesi-Ferretti, and J. Lee.
2008. ―Real Exchange Rates andFundamentals: A Cross-Country Perspective.‖
IMF Working Paper 08/13, International
Monetary Fund: Washington DC.
Qureshi, M. S., J. D. Ostry, A. R. Ghosh and M.
Chamon. 2011. ―Managing capital inflows:
The role of capital controls and prudential

65Global Economic Prospects June 2012

Commodity Annex

Prospects for commodity markets
After strengthening during the first quarter of
2012, most commodity prices have since
retreated below their end-2011 levels (figure
Comm.1). The fall of prices was particularly
sharp during May as the debt crisis in Europe
intensified and China's growth slowed. The
World Bank’s average crude oil price dropped to$92/bbl in early June, 18 percent lower than May
1st. Most metals and raw materials also fell
sharply on concerns about global demand,
especially in China. Food prices declined lessdue to tightness in edible oils and weather
concerns. Part of the recent decline incommodity prices reflects the US$ appreciation
which gained 6.1 percent against the euro
between May 1 and June 5, and 4.5 percent
against a broader index of currencies.

weaker demand.
There are both up- and down-side risks to theforecast. On the up-side, a deepening of politicalunrest in the Middle East and North Africa, or aflare up of tensions surrounding Iran, could
result in further supply losses and hence higher
oil prices--with potentially serious consequencesfor global activity (see main text). Stronger than
expected demand by China could raise metals
prices, while a continuation of supply constraints
that has plagued the industry could further
tighten markets. In view of low stock levels insome agricultural markets, food prices are likely
to remain sensitive to adverse weather conditions
and energy prices. On the down-side, a sharp
deterioration in the global macroeconomic
environment could provoke a steep decline inenergy and metal prices. Food prices, however,are not likely to be affected as much since mostfood commodities are less sensitive to incomechanges than energy and metals.

Under the baseline scenario which assumes a
gradual easing of financial tensions in Europe,
oil prices are expected to average 106.6/bbl in2012, up from $104.0/bbl in 2011, assuming nofurther disruptions in the Middle East as OPEC
continues to keep the market well supplied (table
Comm.1). Metals prices are expected to decline
by 11 percent in 2012 on slower demand growthand new capacity coming online. Food prices in2012 are expected to average 3 percent lower
than in 2011, assuming a normal crop year andenergy prices staying at current levels. Declines
are also expected in raw materials prices due to

Crude OilOil prices (World Bank average) jumped from
$104/bbl in 2011 to nearly $118/bbl in Marchbefore receding back to $104/bbl in May (figure
Comm.2). The price increases earlier in the year
occurred despite the fact that global oil demand
was growing relatively slowly. World oil

Figure Comm.1 Commodity price indicesFigure Comm.2 Oil prices and OECD oil stocks$US nominal, 2005=100$US per bbl

250

140

200

EnergyMetals120

Agriculture100

million bbl
2,800

OECD oil inventories(right axis)

2,700

80
2,600

150

60
40

100

2,500

Oil price (World Bank average)

20

0

50
Jan-04Jan-06

Jan-08Jan-10

Jan-04Jan-12

2,400
Jan-06

Jan-08Source: IEA, World Bank.

Source: World Bank

67

Jan-10Jan-12

Global Economic Prospects June 2012

Commodity Annex

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

EnergyNon-Energy
Agriculture
Food
Beverages
Raw Materials
Fertilizers
MetalsMemorandum items
Crude oil ($/bbl)
Gold ($/toz)

2006

2007

ACTUAL
2008
2009

2010

2011

FORECAST
2012
2013

CHANGE (%)
2011/12 2012/13

118
125
112
111
107
118
104
154

130
151
135
139
124
129
149
186

183
182
171
186
152
143
399
180

115
142
149
156
157
129
204
120

145
174
170
170
182
166
187
180

188
210
209
210
208
207
267
205

191
192
193
204
168
177
268
182

185
188
184
193
163
174
245
189

1.3
-8.5
-7.8
-2.7
-19.3
-14.3
0.4
-11.2

-3.0
-2.2
-4.4
-5.7
-2.7
-1.9
-8.5
3.7

64
604

71
697

97
872

62
973

79
1,225

104
1,568

107
1,675

103
1,600

2.5
6.8

-3.4
-4.5

Source: World Bank.

demand increased only 0.7 percent in 2011, anddemand growth remained weak during the firstquarter of 2012 partly due to a mild winter in thenorthern hemisphere. OECD oil demand is down
more than 4 mb/d or 9% from its 2005 peak.
Japan is the only OECD country which increased
crude oil demand, with most of the additional
demand going to power generation tocompensate for lost nuclear capacity. NonOECD oil demand also slowed, but still remains
positive and robust (figure Comm.3).

U.S. from doing business with Iran. Bothdecisions come into full effect in July.
According to the IEA, up to 1 mb/d of Iranian
exports may be halted by this summer. Although
Saudi Arabia has stepped up production tocompensate for various supply losses, including
1.3 mb/d of Libya’s light sweet crude last year
(but recovering quickly), OECD inventories
have fallen—particularly in Europe and Japan.
Higher Saudi production has also lowered OPEC
spare capacity—contributing to a generalized
sense of tight markets (figure Comm.2).

Rising prices mainly reflect developments on the
supply side, notably the loss of more than 1 mb/din non-OPEC production due to geopolitical andtechnical problems, including tensions between
the U.S./EU and Iran over its nuclear program.
The EU banned Iranian imports, while the U.S.
prohibits financial institutions that deal with the

Although Brent prices topped $126/bbl, West
Texas Intermediate has remained some $15/bbl
below due to the build-up of stocks in the U.S.
mid-continent (figure Comm.4). Greater crude
flows from Canada through the Keystone
pipeline that commenced in 2011 and rapidly

Figure Comm.3 World oil demand growth

Figure Comm.4 Brent/WTI price differential

mb/d

30%

4

Other

Other Asia

China

OECD

25%
20%

2

15%
0

10%
5%

-2

0%

-5%

-4
1Q03

1Q05

1Q07

1Q09

Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12

1Q11

Source: World Bank

Source: World Bank

68

Global Economic Prospects June 2012

Commodity Annex

rising shale-liquids production in North Dakota
have contributed to the build-up of U.S. stocks—
at a time when oil consumption is dropping.
Currently, there is limited capacity to transport
surplus oil to the U.S. Gulf coast, apart fromsome utilization of rail, barge and truck where
possible. While new pipelines and reversal of
exiting lines to the U.S. Gulf are planned, theWTI discount is likely to persist for some time.

forward—although there are concerns about theenvironmental aspects of fracturing and wateruse.
Production among OPEC countries has risen 1.8
mb/d since end-2010 (prior to disruptions in
Libya), with Saudi Arabia accounting for 1.5
mb/d of the net gain (figure Comm.6). In themeantime, Libya’s oil production has recovered
to 1.4 mb/d, compared with 1.6 mb/d pre-crisis,
although further gains may be difficult due tointernal disputes. Iraq’s production hit an 11year high in April of 3.0 mb/d, and exports are
increasing from a new mooring system in the
Gulf. Iran’s exports have declined by 0.3 mb/dfrom pre-sanctions levels, and are set to tumble
further unless alternative buyers (or buying
arrangements) can be found. Iran’s traditional
crude buyers are struggling to arrange payment
mechanisms, secure ships to lift oil, and toengage insurance companies to underwrite thetrade.

Oil market conditions are expected to easein 2012
Looking forward, world oil demand is projected
to grow nearly 1% this year, with all of thegrowth in developing countries. On the supply
side, the decline in non-OPEC production
growth in 2011 appears to have reversed (figure
Comm.5). Overall, a net 0.7 mb/d will be added
to global supplies from non-OPEC sources,
including Canada, Brazil, Russia and Colombia,
but the largest increment will come from the
U.S. reflecting large-scale investments to exploit
shale rock deposits via use of horizontal drillingand hydraulic fracturing. This technology was
first used to extract natural gas, which has risenby 28% since 2005, and caused the U.S. price of
natural gas relative to crude oil to fall by 75
percent (box Comm.1).

The net growth in OPEC production has reduced
spare capacity to 3.1 mb/d (figure Comm.7), of
which nearly two-thirds is in Saudi Arabia. The
Saudi Oil Minister has promised to keep themarket well supplied, and also deems that $100/
bbl is a fair price.

OutlookFigure Comm.5 World oil production

Figure Comm.6 OPEC crude oil production

Thousands

As a result, U.S. producers are shifting from
drilling in dry-gas shale deposits to more liquidsrich (wet gas) and oil-bearing shale deposits.
Shale-liquids (or tight oil) production is justcommencing and has great potential going

In the near term, oil prices are unlikely to exceed
their recent highs of $120/bbl, in part because of
the indicated willingness of U.S., UK and France
to use strategic reserves to assure adequate

mb/d

mb/d

55

13

50

12

Non-OPEC

45

Other Gulf

11

Saudi Arabia

10

40

9
35

8

OPEC

30

6

25
Jan-00

Other

7

Jul-01

Jan-03

Jul-04Jan-06

Jul-07

Jan-09Jul-10Jan-12Jan-00Source: IEA

Jan-02

Source: IEA

69

Jan-04Jan-06

Jan-08Jan-10Jan-12

Global Economic Prospects June 2012

Commodity Annex

Box Comm.1 Induced Innovation, Price Divergence, and Substitution
Because large and sustained changes in commodity prices often alter the relative prices of inputs, they induce innovations that support more efficient production or consumption of substitute (or the same) products. The induced
innovation hypothesis was originally proposed by Hicks (1932), who noted that ―… a change in the relative pricesof the factors of production is itself a spur to invention and to inventions of a particular kind–directed at economizing the use of a factor which has become relatively expensive.‖ The hypothesis has been studied extensively (see,for example, Ahmad (1966) and Kamien and Schwartz (1968) for the theoretical considerations; Binswanger(1974) for an application to agriculture, and Newell, Jaffee, and Stavins (2000) and Popp (2002) for applications toenergy). In the context of the post-2005 commodity price boom, high energy prices induced significant increase in
shale gas exploration and production in the U.S., in turn, causing natural gas prices to fall to just 12% of crude oil
prices from near 75% in the decade of the 2000s (box figure Comm 1.1). High energy prices also induced exploration in oil-bearing shale plays, especially in North Dakota and Texas, thus increasing oil production in (box figure
Comm 1.2). On the consumption side, high oil prices have triggered new vehicle efficiency standards and alternative/hybrid vehicles that are set to further reduce gasoline demand.
Box figure Comm 1.1 Energy prices

Box figure Comm 1.2 U.S. Crude oil production$US /mmbtu

000 b/d25

5,000

Crude Oil

Other

Japan LNG

20

4,000

Europe Nat Gas
15

US Nat Gas

3,000

Coal
10

2,000

5

1,000

0

Texas + N. Dakota0

Jan-00

Jan-02Jan-04Jan-06

Jan-08Jan-10Jan-12

Source: World Bank

Jan-00

Jan-02Jan-04Jan-06

Jan-08Jan-10Jan-12

Source: IEA

Similar trends have taken place in metals. Copper and aluminum traded at similar price levels 10 years ago, buthigh copper prices (box figure Comm 1.3) induced substitution to other materials, e.g., aluminum coated wiringand plastic tubing. Aluminum—a light-weight strong metal—continues to displace steel in autos and other applications. Consequently aluminum’s volume growth over the past ten years has been nearly four times that of copper(box figure Comm 1.4). And, the nickel price boom caused China to import low grade ores from the Philippines
and Indonesia to produce nickel pig iron and reduce refined nickel imports.
Box figure Comm 1.3 Refined metal prices

Box figure Comm 1.4 Refined metal consumption$/ton
10,000$/ton

000 tons

60,00050,0008,000

50,00040,000

Copper

6,000
4,000

40,00030,000

Aluminum
30,000

Nickel

20,00020,0002,000

0Jan-02Jan-04

Source: World Bank.

Jan-06

Jan-08Jan-10

Copper

10,00010,0000
Jan-00

Aluminum1990

Jan-12

1993

1996

1999

2002

Source: World Bureau of Metal Statistics

70

2005

2008

2011

Global Economic Prospects June 2012

Commodity Annex

supply. Upside risks entail supply disruptions
due to further technical and geopoliticalproblems, particularly in countries dealing withconflict and security, including Libya and Iraq.

Oil prices are expected to average $107/bbl in2012 and decline slightly to $103/bbl in 2014 as
ample supply is likely to accommodate moderate
growth in demand. Over the longer term oil
prices are projected to fall (a little less than$100/bbl in 2025 in nominal terms), due toslowing global demand growth, increased supply
of conventional and (especially) unconventionaloil, efficiency gains, and substitution away fromoil. The long-term assumptions that underpin
such projections are based on the upper-end costof developing additional oil capacity, notably
from oil sands in Canada, currently assessed at$80/bbl in 2012 dollars. It is expected that OPEC
will continue to limit production in an effort tokeep prices relatively high, given the large
expenditure needs in most countries.

In the medium term, world oil demand is
expected to grow moderately, at 1.5% p.a., withall of the growth in demand coming fromdeveloping countries. Global growth will remain
well below GDP growth, reflecting efficiency
improvements in vehicle transport—partly
induced by environmental pressures to reduce
emissions, especially in OECD countries.
Consumption growth in developing countries is
expected to moderate in the longer term as theireconomies mature, as subsidies are phased out,
and as other fuels penetrate their fuel mix,
notably with natural gas.

MetalsOn the supply side, non-OPEC oil supply is
expected to continue its upward climb, in partdue to high prices and continued advances in
upstream technology. There are no physicalresource constraints into the distant future, andnew frontiers continue to be exploited, e.g., deep
water offshore and shale liquids, with newtechnologies that lower unit costs. The main
impediments to investments are above ground,such as access to resources, security ofoperations and investments, and suitable fiscal
terms and conditions. Production increases are
expected from a number of areas, such as Brazil,
Canada, the Caspian, West Africa, and theUnited States. These will be partially offset by
declines in mature areas such as the North Sea.

Metals prices rose 7 percent during Q1:2012
from the earlier quarter on recovering demand in
the U.S. and strong import demand in China,
most of which went to restocking. However,prices began to ease from their February highs
on renewed concerns about global growth,
slowdown in China, still high stocks for mostmetals, and emerging supply growth. China
metals import demand slowed in 2012,portending a few weak months owing todestocking, but the country consumes 43% ofworld’s metal output (figure Comm.8).
While most metals prices are well below theirformer peaks due to ample supplies, copper
Figure Comm.8 Metals consumption

Figure Comm.7 OPEC spare capacitymb/d'ooo tons

940,000China

8
730,000OECD

6
5

20,000

4

Other

3

10,0002
1

0

0
Jan-01

Jan-03Jan-05Jan-07

Jan-091990

Jan-11

1993

1996

1999

2002

2005

Source: World Bureau of Metal Statistics

Source: IEA

71

2008

2011

Global Economic Prospects June 2012

Commodity Annex

prices in May 2012 averaged just 20% below
their February 2011 highs and well above
production costs due to chronic supply problems,
including project delays, labor disputes, anddeclining ore grades. A prolonged period of highprices has generated substantial investment in
new capacity, and supply is emerging for nickel
in significant volumes, and is soon to emerge forcopper after a long period of supply tightness.

struggled to keep pace with demand the last
several years due to a host of difficulties, e.g.,technical problems, labor strikes, declining ore
grades, delayed start-up of projects, rising costs,
and shortages of skilled manpower, equipment
and materials. The tightness in the copper market
in 2011 reflected disruptions and lower grade ore
output, and was most pronounced at the world’s
two largest mines—Escondida in Chile (-24% y/y) and Grasberg in Indonesia (-31% y/y).
However, high copper prices have induced awave of new mine supplies that is expected tocome on-stream, especially from Africa’s copper
belt, Peru, the U.S. and China, and is expected to
tip the market into surplus.

Recent developments in metal markets
Aluminum prices fell to $2000/ton in the second
quarter, near where they were in 2005, in
response to a persistent global surplus and highstocks. Prices nevertheless are at or below
marginal production costs for many producers,
with more limited downside risk to prices. In
addition, a significant amount of inventories aretied up in warehouse financing deals, andunavailable to the market. Consumption
continues to benefit from substitution, mainly
from coppers’ wiring and cable sectors, as
copper prices are some four times that ofaluminum. Substitution is expected to continue
as long as the copper/aluminum price ratio is atleast 2:1, as expected over the forecast period.
Global production capacity continues to outstrip
consumption, the bulk of which comes from
China, and less so from new capacity in Middle
East, and restart of idle capacity in North
America and Europe. Market surpluses are
expected to endure in the near term, but prices
are expected to rise in the medium term due torising costs, especially for energy (which
accounts for about 40% of production costs) but
also carbon and alumina.

Nickel prices rose in early 2012 on improved
macro sentiment, but then receded on a sluggish
market for stainless steel (the end use of morethan two-thirds of nickel production) and rapid
restart of nickel pig iron (NPI) production in
China. The country accounts for 40% of global
stainless steel production—up from 4% a decade
ago—and stainless steel undergoes significant
stocking/destocking cycles, hence contributing
to the volatility of nickel prices. Stainless steel
demand is expected to remain robust, growing
by more than 6% p.a., driven by its high grade
consumer applications and growing wealth andsize of middle classes in emerging markets. A
wave of new nickel mine capacity is expected tokeep nickel prices close to the marginal cost of
production. Several ferro-nickel and highpressure acid leach (HPAL) projects will soon
ramp up production, including in Australia,
Brazil, Madagascar, New Caledonia and Papua
New Guinea. HPAL projects have had
considerable technical problems and delays inrecent years, thus there is a risk that theseprojects will come on-line more slowly than
expected. The other major source of supply isnickel pig iron (NPI) in China, which sources
low-grade nickel ore from Indonesia and thePhilippines. However, Indonesia has proposeddeveloping its own NPI industry and isconsidering banning nickel ore exports from2014. Nickel prices are expected to decline overthe forecast period due to the substantial supply
additions in the coming years, and are expected

Copper prices rose sharply in early 2012 on
falling inventories and strong Chinese importdemand which, in recent years has led tosignificant thrifting and substitution of copperuse, and has accelerated recycling rates of scrap
reprocessing. These trends are expected tocontinue in the near term. Copper demand is
projected to increase only moderately over theforecast period at about 2.5% p.a., and moderateover the longer term as copper intensity in
China—which has risen sharply—plateaus anddeclines. Copper mine supply (flat in 2011) has

72

Global Economic Prospects June 2012

Commodity Annex

Box Comm.2 The role of emerging markets in commodity consumption
Emerging market demand, especially by China, has Box figure Comm 2.1 China’s share of world’s
been a major force in pulling up the prices of refined commodity consumption
metals. In energy commodities, while China plays animportant role (especially in coal), its share of crude oil
GDP
1990-91
consumption is more limited, but is a major contributor
2010-11GDP (PPP)
to growth. In fact, it is the entire group of emerging
economies that has been the key driver of oil prices. In
Population
food commodities, the role of emerging economies isless important than sometimes thought (Baffes 2012).
Beef
Since 1990, China’s refined metal consumption(aluminum, copper, lead, nickel, tin, and zinc) has
jumped seventeen-fold; China now accounts, for 43
percent of the world’s refined metal consumption, up
from just 5 percent two decades ago (Figure Comm
2.1). This enormous share of the world’s metal market
reflects substantial investment in construction,
infrastructure, and manufacturing that has led China’s
rapid economic growth. In 1990, China’s metal
intensity (metal use per $1,000 of real GDP) was threetimes higher than the rest of the world. By 2008, it wasalmost nine times higher (Figure Comm 2.2). Highdemand by China has been instrumental to the supercycle in metal prices (Jerrett and Cuddington 2008).

Crude oil
Chicken
Wheat
Maize

Soybeans
Rice
Rubber
CottonCopperEmerging market demand has played a critical role in
Aluminumincreasing demand for, and price of, crude oil (Killian
Zinc2009). In 1965, OECD countries accounted for threequarters of global crude oil consumption, but by 2010
Nickeltheir share had fallen to a little over half. Over the same
Leadperiod, China’s and India’s shares grew from less than
one percent each to roughly 10 and 4 percent,Coalrespectively. Over the past 15 years non-OECD
countries’ share of oil consumption has increased from
0%
10%
20%
30%
40%
50%
35 percent to 47 percent. More important, developing
countries accounted for all the net growth in global Source: World Bank, USDA, UN, Metal Statistics, IEA
crude oil consumption in the last decade.
The role of emerging market demand has been much Box figure Comm 2.2 China’s metal intensity
more muted in food commodities, despite the tons per $1000 GDP
conventional wisdom that rising incomes have 10translated into much greater demand for food, andChina
hence, higher food prices (see Krugman (2008) and 8
Wolf (2008) as well as Alexandratos 2008 and Baffes
and Haniotis (2010) for different views). For example, 6
while in some food commodities China’s share in
4
global consumption increased (e.g., meats, soybeans,
World (excluding China)
and to a lesser extent maize) in others did not. In fact, 2
for China’s share in rice and wheat declined--from 36.1
to 30.1 percent in rice and from 18.9 to 17 percent in 0
1993
1996
1999
2002
2005
2008
2011
wheat. India’s per capita grain consumption has 1990
declined as well; and, its per capita calorie intake
Source: World Metal Statistics
declined also, despite sharply rising incomes andincreased consumption of fruits and vegetables (Deaton and Dreze 2008). Thus, a slowdown in China’s growth islikely to have a large impact on metal prices, a moderate impact on crude oil prices, and very little effect on foodprices. More generally, a slow-down in emerging economy growth is likely to affect energy prices the most.

73

Global Economic Prospects June 2012

Commodity Annex

to remain within a band of $18,000-$23,500 per
ton.

2012 are expected to be on average 8.6 percent
lower than 2011, but still more than 75 percent
above their 2000 levels.

Outlook

The easing of international food prices has been
partly reflected in a moderation of food priceinflation in several regions (see Main Text). For
example, food price inflation decelerated in
Middle East and North Africa and South Asia,
while in Europe and Central Asia consumer foodprices have actually declined—in contrast, foodprice inflation has accelerated in Sub-SaharanAfrica and Latin America and the Caribbean.
Yet, domestic food prices in developing
countries remain 25 percent higher relative to
non-food consumer prices than they were at the
beginning of 2005—a large increase consideringthat food often represents than 50 percent of
their total expenditures of urban families indeveloping countries (and in very poor countries
it reaches 80-90 percent).

Overall, metals prices are expected to decline 11
percent in 2012 on moderating demand growth
and reduced metals intensity in China, andincreases in new mine capacity (see box
Comm.2 for the role of China in commodity
consumption). However, aluminum prices are
expected to increase over the forecast period due
to rising power costs, and the fact that current
prices have some producers at or below
production costs. Although there are little
physical constraints over the forecast period,
there are a number factors could result in upward
pressure on prices in the longer term such as
declining ore grades, environmental and land
rehabilitation, as well as rising costs for water,energy and labor.

Most of the drivers of the post-2005 priceincreases are still in place (table Comm.2).
Energy and fertilizer prices (key inputs to the
production of most agricultural commodities) arestill high. The US dollar remains weak byhistorical standards (despite its recent
appreciation), while most agriculturalcommodity markets (especially grains) areexperiencing low stock levels.

There are also geopolitical risks from risingresource nationalism, and increased government
intervention. The Indonesian government hassigned an order to ban exports of all raw ores
from 2014, which would affect producers ofnickel ore, copper and bauxite. Governments
have also been increasing taxes to raise
revenues. Depending on the design of thosetaxes and how widespread tax increases become,such increases could impact future supply andprices.

Nevertheless, three ―new‖ drivers of commodity
prices, notably, financial investment activity,
biofuels, and export restrictions, have given the

Agriculture

Figure Comm.9 Agriculture price indices

Despite rising in the first half of 2011, the US
dollar price of internationally traded agriculturalcommodities subsequently eased substantially,
ending the year 10 percent lower than a year ago.
Prices, especially of food commodities, firmed
again, rising 6 percent from December 2011 toApril 2012, but declined 2 percent in May(figure Comm.9).

2005=100
250
Food
200

Beverages
Raw Materials

150

Food prices followed a similar pattern, ending
2011 7.3 percent lower than in December 2010,
and firming 6.6 percent since then. Currently(May 2012) they are 2.2 percent lower than ayear ago. In real terms, agricultural prices in100

50
Jan-00

Jan-02Jan-04

Source: World Bank

74

Jan-06

Jan-08Jan-10Jan-12

Global Economic Prospects June 2012

Commodity Annex

Table Comm.2 Most of the post-2005 boom condition are still in place
Agricultural prices (nominal index, 2005 = 100)
Grain price volatility (stdev of log differences, monthly)
Crude oil price (US$/barrel, nominal)
Fertilizer prices (nominal index, 2005 = 100)
Exchange rate (US$ against a broad index of currencies, 1997 = 100)
Interest rates (10-year US Treasury bill, nominal)
Funds invested in commodities (US$ billion)
GDP growth (low and middle income countries, % p.a.)Industrial production growth (low and middle income countries, % p.a.)
Biofuel production (millions of barrels per day equivalent)
Stocks (total of maize, wheat, and rice, months of consumption)
Yields (average of wheat, maize, and rice, tons/hectare)
Growth in yields (average of wheat, maize, and rice, % p.a.)Natural disasters (droughts, floods, and extreme temperatures)
OECD policies (Producer NPC, %)2000-05
87
4.5
33
75
119
4.7%
80
6.7
5.6
0.5
3.0
3.7
0.9
220
1.3

2006-11
158
8.0
80
218
103
3.7%
230
7.2
6.5
1.5
2.5
4.1
1.4
207
1.1

Change
81%
78%
142%
191%
-14%
-21%
188%
7%
16%
220%
-15%
9%
56%
-6%
-11%

Note: The NPC (OECD policies) for the second period is based on the 2006-2010 average.
Source: World Bank, US Treasury, US Department of Agriculture, Federal Reserve Bank of St. Louis, Barclays Capital,
Center for Research for the Epidemiology of Disasters, and OECD.

first signs of moderation. Investment fundactivity is currently at 330 US$ billion (as of2012:Q1), a level similar with the end of 2011,
but 9 times higher than a decade ago, when thisactivity started becoming a popular investment
vehicle within the financial community.
Production of biofuels did not increase in 2011
and is expected to increase only marginally in2012. Lastly, with the exception of the Indian
cotton ban earlier in March—which did not
impact cotton prices because the market was
well-supplied—policy restrictions have not beena problem in agricultural markets.

to be traded at roughly the same price level withwheat, a very rare occurrence—historically,
wheat has been traded 30 percent higher thanmaize (figure Comm.10). In May, however,both maize and wheat prices retreated somewhat
as the global financial conditions deteriorated
and the US$ appreciated. Contrary to maize andwheat the rice market is well-supplied. During
the past 3 years rice prices have averaged almost$530/ton. They temporarily exceeded $600/ton
in November 2011, following theimplementation of the Thai Paddy Rice
Program—Thailand is the world’s largest rice
exporter, accounting for 25-30 percent of global
exports, hence the large influence of its policy
actions on world markets. Indeed, the 10 percent
increase in rice prices in May has been attributed
entirely to the Thai rice program.

Recent developments in agricultural markets
Grain prices declined by 7 percent between
August and December of 2011. This was inresponse to the improved 2011/12 outlook.
Indeed, between May and December 2011, theglobal grain end-of-season stock outlook for the
2011/12 crop season, improved by 7 percent
with most of the gains realized in the maize (15percent) and wheat (3.5 percent) stocks. Prices
reversed course at the beginning of 2012,
gaining some 9 percent within 4 months after it
became apparent that supply conditions weretighter than originally though. Specifically,
between December 2011 and March 2012, maize
and wheat prices gained 8.5 and 5.5 percent,respectively. Tight maize supplies caused maize

Following 10 months of declines, edible oil
prices began increasing, with the World Bank
edible oil price index gaining 19 percent between
December 2011 and April 2012. Tight supplies
have been the key driver behind higher prices, inpart due to persistent drought in South America(soybeans) and in part due to production
cyclicality in East Asia (palm oil). As in the caseof grains, the edible oil price index declined 2.5
percent in May.
The strength in beverage prices during 2010-11

75

Global Economic Prospects June 2012

Commodity Annex

was supported primarily by arabica prices (itaveraged close to $6.00/kg during 2011, thehighest nominal level). However, news that
Brazil’s crop for the current season will be muchhigher than anticipated caused arabica price toplummet 37 percent between May 2011 and May
2012—Brazil is the world’s largest arabica
supplier. On the contrary, robusta prices
declined only 12 percent over the same period
despite a large Vietnamese crop as growers andtraders have kept their coffee in anticipation ofhigher price. Cocoa prices have weakened
considerably during the past five months (25percent lower than the same period of last year),primarily a response to better crop outlook in
Côte d’Ivoire. Tea prices declined a cumulative
22 percent between the all time high of $3.10/kg
in July 2011 and March 2012 as the drought
cycles in East Africa eased. However, tea prices
gained more than 20 percent between March and
May 2012 due to the Indian and Sri Lankan
rupee appreciation as well as the new tea crop of
higher quality coming in the market.

standards. Natural rubber prices reachedhistoric highs, exceeding $6.00/kg in February
2011, more than a 4-fold increase within just 2
years. Tight supplies due to adverse weather inSouth-East Asia and strong demand by China(mainly destined for tire manufacturing)underpinned the rally. Crude oil prices play a
key role as well, because synthetic rubber, aclose substitute to natural rubber, is a crude oil
by-product. Timber prices strengthened
considerably during 2011, aided by the Tohoku
disaster in March 2011. However, prices
declined 18 percent between August 2011 andMay 2012 as the expected surge in demand did
not materialize.

OutlookAs supply conditions improve, agricultural
prices are projected to decline 7.8 percent in2012. Specifically, for 2012, wheat and maize
prices are expected to average 11.5 and 4.0
percent lower than their 2011 levels while rice
prices are anticipated to average at roughly thesame level as in 2011, about $550 per ton.
Soybean and palm oil prices are expected to be
3.8 and 4 percent lower, respectively. Beverage
prices will experience larger declines (cocoa,
coffee, and tea, 19.5, 16.5 and, 8.6 percent
lower, respectively). On raw materials, timber
prices are expected to decline slightly (3.7
percent) but cotton and rubber prices will be
35.4 and 20.2 percent lower.

Tight supplies during the 2010/11 season caused
cotton prices to almost quadruple, from $1.41/kg
in September to $5.06/kg in March 2011. Since
then, prices reversed direction to decline just as
sharply and reach $2.52/kg in August 2011 and$2.10/kg in December 2011. In addition to tightsupplies, the rally was aided by India’s decision
to impose a ban on cotton exports in 2010. A
similar ban by India announced in March 2012,
did not have any discernable impact on prices.
The cotton market is well-supplied by historical

A number of assumptions underpin this outlook.
First, the next crop year will be better supplied
than 2011/12. The US Department ofAgriculture’s May 10th outlook—the firstprojection for the 2012/13 crop, estimated next
season’s global grain availability (production
plus beginning stocks) to reach 2.52 billion tons,
up 2.8% from the current season, and 21%
higher than the lows reached in 2006/07. Global
maize production and end-of-season stocks are
set to increase by 8.7-and 19.4% respectively in
2012/13, while moderate increases are expectedin the global rice market. The wheat market is
expected to be tight next season, however, withproduction and end-of-season stocks down 2.5and 4.5% respectively. (figure Comm.11).

Figure Comm.10 Wheat/maize price ratio
12-month trailing moving average (%)

80%
70%
60%

50%
40%
30%

20%
10%
0%

-10%
Jan-61

Jan-68

Jan-75Jan-82Jan-89Jan-96

Jan-03Jan-10Source: World Bank

76

Global Economic Prospects June 2012

Commodity Annex
Figure Comm.11 Global Grain Supplies

Second, there are no foreseeable policy
responses that would upset food markets. Suchrisk however, depends crucially on the degree towhich markets are well-supplied. If the assumed
outlook materializes, policy actions are unlikely
and, if take place, their impact will be limited.
For example, when the market conditions forrice and cotton were tight in 2008 and 2010, therespective export bans had a major impact onmarket prices. However, last year’s Thai riceprogram and the Indian export ban of March2012 had very limited impact on prices because
the markets are well-supplied.

Maize

40%

1,000

900

30%

800
20%
700
10%

Third, it is assumed that that energy andfertilizer prices will stay at current levels, theformer already expected to average 1.3 percent
above 2011 and the latter projected to remain at
the roughly the same levels . Because agriculture
is energy intensive—4 to 5 times more energy
intensive than manufacturing—an energy pricespike (or decline for that mater) would be
followed by food price increases (or declines).
The price transmission elasticity from energy toagriculture is about 0.20, implying that for any
10 percent change in energy prices, agricultural
prices are expected to change by 2 percent.

600

0%

500
2000

2002

2004

2006

2008

2010

2012

Wheat

40%

700

30%
600
20%
500
10%

Lastly, biofuels are expected to play a key role infood markets, especially in the long run.
Production of biofuels increased only marginallyin 2011; it currently accounts for 2/bbl of crude
oil equivalent (figure Comm.12). OECD expects
it to increase by an annual average of about 3
percent for the next few years, corresponding
roughly to 2 percent of global land allocated tograins and oilseeds. Yet, the impact of biofuels
on food prices is more complex as it goes far
beyond the land diversion. It will depend
crucially on (i) whether current energy prices
make biofuels profitable and (ii) whether
technological developments on existing biofuel
crops (maize, edible oils, and sugar cane) or newcrops increase the energy content of these crops,
thus making them more attractive sources ofenergy. Thus high energy prices in combination
with technological improvements may pose
enormous upside risks for food prices in thelonger term.

0%

400

2000

2002

2004

2006

2008

2010

2012

Rice

40%

500

30%

450

20%

400

10%

350

0%

300
2000

2002

2004

2006

Stock-to-use ratio (%)

2008

2010

2012

Production (1000 MT)

Source: US Department of Agriculture (May 10, 2012
update).

77

Global Economic Prospects June 2012

Commodity Annex
and Political Weekly, vol. 44, pp. 42-65.
Hicks, John R. (1932). The Theory of Wages.
Macmillan, London.
Kilian, Lutz (2009). ―Not All Price Shocks Are
Alike: Disentangling Demand and Supply
Shocks in the Crude Oil Market.‖ American
Economic Review, vol. 99, pp. 1053-1069.
Krugman, Paul (2008). ―Grains Gone Wild.‖ OpEd, New York Times, April 7.
Neweel, R.G., Jaffe, A.B., Stavins, R.N. (1998).
―The Induced Innovation Hypothesis andEnergy-Saving Technological Change.‖
Quarterly Journal of Economics, vol. 114,
pp. 941-975.
Wolf, Martin (2008). ―Food Crisis is a Chance to
Reform Global Agriculture.‖ Financial Times,
April 27.
Popp, David (2002). ―Induced Innovation andEnergy Prices.‖ American Economic Review,
vol. 92, pp. 160-180.

Figure Comm.12 Biofuel production
mb/d equivalent

2.8
2.4
2.0
1.6
1.2
0.8
0.4
0.0
2000

2002

2004

2006

2008

2010

2012

2014

Source: BP Statistical Review (history) and OECD
(projections).

References
Alexandratos, Nikos (2008). ―Food Price Surges:
Possible Causes, Past Experience, and Longterm Relevance.‖ Population andDevelopment Review, vol. 34, pp. 599-629.
Ahmad, Syed. (1966). ―On the Theory ofInduced Innovation.‖ Economic Journal, vol.
76, pp. 344-357.
Baffes, John (2012). ―Going against the Grain on
the Post-2005 Commodity Price Boom.‖
International Economic Bulletin, Weekly
Commentary, April 19.
Baffes, John and Tassos Haniotis (2010).
―Placing the Recent Commodity Boom into
Perspective‖ In Food Prices and Rural
Poverty, pp. 40-70, ed. A. Aksoy and B.
Hoekman. Center of Economic and Policy
Research and the World Bank.
Binswanger, Hans P. (1974). ―A Microeconomic
Approach to Innovation.‖ Economic Journal,
vol. 84, pp. 940-958.
Jerrett Daniel and John T. Cuddington (2008).
―Broadening the Statistical Search for Metal
Price Super Cycles to Steel and related
Metals.‖ Resources Policy, pp. 188-195.
Deaton, Angus and Jean Dréze (2008). ―Nutritionin India: Facts and Interpretations.‖ Economic78

Global Economic Prospects June 2012

East Asia and the Pacific Annex

East Asia and the Pacific Region
the most likely scenario, but an overshooting to
the downside cannot be ruled out. For the
ASEAN-4 countries (Indonesia, Malaysia,
Philippines and Thailand), growth is projected to
be buoyant, stepping up to 5 percent in 2012
with solid activity in Indonesia and recovery inThailand. These countries will clearly benefit
from the revival of world trade. Vietnam, as anoil exporter, should enjoy a near-term fillip due
to high oil prices, but as these prices settle,
growth is projected to register 6.5 percent by
2014 grounded in stronger fundamentals.

Overview
Growth in the East Asia and Pacific region isslowing, partly reflecting an easing of stimulus
in China and a shift toward domestic sources ofdemand. Growth for the region eased to 8.3
percent in 2011 from 9.7 percent in 2010. Slower
activity in China, natural disasters (earthquake
and tsunami in Japan and flooding in Thailand),and the intensification of the crisis in Europe
have each served to temper the pace of growth in
the region.

Risks and vulnerabilities: Financial conditions
in high-income Europe, higher oil prices, and aslowdown in China would pose the largest risks
to the outlook.

Capital flows, which were resilient during thefirst half of 2011, slowed markedly in the second
half of the year in response to increased risk
aversion and new global banking regulations that
accelerated deleveraging by Euro Area banks.
Foreign direct investment (FDI) inflows
increased by $45 billion (largely to China),
partly offset by declines in portfolio equity flows(IPOs and fund investments in regional
exchanges). Regional equity markets
underperformed global markets to a measureable
degree, while bond issuance improved by $27
billion in 2011.

Euro Area. Though financial developments inthe Euro Area calmed in the first four months of
2012—tensions have revived in May. While a
gradual improvement of conditions remains themost likely outcome, a serious deterioration of
conditions in Europe is a possibility. In such a
scenario, growth in East Asia and the Pacificcould slow by as much as 2 to 4 percentage
points due to reduced import demand, tighterinternational capital conditions and increased
precautionary savings abroad and within theregion. Countries heavily reliant on remittances(Fiji, the Philippines and Vietnam), tourism(Cambodia, Fiji, Malaysia, Thailand andVietnam) and commodities (Indonesia, Malaysia
and Thailand) as well as those with high-levelsof short-term debt or medium term financing
requirements (Malaysia) could be hardest hit.

Outlook: In the baseline, the financial turmoil
currently gripping the Euro Area is assumed toease, allowing prospects for advanced economies
to improve in 2013 to 2014. Nevertheless,uncertainty regarding oil prices, and still
relatively weak demand from the high-income
world, coupled with slow growth in China areprojected to ease GDP gains in East Asia andPacific to 7.6 percent in 2012, before
rebounding to 8.1 percent in 2013, and to 7.9 in2014.

China Growth. A more rapid than expected
slowdown in China poses an external risk for the
rest of the region. A slowdown in China would
spill-over into the rest of the region in the formof reduced demand for exports, and commodity
dependent countries would be especially at riskof a slowdown in China’s investment.

In China, GDP is expected to accelerate onbalance from 8.2 percent growth in 2012 to 8.4
percent by 2014. Though production, trade anddomestic demand have slowed over 2011 to2012, this is a response, in part, to earlier policy
targeted at slowing certain segments of theeconomy, especially housing. ―Softlanding‖ is79

Global Economic Prospects June 2012

East Asia and the Pacific Annex
Quarterly GDP figures for 2011 were mixed
across countries, reflecting the extent to whichsome governments supported domestic demandthrough stimulus measures, and those economies
where this did not occur (figure EAP.1). China’s
growth eased over the course of the year bothbecause of weak external demand and policies
geared to stem overheating in specific sectors.
Outturns elsewhere began to pickup in thesecond half of the year, as additional fiscal andother stimulus measures began to offset thebuilding headwinds from international trade andfinance (box EAP.1).

Recent developments
Overview. Growth for the East Asia and Pacificregion is on a moderately easing trend, expected
to continue for the next years. Weaker external
trade dynamics for China has served to shift thelocus of near term growth toward domestic
demand and momentum of this demand has been
on a softening trend. GDP gains for the region
dropped to 8.3 percent in 2011 on the heels ofstronger 9.7 percent recovery from the global
recession in 2010. Slower activity in China (dueto both domestic and external factors); a series ofnatural disasters in East Asia (a serious
earthquake and tsunami in Japan and flooding in
Thailand) and intensification of the crisis in
Europe, each served to temper the pace of direct
trade flows for the major ASEAN economies
and trade among countries of the region, playing
an important role in the growth slowdown.

Despite the easing in quarterly patterns ofgrowth, China registered a firm 9.2 percent
advance for 2011. Growth in Indonesia (6.5
percent) and Malaysia (5.1 percent) were also
robust partly reflecting government spending in
the latter country that acted as stimulus. And incontrast with many developing countries,
carryover of growth into 2012 will be strong for
the ASEAN countries (see Main Text for a fuller
discussion of carryover).

More difficult financing conditions during thesecond half of 2011, as banking flows started to
dry up—tied in part to deleveraging by European
commercial banks—and a flight to safety acrossinternational portfolio flows, also served torestrain the tenor of growth (table EAP.1). GDP
for East Asia outside of China was affected
sharply by the downturn in global- and local
goods trade, and, in some cases the adverse
terms of trade attendant upon higher oil prices.
Growth for this group registered 4.5 percent in2011, following a stronger 7 percent
performance in 2010.1

Industrial production and trade were
exceptionally hard hit in 2011 by the combined
effects of the Tohoku earthquake and tsunami(second and third quarters), which affected
Japanese output and operation of multi-country
production value chains; and by the noted
flooding in Thailand (third and fourth quarters)
which played a similar role in disrupting
production networks among ASEAN members
and their tightening links with China. These
events had ripple effects throughout the global
economy, slowing demand for the region’s
products, and were exacerbated by theintensification of the financial turmoil andemerging recession in the Euro Area – East
Asia’s largest export market. Production outturns
for the region excluding China and Thailand
turned negative, but would have been much
weaker if it had not been for the region’s
domestic demand. More recently, growth has
accelerated sharply, particularly in Thailand as
the economy recovers from the disruption causedby last year’s floods (figure EAP.2)

Figure EAP.1 Quarterly patterns of recovery across2011 varied
12

Growth of real GDP, percent q/q, saar

10

8

6

4

2

0
China

Indonesia

Q1/11

Q2/11

Malaysia

Q3/11

Phillipines

Q4/11

A similar pattern is observed for both regional

Source: World Bank.

80

Global Economic Prospects June 2012

East Asia and the Pacific Annex

exports and imports, with a steep decline in thesecond half of 2011 having turned into
significant recovery in the early months of 2012
(figures EAP.3 and EAP.4). If continued, thisdevelopment should complement expansion indomestic demand and provide a firm footing forrecovery in the second half of 2012. Import
volumes for China returned to growth at a robust
27 percent pace (saar) as of April 2012. ASEAN
countries have seen momentum build as well,suggestive of revival of the region’s production
networks, served by countries such as Malaysia,
Indonesia and the Philippines. And evidence
supports a step-up in reconstruction activity in
Thailand, as imports there have turned the cornerto growth following a slump in late-2011, toregister gains of 55 percent as of Marchdevelopments could in part be an example of―South-South‖ recovery, there is now evidence
to suggest that import demand from the UnitedStates, Japan and Germany is coming to the fore
(despite Euro Area turmoil) to support East
Asian exports.
Figure EAP.2 Thai rebound from floods, China IP
momentum rebuilding
Industrial production, ch%, saar
30

300.0

China

20

250.0

10

0

200.0

East Asia

150.0

-10

Early signs of recovery in regional markets finds
China showing modest (for China) export gainsof 11 percent ―saar‖2 as of April 2012. In likefashion, the ASEAN-4 group excluding Thailand
had breached zero to jump to 30 percent in thethree months to March; while with capacity
coming back on-stream, Thailand’s’ exports
boomed to a 57 percent pace. Though these

100.0

ASEAN ex Thailand

-20

50.0

Thailand [right scale]

-30

0.0

-40

-50.0

-50

-100.02010M01

2010M06

2010M11

2011M04

2011M09

2012M02

Source: World Bank.

Table EAP.1 East Asia and Pacific forecast summary(annual percent change unless indicated otherwise)
98-07a

2009

2010

2011

Est. Forecast
2012
2013
2014

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 (%)

7.5
6.7
7.4
6.9
9.1
18.9
-9.9
-2.0
-3.9
5.1
0.2
-3.2

9.7
8.9
9.6
5.6
11.2
11.3
23.9
19.3
2.9
3.7
6.6
-1.8

8.3
7.4
8.2
7.5
7.7
11.3
9.9
12.5
-0.2
2.4
5.1
-1.4

7.6
6.7
7.5
7.6
7.8
9.0
8.7
9.4
0.3
2.4
4.1
-2.1

8.1
7.1
8.0
6.0
8.5
8.8
14.2
11.4
1.4
4.1
5.5
-2.1

8.1
7.2
8.0
7.7
6.5
7.9
10.6
10.8
0.7
3.0
3.5
-1.7

7.9
7.0
7.9
8.0
6.5
7.9
11.4
12.9
0.2
2.9
4.4
-1.4

Memo items: GDP
East Asia excluding China
3.6
1.5
7.0
4.5
5.1
5.8
5.8
China
9.9
9.2
10.4
9.2
8.2
8.6
8.4
Indonesia
2.6
4.6
6.2
6.5
6.0
6.5
6.3
Thailand
3.3
-2.3
7.8
0.1
4.3
5.2
5.6
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).

Source: World Bank

81

Global Economic Prospects June 2012

East Asia and the Pacific Annex

Tourism and remittances play important
ancillary roles in the non-merchandise portionsof East Asia’s current account position. Amongdeveloping regions, East Asia is the largest
destination for global tourism arrivals, having
accommodated some 116 million visitors incalendar year 2010, according to the United
Nations World Tourism Organization(UNWTO). And worker remittances provide afoundation for consumer spending, and in somecases investment, for countries such as thePhilippines, Vietnam and smaller island
economies. Table EAP.2 highlights some of themain currents in revenue flows for the region. In
the case of each revenue source, flows
diminished at the peak of the crisis in 2009, buthave since recovered sharply to exceed pre-crisis
levels by a wide margin.

account positions at moderate levels while
representing an important and relatively
stable source of foreign currency for some ofthe smaller island economies.
 Remittances. The Philippines is the largest

recipient of worker remittances in East Asia,
accounting for 10.7 percent of the country’sGDP. Philippine remittances have bounced
back 24 percent since 2009. Remittances arealso an important source of foreign currency
and incomes in Fiji (5.8 percent of GDP),
Vietnam (5.1 percent) and Cambodia (3percent).
The region’s current account surplus position
has diminished by $225 billion from 2008 to
2011, with a large portion of the decline
accounted for by China, where surplus declined
from $410 billion (10.4 percent GDP) in 2008 to$200 billion (2.8 percent of GDP) in 2011,reflecting both negative terms of tradedevelopments and a reorientation of growth
toward the domestic market. Changes in current
account balances of other countries in the region
have been much more modest. The strengthening
recovery in high-income countries is expected tosee the regional surplus increase somewhat
despite recent increases in oil prices (figure
EAP.5).

 Tourism. According to the UNWTO, 85

percent of countries reported positive figuresfor 2011, with 33 percent recording double
digit gains. Cambodia, Thailand and Vietnam
saw arrivals increase by 20 percent during theyear. Overall, East Asian tourism receipts
reached an estimated $115.5 billion, or 1.5
percent of GDP during 2011, a small share atregional level, but of substantial importancefor countries like Fiji, Cambodia, Malaysia,
Thailand and Vietnam. Overall tourism
receipts have recovered strongly from the2009 crisis and have helped maintain current

Domestic policies. Most countries in the region
Figure EAP.4 Recent revival of exports is ofencouragement

Figure EAP.3 Imports revive following downturns in
China and Thailand
Import volumes, ch%, saar

Export volumes, ch%, saar

100

80

80

60

60

40

40

20

20

0

0

-20

-20

-40

-40
2010M01

2010M06

2010M11

China

2011M04

ASEAN-4 x Thailand

2011M09-60

2012M02

2010M01

Thailand2010M06

2010M11China

ASEAN-4 x Thailand

Source: World Bank.

Source: World Bank.

82

2011M04

2011M09

2012M02

ThailandGlobal Economic Prospects June 2012

East Asia and the Pacific Annex

Table EAP.2 Tourism and worker remittance flows to East Asia , USD billions
Country
Tourism Revenues $mn
East Asia and Pacific
China
Thailand
Malaysia
Indonesia
VietnamPhilippines
CambodiaFiji
Papua New Guinea
Worker Remittances $mn
East Asia and Pacific
China
Thailand
Malaysia
Indonesia
VietnamPhilippines
CambodiaFiji
Papua New Guinea
Memo: Tourism and Remittances

2009

2010

2011E

%GDP
2010

94.2

112.1

115.5

1.5

22.6

42.6

50.1

56.3

0.8

32.2

19.4

23.4

25.1

7.4

30.0

17.2

19.8

22.2

8.4

29.0

6.0

7.6

8.4

1.1

40.0

4.0

4.5

5.0

4.1

25.0

2.8

3.2

3.5

1.6

9.8

2.0

2.4

2.5

21.2

25.0

0.6

0.7

0.7

22.9

17.0

0.1

0.1

0.1

0.1

0.0

Ch% 11/09

84.4

94.9

106.8

1.4

26.5

48.9

53.1

62.5

0.8

27.8

2.8

3.6

4.0

0.5

11.1

1.1

1.4

1.2

0.5

9.1

6.8

6.9

6.9

1.0

1.5

6.0

8.3

8.6

5.1

26.4

19.8

21.4

23.0

10.7

23.5

0.3

0.4

0.4

3.0

25.2

0.1

0.2

0.2

5.8

66.4

0.1

0.1

0.1

0.1

1.2

178.6

207.0

223.3

2.8

25.0

Sources: United Nations World Tourism Organization (e); World Bank.

introduced some form of fiscal and-or monetarystimulus during the course of 2011 in order tocompensate for the slowing in high-income
economies. Most countries in the region havesignificant fiscal space with which to work,
Vietnam being a notable exception (figure
EAP.6). Policy cushions are considerable alsowith regional central banks holding substantial
amounts of international reserves. In responseto recent slowing in demand growth, Chinese
authorities have announced a return to stimulus
mode, with interest rate reductions, changes insubsidies and other demand-boosting measures.

eased less sharply (figure EAP.7 and Inflation
Annex). In several ASEAN countries, priceinflation is building due to strong domestic
demand growth.

Figure EAP.5 Compression of current accounts during crisis
Current Account Balance, USD billions
500
400
300

Inflation. A stabilization of domestic food priceinflation contributed to a strong deceleration in
East Asian headline CPI from 7.5 percent in thesecond half of 2011 to 4.8 percent in the firstmonths of 2012 (saar). And despite a 15 percent
increase in global oil prices in the year throughApril 2012, developing country inflation
continued to ease. However, most of the decline
in East Asia reflected disinflation in China.
Inflation in the other countries in the region has

200
100
0
-100
2007
China

2008
Malaysia

Source: World Bank.

83

2009
Indonesia

2010

2011
Thailand

2012P
Other

Global Economic Prospects June 2012

East Asia and the Pacific Annex

For the region and year as a whole, FDI inflows
increased by $45 billion (largely to China),

offset by a $20 billion decline in portfolio equity
flows (IPOs and fund investments in regional
exchanges) (table EAP.3 and figure EAP.8a).
Partly reflecting the withdrawal of foreign
investors and worries about Chinese growth
pr ospects, regi onal equit y mar ket s
underperformed global markets to a measureable
degree (figure EAP.8b). Bond issuance,
however, stepped up to $27 billion in 2011, an
improvement over the robust rate of issuance inthe prior year, while short-term debt flows eased
by some $30 billion—a possible indication oftightened trade finance conditions in the region.

Figure EAP.6 Fiscal room sufficient for most countries if required

Figure EAP.7 Inflation on a sharp downward course,
led by China

Financial markets and capital flows
Capital flows into the developing East Asia
region were resilient during the first half of2011, but as in other developing regions, flows
slowed markedly in the second half of the year,
in response to increased risk aversion but also
new banking regulation that accelerated
deleveraging in several Euro Area banks (seeFinance Annex).

Fiscal balance, share of GDP %Headline CPI, ch%, 3m/3m saar

0

9

-1

8

-2

7

-3

6

-4

5

-5

4

-6

3

-7

2

-8

1

-9

0

China
2008

ASEAN
2009

2010

2010M01

Vietnam2011

2010M06

2010M11

East Asia

2012

2011M04

2011M09

EAP x China

China

2012M02

Source: World Bank.

Source: World Bank.

Box EAP.1: Recent developments for major countries and groups.
China’s economy slowed into the first quarter of 2012, with GDP gains reduced to 8.1 percent (y/y) from 8.9 percent in the final quarter of 2011, the slowest advance in three years. Softer trade conditions, but also an easing indomestic activity led by real estate investment was responsible for the easing, as government maintained tighter
policy toward residential investment.3 The softening of China’s growth should be moderate in the near-term, supported at quarterly rates near 8 percent in 2012—during a crucial year for political change in the country.
Several ASEAN countries have been making good progress on the domestic policy and growth fronts. Indonesia’s
GDP advanced by 6.5 percent in 2011, and the country was re-awarded investment grade status by Moody’s; thePhilippines, where the government is determined to boost growth from the less-than-expected 3.7 percent resultsof 2011, anticipates use of fiscal space to enhance investment and consumer spending. Portfolio investment has
returned to these countries, supporting private capital outlays. And Thailand is anticipated to recover from thetravesty of flooding (a 9 percent GDP falloff in the final quarter of 2011); and growth should rebound to more-than
4 percent in 2012, now that administrative barriers have been removed to clear more post-flood stimulus spending.
Vietnam’s growth dropped by a full percentage point in 2011 to 5.9 percent, as oil prices eased to a degree in thesecond half of the year, and the revival of hydrocarbon prices during 2012 is a key factor in carrying growth backinto the country’s more traditional trend range of 6.5 percent. In October 2011, the Communist Party Plenum underscored the need for economic restructuring and identified public investment, SOEs and the financial sector aspriorities for the coming 5 years.

84

Global Economic Prospects June 2012

East Asia and the Pacific Annex

Table EAP.3 Net capital flows to East Asia and the Pacific$ billions
Current account balance

2008
439.1

2009
318.9

2010
277.2

2011e
210.3

2012f
253.7

2013f
341.8

2014f
392.0

Capital Inflows

209.4

235.3

448.2

440.0

343.2

397.4

473.0

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

210.4
206.8
214.1
-7.3
3.6
1.2
16.1
-11.4
-2.3
-1.0
1.2
0.0
-2.1

231.7
166.3
137.5
28.9
65.3
8.4
-6.6
63.5
0.0
3.7
2.2
0.1
1.3

444.8
268.2
227.7
40.5
176.6
20.8
13.1
141.5
1.1
3.4
2.7
0.0
0.8

437.1
290.7
272.2
18.5
146.4
27.0
15.0
104.3
0.1
2.9
1.1
0.0
1.8

340.9
245.3
229.7
15.6
95.6
23.5
9.0
63.0
0.1
2.3

394.3
286.1
265.1
21.0
108.2
24.0
12.0
72.0
0.2
3.1

470.2
321.9
286.9
35.0
148.3
21.0
19.0
108.0
0.3
2.8

Note :e = estimate, f = forecast

Source: World Bank.

The projected decline in flows for 2012 mainlyreflects the drop already observed in the second
half of 2011. Indeed, even if flows grow during
the course of 2012 at a 10 percent quarterly pace,
the low-base at the end of 2011 means thatyearly growth rates for 2012 would be low, withall categories of finance affected. Indeed, during
the early months of 2012, capital flows
improved. Overall, capital flows to the region are
expected to rise from about $440 billion (5percent of regional GDP) in 2011 to $470 billion(4 percent of regional GDP) by 2014.

Foremost among regional headwinds is likely thegradual slowing of growth in China, as theauthorities seek to moderate activity in order that
production capacity can catch back up to demandlevels. As a result, the easing of growth thatbegan in 2011 will likely give way to further
slowing during 2012 to 8.2 percent , due in partto worsening conditions in Europe. Thereafter apickup with stronger world recovery is expected
to yield trend growth of some 8.4 percent by
2014. The evident slowing of growth as readthrough recent GDP releases, production, trade,
PMI surveys, investment and householdspending data has placed the Chinese authorities
back in ―stimulus mode‖, (subsidy measures,
acceleration of infrastructure investment andlowered required reserves ratios for the banking
system). With more fiscal than monetary space
available, the burden is expected to fall on thefiscal side, helping to sustain growth until
external demand factors come to play over 201314 (table EAP.4).

Medium-term outlook
Improved global financial conditions and a
gradual step-up in growth prospects in the highincome world are expected to help re-invigorate
growth for most of the countries in the region
over the forecast period. However, the outlook
will not be as robust as it might otherwise havebeen because of significant external and regional
headwinds. Global headwinds include the recent
high level of oil prices as well as relatively weak
demand growth from high-income countries
where recovery will continue to be held back by
fiscal consolidation.

Growth in other major economies of the region
is projected to accelerate moderately before
easing into the latter years of the projection
period. Despite the expected near-term anemic

85

Global Economic Prospects June 2012

East Asia and the Pacific Annex
Figure EAP.8b East Asia's bourses have been outperformed at the world level

Figure EAP.8a Capital flows diminish by 2.3% of
GDP between 2010 and 2012
Net capital flows to EAP, by type, billions U.S. dollars
500
ST and Other
400

300

130.0

Bank borrowing

120.0

Bond issuance

MSCI World

Portfolio equity
FDI inflows

110.0

200

100.0
100

90.0
0

MSCI Pacific

80.0

-100
2008

2009

2010

2011

2012

2014

Source: World Bank.

Source: Thomson-Reuters Datastream.

recovery in the high-income world, demand forthe exports of East Asia and Pacific will
strengthen (partly because Euro Area imports
will stop falling and partly because of faster
growth elsewhere in the high-income anddeveloping worlds), prompting an accelerationof regional exports from a more sluggish 9.9
percent pace in 2011 to 11.4 percent by 2014.4
But the vigor of growth in the region will besapped by the expected reversal of some of theregional stimulus measures that were introduced
in 2011 (figure EAP.9).

percent pace by 2014 grounded in improved
fundamentals.
Among low- income countries of the region,
Cambodia and Lao PDR, GDP gains inaggregate eased to 7.1 percent in 2012 from 7.7
in the preceding year. Lao PDR should besustained at growth rates between 7 to 8 percent
by continued strong investment in hydropower;
while Cambodia (5 to 6 percent) is deriving
growth dividends from focus on higher riceproduction, inflows of FDI into the growing
garment industry and building of tourism
arrivals.

For the major ASEAN countries, growth isviewed to be buoyant for 2012, as broadly
favorable ―carry over‖ should sustain domestic
demand until impetus from a revival in global
trade comes to the fore in the second half of theyear. For the group in aggregate, growth isexpected to step-up to 5 percent in 2012 on
activity remaining strong in Indonesia andrecovering in Thailand. The pace of growth isexpected to increase to 5.7 percent through2014, as Indonesia continues to grow rapidly ataround 6.5 percent, followed by Malaysia,
Thailand and the Philippines nearer 5-5.5
percent. These countries will clearly benefit fromthe revival of world trade. Vietnam, as an oil
exporter, will enjoy a near-term fillip to growth
due to high oil price levels, but as these prices
settle, growth is projected to establish a 6.5

Figure EAP.9 A moderating growth profile in line withmedium-term potential output
Growth of real GDP
10
9
8
7

6
5
4
3
2
1
0
China

ASEAN

East Asia
2011

Source: World Bank.

86

2012

Vietnam
2013

2014

Low income

Islands

Global Economic Prospects June 2012

East Asia and the Pacific Annex

The smaller Pacific Islands of East Asia, among
which, Fiji, Papua New Guinea (PNG) and
Vanuatu were hard hit in recession (3.2 percent
growth in 2009), but have recovered fairly wellin the two years succeeding, with activity for thegroup advancing by 5.3 and 6.4 percent
respectively. The driver for the aggregate of theIslands may be found in PNG, where LNG
investment has been a critical factor. Despite
shocks to its export prices, the economy slowed
only marginally, and had jumped to a 9 percent
advance in growth for 2011. Expectations for
GDP gains of this group of countries are for amoderate easing of activity toward a 4 percent
range by 2014, as LNG investment falls off in
PNG, and remittances may require some time torecoup.

reduced import demand in high-income
countries, much tighter international capitalconditions and increased pre-cautionarysaving within the region. Countries heavily
reliant on external remittances (Fiji, thePhilippines and Vietnam), tourism(Cambodia, Fiji, Malaysia, Thailand andVietnam), and commodities (Indonesia,
Malaysia and Thailand) as well as those withhigh-levels of short-term debt or medium
term financing requirements (Malaysia)
would be hardest hit.
 Over the last several months geo-politicaltensions in the Gulf region have increased(although they now show signs of prospective
waning). Should the situation escalate, or if
developments in the Arab Awakening were to
spread to a major oil-exporting country,
global oil prices could increase substantially.
As discussed in the main text, should oil
prices rise by $50 dollars per barrel for asustained period, that would cut as much as
1.7 percent points from oil importers growth,raise inflationary pressures and generate asignificant deterioration in regional tradebalances.

The Island economies, and indeed the major
ASEAN countries, are expected to benefit from a
pickup in tourism arrivals, which are projected toincrease by about 6 percent per year (globally)
over the projection period, as incomes andconfidence are gradually restored in high-income
countries that have been most affected by thecrisis.
Overall, growth for the developing region is
anticipated to ease from 8.3 percent in 2011 to
7.6 percent in 2012 before recouping to an 8.1
percent pace in 2013, then easing to 7.9 percent,a figure closer to potential output gains for theaggregate of the region.

 A slowdown in China would spill-over into

the rest of the region in the form of reduced
demand for exports, and commodity
dependent countries would be especially atrisk of a slowdown in China’s investment.
Though a ―soft landing‖ is the most likely
growth outturn, a more rapid-than-expectedslowing is possible.

Risks and vulnerabilities
 Though financial developments in the EuroArea calmed in the wake of the Greek
settlement, this unraveled with Greek
elections, generating a spurt in CDS rates
across the Area, increasing the fragility of thesituation. While the likelihood of a serious
deterioration of the situation in Europe has
declined, it remains a distinct possibility –which would have significant effects onregional growth in East Asia. Down-side
simulations presented in Global Economic
Prospects, January 2012, suggest that growthin East Asia & the Pacific could slow by asmuch as 1.5 to 2.3 percentage points due to87

Global Economic Prospects June 2012

East Asia and the Pacific Annex

Table EAP.4 East Asia & the Pacific country forecasts(annual percent change unless indicated otherwise)
98-07 a

2009

2010

2011

Est. Forecast
2012
2013
2014

Cambodia
GDP at market prices (2005 US$) b
9.3
0.1
6.0
6.9
6.5
6.8
6.3
Current account bal/GDP (%)
-4.2
-8.9
-7.7
-8.7
-9.9
-9.5
-8.1
China
GDP at market prices (2005 US$) b
9.9
9.2
10.4
9.2
8.2
8.6
8.4
Current account bal/GDP (%)
4.1
5.2
4.0
2.8
3.0
3.5
3.6
Fiji
GDP at market prices (2005 US$) b
2.1
-1.3
-0.2
2.0
1.5
1.7
1.9
Current account bal/GDP (%)
-6.3
-7.6
-11.3
-11.9
-9.8
-18.6
-8.7
Indonesia
GDP at market prices (2005 US$) b
2.6
4.6
6.2
6.5
6.0
6.5
6.3
Current account bal/GDP (%)
3.1
2.0
0.8
0.2
-0.9
-0.4
-0.6
Lao PDR
GDP at market prices (2005 US$) b
6.4
7.6
9.4
9.4
8.2
7.6
7.4
Current account bal/GDP (%)
-10.6
-14.0
-8.7
-2.1
-12.9
-15.9
-9.0
Malaysia
GDP at market prices (2005 US$) b
4.3
-1.6
7.2
5.1
4.4
5.2
5.2
Current account bal/GDP (%)
12.5
16.5
11.6
10.5
11.1
10.6
9.0
Mongolia
GDP at market prices (2005 US$) b
6.4
-1.3
6.4
14.9
17.2
11.8
Current account bal/GDP (%)
-2.9
-9.0
-5.8
-15.1
-13.6
-1.8
Papua New Guinea
GDP at market prices (2005 US$) b
1.3
5.5
8.0
9.0
7.3
4.2
4.6
Current account bal/GDP (%)
3.3
-10.8
-8.7
-14.6
-26.3
-18.0
-21.5
Philippines
GDP at market prices (2005 US$) b
4.2
1.1
7.6
3.7
4.0
5.0
5.0
Current account bal/GDP (%)
0.6
5.6
4.2
2.3
1.7
2.5
3.0
Thailand
GDP at market prices (2005 US$) b
3.3
-2.3
7.8
0.1
4.3
5.2
5.6
Current account bal/GDP (%)
4.7
8.3
4.9
-2.3
-3.5
1.8
3.3
Vanuatub
GDP at market prices (2005 US$)
2.9
3.5
3.0
3.9
4.0
4.2
4.2
Current account bal/GDP (%)
-9.6
-8.9
-7.9
-7.0
-7.2
-7.7
-8.2
Vietnam
GDP at market prices (2005 US$) b
7.1
5.3
6.8
5.9
5.7
6.3
6.5
Current account bal/GDP (%)
-8.6
-13.8
-13.6
-12.5
-3.5
-4.9
-6.6
World Bank forecasts are frequently updated based on new information and changing (global)
circumstances. Consequently, projections presented here may differ from those contained in other Bank
documents, even if basic assessments of countries’ prospects do not significantly differ at any given
moment in time.
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
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.

Source: World Bank.

Notes:
1

2

For the region excluding both China andThailand, where GDP in the latter wasconstrained to 0.1 percent in 2011 due tocatastrophic flooding, East Asian growth
dropped to 5.7 percent in 2011 from 6.7
percent in the previous year.
Saar--or seasonally adjusted annualized rate.

88

3

The first quarter GDP release shows that
residential property prices fell 15 percent in
the year to Q1-2012.

4That is, country (i)s partner import volumes
weighted by the share of country (i)s exports
in partner imports.

Global Economic Prospects June 2012

Europe and Central Asia Annex

Europe and Central Asia Region
projected to slow to 2.9 percent in 2012 (from8.5 percent in 2010), before firming to 4 and 5
percent in 2013 and 2014.
Net capital flows are expected to fall in 2012,
before rebounding in 2013, while remittances areprojected to grow in line with activity over the
medium-term.
Risks and vulnerabilities: As tensions in theEuro Area have returned, economic prospects are
fragile and risks of a contagion to developing
countries in the region remain real, especially for
those with strong economic linkages (trade,
remittances, commodity prices, international
finance). These linkages were discussed in detailin the January 2012 edition of Global Economic
Prospects. A major deterioration of conditions in
the Euro Area could reduce GDP in the regionby 5 or more percent compared with thebaseline.
Even if the worst downside risk does notmaterialize, some of the region’s vulnerabilities
could be magnified by slow growth, and weak
and volatile international capital conditions.
Deleveraging and banking systems. The
region’s banking system is particularly
susceptible to deleveraging by high-income
European banks. Some deleveraging has alreadybeen undertaken in a more or less orderly
fashion. However, recent events are likely toaccelerate deleveraging by Greek-owned banks,
which have a large presence in Albania,
Bulgaria, Macedonia, Romania and Serbia.
Possible spill-over effects to other Euro-areabanks, should they occur, would have a morewidespread effect in the region. Deleveraging
has been adding to vulnerabilities of thedomestic banking system in many countries,
some of which already have high rates of nonperforming loans (NPL).
Oil prices. The baseline growth forecast
assumes that the recent decline in oil prices will
not be reversed, but there are both up- and downside risks to that assumption. While a sharp
decline in commodity prices—due to faltering of
global growth—would have potentially serious
consequences for commodity exporting countries
in the region, persistently high oil prices mightcause a deterioration of external and domestic
imbalances in some commodity-importers.

Overview
Europe and Central Asia posted another yearof strong growth of 5.6 percent in 2011, driven
mainly by oil-exporters Russia and Kazakhstan,
Turkey and a rebound in Bulgaria, Romania,
Ukraine, and some others. Growth picked up
despite strong headwinds from the Euro Area inthe latter part of 2011. The increased financial
turmoil in high-income Europe was reflected inweakening external demand that caused bothindustrial production and export growth to slow
sharply in the second half of the year. The region
also experienced a reversal in capital flows and acollapse in stock prices. Deleveraging by
European banks, which intensified during thesecond half of 2011, has cut into syndicatedbank lending to the region.
The effects of the Euro Area crisis were offset toa significant degree by favorable domestic
developments in large middle income countriesof the region. Favorable terms-of-trade effects,
declining unemployment and accommodative
fiscal and monetary policies all supported
domestic demand. For the year as a whole, net
private capital flows increased to $159 billion in
2011, from $150 billion in 2010. Most of theincrease came in the form of foreign direct
investment (FDI). Remittances grew by 12.6
percent in 2011 despite the problems in Western
Europe.
Outlook: Growth in the developing Europe andCentral Asia region (box ECA.1) should slow in2012 to 3.3 percent, rebounding to 4.1 percent in2013 and 4.4 percent in 2014, assuming a
resolution of the Euro Area crisis by end-2012.
Growth in Russia and Kazakhstan will moderate,
as countries close output gaps. Russian growth isprojected at 3.8 percent in 2012, 4.2 and 4.0
percent in 2013 and 2014. After two years of
unsustainably strong growth, GDP in Turkey is
Box ECA 1. Country coverage
For the purpose of this note, the Europe and Central Asia
region includes 21 low– and middle-income countries withincome of less than $12,276 GNI per capita in 2010. These
countries are listed in the table ECA.4 at the end of thisnote. This classification excludes Croatia, the Czech Republic, Estonia, Hungary, Poland, Slovakia, and Slovenia. The
list of countries for the region may differ from those contained in other World Bank documents.

89

Global Economic Prospects June 2012

Europe and Central Asia Annex
and inflationary pressures started to ease.
Turkey, Serbia, and Romania cut their policy
rates. In addition to policy rates, many
developing countries have been pro-actively
relaxing the conditions governing credit growth,such as reserve requirements. Fixed investment
spending was also supported by higher capital
flows, particularly FDI inflows to the region,
which increased 21 percent in 2011.

Recent developments
Growth in the region was strong in 2011 despite
global financial turmoil
2011 turned out to be another year of strong
growth for Europe and Central Asia with theregion registering 5.6 percent growth, slightly
higher than the 5.4 percent recorded in 2010(box ECA.1). While almost all countries grew ata faster rate in 2011 compared with 2010,
growth in the region was mainly driven by theoil-exporting countries (Russia and Kazakhstan),
Turkey and the rebound in Armenia, Bulgaria,
Latvia, Lithuania, Romania, Serbia, and Ukraine
from the very low growth rates of 2009 and 2010
(table ECA.1).

High commodity prices contributed to theeconomic growth in oil exporters in the region,such as in Russia (50 percent of the regionalGDP) and Kazakhstan. In Russia, fixed
investment and inventories were the largest
contributors to growth in 2011, as stocks are still
being rebuilt following the sharp depletion in2009. Similarly, in Kazakhstan high oil prices
boosted income (and private consumption) andspurred investment spending. Following the2010 drought the bumper harvest in the region in2011 contributed significantly to regional
growth, particularly in economies with large
agricultural sectors, such as Romania andUkraine.

The strong headwinds in the second half of 2011
generated by the intensification of the fiscal
crisis in Europe (discussed in detail in theJanuary 2012 edition of Global Economic
Prospects) hit several economies in the Western
Balkans particularly hard because of strong
trade, financial and banking linkages with theEuro area. In fact, industrial production growthin the region declined to a 3 percent annualizedpace in the second half of the year comparedwith 15 percent in the first half. Similarly, export
growth slowed to a 6.1 percent annualized pacein the second half of the year, after 21 percent
growth in the first half of the year. The region
was also affected by the sharp decline in risk
appetite among investors, which led to abrupt
reversal in capital flows (particularly in portfolio
investment flows), a jump in risk-premia, and acollapse in regional stock prices.

Unlike other developing regions which are
beginning to rub up against capacity constraints,
the supply side was able to keep up with thestrengthening of demand in the region, because
many countries have yet to recover the output
lost following the 2008/09 crisis (figure ECA.1).
Industrial output remains much lower than its
long term trend in several countries (Ukraine, 28
percent lower; Bulgaria 28 percent lower,
Armenia 27 percent lower, Lithuania 25 percent,and Latvia 16 percent). Economy-wide output
gaps exceed 3 percent of potential output in allthese economies.

The negative influence of the intensification of
the Euro Area crisis in the region was offset to asignificant degree by the favorable domestic
developments in large middle income countries.
Favorable terms-of-trade developments(especially for commodity exporters), declining
unemployment and accommodative fiscal andmonetary policies supported domestic demand in
most of the middle income countries. Beginningin August, several countries shifted their policy
focus from inflation towards growth as theglobal economic outlook started to deteriorate

In Turkey, the second largest economy in theregion, growth was exceptionally strong amidst
indications of growing imbalances. The growth
was mainly driven by the rapidly rising domestic
demand, pro-cyclical policy (increased
government expenditure prior to the elections inJune 2011) and increased investment. Domestic
demand has also benefited from accommodative
monetary policy by the Central Bank of Turkey,
which has resulted in rapid credit growth. The

90

Global Economic Prospects June 2012

Europe and Central Asia Annex

Table ECA.1 Europe and Central Asia forecast summary(annual percent change unless indicated otherwise)
98-07a

2009

2010

2011

2012

2013

2014

GDP at market prices (2005 US$) b

5.3

-6.5

5.4

5.6

3.3

4.1

4.4

GDP per capita (units in US$)

5.2

-6.9

5.0

5.5

3.3

4.0

4.4

PPP GDP c

5.4

-6.6

5.1

5.3

3.4

4.1

4.4

Private consumption

6.2

-5.1

3.9

7.5

5.4

4.6

5.3

Public consumption

2.7

1.4

1.7

1.3

2.1

2.3

2.6

Fixed investment

8.2

-17.3

9.9

7.4

4.3

6.6

5.8

Exports, GNFS d

7.6

-7.0

6.9

5.7

3.9

5.9

7.2

Imports, GNFS d

9.9

-24.0

16.6

9.6

6.5

7.1

8.0

-0.3

6.5

-2.7

-1.3

-0.9

-0.5

-0.4

Current account bal/GDP (%)

2.4

0.8

0.8

0.8

0.3

-0.7

-1.1

GDP deflator (median, LCU)

10.0

2.5

8.7

7.0

6.0

5.2

5.1

Fiscal balance/GDP (%)

-2.1

-5.4

-2.9

0.6

0.0

0.7

0.1

Net exports, contribution to growthEst. Forecast

Memo items: GDP
Transition countries e

5.9

-7.1

3.9

4.4

3.5

4.1

4.2

Central and Eastern Europe f

4.8

-7.9

-0.5

3.1

1.4

2.8

3.5

Commonwealth of Independent States g

6.1

-7.0

4.7

4.6

3.9

4.3

4.3

Russia

5.8

-7.8

4.3

4.3

3.8

4.2

4.0

Turkey

4.0

-4.8

9.2

8.5

2.9

4.0

5.0

Romania
3.8
-6.6
-1.6
2.5
1.2
2.8
3.4
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. 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,
Moldova, Russian Federation, Tajikistan, Turkmenistan, Ukraine, Uzbekistan.

Figure ECA.1 Industrial output remains significantly
below its long-term trend in ECA region

central bank increased reserve requirements rates
in December 2010 and later in March 2011, butlater reversed the policy and reduced the rates inAugust 2011 due to increased concerns about
global economic prospects. Strong domestic
demand amid weakening external demand has
led to a sharp increase in the current accountdeficit and inflation.

Percent deviation from trend

30
20
10

Indications are that the industrial production
and trade slowdown have already bottomed out

0-10Global economic news during the first fourmonths of 2012 were generally positive.
Tensions in financial markets eased significantly
and real-side global economic activity
strengthened following the significant structural,fiscal and monetary policy steps in high-income
Europe. Global industrial production has
recovered from November lows and trade has
improved led by developing country imports.

-20
-30
-40

East Asia & Pacific
Europe & Central Asia
Latin America & Caribbean
Middle East & North Africa
South Asia
Sub-Saharan Afria
Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12

Source: World Bank.
Note: For this analysis, the Europe and Central Asia region includes Armenia, Bulgaria, Kazakhstan, Latvia,
Lithuania, Romania, Russia, Serbia, Turkey and Ukraine.

91

Global Economic Prospects June 2012

Europe and Central Asia Annex

Similar trends were seen in the Europe andCentral Asia region.

experienced in other economies like Serbia andBulgaria, all of which have relatively close ties
to high-income Europe. While industrial
production growth has remained positive inTurkey in 2012, it has lost momentum sinceNovember.

Industrial production data indicate that therecovery of activity in the second half of 2011
continued into early 2012 largely due toimproving demand in high-income countries
outside the Euro area, including among large
developing economies. Reflecting thesedevelopments, production growth accelerated toa 5.3 percent annualized rate (3m/3m saar) in
Europe and Central Asia in the first quarter of2012 (figure ECA.2). Despite the strong growthof recent months, activity within the region
remains well below pre-crisis trends and unlike
other developing regions there is much sparecapacity.

The activity in the region has started to slow
down in April, however. Among the countries
that have data for April, industrial production
growth slowed down in Russia, Ukraine, andKazakhstan and increased only in Lithuania.
Exports in the region had a strong reboundtowards the end of 2011, and grew at a 16.9
percent annualized pace in the last three-months
ending March (figure ECA.3). The reboundcame despite the recession and weak importdemand in high-income Europe—the region’s
main export destination (high-income European
demand contracted through November, before
firming marginally to grow at a 8.9 percent
annualized pace during the three months ending
March 2012).

Industrial output performance varied markedly
by country as country specific factors continue
to shape the individual trends. For example,
while initially the rebound was driven by thestrong performance of Romania and Turkey,
more recently industrial production has picked
up noticeably in commodity exporters Russia
and Kazakhstan as well as Latvia. In contrast,
industrial production continues to slow in
Turkey and Romania. Indeed, industrial
production in Romania began shrinking toward
the end of the year, reflecting fiscal tightening
and weak import demand from high-income
European countries. Similar contractions wereThus while exports in Romania and Albania,
which are heavily oriented toward high-income
Europe declined in 2012, exports reboundedstrongly in countries like Turkey (38.5 percent
saar during the three months through March2012), Lithuania (13.6 percent) and Russia (4percent). In part, this reflected the trade
Figure ECA.3 Export growth rebound mostly driven
by developing country demand

Figure ECA.2 IP growth had a rebound in October
IP Volume Growth
3m/3m saar

Europe Central Asia
TurkeyRussiaRomania
Bulgaria

50
40

50
40

30

30
20

20

10

10

0

0

-10

-10

-20

-20

-30

-30

-40

-40

-50

-50

-60
2009M01

Import and Export
Volume3m/3m saar

2009M10

2010M07

2011M04

Europe Central Asia Exports
Developing Country Imports
High-income Country Imports
EU High Income Imports-60
2009M01 2009M07 2010M01 2010M07 2011M01 2011M07 2012M01

2012M01

Source: World Bank.

Source: World Bank.

92

Global Economic Prospects June 2012

Europe and Central Asia Annexorientation of these economies whose exports are
relatively more oriented to fast-growing
developing economies (developing-country
import demand continued to expand even in thesecond half of 2011), or the recovering UnitedStates economy. Exports to other developing
countries are particularly important for somecountries in the region with Turkey being amajor destination for exports from the South
Caucus region and China for countries in Central
Asia.

Figure ECA.4 Gross capital flows were subdued in
2012…but capital flows were mostly subdued in theregion despite the improved financial conditions

10

As discussed in the main text, after several
months of heightened uncertainty and much
weaker capital flows, conditions in financial
markets improved significantly during the first
four months of 2012. Spreads paid on sovereign
debt of both high-spread European anddeveloping economies also came off their late2011 highs and global equity markets
rebounded. More recently, however, there was aconsiderable increase in spreads andretrenchment in the equity markets as debt
sustainability concerns for high-spread
economies returned.

0

Syndicated Bank Loans
Bond Issuance
Equity Issuance$ billion
40
35
30
25
20
15

5

2010 Q1

2010 Q3

2011 Q1

2011 Q3

2012 Q1

Source: World Bank

decline partly reflects weaker economic activity
in the region, deleveraging by the European
banks has also curtailed the availability of crossborder bank credit, including trade finance.
The impact of deleveraging was also evident asforeign claims data—including all cross-borderand local lending by subsidiaries—by BIS
reporting Euro-area banks declined by $44
billion between June and December 2011 in theEurope and Central Asia region (figure ECA.5).
While the bulk of the reduction were in large
economies such as Romania ($14 billion),
Turkey ($13 billion) and Russia ($9 billion), theimpact was much more widespread when thesize of economies were taken into account(figure ECA.5)

Gross capital flows (international bond issuance,cross-border syndicated bank loans and equity
placement) were subdued in the Eastern Europe
and Central Asia (figure ECA.4). Similar to theother regions and despite the slowdown in May,bond flows surged in the first five months of2012, but only partially compensated for the
sharp reduction in syndicated bank lending andequity issuance. Bond flows reached $26 billion
in the first five months with issuances by large
middle income countries in the region Russia,
Turkey, Romania, Lithuania, Latvia andKazakhstan.

Net capital flows are expected to decline in
2012…
Net private capital flows in the Europe andCentral Asia region increased to $159 billion(4.4 percent of the region’s GDP) in 2011 from$150 billion (4.9 percent) in 2010. Most of theincrease came in form of foreign direct
investment (FDI). While FDI inflows increasedin most economies including Bulgaria, Latvia,
Russia, Kazakhstan and Turkey, it contracted in
Romania.

…with Euro-zone bank deleveraging on-going
Syndicated bank flows weakened sharply during
the second half of 2011 in part due to an
intensified deleveraging process by the European
banks (see main text and the Finance annex).
International bank lending totaled only $15.6
billion in the first five months. While the sharp

93

Global Economic Prospects June 2012

Europe and Central Asia Annex

Figure ECA.5
Foreign claims by European banks
declined between June and December 2011

the region are expected to rebound in 2013 withthe growth in global economy and are projected
to reach $188 billion in 2014—around 4 percent
of region’s GDP (table ECA.2). By 2014, allflows are expected to increase, with bondissuance expected to level off slightly as banklending picks up the pace, with the latter
supported by increased South-South flows.

Change as % of GDP

12
10
8
6

Worker remittance flows are expected toincrease further in 2012 as oil prices remain
high

4
2
0

Remittances are an importance source of bothforeign currency and domestic incomes forseveral countries in the developing Europe andCentral Asia region. They represent more than
20 percent of GDP in Kyrgyz Republic,
Moldova and Tajikistan. Remittances flows
increased by 12.6 percent in 2011 despite the ongoing economic problems in Western European
countries, which contribute 40 percent of theremittances flows to the region (table ECA.3).
Much of the increase came from the otherdeveloping countries, notably Russia. Russia andother developing countries account more than 30
percent of the remittances in the region. Oilprices have been an important determinant for
the remittance flows in the region as buoyant oil

Source: Bank for International Settlement and WorldBank.
Note: Local lending portion of foreign claims is unadjusted
for foreign exchange rate changes.

Going forward, net private capital flows are
expected to fall in 2012, reflecting weaker FDI
flows as the investment decisions that were
postponed in the second half of 2011 will reduce
flows in the first half of the year, and banklending that has continued to decline since thesecond half of 2011. Under the assumption thatthe ongoing turbulence in Europe will be
resolved to market’s satisfaction by the end of2012 and early 2013, net private capital flows toTable ECA.2 Net capital flows to Europe and Central Asia
$ billions
2008

2009

2010

2011e

2012f

2013f

2014f

Capital Inflows

313.0

104.0

172.8

171.6

111.4

170.1

201.6

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

301.0
146.9
162.2
-15.3
154.1
16.4
145.1
-6.9
-0.6
12.0
0.7
7.0
4.3

68.4
92.3
85.9
6.4
-23.9
-1.8
16.8
-38.5
-0.4
35.7
3.0
20.5
12.2

150.2
85.4
86.3
-0.8
64.7
27.1
-7.7
45.5
-0.2
22.6
3.5
9.4
9.8

158.6
95.6
104.7
-9.1
63.0
23.1
24.0
15.8
0.1
13.0
1.7
4.2
7.1

99.2
70.8
80.8
-10.0
28.4
24.0
-7.2
13.0
-1.4
12.2

157.2
96.4
94.4
2.0
60.8
29.2
7.0
24.0
0.6
12.9

188.0
119.6
113.6
6.0
68.4
25.6
14.0
28.0
0.8
13.6

Note :e = estimate, f = forecast

Source: World Bank.

94

Global Economic Prospects June 2012

Europe and Central Asia Annex

revenues and increased spending on
infrastructure development tend to create
opportunities for immigrants in Russia and otheroil producing countries.

improved labor market conditions in many othersuch as Armenia, Albania and Bulgaria andSerbia. Despite the improvement in large
economies, the region’s unemployment rate
remains higher than developing country averageand might not get better in the medium-term as
economic growth is expected to slow further in2012.

Remittance flows to the region are expected to
grow at a slower pace of 8.8 percent in 2012 andto reach $45 billion, before accelerating to 10.1
percent ($49 billion) by 2013 (see Migration andDevelopment Brief 18).

Outlook

Unemployment rates have also declined but
remain quite highGrowth is expected to slow in 2012 as the region
faces several headwinds…

Unemployment surged following 2008 crisis in
the region reflecting the sharp contractions in the
Eastern Europe and Central Asian economies(figure ECA.6). While the increased output sincethen has helped to reduce the unemployment rate
in countries such as Turkey, Latvia, Lithuania
and Russia, it was not accompanied with

Despite the improved industrial production andtrade, GDP growth in Europe and Central Asia is
projected to slow to 3.3 percent in 2012 from 5.6
percent in 2011 (table ECA.4). There are several
factors contributing to the slowdown: Despite the high(er) annual growth rates in

2011, economic growth declined in thesecond half of 2011 in most of these
economies (figure ECA.7). The weakness inactivity particularly in the last quarter of theyear has reduced the carry-over growth in2012 (see footnote 5 in the main text for an
explanation). While carry-over from 2011 isgenerally low in many economies in theregion, it is the weakest for Bulgaria andSerbia.

Figure ECA.6 Unemployment declined but still quite
high in many economies in the region
percent seasonally adjusted

Lithuania
LatviaRomania
RussiaTurkeyAll Developing

18
16
14
12
10

 The strong contribution to growth made by a8

rebounding agricultural sector in 2011
following the 2010 drought will be absent in2012. The extreme weather conditions in thefirst quarter of 2012 may imply a weaker
crop, especially in countries Ukraine,
Romania, and Albania where harvests may
disappoint.

6

4
2
0
2007M01

2008M01

2009M01

2010M01

2011M01

2012M01

Source: World Bank.

Table ECA.3 Workers’ remittances, compensation of employees, and migrant transfers, credit (US$ billion)
2008

2009

2010

2011e

2012f

2013f

2014f

All developing countries

324

308

332

372

399

430

467

Europe and Central Asia

45

36

37

41

45

49

55

$ billions

Growth rate (%)
All developing countries

16.4%

-5.2%

6.0%

8.0%

7.3%

7.9%

8.4%

Europe and Central Asia

16.3%

-19.8%

-0.1%

12.6%

8.8%

10.1%

11.4%

Source: World Bank Migration and Development Brief #18.

95

Global Economic Prospects June 2012

Europe and Central Asia Annex

 While high oil-prices forecasted for 2012 Apart from Turkey (discussed above), othershould help the economic activity in oilexporting countries, growth in Russia andKazakhstan is expected to slow slightly as
they have been closing their output gaps andmight be facing with capacity constraints. In
Russia, output has already returned to its precrisis levels in 2011. In Kazakhstan, theoutput gap remained small and industrial
production already surpassed its long-term
trend in 2011. In addition, both economies
benefited from bumper harvest in 2011,
which is expected not to be a major
contributor to growth in 2012.

economies in the region with strong economic
and banking linkages with high-income
Europe, will continue to be held back by
weak growth in Europe (dragged by on-goingfiscal consolidation in these countries) in2012 and deleveraging by European banks,
which is expected to limited credit growth(and therefore domestic demand). In addition,
FDI is expected to moderate in 2012, whichmight limit investment growth in countries
where FDI accounts for an important share ofgross fixed investment such as Montenegro,
Albania, and Kosovo.

 After two years of unsustainably strong…with modest recovery in the medium term

growth, GDP growth in Turkey is also
projected to slow to 2.9 percent in 2012 from
8.5 percent in 2011—assuming that global
conditions do not deteriorate further. Much of
the forecast slowing in the annual growth
relates to a weak carry-over, as quarterly
growth during the year is forecast to behigher. However, growth can be lower as thecountry is highly dependent on global
financial conditions and with various
macroeconomic indicators (high inflation,
large and growing current account) pointing
towards growing imbalances, the country isvulnerable to adverse developments ininvestor sentiment.

GDP growth in the region is projected torebound to 4.1 percent in 2013 and rise further to
4.4 in 2014, under the assumption that European
debt crisis will be resolved by the end of 2012and global economic conditions will improve.
Medium-term prospects for the region will
critically depend on progress in addressing
external (large current account deficits) anddomestic (large fiscal deficit, unemployment,
inflation) imbalances; lack of competitiveness;and structural constraints in their economies. For
example, for the commodity exporters, the key
challenge continues to be high dependence of
extractive industries—most of them are facing
capacity constraints and diversifying theireconomies from the extractive sector andreducing their dependence on commodity-related
earnings (and international commodity prices).
Diversification has been challenging, largely due
to the lack of competitiveness in the non-oil
sectors, high cost of doing business and weak
investment climate. Russia’s accession to theWorld Trade Organization which is expected tobe finalized this summer might be an importantmilestone for Russia’s medium-term prospects.

Figure ECA.7 Growth has been slowing down….
GDP Growth y-o-y, percent
122011 Q1

102011 Q2
2011 Q3

8

2011 Q4

6

4

The economies that have yet to fully recoverfrom the 2008/09 crisis face significant structural
policy challenges in terms of balancing the needto reach/maintain fiscal prudence and addressing
reforms of labor markets, healthcare andeducation. Several upcoming elections in 2012
and 2013 may delay the progress in necessary

20RussiaLatviaRomania Ukraine Lithuania Bulgaria

Flat/Small increase in 2011 Q3/Q4

SerbiaTurkeySharp Decline in 2011 Q3/Q4

Source: World Bank.

96

Global Economic Prospects June 2012

Europe and Central Asia Annex

fiscal adjustments. In fact, IMF lending has beensuspended in the lead-up to elections in Serbia(May) and Ukraine (October) on the
disagreement about fiscal measures.
Postponements have generated uncertainty
regarding medium-term growth for thesecountries due to their high external financing
needs and limited access to international
financial markets.

Risks and vulnerabilities
Tensions in the Euro Area are coming to the fore
again forcefully after a relatively calm during thefirst quarter. Market sentiment had taken a turnfor the worse during the first week of May,driven by election outcomes, renewed concerns
about the health of the European banking sector
and discussions about Greece leaving the Euro
Area. As a result, the revival in the global
economy that was observed in the first fourmonths of the year and more favorable prospects
remain fragile, and risks of contagion todeveloping countries in the region, especiallythose with strong economic linkages, remain
real. These links (through trade, remittances,commodity prices, international finance) and thevulnerabilities of developing countries werediscussed in detail in the January 2012 edition of
Global Economic Prospects. Based on
simulations highlighted in the main text, the realside impact of serious deterioration in highincome Europe could reduce growth in Europe
and Central Asia by 2.9 percent in 2012, 5.2
percent in 2013 and 3.9 percent in 2014 (seemain text box 5 for details).

Current account balance is forecasted todeteriorate while fiscal balance improves in theregionThe region’s current account balance is projected
to shift to one percent of GDP deficit in 2014,
from a surplus of 0.8 percent of GDP in 2011.
High growth rates driven by strong domestic
demand amid weakening external demand have
led to large current account deficits in many
commodity importing countries in the region.
The increase in commodity prices and moderate
recovery in exports combined with slowing
domestic demand during the first quarter of
2012, is forecast to result in a rather slow
narrowing of current account deficits. In factcurrent account deficits among oil importers are
estimated to have reached over 7.8 percent of
GDP in 2011 and is forecast to only gradually
improve to 6.3 in 2013 and 5.8 percent in 2014.
Moreover, despite high commodity prices thecurrent account surplus of commodity-rich
exporters is expected to fall from 6.3 percent of
GDP in 2011 to 1.9 percent in 2014, as
additional revenues are projected to leak into
spending and imports relatively quickly.

Even if policymakers will eventually act to avoid
the materialization of the worst downside risks, avolatile international environment characterized
by slow growth in major markets, weak andvolatile international capital conditions and highcommodity prices can exacerbate some of theregion’s vulnerabilities.
There
are
significant
exposures
andvulnerabilities for the region’s banking system.
As discussed in the January edition, the banking
system is particularly susceptible to deleveraging
by high-income European banks with its
unusually strong linkages both in terms ofownership and day-to-day financing. So far, afair bit of European banking-sector deleveraging
has already been undertaken, in a more or lessorderly fashion. Nevertheless the recent
developments in Greece have put enormouspressure on an already stressed Euro-areabanking system. Deleveraging by Greek-ownedbanks is likely to accelerate, with possible spillover effects to other Euro-area banks.

Nonetheless, high commodity prices should
boost government revenues in resource-richcountries, turning government deficits of 2.3
percent of GDP in 2011 to a slight surplus of 1.3
percent by 2014. At the same time, slowly
improving activity levels and ongoing fiscal
consolidation measures are projected to reduce
government deficits in oil importing countries
from 2.5 percent of GDP in 2011 to about 1.8
percent of GDP in 2014.

97

Global Economic Prospects June 2012

Europe and Central Asia Annex

Greek banks have a large presence in Albania,
Bulgaria, Macedonia, Romania and Serbia andaccount for large shares of domestic bank assets
in these economies—the highest in Bulgaria with
23.7 percent. Despite shedding $8.5 billion of
their claims between June and December 2011,
Greek-owned banks still had $69 billion inforeign claims (direct cross-border lending, andforeign and domestic currency lending throughits subsidiaries) in the region by the end of 2011
(figure ECA.8). In countries such as Bulgariaand Serbia, subsidiaries of some of these banks
have relied upon cross-border lending from theirparents to support their loan portfolios, with loan
–to–deposit ratios well over 100 percent.
Nevertheless, most of the Greek-bank presencein the region is through subsidiaries (as opposed
to branches) allowing host country authorities tomonitor and address the developments, although
their effectiveness will depend on various factors
including the health of the domestic and otherforeign banks operating in their country.
Possible acceleration of deleveraging by other
Euro-area banks will have a more widespread
effect with $0.35 trillion foreign claims—
including all cross-border and local lending by
subsidiaries—in the region (figure ECA.8).

the wake of the 2008/9 crisis seeks to reduce thelikelihood of a disruptive transmission of such acrisis to the financial systems of developing
Europe and Central Asia by bolstering crossborder supervisory and fiscal cooperation
between home-host authorities. However, thesecond Vienna Initiative might be less effective
compared to the initial one as the health ofparent banks’ balance sheet is now weaker andmany of the sovereigns of the banks have limited
ability to recapitalize them. In fact, several
subsidiaries and branches in the region weredowngraded or have been put under watch by
one of three major rating agencies because of
their weakened parent institutions in recent
months.

In case of a more accelerated deleveraging,policy coordination will be crucial to restore
confidence. In this context, the second Vienna
Initiative of March 2012, like the earlier one in
Figure ECA.8 Foreign Claims as percentage of GDP(December 2011)

Several economies in the region have highexternal financing needs (current account deficits
and amortization of external debt) in 2012,
which places them in vulnerable positions to asudden reversal of global conditions. Some ofthese vulnerabilities have decreased, as all
countries in the region—with the exception of
Macedonia, FYR, Moldova and Armenia—have
reduced short-term debt throughout 2011
lowering their external financing needs for2012.1

UkraineTurkeyGreeceEuro Area (excluding Greece)

Montenegro
Macedonia
Albania
Romania
Bosnia andHerzegovina
Bulgaria
Serbia
0

20

40

60

Funding pressures from deleveraging has been
adding to vulnerabilities of the domestic banking
system in many countries. Overall, the conditionof the region’s banking system has deteriorated
sharply following the 2008/09 crisis as nonperforming loans (NPLs) jumped to 11 percent
in 2011 from 3.8 percent in 2007. Many
countries in the region could see a further
marked deterioration in loan performance in theface of slowing growth. While many banks in
the region seem well-capitalized, rating agencies
have already downgraded or put several regionalbanks under watch because of increasing signs
of weakness in the bank's asset quality, or in
response to the downgrade of the sovereign.
These downgrades will in return increase thecost of international funding and might generate
constraints to investment in the medium-term.

80

Source: Bank for International Settlements; World Bank.

98

Commodity prices—in particular oil prices—
exhibited a significant level of volatility over theGlobal Economic Prospects June 2012

Europe and Central Asia Annex

Table ECA.4 Europe and Central Asia country forecasts(annual percent change unless indicated otherwise)
98-07aEst.

Forecast

2009

2010

2011

2012

2013

2014

Albania
b

6.8
-6.3

3.3
-15.3

3.5
-11.9

3.0
-12.2

1.6
-10.8

2.5
-10.1

3.0
-9.7

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

10.4
-8.6

-14.1
-15.8

2.1
-14.7

4.6
-12.2

4.1
-11.6

4.2
-9.6

4.5
-8.2

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

15.3
-7.2

9.3
23.7

5.0
28.3

0.1
27.8

3.1
24.9

3.5
21.6

4.5
18.0

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

7.4
-3.9

0.2
-13.0

7.7
-15.5

5.3
-10.8

2.9
-6.2

3.5
-6.4

4.4
-6.1

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

5.3
-8.7

-5.5
-8.9

0.2
-1.1

1.7
0.9

0.6
0.1

2.5
-1.2

3.3
-1.8

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

6.6
-10.5

-3.8
-10.6

6.4
-10.3

7.0
-11.7

6.0
-9.4

5.5
-8.9

5.2
-8.4

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

8.1
-2.7

1.2
-3.8

7.3
2.9

7.5
7.1

6.0
5.3

5.8
4.4

7.5
3.3

2.9
-25.7

3.9
-25.6

5.0
-26.2

4.0
-23.7

4.1
-22.1

4.4
-19.5

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

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

4.2
-8.4

2.9
0.7

-0.5
-6.9

5.7
-3.1

4.7
-5.1

5.4
-4.5

5.5
-3.6

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

7.9
-11.6

-18.0
6.3

-0.3
3.0

5.5
-1.2

2.3
-1.9

2.9
-3.1

3.5
-4.7

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

6.6
-8.5

-14.7
4.5

1.4
1.8

5.9
-1.7

2.3
-3.2

3.5
-3.7

4.2
-3.7

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

3.1
-5.2

-0.9
-6.5

2.9
-2.1

3.0
-2.8

2.2
-5.4

2.9
-6.0

3.1
-5.1

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

3.4
-8.4

-6.0
-9.8

7.1
-10.2

6.4
-12.6

3.0
-12.9

3.8
-11.5

3.7
-8.5

-5.7
-29.6

2.5
-24.6

2.5
-19.4

0.5
-16.9

1.5
-15.7

3.0
-13.7

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

3.8
-7.0

-6.6
-4.2

-1.6
-4.4

2.5
-4.4

1.2
-4.6

2.8
-4.5

3.4
-4.8

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

5.8
9.5

-7.8
4.0

4.3
4.7

4.3
5.5

3.8
3.4

4.2
1.7

4.0
1.2

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

3.1
-7.4

-3.5
-7.1

1.0
-7.2

1.6
-9.1

0.5
-8.6

3.0
-7.9

3.5
-6.0

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

7.9
-4.2

3.9
-5.9

6.5
-2.1

7.4
-2.3

5.8
-3.6

5.9
-5.0

6.0
-4.9

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

4.0
-2.4

-4.8
-2.2

9.2
-6.4

8.5
-10.0

2.9
-7.8

4.0
-7.5

5.0
-6.9

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

5.7
3.2

-14.8
-1.6

4.2
-2.1

5.2
-5.5

2.5
-4.7

3.8
-4.2

4.0
-3.9

GDP at market prices (2005 US$) b
5.6
8.1
8.5
8.3
8.0
6.5
6.7
Current account bal/GDP (%)
6.2
2.2
6.2
5.8
4.5
4.4
4.5
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. Bosnia and Herzegovina andTurkmenistan 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.

Source: World Bank.

99

Global Economic Prospects June 2012

Europe and Central Asia Annex

course of last twelve months (see the main text).
While prices increased earlier in the year
reflecting supply-side issues, they later fell
considerably with increased uncertainty related
to global economic prospects. The baseline
scenario assumes that the recent declines in oil
prices do not reverse themselves and that oil
prices gradually move toward a long-term levelof about $80 dollars at today’s prices. There areboth up- and down-side risks to the forecast.

than anticipated delivery of new supply could
result in lower than expected commodity prices.
According to the simulations, lower oil and nonoil prices will have significant affects on
economic prospects of the resource-richeconomies in the region (see Main text Table 5).
On-going economic problems among highincome countries might also constrain
remittances flows, which several small
economies in the region are highly dependent on.
The medium-term growth in remittances might
be hindered if high unemployment rates persist
in high-income Europe (which accounts for 40
percent of remittance inflows) as it will not only
limit the job opportunities for migrants, but
might also generate political pressures to reduce
immigration.

If international tensions (or internal tensions
within an important oil exporter) intensify and aserious disruption to global supply ensues, prices
could rise much higher. Higher oil prices might
accentuate some of the vulnerabilities in oilimporting economies in the region. According tosimulations highlighted in the main text (see themain text Box 6), headwinds associated withpersistent higher oil prices are estimated toreduce baseline growth by 1.0 percent in 2012,
1.3 percent in 2013 and 0.4 percent in 2014 forthe region’s oil importers, while they increase
baseline growth by 0.6 percent, 1.0 percent and0.5 percent for the region’s oil-exporters,
respectively.

Notes:
1

In addition to the adverse regional growth
impacts, higher oil prices will likely cause
further deterioration of external and domestic
imbalances in some countries. For example, as
discussed earlier, Turkey’s economy is alreadyshowing signs of growing imbalances with its
high inflation and large and growing current
account deficit. Given that energy imports
account for almost half of its current accountdeficit, high oil prices will add to thesevulnerabilities and may increase the probabilityof a hard-lending. According to the Central Bankof Turkey, a permanent $10/barrel increase in
the price for Brent crude would add 0.4 percent
to headline inflation and 0.7 percent of GDP tothe current account deficit over a 12-month
period while cutting real GDP growth by 0.5
percentage points.
The recent decline in commodity prices attests tothe possibility that commodity prices could
indeed come down sharply in the projection
period. Weaker global demand and a more rapid

100

Much of the increase in short-term debt in
Macedonia, FYR was the result of new
measures initiated by the central bank andincrease in trade-related credit.

Global Economic Prospects June 2012

Latin America & the Caribbean Annex

Latin America & the Caribbean Region
respectively. Growth in Brazil is projected at 2.9
percent in 2012, accelerating to 4.2 percent in2013, and 3.9 percent in 2014, supported bymore expansionary policies and increased
investment ahead of the World Cup. Argentina is
expected to record one of the sharpest
slowdowns in the region, with GDP projected at
2.2 percent in 2012 ( 8.9 percent in 2011), and togrow below 4 percent on average in the 20132014 period. Growth in the Caribbean is
expected to consolidate at 4 percent by 2014,
due, in part, to improvements in labor markets in
the United States. The expected gradual recovery
in the United States bodes well for Mexico,
Costa Rica, El Salvador, and Haiti; countries thathave strong industrial links to the world’s largest
economy. It will also support remittances andtourism to Central America and the Caribbean.

Overview
Having made a strong recovery from the global
financial crisis of 2009, economic activity in
Latin America and the Caribbean is once
again facing external and domestic headwinds.
Overall growth in the region eased to 4.3 percent
in 2011, from a remarkable 6.1 percent postcrisis rebound in 2010. Growth in Brazil, theregion’s largest economy, slowed markedly to
2.7 percent in 2011, from 7.5 percent in 2010, on
sharply slower investment growth and slowing
private consumption growth. Growth in the
Caribbean was supported by a continued, albeit
subdued, recovery in tourism, and a notable
increase in activity in the mining and extractive
sectors. Growth in the Central American region,
which excludes Mexico, accelerated marginally,in part due to a marked acceleration in growth inPanama, due to the expansion of the Panama
Canal, the construction of Metro system, andstrong private consumption.

Risks and vulnerabilities: Risks to growth in
the region have shifted to the downside. Largefiscal deficits and public debts in high-income
countries and very loose monetary policies
suggests that capital flows will remain volatile in
the next years, making the fine-tuning ofmacroeconomic policies challenging.

Increased concerns about the worsening of thesituation in the Euro area during May has caused
market sentiment to deteriorate globally.
Increased financial tensions have driven up theprice of risk, caused most currencies todepreciate against the U.S. dollar, and caused
commodity prices and stock market indexes todecline markedly. This is in contrast to
developments in early 2012, when improved
sentiment in high-income Europe and theassociated improvements in market expectations
had prompted a robust rebound in capital flows,
equity markets and regional currencies.

Euro Area. A sharp deterioration of conditionsin the Euro area is one of the main risk to theLatin American and Caribbean economies. In
such a scenario global demand could drop
significantly, andcommodity prices,
remittances, tourism, finance, and consumer andbusiness sentiment would be negatively affected,
potentially causing regional output to decline
relative to baseline by close to 4 percent.
Countries that have fewer macroeconomic
buffers could be particularly vulnerable in theface of a significant weakening in global
demand.

Outlook: The short-term outlook for Latin
America and the Caribbean is clouded by afragile and uncertain external environment, stillhigh oil prices and capacity constraints in selecteconomies. Due to resurgence in tensions in thehigh-income world the region is once again
facing headwinds from marked declines incommodity prices and weaker capital flows.
Consequently growth is expected to decelerate to
3.5 percent in 2012, before firming marginally to
4.1 percent and 4 percent in 2013 and 2014,

Looking East. As the region, notably SouthAmerica, is becoming increasingly reliant onexports to East Asia, particularly China, a hardlanding there could have important implications
for export growth in the region.

101

Global Economic Prospects June 2012

Latin America & the Caribbean Annex
whether in terms of production capacity or labor
force (figure LAC.2), which has been reflectedin rising inflation or a slowdown in the pace of
expansion.

Recent economic developments
LAC economies have recovered from the 2009
slump…

…with annual growth decelerating in 2011 afterrobust performance the previous year

Economic activity in most Latin American and
Caribbean economies has recovered from theglobal economic crisis, with output gaps positive
or close to zero (greater than -0.5 percent ofpotential GDP) in two thirds of the economies in
the region. Regional industrial output1 in the firstquarter of 2012 was in line with its long term
trend level (figure LAC.1), with output in
Colombia, Mexico, Peru, and Uruguay having
recovered long-term trend levels, while
industrial production in Argentina, Brazil, Chile,and Ecuador remains below long-term trendlevels. Unemployment has fallen well below precrisis levels, in part a continuation of thedownward trend established in the pre-crisis
period. Several economies in the region havestarted to run against capacity constraints

Overall growth in the region eased to 4.3 percent
in 2011 from a remarkable 6.1 percent post-crisis
rebound in 2010 (table LAC.1). Growth
decelerated the most in the fastest growing
economies that had started to push against
production capacity constraints and where fiscal,monetary and prudential tightening was mostaggressive. Growth in South America eased 2
percentage points to 4.6 percent, while growth inCentral America (excluding Mexico) and the
Caribbean (outside of Dominican Republic),
which lagged behind the global cycle,
accelerated marginally in 2011. Neverthelessgrowth in many countries in this part of theTable LAC.1 Latin America & the Caribbean summary forecast(annual percent change unless indicated otherwise)
98-07a

2009

2010

2011

Est. Forecast
2012 2013 2014

3.1
1.7
3.1
3.9
2.6
3.9
6.0
6.4
-0.1
-0.9
6.2
-2.9

-1.9
-3.0
-1.6
-0.8
4.0
-10.2
-9.7
-14.8
1.6
-0.6
3.0
-3.9

6.1
4.9
6.1
6.0
4.1
12.8
11.4
22.3
-2.7
-1.3
5.2
-3.0

4.3
3.0
4.5
5.1
2.9
8.6
6.2
9.7
-1.2
-1.4
5.3
-2.6

3.5
2.2
3.4
3.6
3.1
6.6
5.6
7.6
-0.8
-1.9
6.6
-2.8

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 (%)

4.1
2.8
4.1
4.0
3.2
8.3
6.4
8.1
-0.8
-2.1
6.1
-2.5

4.0
2.7
4.0
3.8
3.4
8.0
6.6
8.0
-0.8
-2.4
5.9
-2.4

Memo items: GDP
LAC excluding Argentina
3.2
-2.1
5.8
3.9
3.6
4.1
4.0
Central America e
3.4
-5.3
5.4
4.0
3.6
4.0
3.9
Caribbean f
4.7
0.4
3.5
2.7
3.5
3.8
4.0
Brazil
2.8
-0.3
7.5
2.7
2.9
4.2
3.9
Mexico
3.3
-6.0
5.5
3.9
3.5
4.0
3.9
Argentina
2.6
0.9
9.2
8.9
2.2
3.7
4.1
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: Antigua and Barbuda, Belize, Dominica, Dominican Republic, Haiti, Jamaica, St. Lucia, St. Vincent and
the Grenadines, and Suriname.

Source: World Bank

102

Global Economic Prospects June 2012

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Figure LAC.2 Unemployment at decades low in Latin
AmericaFigure LAC.1 Industrial output above its trend level
Percent deviation from trend

unemployment rate (%, sa)
12

30
11

20
10

10

9

0

8

-10
-20
-30
-40

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

7

Developing countries, excl. China
Latin America and the Caribbean

6
Nov-01 Mar-03

Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12

Jul-04

Nov-05 Mar-07

Jul-08Nov-09 Mar-11

Sources: Thomson Datastream, World Bank.

Sources: World Bank, Thomson Datastream.

weakness of governing institutions has made thereconstruction more difficult, while agricultural
output was affected by poor harvest conditions,further limiting growth.

region remained relatively subdued. Panama wasa notable exception, with growth accelerating
markedly in 2011 to 10.6 percent, boosted bypublic works related to the expansion of the
Panama Canal and the construction of the Metro,and by strong private consumption. Robust
private consumption also supported growth in
Guatemala, alongside stronger external demand.

The deceleration in growth in South America
was largely on account of the sharp decelerationin Brazil, the largest economy in the region andthe spillover of weaker demand to its main
trading partners in the region. Brazil’s growthslowed markedly to 2.7 percent in 2011, downfrom 7.5 percent in 2010, when the economy
began to show signs of overheating (rising
inflation, falling unemployment, rising current
account deficit, and declining competitiveness inpart due to rising wage costs). The slowdown in2011 has helped relieve these pressures, bringing
output back into line with potential output(Brazil's 2011 output gap is estimated at 0.8
percent of GDP). This was partly the result ofpolicy tightening in the first half of 2011, andsofter external demand in the second half of theyear. Performance in the manufacturing sector
was particularly weak, held down also by theappreciation of the real in the context of strong
capital inflows. The marked slowdown in Brazil
has had negative consequences for its main
trading partner in the region. Growth has also
decelerated markedly to 4 percent in Paraguay,
down from a remarkable 15 percent growth in2010, as agricultural output was negatively
affected by drought following a bumper harvest
in 2010, and as the foot and mouth disease took

The Caribbean region has finally recovered froma two-year recession, but efforts to consolidate
fiscal accounts in combination with negative
terms of trade (notably higher oil prices), have
kept growth in check. The economy of the
Dominican Republic expanded at a robust 4.5
percent pace in 2011, following a 7.8 expansion
in 2010, supported by rapid growth in mineral
output and a strong acceleration in free-zone
manufacturing output. Elsewhere in the
Caribbean, growth was supported by continued
albeit subdued recovery of tourism, as highunemployment in high-income countries has
held back tourist arrivals (up 3.6 percent in 2011
and now 3.4 percent higher than pre-crisis
levels) and tourist spending. In addition, there
was a notable increase in activities in the mining/
extractive sector. Haiti’s economy expanded at a
5.6 pace in 2011, after the output collapsed in2010 following the devastating earthquake thatstruck in January 2010. The recovery was
weaker than anticipated due to the slow pace ofreconstruction and political instability. The

103

Global Economic Prospects June 2012

Latin America & the Caribbean Annex

a toll on the cattle sector. The contraction in theconstruction sector, induced by the slowdown inprivate sector credit and capacity constraints has
also contributed to the deceleration in growth.
Similarly growth in Uruguay eased from robust
8.9 percent rebound in 2010, to a still strong 5.7
percent growth in 2011, partly due to the marked
deceleration in growth in its main trading partner
Brazil.

Market nervousness affected the Latin American
and Caribbean region both directly andindirectly. Credit Default Swap rates forvirtually every country in the region rose
sharply. By the end of 2011, CDS rates had
increased by 90 basis points on average for thefinancially integrated economies (Brazil, Chile,
Colombia, Peru, Mexico) of the region. The
spreads for Argentina and Venezuela increasedmuch more sharply rising close to 300 basis
points and 490 basis points respectively, as
rising global risk aversion was compounded byconcerns regarding domestic conditions. Market
tensions prompted a flight to safe haven assets
and a sharp decline in foreign capital flows to theregion (40 percent year-on-year decline in equity
issuance and a 9.5 percent year-on-year decline
in syndicated bank lending in the fourth quarter),
sharp equity selloffs and currency depreciations.

Most other countries in the region recorded only
mild deceleration in growth or they actually saw
an improvement in their economic performance.
Output in Colombia bucked the slowing trend,with its economy expanding 5.9 percent, almost
2 percentage points faster than in 2010, withgrowth driven by robust domestic demand.
Colombia’s economy was particularly resilientin the second half of 2011 notwithstanding thechallenging external environment, and is starting
to run against capacity constraints prompting thecentral bank to continue raising interest rates
through early 2012. Although Mexico’s
economy decelerated 1.6 percentage points to
3.9 percent, it proved more resilient than othereconomies in the second half of 2011. Althoughprivate consumption growth slowed somewhat, it
continued to be supported by rising employment,
recovery in credit growth, and strong
households’ balance sheets. Growth in both
exports and imports decelerated markedly in
2011, on account of weaker external demand(exports have a large import content). Investment
growth accelerated as Mexico competitivenessand its proximity to the U.S. continues to attract
investment.

The combination of monetary policy tightening
and fiscal consolidation (figure LAC.3) and the
sharp deterioration of global sentiment andcapital flows caused growth in the region to
falter, with regional industrial production fallingfor some 5 months straight. Overall, regional
GDP growth slowed to an estimated 4.3 percent
in 2011, down from 6.1 percent the previous
year.
At the same time, the slowing of growth in thesecond half of 2011 and a stabilization of global
food prices served to ease regional inflationpressures. Seasonally adjusted quarterly inflation
Figure LAC.3 Monetary policy in inflation-targeting
countries
short-term policy interest rates, percent…largely on account of a marked deceleration in
the second half of 201116
14

Industrial production in the Latin America andthe Caribbean region declined for much of 2011,
falling at a 1.7 percent annualized rate in the
fourth quarter. The slowdown was triggered bydomestic policy tightening introduced beginningin late 2010 in several large Latin American
economies, but was exacerbated by the rise inglobal uncertainty mid-year as concerns aboutEuro Area fiscal sustainability heated up once
again.

12
10

Colombia

Brazil86

Mexico40

May-08

Chile

Peru

2
Jan-09Sep-09

May-10Jan-11

Sep-11

Sources: National agencies through Datastream.

104

May-12

Global Economic Prospects June 2012

Latin America & the Caribbean Annex
Figure LAC.5 Growth and growth carry over in Latin
America & the Caribbean

Figure LAC.4 Weak bank flows and equity
placements$ billion, 3-mon. m.a.

14

Bond Issuance
Equity Issuance
Syndicated Bank Loans

12

BrazilArgentina

8
6

Peru

4

Chile

2

Colombia

0

2011

Mexico10Jan-092012 carry overJul-09Jan-10Jul-10Jan-11

Jul-11

Costa Rica

Jan-120

Sources: Dealogic and World Bank staff calculations.

1

2

3

4

5

6

7

8

9

10

Source: World Bank staff calculations.

rates in the first quarter of 2012 were lower thanin the first quarter of 2011 in two out of three ofthe regional economies that report data. The
disinflation was particularly pronounced in
Chile, Dominican Republic, Guatemala, Haiti,
Mexico, Uruguay, and R. B. de Venezuela.
However, annual inflation rates remain in the
double-digit range in R. B. de Venezuela.
Inflation has decelerated also in Brazil, to 5.2
percent year-on-year by March, or 4 percent
quarter-on-quarter, seasonally adjusted
annualized basis in the first quarter of 2012.
Inflation remains elevated in Argentina.

points, in part due to high oil prices. On
aggregate, remittances to Caribbean countries,
which amount on average to about 6.4 percent ofGDP, expanded at a slower pace of 3.7 percent
in 2011. In Jamaica, where remittances
accounted for 14 percent of GDP, remittanceswere growing at a 3.8 percent pace in the year to
April, down from 8 percent pace of the previous
year. Remittances to most Central America andCaribbean countries are now above their precrisis levels, with the notable exceptions of
Mexico, El Salvador and Jamaica. The decline inmigration from Mexico to the United States overthe period 2005-2010 and an increase of
migration back to Mexico by Mexican nationals
in the wake of the crisis has brought net
migration to the United States from Mexico
down to zero or even negative. Remittances havemirrored this patterned reaching an all-time highof $26.9 billion in 2007, and have since decline
to $23.6 billion, in part due to increased
unemployment among migrants in the U.S. in
the wake of the crisis.

Current account balances continued todeteriorate in South America despite very
favorable terms of trade, in part due to very
robust domestic demand in some cases boosted
by very expansionary policies which have fueled
import growth.
More buoyant domestic demand in Central
America led to a 0.9 percentage point
deterioration in current account balances to 6.7
percent of GDP, as stronger import growth offset
the relatively strong growth in export revenues
and remittances. Remittances grew on averageby 7.6 percent in 2011, up from 4.4 percent
growth in 2010.

Public debt as a share of GDP has increased
moderately in the wake of the 2008/2009 crisis
as governments in the region used countercyclical fiscal policies to support domestic
demand while at the same time economic growth
decelerated. Nevertheless vulnerabilities toexternal shocks have been reduced. Improved
macroeconomic performance and stability, andSimilarly in the Caribbean countries that rely on
tourism services, current account deficits havealso deteriorated, by nearly 0.5 percentage

105Global Economic Prospects June 2012

Latin America & the Caribbean Annex

more prudent fiscal policies have helped reduce
the public debt burden, whose levels are now
well below the levels of the 1990s (figure
LAC.6). In addition, a restructuring of debt
toward local currency and longer-maturity
instruments have reduced the scope for balance
sheet effects, which along with higher reserves
have reduced vulnerabilities further. In contrast,in the Caribbean debt burdens have increased
significantly immediately following the crisisand continued to rise in subsequent years, withdebt servicing taking a heavy toll on growth(IMF 2011).

issuance, which surged, to $41 billion up 43
percent year-on-year to reach historic highs in
the first quarter of 2012 (figure LAC.4).
Meanwhile syndicated bank lending was up
close to 30 percent. In contrast equity issuanceremains very weak. The strong inflows reflectedvery robust bond issuance by mainly stateowned resource firms in Latin America on the
one hand and very weak bank-lending on theother hand. The biggest corporate bond issuers
were oil & gas, including a record (fordeveloping-country firms) $7 billion bondoffering by Brazilian oil company Petrobras inFebruary.

Figure LAC.6 Public debt in Latin America & the
Caribbean as share of GDP

90
80

There was also evidence of a weak recovery in
trade finance flows to the region. These had
been fallen by 47.4 percent in the fourth quarter
despite a 1.4 percent increase in trade. Tradefinance is up $4.2 billion in absolute terms in thefirst quarter of 2012 with its share in regionalmerchandise exports rising 4.7 percentage
points, to 11.5 percent of merchandise exports,
with at least some of the rebound reflecting entryof regional banks into the trade finance arena(see the Finance Annex).

The Caribbean
Central America
Latin America and the Caribbean

70
60
50
40
30
20
10
0
2007

2008

2009

2010

2011

Most recently however there are indications of adeterioration in financial conditions fordeveloping countries. The stock market indexes
in the region declined during May and early
June, with the MSCI LAC index down 17
percent in U.S. dollar terms since early May.
The marked weakening in many of thecurrencies in the region against the U.S. dollar is
likely due in part to capital outflows andincreased risk aversion. The Mexican peso lost 9
percent of its value against the U.S. dollar while
the Brazilian real and the Chilean peso
depreciated more than 7 percent. Credit Default
Swap spreads rose by nearly 50 basis points for
LAC countries.

Source: WDI, World Bank

Sources: World Bank.

Capital flows returned to the region inearly 2012
Financial market tensions eased in the first 4
months of 2012 after heightened uncertainties inthe second half of 2011. In part as response to
major policy initiatives in Europe sentiment
lifted and market expectations improved, andcapital flows, equity markets and regional
currencies rebounded in early 2012.
Latin America benefited the most from thepartial recovery of capital flows to developing
countries in the first quarter of 2012, receiving
almost half of the $117.7 billion gross capital
flows (international bond issuance, cross-border
syndicated bank loans and equity placements)
received by developing countries. Almost all theincrease came in the form of increased bondEconomic outlook
Short-term outlook is clouded by a weak external
environment
Growth for the Latin America and the Caribbean
region is expected to decelerate to 3.5 percent in

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Global Economic Prospects June 2012

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Table LAC.2 Net capital flows to Latin America and Caribbean$ billions
Current account balance

2008
-35.5

2009
-22.2

2010
-60.6

2011e
-77.5

2012f
-109.72013f-144.62014f-184.3

Capital Inflows

181.5

173.2

319.8

278.5

230.7

258.3

298.5

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

174.9
120.4
130.0
-9.7
54.6
9.0
40.4
5.7
-0.5
6.5
2.4
0.0
4.1

155.3
119.9
78.3
41.6
35.4
40.7
-0.3
-4.5
-0.5
17.9
6.6
0.4
10.9

298.4
153.9
112.6
41.3
144.5
48.8
27.4
67.2
1.1
21.4
8.3
1.3
11.8

267.4
161.5
155.0
6.5
105.9
49
14
42.7
0.2
11.1
1.9
2.4
6.8

223.5
124.4
118.8
5.6
99.1
61
11
27.0
0.1
7.2

250.4
145.7
131.3
14.4
104.7
57.6
12
35.0
0.1
7.9

289.9
178.7
158.7
20
111.2
50
15.9
45.0
0.3
8.6

Note :e = estimate, f = forecast

Sources: World Bank.

2012, from 4.3 percent in 2011, due to a weakerglobal external environment, high oil prices,
capacity constraints in selected economies, andweak carry-over effects (box LAC.1, figure
LAC.5, and figure LAC.7) following the
pronounced slowdown experienced by some of
the largest economies in the region during thesecond half of 2011. In contrast growth in the
Caribbean is expected to accelerate slightly to
3.5 percent in 2012, benefitting in part from
improvements in the U.S. labor markets. Allother sub-regions are expected to see
deceleration in growth, with growth in SouthAmerica expected to ease 1.2 percentage points
to 3.4 percent.

The recent improvement in economic sentimentin the U.S. economy and the expected gradual
recovery bodes well for countries like Mexico,
Costa Rica, El Salvador, Haiti that have strong
industrial economic links to the world’s largest
economy, while improvements in the U.S. labormarket will similarly support remittances anddemand for tourism services benefitting
countries in Central America and the Caribbean.
In Mexico growth is projected to decelerate
gradually in the first half of 2012, but reaccelerate again towards the end of the year as
demand from its major trading partner
strengthens and the inventory reduction thatweakened growth in 2011 comes to an end.
Moreover, the 8 percent increase in investment
last year is projected to improve external
competitiveness, while increasing future
production capacity. In addition government
spending in preparation for the presidential
elections scheduled to take place in July willfurther support growth in 2012. Growth willcontinue to accelerate marginally over the 20132014 to close to 4 percent from 3.5 percent in
2012, as the manufacturing sector will benefit
from stronger external demand as well asCountries that are more financially integrated
with the global economy are projected to benefit
from improved conditions on capital markets (ascompared with 2011H2), but in selected
countries stronger speculative capital flows may
complicate macroeconomic policy. In particular,
unless currencies are allowed to appreciate large
capital inflows could fuel credit growth
domestically and lead to build up in inflationarypressures in countries operating close topotential.

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Global Economic Prospects June 2012

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Figure LAC.7 Growth deceleration in 2012 and output
gaps
6

Closing positive output gap
Argentina

Paraguay

expected to rise 2.5 percent this year (before
declining in 2013-2014 by 2 percent on average),mostly reflecting price increases observed inearly 2012. Prices during the second half areprojected to decline gradually as supply
disruptions dissipate. Metal prices are expected
to decline 11.2 percent in 2012, as demand
growth is moderating in China and its metals
intensity declines, before recovering 3.4 percent
in 2013. Additional increases in new mine
capacity are also expected to contribute todampening prices. Agricultural prices are
expected to decline 7.8 percent in 2012 on
improved supply, and an additional 4.4 percent
in 2013 (See the Commodity Annex).

Risks of inflationary pressures

4

PanamaOutput gap relative to potential in 2011

UrguayEcuador-8-62
Dominican Rep.
Bolivia
BrazilColombiaCosta Rica
Chile
Guatemala0
Nicaragua 0Guyana
Dominica 2
SurinameVenezuela
Belize-2 Honduras
El Salvador St. Lucia
Jamaica
Mexico

Peru

-4

-2

4

-4

-6

Haiti
St. vincent and Grenadines-8Persisting negative output gaps

Closing negative output gaps
-10
Antigua and Barbuda-12

Change in growth rate between 2011 and 2012
(percentage points)

Brazil's economy will continue to grow below
potential in 2012 (2.9 percent), despite more
supportive government policies, in part due to a
weak external environment. Starting in August
2011 in response to perceived disinflationary
effects of the worsening global economic
outlook, the authorities have reversed theirmonetary policy stance, which had beentightening since April 2010. A 14.2 percent
increase in the minimum wage, additional fiscal
stimulus, and a 400 basis point decline inmonetary policy interest rates are among themeasures already announced or planned.
Reflecting these efforts, gross domestic
expenditure is projected to accelerate to close to
4 percent in 2012. Reflecting somewhat stronger
domestic demand, increased labor costs andsectoral bottlenecks, net exports are expected tosubtract from growth, and the current accountbalance as a share of GDP is expected todeteriorate by 1 percentage points (despite therecent imposition of "voluntary" trade restriction
on Mexican autos), while inflation pressures willbuild up further. Growth is projected to

Source: World Bank.

relocation of manufacturing activities andincreased investment in manufacturing as
Mexico's competitiveness rises, including withrespect to that of China, as wages there rise
while transport costs are expected to remain highover the forecasting horizon. Continued soundand skilful macroeconomic policy andfundamentals are likely to be conducive tohigher growth, but much needed structuralreforms on the labor markets, energy, tax andeducation will be slow-coming and will continue
to limit potential growth.
With global demand for commodities expected
to moderate this year, partly reflecting slower
Chinese growth, commodity exporters will see a
decline in export performance. Most commodity
prices are expected to decline this year, due toweaker demand, and in some cases improved
efficiency, lower intensity of use andsubstitution. On annual basis oil prices are

Box LAC.1 Slow growth in 2011, will reduce annual growth in 2012 because of unusually weak carry-over
The weakness seen in many of the larger economies in the second half of 2011 has reduced the carry-over growth in 2012 to
below the ten-year average. Over the last decade, the contribution of the previous year to the following year’s growth rate (thecarry-over – see Box xx in the main text for a fuller discussion of carryover) averaged 1.8 percentage points. In 2012, however,
it is expected to come in at only 1.3 percentage points, the weakest carry-over among developing regions. By comparison for
high-income countries, lower than normal carry-over (0.7 percentage points) can be expected to cut about 0.3 percentage points
from the 2012 growth rate. Among the major Latin American economies Brazil’s carry-over is the weakest, at 0.2 percentage
points, more than 3 percentage points below its ten-year average – 1/2 standard deviation, due to the pronounced slowdown
observed in the second half of 2011 on account of policy tightening at home and weaker external demand. Argentina, Chile,
Colombia, and Mexico have carry-overs slightly above their 10-year averages, while Bolivia, Costa Rica, and Paraguay haverelatively strong carry-overs compared to historical averages.

108

Global Economic Prospects June 2012

Latin America & the Caribbean Annex

accelerate to 4.2 percent in 2013, supported byincreased government spending in connection
with the 2014 presidential elections and stronger
investment growth ahead of the World Cup,
before capacity constraints and building tensions
cause a slowing to 3.9 percent in 2014.

Argentina is expected to record one of the
sharpest decelerations in growth in the region,
with GDP projected to decelerate sharply to 2.2
percent, from a very strong 8.9 percent
expansion in 2011, with the pace of quarterly
growth decelerating sharply by the end of 2012.
The expected deceleration is due to softer
domestic demand and subdued external demandin main trading partners, such as Brazil.
Consumer and business sentiment will continue
to deteriorate. The government’s decision tonationalize the shares of a major oil producer
could negatively affect investor confidence andweaken investment growth. The macro
imbalances are likely to persist with private
consumption deflator growth remaining indouble digits, and the current account balances
deteriorating despite tightening controls (e.g. theelimination of any automatic access to exchange
rate market, the introduction of tariffs on capital
goods imports etc.). The elimination of energy
subsidies will yield fiscal savings of about 1
percent of GDP but revenues will be adversely
affected by the deceleration in economic activity.
Growth is expected to pick up in the 2013-2014
period, but remain below potential.

Colombia’s economic expansion is expected todecelerate to 4.7 percent in 2012 from a robust
5.9 percent in 2011, mainly reflecting capacity
constraints that are increasingly binding. Last
year’s 225 basis points increase in interest rates
should help slow consumer and investment
spending growth – thereby limiting inflationarypressure and current account deterioration.
Growth is projected to decelerate further to 3.9
percent by 2014, reflecting continued policy
tightening and a weaker external environment
and tighter financial conditions at home. Below
trend demand growth in 2013 and 2014 should
allow the supply side of the economy to catch up
with demand by the end of the projection period
setting the stage for stronger growth in the years
to follow.
Quarterly growth in Chile is also projected todecelerate in 2012, after a robust performance inthe first quarter, with the economy showing
signs of pushing against potential (tight labormarkets, rising wages) and as softer external
demand will affect growth in the tradable sector.
Technical difficulties in the mining sector earlier
in 2012 have affected mining output andsubtracted from annual growth. Nevertheless,
GDP growth is expected to ease to a still robust
4.4 percent in 2012, supported partly by strong
real income gains, rising employment, strong
credit growth, as well as by strong carry-overfrom last year. Growth is expected to acceleratemarginally over the 2013-2014 period to near 5
percent.

Growth in R.B de Venezuela is expected
decelerate marginally but should remain above
potential over the 2012-2014 horizon, assuminga relatively stable political environment. The
32.3 percent increase in minimum wage
announced for 2012 will boost private
consumption, but the gain in real incomes will
be eroded by continued high inflation, expected
to remain in the mid-20s over the forecastinghorizon. Uncertainties regarding the results of
the upcoming elections and the health of theincumbent and the weakening of the policy
framework are likely to weigh down businesssentiment.

In commodity exporters that are not integrated
financially with the global economy growth will
be shaped predominantly by weak external
demand, and in particular weak demand fromhigh-income countries, growth in China that is
slower than in the recent past, and by domestic
policies and their impact on consumer andbusiness sentiment.

Growth in the Plurinational State of Bolivia willcontinue to be supported by strong domestic
demand and higher natural gas production overthe forecasting horizon, although growth isexpected to inch down slightly, on account of
weaker external demand. The increase in public
employment and the increases in real incomes
will support private consumption growth in109

Global Economic Prospects June 2012

Latin America & the Caribbean Annex

excess of 4 percent. Government plans to boost
investment in infrastructure projects will also be
supportive of growth going forward. The prudent
macroeconomic policies that have been
implemented in recent years have also put theeconomy on a more sustainable growth path,
prompting credit rating agencies to increase
Bolivia’s long-term foreign currency rating by anotch. This paves the way for Bolivia’s return tothe international capital markets for the first timein more than 70 years this year. The recent
nationalization of an electricity company could
however have a negative impact on foreign
investor sentiment.

Dominican Republic is expected to acceleratemarginally to 2.4 percent in 2012. Growth in the
Dominican Republic is expected to continue toexpand at a relatively robust pace of 4.4 percent
in 2012, boosted by continued expansion in themineral output and increased government
spending ahead of presidential elections.
Jamaica’s growth will remain weak,
notwithstanding a gradual recovery in the UnitedStates, its main trading partner, and a marginalincrease in remittances. The public debt burden
remains very heavy and together with the highcrime rate are constraining growth. Investment
ratio to GDP has declined markedly in the wakeof the crisis and remains close to 8 percentage
points below the pre-crisis ten-year average, withnegative consequences for potential growth. In
Haiti growth is expected to accelerate in 2012 toabove 7.3 percent on account of an accelerationin the path of reconstruction, following
improved political stability after the government
has finally took office in October 2011, although
the security situation remains fluid. Growth will
be buoyed by increased agricultural output, as
well as acceleration in construction sector
growth and a rebound in manufacturing output.
The garment industry will benefit from HOPE II
agreement that grants duty-free access to the US
for the textile products. Post-disasterreconstruction efforts will also support growth in
Dominica over the next couple of year, with thecosts of reconstruction estimated at close to 6.5
percent of GDP.

Growth in Central America, excluding Mexico,
is expected to ease in 2012 to 3.9 percent partly
due to a 4.5 percentage points deceleration ineconomic expansion in Panama, from a verystrong pace in 2011, due in part to a weaker
growth performance in the financial sector.
Growth in Panama will remain however above 6
percent, supported by the expansion of the
Panama Canal and the construction of the metro
for which financing has already been secured.
Central American economies that are still
operating below potential could see growth
accelerate as external demand improves. In
addition, better financing (higher remittancesand capital flows) could allow a step up in
investment. Low tax-to-GDP ratios keep the
structural deficits at relatively elevated levels,
and will continue to limit the fiscal space. A
weaker fiscal impulse relative to 2011 or fiscal
consolidation will negatively affect domestic
demand in some of the economies in the region.
In addition in selected economies growth willcontinue to be constrained by structural issues,
including inadequate infrastructure, deteriorating
security situation, and a weak rule of law thatwill hold back investment growth and willcontinue to depress total factor productivity.

Fiscal consolidation especially in the high-debt
Caribbean countries will negatively affectdomestic demand’s contribution to growth.
Higher oil prices will fuel inflation and will
undermine private consumption (which accounts
for more than 70 percent of GDP) in the oilimporting countries in the region. In addition,
countries that rely on Official Development
Assistance for meeting their external financing
needs will likely see a decline in ODA over the
coming years as many high-income countries
continue to struggle with fiscal sustainability andas they will probably not meet their Monterrey
targets of providing 0.7 per cent of their national
income in ODA. For 2012, bilateral flows are
expected to remain flat at best although

The Caribbean economies that are reliant on
tourism will continue to face subdued growth intourism arrivals and spending due to continued
high-unemployment in high-income countries,
although recent improvements in the labormarket in the United States may bring some
respite. Growth in the Caribbean excluding

110

Global Economic Prospects June 2012

Latin America & the Caribbean Annex

multilateral aid might increase based on earlier
commitments.

As the region, particularly South America, has
become increasingly reliant on exports to East
Asia, prospects in that region and China inparticular are increasingly important. Either astronger or weaker than anticipated outturn inEast Asia could have significant impacts on
activity and incomes among metals exporting
economies (more than 50 percent of all metals
are consumed by China alone). Commodity
exporting countries that have not rebuilt fiscal
buffers could be particularly vulnerable in theface if a significant weakening in demand forcommodities and prices – especially if theyoccur in a context where global financial
conditions are tightening. With regional
economies already fully recovered a muchstronger than anticipated increase in global
demand (or prices) for its exports could
exacerbate overheating and exchange ratepressures to the detriment of already struggling
manufacturing sectors in countries like Brazil.

Risks and vulnerabilities
Risks to growth have shifted to the downside. A
main risk to the global economy is posed by thepossibility of a marked deterioration in
conditions in Euro area. A sharp deterioration of
conditions in the Euro area could haverepercussions for global growth. The January
edition of Global Economic Prospects outlines
some of the major developing country
vulnerabilities to such a scenario – emphasizingthat no region would be spared (in the worst casescenario Latin American & Caribbean GDP
could be hit by as much as 3.8 percent of GDP).
Even in a less dramatic scenario – one where theEuropean recession deepens and recovery iseven slower than in the baseline would haveimportant implications for developing countries
in Latin American and Caribbean. In such a
scenario, global demand and demand forcommodity would be significantly weaker thanin the baseline, negatively affecting commodity
prices, incomes, fiscal balances and GDP incommodity exporting countries.

In this context, domestic policy making is
especially complicated. Last year demonstrated
the difficulties inherent in fine-tuning externallyoriented economies in a volatile international
environment. Just as necessary policy tightening
at that time was exacerbated by the slowdown inEurope, so too there is a risk that the subsequent
loosening of policies since then and perhaps in
the future could combine with improved external
conditions to provoke an overshooting ineconomic activity and inflation. Such challenges
appear particularly elevated in countries like
Brazil, Chile, and Colombia, where capacity
constraints pressures and commodity-based
exchange rate appreciations have fueled growing
current account deficits and eroded thecompetiveness of local industry.

An additional down-side risk is that of a major
oil supply disruption in the Middle East thatwould have negative repercussions for global
growth, including for the region, and inparticular for oil-importing countries. Domestic
imbalances and/or policy errors could also be
detrimental to growth in selected economies in
the region. In the Caribbean countries with weakfinancial systems a sharp slowdown in growthwould result in a marked deterioration in credit
quality that could further impair growth. In
addition, a significant downside risk for somethe Caribbean economies, notably Grenada,
Guyana, and Jamaica is that of a change to theconcessional financing terms offered by
Venezuela for oil imports. This could result in
substantially higher oil import prices adding
further pressure on current account balances.
Increased competition for FDI and tourists from
Cuba represent additional downside risks for the
tourism dependent economies in the region.

Notes:
1

111

Regional industrial output is proxied byindustrial output in 10 Latin American and
Caribbean countries which represent 95
percent of the regional GDP and more than90 percent of the value added by theindustrial sector.

Global Economic Prospects June 2012

Latin America & the Caribbean Annex

Table LAC.3 Latin America and the Caribbean country forecasts(annual percent change unless indicated otherwise)
Argentina
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Antigua and Barbuda
GDP at market prices (2005 US$) 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 (%)

112

98-07a

2009

2010

2011

Est. Forecast
2012 2013 2014

2.6
1.3

0.9
2.7

9.2
0.8

8.9
-0.3

2.2
-0.5

3.7
-1.2

4.1
-2.0

5.4
-12.6

-10.3
-19.3

-8.9
-12.8

-0.2
-10.8

1.7
-13.6

2.4
-14.0

3.1
-14.0

5.8
-13.1

0.1
-6.1

2.9
-3.3

2.6
-3.3

2.7
-4.2

2.8
-5.5

2.6
-5.9

3.3
0.7

3.4
4.3

4.1
4.9

5.1
2.2

4.3
2.5

4.2
1.4

4.1
0.2

2.8
-1.2

-0.3
-1.5

7.5
-2.2

2.7
-2.1

2.9
-3.1

4.2
-3.2

3.9
-3.4

3.7
0.3

-0.9
2.0

6.1
1.5

5.9
-1.3

4.4
-3.2

4.7
-2.9

4.9
-2.9

3.2
-1.4

1.7
-2.1

4.0
-3.1

5.9
-3.0

4.7
-2.8

4.2
-3.1

3.9
-3.2

5.5
-4.6

-1.0
-2.0

4.7
-3.5

4.2
-5.2

3.7
-5.3

3.8
-5.6

4.1
-5.7

2.2
-15.5

-0.4
-21.9

0.1
-20.8

0.9
-21.2

1.6
-18.0

2.2
-16.9

2.2
-15.8

5.6
-1.4

3.5
-5.0

7.8
-8.6

4.5
-8.1

4.4
-7.5

4.6
-7.8

4.8
-8.0

3.3
-0.1

0.4
-0.2

3.6
-3.1

7.8
-2.1

3.0
-0.6

3.2
-1.8

3.6
-3.4

2.9
-3.2

-3.1
-1.5

1.4
-2.3

1.5
-3.8

2.0
-4.3

3.1
-4.0

2.9
-3.7

3.9
-5.4

0.5
-0.1

2.8
-1.5

3.8
-3.1

3.6
-3.5

3.7
-4.1

3.4
-4.5

1.5
-8.7

3.3
-8.2

3.6
-7.2

4.8
-8.9

4.7
-15.0

5.0
-18.3

4.6
-21.7

4.3
-6.7

-2.1
-3.7

2.8
-6.2

3.4
-8.6

3.3
-7.8

4.1
-6.5

3.9
-5.7

Global Economic Prospects June 2012

Latin America & the Caribbean Annex(annual percent change unless indicated otherwise)
98-07a

2009

2010

2011

Est.
Forecast
2012
2013

2014

Haiti
GDP at market prices (2005 US$) b
0.9
2.9
-5.4
5.6
7.3
7.1
6.9
Current account bal/GDP (%)
-1.0
-3.7
-3.0
-5.3
-5.8
-6.2
-6.9
Jamaica
GDP at market prices (2005 US$) b
1.3
-3.1
-1.4
1.5
1.4
1.7
1.5
Current account bal/GDP (%)
-7.8
-10.9
-8.1
-9.9 -11.4
-9.6
-8.2
Mexico
GDP at market prices (2005 US$) b
3.3
-6.0
5.5
3.9
3.5
4.0
3.9
Current account bal/GDP (%)
-1.9
-0.7
-0.5
-0.8
-1.4
-1.6
-1.9
Nicaragua
GDP at market prices (2005 US$) b
4.1
-1.5
4.5
4.7
3.3
4.0
4.5
Current account bal/GDP (%)-18.4-12.2 -14.4 -17.4 -18.2 -18.6 -17.2
PanamaGDP at market prices (2005 US$) b
5.6
3.9
7.5
10.6
6.1
6.3
5.9
Current account bal/GDP (%)-5.5-0.7 -10.8 -12.7 -12.1 -10.8
-9.5
Peru
GDP at market prices (2005 US$) b
4.0
0.9
8.8
6.9
5.3
5.5
5.7
Current account bal/GDP (%)
-1.1
0.2
-1.5
-2.6
-1.7
-2.2
-3.2
Paraguay
GDP at market prices (2005 US$) b
1.9
-3.8
15.0
4.0
-1.5
6.0
4.6
Current account bal/GDP (%)
-0.1
0.5
-3.6
-1.9
-4.3
-3.4
-2.9
St. Lucia
GDP at market prices (2005 US$) b
2.5
-1.3
3.4
0.3
2.0
3.3
3.0
Current account bal/GDP (%)-17.8-12.1 -13.7 -18.1 -16.8 -15.7 -14.4
St. Vincent and the Grenadines
GDP at market prices (2005 US$) b
4.2
-2.3
-1.8
-0.2
2.6
3.1
3.3
Current account bal/GDP (%)-17.6-29.1 -31.6 -29.0 -25.6 -24.3 -23.1
Suriname
GDP at market prices (2005 US$) b
3.6
2.5
4.0
5.0
4.9
5.4
5.6
Current account bal/GDP (%)
8.9
3.9
2.0
1.1 -10.7 -10.9-8.4
Uruguay
GDP at market prices (2005 US$) b
1.2
2.4
8.9
5.7
4.0
4.6
4.4
Current account bal/GDP (%)
-1.0
-0.3
-1.1
-1.9
-1.5
-2.5
-4.2
Venezuela, RB
GDP at market prices (2005 US$) b
2.9
-3.2
-1.5
4.2
4.6
2.7
3.4
Current account bal/GDP (%)
8.4
1.8
3.1
8.6
6.3
4.4
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.
Cuba, Grenada, St. Kitts and Nevis, 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.

Source: World Bank.

113

Global Economic Prospects June 2012

Middle East and North Africa Annex

Middle East and North Africa Region1
and as regional credit default swap (CDS) rates
skyrocketed.

Overview
Uncertainty, volatility, and significant social
unrest continue to characterize conditions in thedeveloping Middle East and North Africa
region. Aggregate GDP grew by only 1 percent
in 2011, in contrast with 3.8 percent in 2010. In
Egypt, GDP fell by 0.8 percent in calendar 2011,
while growth in oil exporting Algeria registered
2.5 percent due to increased infrastructure
outlays. In Iran, growth eased to 2 percent as
new domestic policies were implemented andeconomic sanctions by Europe and the UnitedStates began to take a toll. High-income oilexporting countries of the Gulf Cooperation
Council (GCC) posted a strong 6.1 percent gainin 2011, on the back of stronger oil prices.

Outlook: Assuming a degree of stabilization in
the political situation in the Middle East andNorth Africa during 2012, regional growth isprojected at 0.6 percent for the year, largely as
sanctions take hold on growth in Iran, and GDP
continues to decline in Syria and Yemen. As
these elements fade in importance, growth forthe region is expected to firm to a still moderate
2.2 percent in 2013, picking up to 3.4 percent by
2014. Egypt’s economy is projected to move outof negative territory to 1.4 percent growth in2012, rising by 4.6 percent in 2014. Growth isexpected to pick up sharply in Jordan andLebanon, from 2.1 percent and 3.6 percent
respectively in 2012, to near 4.5 percent each by
2014. Despite recent declines, oil prices areprojected to average $107/bbl in 2012, up 3.6
percent on 2011. As a result, developing oil
exporters are expected to maintain strong
spending on domestic infrastructure and social
projects. Growth in Algeria is projected to firm
to 2.6 percent this year, rising to 3.6 percent in2014, while in Iran it is anticipated to compress
by 0.8 percent in 2012 and 2013 before rising to
1.5 percent by 2014.

Despite the volatility in the region, there aresigns that economic developments during thefirst half of 2012 are moving in a more favorable
direction. Industrial production for the firstquarter is showing advances across thediversified oil importing economies, while tradeflows appear set to break into positive territory.
However, tourism is likely to remain a problem
area until the political situation stabilizes, withaggregate tourist arrivals to the region having
fallen by 8.8 percent in 2011 versus a global
increase of 4.4 percent. Tourist arrivals declined
about 30 percent during 2011 in both Egypt andTunisia, 40 percent in Syria and 24 percent in
Lebanon.

Risks and vulnerabilities: Economic progressin the region will continue to be highly
dependent on the overall political climate.
Regional spillovers. Economic spillovers from
Syria to Jordan and Lebanon are beginning tolook serious as Lebanon’s service-based
economy is beginning to feel the effects of theconflict next door.
Economic tensions. Egypt is coming underincreasing pressure to finance its burgeoning
fiscal and current account deficits. Should these
difficulties become acute, the country could beforced to cut radically into government spending
and/or imports and potentially seek assistancefrom the international community.

Foreign direct investment (FDI) inflows to theregion (including the oil exporters) more thanhalved in 2011, dropping to an estimated $9.5
billion versus $22.7 billion in 2010, with majordeclines throughout the Maghreb, Egypt, Jordan
and Syria. Net capital inflows fell by almost 90
percent in the year, reflecting large outflows on
debt instruments as both foreign and domestic
investors sought safer havens. Regional stock
markets lost 15 percent over the last 2 years, incontrast with modest gains of 2.5 percent for all
emerging markets, while bond issuance dropped
from $3.2 billion in 2010 to $1 billion in 2011115

Global Economic Prospects June 2012

Middle East and North Africa Annex
provide the underpinning for growth to reach 4.7
percent by 2014 (figure MNA.1). Egypt may
experience more domestic headwinds to thisprocess than Tunisia and other regionalcountries. Developing oil exporters are
anticipated to benefit from the current andanticipated high price of crude oil (above $100/
bbl on a World Bank average basis), allowing
continued spending on domestic infrastructureand social projects. A notable exception is Iran,where product boycotts and financial sanctions
are expected to exact a toll on growth over 2012
and 2013, compressing GDP to decline of morethan 0.8 percent per year.

Recent developments
For the Middle East and North Africa, 2011
marked the start of a potentially historic year oftransition, many elements of which have carriedover into 2012. Political transitions in Egypt,
Tunisia and Libya continue with elections now
planned or ongoing; ―evolving monarchies‖ areundertaking political reforms (Morocco, Jordan(high-income Kuwait)); but conditions remain
turbulent in Syria, Libya, Iraq and Yemen. Shortterm uncertainty has increased with new election
formulas, broad disagreement between old andnew constituents regarding choice of prospective
candidates; evolving institutions and weakcapacity. As a result, foreign investors andtourists have taken a more cautious view to theregion. And the economic fallout of that caution
was worsened by financial uncertainty andvolatility in high-income Europe, culminating in
the current Greek stalemate – with Europe theMiddle East and North Africa’s largest partner
for trade in goods, services and income.

For those developing economies undercontinuing political or civil stress—notably
Syria—substantial losses are likely tocharacterize the near term, until closure can beachieved for the military-, social and politicalfallout generated by developments in the
country. For these reasons, growth for oil
exporting economies will likely decline in 2012
(0.4 percent) and register less-than 1 percent
growth in 2013, before a gain of 2.5 percent sets
in by 2014 on a coming to an end of present
violence and other conflicts among the group.

Economic progress within the developing region
has varied across countries in the interval since
the onset of transition for several Arab nationsin December 2010. Aggregate GDP grew by adiminished 1 percent in calendar year 2011
contrasted with 3.8 percent in the year preceding(table MNA.1). GDP fell by 0.8 percent in
Egypt, due to dislocations associated withpopular unrest and political uncertainty, sharp
declines in investment (domestic and foreign)
and in tourism. And Tunisia’s extensive links todevelopments in the Euro Area contributed to a
GDP downdraft of 1.8 percent in the year, withmajor declines in tourism and investment.2

Activity improves for several oil-importing
economies. Uncertainty and significant political
economy issues continue to characterize
conditions in the region. Nevertheless, there aresigns emerging that economic developments
during the early months of 2012 are moving in a
Figure MNA.1 A gradual recovery toward growth centered on 3.5 percent
GDP growth, percent
6

GDP in Yemen and Syria declined by a
substantial 10.5 and 3.1 percent respectively,reflecting significant domestic tumult, and inboth cases declining oil production. For oil
developing exporters as a group GDP advanced
by a sluggish 1.1 percent in the year.

2011

2012

2013

2014

4

2

0

-2

-4

A slow recovery among the diversified
economies (oil-importers) on the path of reforms
is envisioned for 2012 before conditions are
sufficiently conducive to support investment to-6
Developing MENA

Oil importers

Sources: World Bank.

116

Oil exportersof which: Syria andYemen

Global Economic Prospects June 2012

Middle East and North Africa Annex

more favorable direction. Industrial production
for the first quarter is showing advances acrossthe oil importers, while trade flows (thoughvolatile) appear set to break into positive
territory. Worker remittance flows were fairly
strong during 2011 and anecdotal evidence
suggests continued solid flows in 2012 asoverseas workers increase efforts to provide
support for incomes in home countries. Tourism
however, is likely to remain a problem area until
conditions stabilize across the main destination
countries. Tourist arrivals declined by about 30
percent during 2011 in both Egypt and Tunisia.

Tunisia, a revival of activity in mining,chemicals, and to a lesser degree manufacturing,has boosted production by 4.1 percent on thesame measure over the year through March.
While in Morocco and Jordan, less adversely
affected over the course of 2011, production is
Figure MNA.2 Industrial production moving higher
into 2012
Industrial production, quarterly, year-on-year
16
12
8
4

Industrial production for the diversified
economies firmed in the first quarter of 2012. In
Egypt, following a 3 percent decline in crude oil
production in the last quarter of 2011, oil output
has been growing during the first 5 months of2012, gaining 2.6 percent in the first quarter(year-over-year); electricity production (a goodproxy for commercial and industrial activity) is
up 12.5 percent over the same period, yielding
total production gains of 16.8 percent for thequarter (3mma, year-on-year, figure MNA.2). In

0
-4
-8
-12
-16
Egypt

Tunisia

Q1/11

Q2/11

Morocco

Q3/11

Q4/11

JordanQ1/12eSources: National Sources through Haver Analytics.

Table MNA.1 Middle East and North Africa forecast summary(annual percent change unless indicated otherwise)
98-07aGDP at market prices (2005 US$) b
4.6
GDP per capita (units in US$)
2.9
PPP GDP c
4.7
Private consumption
4.8
Public consumption
3.8
Fixed investment
6.8
Exports, GNFS d
5.6
Imports, GNFS d
7.4
Net exports, contribution to growth-0.2
Current account bal/GDP (%)
7.4
GDP deflator (median, LCU)
4.9
Fiscal balance/GDP (%)
-1.0

2009
3.3
1.7
3.2
2.5
19.7
5.6
-7.5
-2.5
-1.9
-0.7
1.5
-4.2

2010
3.8
2.1
3.8
3.6
4.2
1.5
3.2
2.5
0.2
2.4
6.5
0.4

2011
1.0
-0.6
0.8
1.8
8.2
-0.1
-1.9
3.6
-1.8
3.4
8.2
-1.8

Est. Forecast
2012
2013
2014
0.6
2.2
3.4
-1.0
0.6
1.8
0.4
1.9
3.3
3.2
3.6
4.3
5.7
5.0
5.2
0.9
3.5
4.2
0.2
1.8
3.4
5.5
5.3
5.4
-1.9
-1.4
-1.0
1.8
0.2
-0.9
8.9
4.6
4.3
-4.7
-3.4
-2.2

Memo items: GDP
MENA Geographic Region e

4.2

1.6

4.0

3.2

2.4

3.2

3.6

Resource poor- Labor abundant

4.6

4.7

4.5

1.0

2.2

4.1

4.7

Resource rich- Labor abundant

4.7

2.3

3.3

1.1

-0.4

0.9

2.5

3.7
4.7
5.1

-0.5
4.7
1.8

4.4
5.1
2.9

6.1
-0.8
2.0

4.8
1.4
-1.0

4.5
3.6
-0.7

3.7
4.6
1.5

Algeria
4.0
2.1
3.3
2.5
2.6
3.2
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. Geographic region includes high-income countries: Bahrain, Kuwait, Oman and Saudi Arabia.
f. Selected GCC Countries: Bahrain, Kuwait, Oman and Saudi Arabia.

3.6

Selected GCC Countries f
Egypt
Iran

Source: World Bank

117

Global Economic Prospects June 2012

Middle East and North Africa Annex

up 5.5 and 4.7 percent respectively, reflecting
earlier strong exports of phosphates which havesupported output in the mining and processing
sectors.

helped to buoy shipments to better performance.
In two of four diversified economies highlighted
in the figure, exports appear to be turning thecorner to growth, possibly reflecting renewed
import demand in countries such as Germany
and to a degree the United States. Prospects forthe second half of 2012 should improve, if as
expected in the baseline forecast, following anear-term increase in uncertainty related to
Greece and the EMU, the Euro Area emerges
from recession, implying increased demand forregional exports.

The track record for goods imports and exports
for the diversified economies over the past 18
months has been buffeted by both domestic
turmoil and the collapse of European importdemand in the second half of 2011. Imports by
Egypt, Tunisia and Jordan accelerated in mid2011, following the reform uprisings in thosecountries, as governments likely replenishedstocks depleted during the turmoil (figure
MNA.3a). After easing in the second half of2011, the dollar value of imports accelerated
once more into the early months of 2012, rising
to a 24 percent annualized pace in Jordan(3mma, year-on-year), 27 percent in Egypt and14 percent in Tunisia. While high oil prices
explain part of the upturn, it also likely reflects
stronger domestic demand and emerging
strength in economic activity.

But trade prospects will remain fragile, with key
partners for the Maghreb such as Italy, France
and Spain all facing substantial challenges athome, which are likely to be reflected in weakerthan-normal import demand. Moreover, many ofthe diversified economies in the region are
running large trade deficits, ranging from $28
billion for Egypt (13 percent of GDP) to $6
billion for Tunisia (16 percent of GDP). If
external financing conditions become moredifficult still—or if capital flows dry up such thatcountries in the region do not have the foreign
currency to finance imports, they could findthemselves in difficult straits.

On the export side of the ledger, the effects ofthe 2011 European downturn in demand areclear, compounded by disruptions to industrial
output, logistics and associated factors in theregion (figure MNA.3b). Export declines havebeen substantial for Morocco and Jordan, which
as noted had enjoyed a boom in phosphate
shipments; Egypt’s hydrocarbons exports have

Oil exporters enjoy renewed windfall. For oil
exporting economies in the broader geographic
region, including the high-income GCC
countries, higher oil prices will translate into
Figure MNA.3b Exports turning the corner to growth?

Figure MNA.3a Notable acceleration in MENA imports
Import values, ch% 3mma, year-on-year

Export values, ch% 3mma, year-on-year

40

50

35

40

30

30

25
20

20

15

10

10
5

0

0

-10

-5
-10
Jan-10Jun-10
Egypt

Nov-10

Apr-11

Tunisia

Sep-11-20
Jan-10Feb-12

Jun-10Egypt

JordanNov-10MoroccoApr-11

Sep-11

TunisiaFeb-12JordanSource: National sources through Haver Analytics

Source: National sources through Haver Analytics

118

Global Economic Prospects June 2012

Middle East and North Africa Annex

moderate increases in government revenues in2012. Oil prices are projected to average $107/
bbl in 2012, up 3.6 percent from 2011. Theserevenues should permit exporters to continue
supporting social spending, subsidies and othermeasures supportive of domestic living
standards. If oil prices remain high, oilimporting countries in the region may see
increased remittances, FDI, and aid flows fromthe high-income oil-exporters of the region. But
if prices moderate substantially, GCC
government accounts could come under strain –prompting cuts and a decline in these positive
externalities (box MNA.1).

Countries
pressure

underheightenedpolitical

The open civil conflict in Syria contributed to an
estimated 3.1 percent fall in GDP in 2011 and is
expected to provoke a further large 6.4 percent
contraction in 2012. With FDI and tourism
absent, reserves are being depleted rapidly. The
regime appears to be holding and unlikely tocollapse in 2012, but conditions would change
rapidly if divisions within the administration’s
supporting groups came to believe that theywould be better served by a negotiatedBox MNA.1: Oil markets and hydrocarbon revenues for regional exporters.
Crude oil (World Bank average) prices are expected to register $107.8/bbl in 2012, up from $104/bbl in 2011, assuming that political unrest and disruption in the Middle East are contained and OPEC continues to keep the market well supplied. Price increases are occurring despite the fact that global oil demand has been growing relatively
slowly. Demand increased only 0.7 percent in 2011, and demand growth remained weak in the first quarter of2012 partly due to a mild winter in the northern hemisphere. OECD oil demand is down more than 4mb/d or 9
percent from its 2005 peak. And non-OECD oil demand also slowed, but remains positive.
Rising prices mainly reflect developments on the supply side, notably the loss of more than 1mb/d in non-OPEC
production due to geopolitical and technical problems, as well as geopolitical tensions between the U.S./EU and
Iran. The EU has banned Iranian imports (an order to take full effect at the end of July 2012), while the UnitedStates is prohibiting financial institutions that deal with the U.S. from doing business with Iran. 3 According to the
IEA, up to 1mb/d of Iranian exports may be halted by this summer. Although Saudi Arabia has stepped up production to compensate for boycotted Iranian crude, the global supply losses—including 1.3mb/d of Libya’s light sweet
crude last year (but now recovering quickly)—have lowered OECD inventories—while the uptick in Saudi production has lowered OPEC spare capacity – contributing to a generalized sense of tight markets.
In the medium term, world oil demand is expected to grow moderately, at 1.5 percent per annum, with all of thegrowth in demand coming from developing countries. Global demand growth will remain well below GDP growth,reflecting efficiency improvements in vehicle transport – partly induced by environmental pressures to reduce
emissions, especially in OECD countries. Consumption growth in developing countries is expected to moderate in
the longer term as their economies mature, as subsidies are phased out, and as other fuels penetrate their fuel mix,
notably natural gas.
Box figure MNA 1.1 Oil revenues continue to mountWith oil prices remaining above $100/bbl for the period through 2014
through 2014, hydrocarbon exporters in the Middle East Oil revenues, billions USD
and North Africa region will continue to enjoy export 900
revenue windfalls that will maintain current account posi- 800
tions at high levels of GDP and allow continued fiscal 700
spending to shore up economic conditions during the 600
current period of sluggish global growth, through to the 500
expected stronger recovery of the world economy in 2013 400-14. Although GCC economies will benefit most from the 300
maintenance of high prices—given their scale of produc- 200tion and exports—Algeria and Iran (in the absence of 100
0sanctions) would be expected to benefit from market con2009
2010
2011
ditions. Box figure MNA 1.1 highlights the profile ofanticipated oil and gas revenue flows for exporters of the Source: World Bank.
region, reaching a peak $825 billion by 2014.

119

Yemen
Bahrain
Syria

Oman
Algeria
Kuwait

Iran
Saudi Arabia

2012

2013

2014

Global Economic Prospects June 2012

Middle East and North Africa Annex

resolution. In Libya, the U.S. Security Council
extended the U.N. mission supporting Libya’s
democratic transition for a further 12 months.
And parliamentary elections are due to be held in
June 2012, the first multiparty elections in 50
years. Government challenges have been eased
to a degree by the economy which has recovered
more rapidly than expected; but deep divisions
still stand in society. Following a 60 percent
contraction in GDP during 2011, quickly
reestablishing oil output will help thegovernment to revive the wider economy. And in
Yemen, President Aleh stepped down in
February 2012 under a transition agreement thatbrought Yemen back from the brink of civil war.
High turnout for the election of his successor has
given some cause for optimism—however thefragile political situation and continuing security
crisis in several parts of the country mean that
following an estimated 10.5 percent decline in
GDP during 2011, output will contract once
more in 2012, by a moderate 1.1 percent.

period of 2010. Countries perceived byinternational visitors to be more politicallystable, such as Morocco, have picked up some ofthe suffered by Egypt in particular.
The United Nation’s World Tourism
Organization (UNWTO) estimates thatinternational arrivals to the developing region
fell by 8.8 percent in 2011, versus a global
increase of 4.4 percent (table MNA.2). Arrivals
for other Middle East and North Africancountries are as stark as those found in table
MNA.2, with Syria down 40 percent in the year
due to civil strife and ongoing violence, andLebanon reporting declines of 24 percent. The
revenue losses associated with these declines aresubstantial for many countries, ranging from ashortfall of $4 billion for Egypt or 1.8 percent of
GDP to $0.7 billion for Tunisia (1.8 percent ofGDP). With widening trade deficits, theseimportant revenue losses will have to be offset
from alternate sources in the near term,increasing pressures on finance, exchange rates
and international reserves.

Tourism, remittances and foreign direct
investment
Sharp falls in tourism have been among the mostserious impacts of the political turmoil in theregion. Both Egypt and Tunisia suffered 30
percent declines in international arrivals during
2011, with arrivals in the first quarter of the year
as much as 70 percent lower than in the like

Worker remittance inflows to the region held up
fairly well during 2011, after experiencing a 6
percent contraction in 2009 during the global
recession, and a modest rebound in 2010 (3percent) during recovery from the global
economic downturn (figure MNA.4). According
to World Bank estimates, two Middle East andTable MNA.2: International tourism arrivals andrevenues, 2008-2011eFigure MNA.4 Worker remittances retained a positive
flow in 2010 and 2011

2008

2009

2010

2011E

12.0

4.1

17.0

-8.8

Egypt

16.0

-3.0

18.0

-32.0

Morocco

6.5

6.0

11.5

7.5

Tunisia

4.5

-2.0

0.0

-31.0

Jordan

9.0

2.0

20.0

-8.5

millions U.S. dollars

Arrivals % change
Total Region

35,00030,000Iran

25,000

Syria
Tunisia

20,000Algeria
Jordan15,000

Revenues, % change
Total region

13.5

0.1

14.5

-6.5

Egypt

17.2

-3.0

16.0

-30.0

Morocco

7.0

-10.0

2.5

5.5

Tunisia

16.0

-10.0

-1.5

-28.5

Jordan

28.5

-2.0

16.0

-10.0

Morocco10,000

Lebanon
Egypt

5,000
2005

Sources: United Nations, World Tourism Organization,
country sources, World Bank.

2006

2007

Sources: World Bank.

120

2008

2009

2010

2011e

Global Economic Prospects June 2012

Middle East and North Africa Annex

North African countries were able to sustain
strong inflows during 2011: Morocco with a 10.3
percent gain worth some $700 million,
mitigating goods trade deficits on current
account while supporting income andconsumption outlays; and Egypt (4 percent, or$300 million). Remaining countries of the region
registered a moderate 1.2 percent falloff inreceipts, with larger shortfalls in Tunisia, Algeria
and Syria. With gradual recovery in Europe, andwith fresh hydrocarbon windfalls among the
GCC, it is hoped that this important income flow
can be reestablished in the next quarters andyears to help finance current account ―debit‖
items while contributing to offset a portion of
fiscal deterioration.

$2 billion (a fall of 10 percent in the year), withthe decline spread fairly evenly across thediversified economies. According to theSecretariat of the U.N. Conference on Trade andDevelopment (UNCTAD), which compiles dataon international investment flows, FDI advancedby 5 percent at the global level in 2010, or by$58 billion, with the Middle East and North
Africa one of the few regions witnessing decline.
On a brighter note, there have been several
recent announcements of interest on the part of
GCC members to recommence investing in thediversified economies of the region. For example
a report that the UAE would invest up to $3
billion in four Egyptian agricultural projects; andinterest on the part of Qatar in collaborating with
Tunisia to build the first private oil refinery inthe country have been regional news items.

Foreign direct investment inflows to thediversified economies of the region havedeclined sharply from their pre-crisis peaks of$22 billion per annum (figure MNA.5). Egypt
was the recipient for the largest of these flows,
destined for tourism infrastructure and related
business but also into manufacturing, where
niche industries attracted foreign interest.
Lebanon and Morocco also garnered increased
share in the period. But the onset of global
recession in 2009 took a strong toll on FDI
flows, dropping some 20 percent in the year (adecline of $4 billion), highlighted by a 33
percent falloff in flows to Tunisia. The decline
continued in 2010, with a further edging down of

Financial developments and capital flows
In contrast to the firming of real-side activity,
financial developments for the diversified
economies have deteriorated sharply, notably in
Egypt. A number of countries are encountering
difficulty sustaining access to external financedue to downgrades to sovereign credit ratings,
widening CDS rates, and a broader downturn insyndicated bank lending due in part todeleveraging among Euro-Area commercial
banks. Falling reserve levels– a symptom ofwidespread support for exchange rates are ofconcern across several countries. And as
financing requirements mount, effective lack ofaccess to capital—including foreign direct
investment—is an important risk moving
forward.

Figure MNA.5 FDI falls a cumulative 30% over 2009 to2010
FDI inflows, USD millions
25,00020,000In Egypt, the financing of the fiscal deficit, asharp fall in international reserves and volatile
domestic activity remain points of fragility. The
fiscal shortfall is anticipated to reach 9.5 percent
of GDP in FY11/12, and financing the deficit
from domestic sources is getting increasingly
more expensive (15 percent or more fromdomestic commercial banks). Subsidies runningat 27.8 percent of the budget need to beaddressed to lessen these pressures.

Morocco15,000Tunisia
JordanLebanon

10,000

Egypt
5,000

0
2005

2006

2007

2008

2009

2010

Source: United Nations, UNCTAD, International Investment Report.

121

Global Economic Prospects June 2012

Middle East and North Africa Annex

For Tunisia, the fiscal deficit is estimated at afairly high 3.7 percent of GDP in 2011, andcould move still higher (6.6 percent) in 2012,
especially if the government fails to rein-in
spending, especially on public sector wages. As
in Egypt, financing has become more difficult
due to ratings downgrades and unevenconditions in banking. Tunisia has resources thathave gone unspent that could serve to fortify
growth in the near term.

throughout the Maghreb, Egypt, Jordan and
Syria (table MNA.3). On balance, witheconomic recovery and favorable outturns forcountries undergoing political and regulatory
reforms, FDI could return to a range of $23
billion by 2014—about the magnitude of thehalcyon days of the mid-2000s.
Net capital inflows to the region fell by almost
90 percent in 2011, reflecting large outflows on
debt instruments as both foreign and domestic
investors sought safer havens for their assets,
given political and regulatory uncertainty. Grossflows also fell sharply with no new equity
issuance in 2010, and a negative net figure for2011 of some $200 million. Regional stock
markets have lost 15 percent over the last 2 years
contrasted with modest gains of 2.5 percent for
all emerging markets. And bond issuance
dropped from $3.2 billion in 2010 to $1 billion
in 2011, as regional CDS spreads (developing
region issuers of sovereign bonds include
Lebanon, Morocco and Tunisia) jumped much
more than those for other developing countries–
as investors feared that new governments might
not fully respect the debts incurred by theirpredecessors. Prospects for bank lending andshort-term debt flows, larger items in the

Options for these and other countries could
include an International Monetary Fund (IMF)
loan, but political opinion remains divided overwhether assuming further debt and adopting IMF
adjustment policies represents a politically
expedient course of action. Other sources offinance, including bilateral (looking to the GCC
and others for support) are actively being sought.
The fiscal situation is also a key point of stress in
Jordan, with the deficit having registered 12.7
percent of GDP in 2011.
Overall FDI inflows to the developing Middle
East and North Africa (including the region’s
developing oil exporters) more than halved in2011, dropping to an estimated $8.6 billion
versus $22.7 billion in 2010, with major declines

Table MNA.3 Net capital flows to Middle East and North Africa$ billions
Current account balance

2008
69.8

2009
-6.2

2010
25.1

2011e
38.2

2012f
22.8

2013f
2.8

2014f
-13.4

Capital Inflows

19.7

28.3

25.4

1.2

12.9

24.2

33.8

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

21.5
29.6
29.2
0.4
-8.2
-0.8
-1.8
-4.2
-1.3
-1.8
-0.3
-0.1
-1.4

25.9
27.3
26.1
1.2
-1.4
0.1
-2.1
1.6
-0.9
2.4
0.9
-0.1
1.6

24.2
22.7
22.7
0.0
1.5
3.2
-1.9
1.1
-0.8
1.2
0.8
0.0
0.4

-0.3
8.4
8.6
-0.2
-8.7
1
-0.5
-9.2
0
1.5
1
0.1
0.4

11.7
11.7
12.2
-0.5
0.0
1
-2.1
2.0
-0.9
1.2

22.8
19.5
18.5
1
3.3
1
0.3
2.0
0
1.4

31.7
24.6
22.6
2
7.1
2
2
3.0
0.1
2.1

Note :e = estimate, f = forecast

Source: World Bank.

122

Global Economic Prospects June 2012

Middle East and North Africa Annex

region’s capital portfolio, are not favorable, due
directly to conditions in the region but also tied
to anticipated further deleveraging by European
commercial banks (see Finance Annex).

production is scaled back, oil prices soften
moderately and large-ticket projects come tofruition.
For developing oil exporters, high oil prices
should underpin current account balances at lofty
levels and provide the funding required formaintaining infrastructure-, social- and jobcreation programs. Growth for the aggregate ofdeveloping exporters is anticipate to rise from
0.9 percent in 2011 to 4.7 percent by 2014. Thisaggregate includes Syria and Yemen, and should
ongoing conflicts in these countries be quelled in
the near- to intermediate term, growth in these
economies could rise toward 4.5-5 percent by
2014.

Medium-term outlook
The gradual improvement in the international
environment anticipated over 2012-14 will be
helpful in stabilizing the region’s external
receipts and to a degree, domestic finances.
Prospects for the region however will depend
importantly on the resolution of regional
conflicts, tensions and transitions. In thebaseline, it is assumed that the political situation
will stabilize over the course of 2012, setting thescene for a return to growth more in keepingwith underlying potential by 2014.

Risks

For the oil importing countries, recovery in theEuropean market (following additional near-term
volatility related to Greece) during the second
half of 2012 should prompt a revival of goods
exports and to a degree, worker remittances andtourism. Should domestic reform programs
proceed as planned, growth in Egypt could
extend from 1.4 percent in 2012 to 4.6 percent
by 2014; and Tunisia could shift from 2.2
percent gains in 2012 to 4.6 percent by 2014
more in line with underlying potential of these
economies (table MNA.4).

Economic progress in the region will continue tobe highly dependent on the overall politicalclimate. The baseline assumes a normalization of
conditions from 2012 to 2014. Should sucheasing of tensions be delayed, growth could besignificantly slower in several countries. In thisregard: The economic spillovers from Syria to Jordan

and Lebanon are beginning to look serious,with increasingly adverse effects onneighboring economies. Jordan may require
financial support from International Financial
Institutions to cover funding shortfalls; while
Lebanon’s service-based economy is feelingthe effects of the nearby conflict, yetregistering firm growth on industrial output
gains.

Growth in Morocco, Jordan and likely in
Lebanon (the latter two economies adversely
affected by developments in neighboring Syria),
may be expected to soften during 2012, before
recovery gains traction and the group witnesses
GDP gains closer to 5 percent over 2013-14, as
remittances, and to a degree tourism and FDI
help to underpin the growth outlook. Countries
with closer ties to the GCC, including Jordan
and Lebanon, may see financial assistanceappear more rapidly and readily, as oil windfalls
propel financial flows from the high-income
countries of the region. The GCC group is
anticipated to grow by 4.8 percent during 2012,
grounded in higher oil prices and increased oil
production and export, following a strong 6.1
percent gain in 2011. An easing of growth
toward 3.7 percent by 2014 appears likely, as In Yemen, the government has been changed,

though conditions on the ground remain fluid;
how quickly conditions can be brought tostability in the near term remains uncertain.
 In Egypt the process of establishing a new

regime has yet to fully play out, with politicaland policy uncertainty ongoing at high levels.
 In

addition to the political dimension,
economic tensions are growing within theregion, with several countries (Egypt andJordan) coming under increasing pressure to123

Global Economic Prospects June 2012

Middle East and North Africa Annex

finance burgeoning fiscal and current accountdeficits. Should these difficulties become
acute, countries could be forced to cut
radically into government spending and or
imports and potentially seek assistance fromthe international community.

of conditions in the Euro Area (and in turn the
global economy) could imply GDP losses (vs.
baseline) for the Middle East and North Africa
of 3.0 to 4.4 percent over 2012 to 2013
respectively. Key channels of transmission
would include trade, tourism, remittances,financial flows, and importantly a falloff in local
business and consumer confidence, potentiallysustaining the downturn for a more extended
period.

Although a good deal of progress has been madeto restore fiscal sustainability in Europe, thesituation remains fragile. The close economic
and trade ties of the Middle East and North
Africa with the Euro Area (e.g. some 70-80
percent of goods exports from Morocco andTunisia are destined for the Zone), has made theregion particularly sensitive to a deepening of
the crisis. The likelihood of crisis involving
Greece and potential serious spillovers throughbanking systems, remains a palpable threat (seeMain Text). Exceptionally serious deterioration

And outturns in the region remain closely tied tocommodity prices (oil as an export, but foodcommodities as a critical import). The recent
uptick in geopolitical tensions and boycotts of
Iranian oil boosted oil prices during the first fourmonths of the year, and though prices havefallen to $93/bbl in early June on a World Bank
average basis-- prices could spike still higher – ifTable MNA.4 Middle East and North Africa forecast summary(annual percent change unless indicated otherwise)
98-07a

2009

2010

2011

Est. Forecast
2012
2013
2014

Algeria
GDP at market prices (2005 US$) b
4.0
2.1
3.3
2.5
2.6
3.2
3.6
Current account bal/GDP (%)
28.9
0.1
15.6
19.3
12.7
9.8
7.6
Egypt, Arab Rep.
GDP at market prices (2005 US$)
4.7
4.9
5.1
-0.8
1.4
3.6
4.6
Current account bal/GDP (%)
0.9
-1.8
-2.0
-2.1
-1.8
-1.8
-1.9
Iran, Islamic Rep.
GDP at market prices (2005 US$) b
5.1
1.8
2.9
2.0
-1.0
-0.7
1.5
Current account bal/GDP (%)
10.3
4.6
5.6
8.1
7.4
2.8
1.1
Iraq
GDP at market prices (2005 US$) b
4.2
0.8
9.9
11.1
13.5
11.0
Current account bal/GDP (%)
-8.0
3.0
16.5
11.2
12.6
11.8
JordanGDP at market prices (2005 US$) b
5.9
2.3
2.3
2.6
2.1
3.8
4.3
Current account bal/GDP (%)
-2.3
-4.5
-6.9
-10.3
-7.8
-6.4
-5.7
LebanonGDP at market prices (2005 US$) b
3.1
8.5
7.0
3.0
3.6
4.5
4.7
Current account bal/GDP (%)
-17.5
-19.3
-19.1
-23.0
-18.2
-17.8
-16.6
Morocco
GDP at market prices (2005 US$) b
4.5
4.8
3.7
4.3
2.8
5.0
5.0
Current account bal/GDP (%)
1.4
-5.9
-4.4
-9.0
-6.4
-6.1
-5.8
Syrian Arab Republic
GDP at market prices (2005 US$) b
4.1
6.0
3.2
-3.1
-6.4
2.5
4.4
Current account bal/GDP (%)
3.0
-1.9
-0.6
-2.8
-16.5
-6.7
-9.1
Tunisia
GDP at market prices (2005 US$) b
4.9
3.1
3.0
-1.8
2.2
3.8
4.6
Current account bal/GDP (%)
-2.5
-2.8
-4.8
-7.4
-7.7
-6.5
-6.2
Yemen, Rep.
GDP at market prices (2005 US$) b
4.1
3.8
7.7
-10.5
-1.1
3.0
4.5
Current account bal/GDP (%)
2.5
-9.7
-0.7
-0.1
2.8
0.6
-1.0
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.
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.

Source: World Bank.

124

Global Economic Prospects June 2012

Middle East and North Africa Annex

there were a major disruption to global supply.
Simulations in the Main text suggest that an
illustrative but potentially realistic scenario of a
$50/barrel increase in average crude oil price forthe second half of 2012 and 2013 would yield anet positive effect for the region, with oil
exporters seeing GDP growth improve by 1.4
and 1.7 percent respectively; oil importing
countries find GDP growth dampened by some
0.8 to 1 percent over the period.

imports, and further curtailments are likely.
On March 20, the Obama Administration
granted 180-day exemptions from its
sanction to 10 European countries and Japanbecause they had significantly reduced
purchases from Iran. Another 12 nations thatare deemed to be major importers—
including India, China and South Korea—
have until the end of July to take similaractions or face sanctions.

Notes:
1

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
full inclusion in the model aggregates andprojections for Djibouti, Iraq, Libya and theWest Bank and Gaza, though references tothese economies will be made in context of
the report—for example regarding tourism
flows, or foreign direct investment, wheredata is available. 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 with the Gulf
Cooperation Council (GCC) economies(Jordan and Lebanon); and those with tightties to the European Union (Arab Republicof Egypt, Morocco and Tunisia).

2

On a fiscal year basis, GDP growth for
Egypt comes in at: 1.8% in FY10/11, 2.1%
in FY11/12, 3.1% in FY12/13 and 4.2% in
FY13/14.

3

Several EU members, Japan, and othernations have already reduced Iranian125

Global Economic Prospects June 2012

South Asia Annex

South Asia Region
to slow further to 6.4 percent in 2012, partly due
to a weak carryover from the sharp decelerationin the second half of 2011, and to increase
modestly to 6.5 percent and 6.7 percent
respectively in 2013 and 2014. Economic
activity in the region is expected to remain
subdued in the medium-term mainly due tocontinuing external weakness and domestic
concerns, including fiscal deficits, high inflation,and energy and infrastructure constraints. Private
capital inflows are likely to reach the level
reached in 2010 only by 2014. India is expected
to see a modest increase in growth measured atfactor cost to 6.9 percent in the current fiscal
year ending in March 2013, and gradually pickup pace to 7.2 percent and 7.4 percent in the
2013-14 and 2014-15 fiscal years, respectively.
In Pakistan, growth is expected to firm from its
recent sluggishness to 3.8 percent and 4.1
percent in the 2012-13 and 2013-14 fiscal years,
respectively. Bangladesh, which has seen amodest decline of growth in 2011-12, will see
growth firm to 6.4 and 6.5 percent in 2012-13
and 2013-14, respectively.

Overview
Economic activity in South Asia has slowed
considerably, following a promising start to2012. Regional industrial production, exports
and capital flows, which showed signs ofrecovery in the first two months of the year,
faltered by the end of the first quarter. The new
slowdown comes on the heels of a sharp
deceleration in economic growth in the second
half of 2011, which saw regional GDP growthdecline to an estimated 7.1 percent for the year,
from 8.6 percent in 2010. In India, the region’slargest economy, growth measured at factor costslowed sharply to 6.5 percent in the 2011-12
fiscal year ending in March, from 8.4 percent in
the previous two fiscal years.
An expansionary fiscal policy stance, energy andinfrastructure constraints, and political andsecurity uncertainties, together with headwinds
from resurgent Euro Area tensions, arecontinuing to act as a drag on private investment
and growth. Inflationary pressures continue toremain strong across the region, despite easing
briefly in India in early 2012. High fiscal deficits
compared to other developing regions are likely
crowding out productive investment and eroding
future growth potential. Trade deficits havewidened and current account positions comeunder pressure, mainly due to high crude oil
prices in 2011 and weaker export demand,
resulting in depreciation of currencies.

Risks and vulnerabilities: South Asia’s growth
remains vulnerable to several external anddomestic risks.
Euro Area uncertainty. A worsening of EuroArea turmoil, heightened risk aversion andEuropean banking sector deleveraging could
result in lower and potentially more volatile
private capital inflows, which together with theregion’s weakened current account position
could cause balance of payments difficulties.
Limited policy options. The already loose fiscal
policy and high inflation in South Asia imply
there is limited room for demand stimulus in theevent of a negative external (or domestic) shock.
There is an urgent need for rebuilding policy
buffers, including credible fiscal consolidation,
while protecting the most vulnerable.
Policy uncertainty and infrastructure
constraints. In the absence of substantive action,
policy uncertainty, electricity shortages andinfrastructure constraints could continue todampen private investment and regional growth.

Agriculture, however, has performed well, andremittance inflows have continued to growrobustly. Private capital flows to South Asia saw
a brief revival in the first two months of 2012
but appear to have slowed again by the end of
May. Net private capital flows fell 18 percent in2011 and are projected to decline a further 24
percent this year, mainly due to substantiallyweaker syndicated bank lending and bondinflows stemming from European banking sector
deleveraging and India’s worsening credit
profile. Foreign direct investment (FDI) inflows
are also likely to weaken in 2012 after increasing
robustly in 2011.
Outlook: GDP growth in South Asia is expected127Global Economic Prospects June 2012

South Asia Annex
export (import) volumes surged 22.6 percent(40.3 percent) in the three months ending
February, but weakened to 13.1 percent (2.5
percent) by April (figure SAR.2). Regional
imports in US dollar terms outpaced exports
during the 12 months ending April, partly due tohigh crude oil prices compared to previous years.

Recent developments
South Asia’s growth slowed sharply in thesecond half of 2011.1 Headwinds from theintensification of the Euro area sovereign debt
crisis caused a steep deceleration in South Asia’s
exports and a withdrawal of portfolio capital.
Several rounds of monetary policy tightening inIndia, energy and infrastructure constraints
across the region, together with political andsecurity uncertainties and fiscal and inflation
concerns, resulted in a falloff in regional
investment and industrial activity. Tradebalances and current account positions of South
Asian countries came under pressure mainly due
to the weaker export demand and adverse termsof trade shock from elevated international crude
oil prices, which rose 32 percent in 2011 fromthe average level in 2010. Regional GDP
growth, thus, declined from 8.6 percent in 2010
to an estimated 7.1 percent in 2011.

Private capital flows to South Asia revived
briefly in the first two months of 2012, but
portfolio flows (mainly focused on India) fell off
again between March and May amid concerns
about fiscal and current account deficits, slow
pace of policy reform, proposed taxes on crossborder investments in India, and resurgent Euro
area uncertainties after inconclusive Greek
elections in early May. The weaker current
account positions and decline in private flows
put the balance of payments position of South
Asian countries under considerable stress,
resulting in a drawdown of reserves anddepreciation of currencies. Remittance inflows,
however, continued to increase robustly
providing support to current account positions,particularly in countries other than India.

Trade and industrial production activity began torecover in early 2012. Industrial activity,
however, faltered by end of the first quarter, with
regional industrial production slowing from anannualized pace of 18.8 percent in the threemonths ending January to 10.3 percent in March(figure SAR.1). While this represents a reboundfrom the steep quarter-on-quarter declines seenin the second half of 2011, industrial activity
remains weak on an annual basis. Regional

Inflationary pressures continue to remainstrong in South Asia
Inflationary pressures continue to remain strong
in most South Asian countries. On the domesticside, pressures are arising from capacity

Figure SAR.1 Industrial production is reviving inSouth Asia

Figure SAR.2 South Asia's exports are showing signsof recovery

3m/3m saar, Percent

3m/3m saar, Percent
160

40

India
South Asia excl. India

30

East Asia & Pacific120

Europe & Central Asia

20

Latin America & Caribbean
1080Middle East & N. Africa

Sub-Saharan Africa

0

40

-10
India
South Asia excl. India-20

East Asia & Pacific0Europe & Central Asia

-30

Latin America & Caribbean

Middle East & North Africa
Sub-Saharan Africa-40
Jan-10

Apr-10Jul-10-40
Oct-10Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Jan-10

Apr-12

Apr-10Jul-10

Oct-10Jan-11

Apr-11

Jul-11

Sources: Datastream and World Bank.

Sources: Datastream and World Bank.

128

Oct-11

Jan-12

Apr-12

Global Economic Prospects June 2012

South Asia Annex

constraints, persistent fiscal deficits, strong wage
push pressures, and high food inflation (which is
expected to subside after harvests). High crude
oil prices compared to the average levels inprevious years and currency devaluation inseveral countries are further adding to
inflationary pressures.

(figure SAR.4). The depreciation of the Sri
Lankan rupee and increases in administeredprices for fuel have contributed to inflationarypressures. Although inflation in Nepal appears tohave moderated in recent months with foodinflation easing, its currency has depreciated instep with the Indian rupee, and energy andtransport costs have increased. In Bangladesh
too, inflation appears to have eased from doubledigit rates over most of last year, with lower
food inflation contributing to a fall in overall
inflation to 9.2 percent on a year-on-year basis inMay. Non-food inflation also slowed in May
together with easing of international commodity
prices, but remains high at 12.7 percent, partly
reflecting pressures from higher government
spending and strong domestic demand.

India’s inflation rate eased in early 2012 with thebenchmark wholesale price index (WPI)
inflation declining from 10 percent on year-onyear basis in September 2011 to 6.9 percent inJanuary 2012, mainly due to interest rateincreases and slowing economic growth (figure
SAR.3). But WPI inflation inched back again to
7.2 percent by April. Moreover, India’s
consumer price inflation, based on an index
covering rural and urban areas, surged to 10.4
percent year-on-year in April, with food inflation
rising sharply to 10.2 percent from 4.1 percent inJanuary. Food prices in India have risen together
with international food prices, which increased 8
percent between December 2011 and March
2012. Although India’s food grain production
has grown robustly, increases in consumption ofproteins and other food items driven by income
gains in the past few years and supply notkeeping pace with demand have also contributed
to higher domestic food prices.

Figure SAR.4 Consumer price inflation remains highacross South Asia
3m/3m saar, Percent
Bangladesh

25

India
Pakistan

20

Sri Lanka

15

10

5

In addition to India, there are signs of an uptick
in Pakistan and Sri Lanka, where annualized
quarterly inflation is in excess of 14 percent

0-5

Figure SAR.3 Policy rate increases in India helped todrive down wholesale price inflation
Percent

Jan-10

11

8

9
8
7
6
5

6

4
3

5

Policy rate

2

Wholesale price index (WPI) inflation [right]1

Oct-10 Jan-11

Apr-11

Jul-11

Oct-11 Jan-12

Apr-12South Asian countries tightened monetary
policies over the last year to contain inflationarypressures (figure SAR.5). India’s key policy rate
was increased by a cumulative 375 basis point
between April 2010 and October 2011, butmonetary policy eased in the first four months of2012 as the central bank reduced cash reserve
ratio requirements and cut the policy rate from
8.5 percent to 8 percent in a bid to stimulate
investment activity amid slowing growth.
Bangladesh’s benchmark repurchase rate has
been raised 150 basis points since mid-2011 to
7.75 percent with a penalty rate for discretionary

107

Jul-10Sources: Haver Analytics and World Bank.

Year-on-year, Percent

9

Apr-10

0
4
Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12

Sources: Haver Analytics and World Bank.

129

Global Economic Prospects June 2012

South Asia Annex

Figure SAR.5 Real interest rates increased with tightening of monetary policies

Figure SAR.6 India's households' inflation expectation have not declined to the extent of fall in actual
inflation

Lending interest rate minus CPI annual, percent
Mean inflation rates for given survey quarter
18

16
14

Bangladesh

12

16

India

10

Pakistan

8

Sri Lanka

14
12

6

10

4

8
Current perceived

2

6

1-year Ahead

0

Actual4

Linear (Current perceived)-2

Linear (1-year Ahead)2-40
Q1-2007-6
Jul-09

Nov-09 Mar-10

Jul-10Nov-10 Mar-11

Jul-11

Nov-11 Mar-12

Linear (Actual)

Q4-2007

Q3-2008

Q1-2009

Q4-2009

Q3-2010

Q2-2011

Q1-2012Sources: Reserve Bank of India and World Bank.
Sources: IMF International Financial Statistics, EIU andWorld Bank.
Figure SAR.7 Inflation is expected stay close to current rates in Bangladesh and Sri Lanka

liquidity support. Pakistan has kept its key policy
rate steady at 12 percent since October 2011. Sri
Lanka’s rapid credit growth of nearly 35 percent
in 2011 decelerated sharply in early 2012 after a
50 basis point increase in the policy rate andother policy measures to slow private sector
lending.

Year-on-year, Percent
12

10Consensus Forecast for 2012
Actual as of May 20128

Expectations of future inflation remain high inSouth Asia. Inflation expectations of households
in India for the next quarter, and for next year,
lagged the fall in inflation in the first quarter of2012 (figure SAR.6). This suggests thathouseholds expected the decline in inflation in
the first quarter to be short-lived. Inflation is also
expected to persist at close to current rates in
Bangladesh and Sri Lanka through the year, andto fall modestly from the current high rate inPakistan (figure SAR.7). Inflation expectations
in South Asia are partly influenced by the
likelihood of higher extent of pass-through ofinternational oil prices to domestic prices, as
governments across South Asia are attempting to
reduce subsidies in a bid to rein in fiscal deficits.
Administered prices for fuel and electricity havebeen raised in Bangladesh and Pakistan in orderto reduce losses of state-owned energy
companies. In Sri Lanka, prices of petroleum
and electricity were increased 32 percent and 20
percent, respectively, by mid-March. Similar

6

4

2

0
Bangladesh

Pakistan

Sri Lanka

Sources: Consensus Economics and World Bank.

increases are likely to follow in India, where theadministered price of diesel fuel used mainly inthe transport sector was last raised in June 2011.
Fiscal deficits remain at worrisome levels
Across the region, fiscal balances have comeunder pressure from fuel and fertilizer subsidies,social welfare programs, and weak tax
collection. Administered domestic fuel prices,which attempt to shield consumers to varying
degrees from increases in international prices,130

Global Economic Prospects June 2012

South Asia Annex

have resulted in fiscal subsidies that are
eventually unsustainable. These large deficits
and government borrowing programs are likely
crowding out private investment, and havestoked inflationary pressures. Fiscal slippages
have become increasingly common across theregion.

have similarly resulted in an increasing subsidy
burden in Pakistan.
India’s subsidy burden reached an estimated 2.4
of GDP in the 2011-12 fiscal year ending inMarch mainly due to energy subsidies and social
welfare programs. The divergence between
international prices and domestic prices fordiesel, liquefied petroleum gas (LPG) andkerosene in India has resulted in nearly adoubling of ―under-recoveries‖ (losses of public
sector oil marketing companies from sale pricebelow import equivalent plus taxes), which arepartially covered by the government and haveadded to the fiscal burden. Petrol prices in India
are market-based, but are set by state-owned
retailers and have lagged international prices,
implying losses for these firms. Transfer
payments and employment-generation programsin India have supported demand, particularly inrural areas, but some of the potential welfare
gains have been lost due to leakages in publicdistribution systems and the inflationary impactof the commensurately higher fiscal deficit.

South Asia on average has the highest fiscal
deficits among the six developing regions (figure
SAR.8). India’s central government deficit forthe 2011-12 fiscal year ending in March was 5.8
percent of GDP, 1.2 percent higher than targeted,and the general government deficit including
state budget deficits exceeds 8 percent of GDP.
Sri Lanka’s fiscal deficit has fallen from nearly
10 percent of GDP in 2009 due to efforts tocontrol expenditures, but still remains close to 7
percent of GDP, as it does in Pakistan (figure
SAR.9).
In Bangladesh, a short-term reliance on oilpowered rental power plants to boost generation
capacity and mounting losses of the state-owned
Bangladesh Petroleum Corporation due to low
administered fuel prices have resulted in a
subsidy burden of more than 3 percent of GDP.
The off-budget financing of state-owned
electricity companies has contributed to fiscal
woes and increased non-performing loans ofbanks. High prices of imported crude oilcompared to average levels in previous years

On the revenue side, tax collection as a share of
GDP has been weaker in South Asia in recent
years compared to other developing regions(figure SAR.10). Reform of indirect taxes inIndia, which proposes a unified goods andservices tax to replace a number of existing
central and state indirect taxes (including excise

Figure SAR.8 South Asia has the highest fiscal deficit
among developing regions

Figure SAR.9 Fiscal deficits are high across South
Asian countries

General government balance as percent of GDP, 2009-11

General government balance as percent of GDP, 2011 estimate
0.0

0.0
-1.0

-1.0

-2.0

-2.0

-3.0

-3.0

-4.0

-4.0

-5.0

-5.0

-6.0

-6.0

-7.0

-7.0

-8.0

-8.0

-9.0

South Asia

-9.0

Sub-Saharan Latin America Europe & Middle East & East Asia &Af rica& Caribbean Central Asia North Af rica
Pacif ic

India

Sri Lanka

Source: World Bank.

Source: World Bank.

131

Pakistan

Bangladesh

NepalGlobal Economic Prospects June 2012

South Asia Annex

duty, service tax and value-added tax), has been
pending for several years. Pakistan’s tax baseremains very narrow, with a small fraction of the
population paying taxes despite recent efforts by
the government to improve tax collection andreduce evasion. Bangladesh’s tax revenues
amount to a tenth of GDP, constraining
development spending and public investment ininfrastructure and other areas. One-off factors
also contributed to fiscal slippages in specificyears. For instance, lower than expected
revenues from equity sales of state-owned
enterprises in India were part of the reason for alarger than targeted deficit in the 2011-12 fiscal
year.

Trade and current account positions
deteriorated mainly due to weaker external
demand and negative terms of trade shocks
South Asian countries experienced deteriorating
current account balances due to the combined
effect of weak demand in key export markets
and negative terms of trade shocks from theincreases in crude oil prices in both 2010 and2011 (figure SAR.11). Despite an annualized
decline of 33 percent in the three months ending
November 2011 during the intensification of theEuro area sovereign debt crisis, South Asia’s
export volumes registered growth of 19 percent
for the full calendar year. Exports werecushioned to some extent by increasing
diversification towards markets in Asia, Africa
and high-income countries that are not part of
the OECD, where growth has held up better thanthe Euro Area and the U.S. South Asian firms
are also becoming increasingly integrated into
global production and supply chains, and are
moving into higher value-added and moresophisticated products.

Figure SAR.10 Revenue collection is weaker in South
Asia compared to other regions
Median revenue excl. grants as percent of GDP, 2008-11
35

30

25

20

15

However, imports in nominal dollar terms
surged across the region as elevated crude oil
prices—which rose 28 percent in 2010 and afurther 32 percent in 2011—and relatively strong
domestic demand, in particular in India and Sri
Lanka, increased the import bill. In consequence,
India’s current account deficit widened to nearly
4 percent of GDP in the 2011-12 fiscal year

10

5

0
Europe &Central Asia

East Asia &Pacif ic

Latin America Middle East & Sub-Saharan& Caribbean North Af rica
Af ricaSouth Asia

Source: World Bank.

Box SAR.1 Energy shortages are weighing down South Asia’s investment and growth
Pervasive electricity shortages and infrastructure constraints Box figure SAR.1 Electricity demand-supply gaps are
across much of the South Asia region have made the operating acute in South Asia
environment difficult for the private sector and increased the Percent
30
cost of doing business. The gap between the demand for electricity and installed capacity is particularly acute in South Asia,
ranging from 10 percent in India to nearly 30 percent in Nepal 20(SAR box figure 1). Electricity generation companies in Bangladesh, India, and Pakistan often lack reliable access to inputs. 10
In India, the dominance of state-owned enterprises in coal ex0
traction, below-market pricing for certain sectors and underinvestment in capacity expansion, among other factors, has kept
production below demand. Supply of imported crude oil used -10
for power generation in Bangladesh has become more expensive and the supply of natural gas in Pakistan remains sporadic. -20
Electricity surplus/def icit as share of
installed capacity
Tight supply of inputs, has, in turn, forced both public and private power generation companies to ration output, which in turn -30
Sri Lanka
India
Bangladesh
PakistanNepal
has cut into activity levels and exports. Energy shortages havelikely reduced the willingness of South Asian firms to invest,
Source: More and Better Jobs in South Asia, World Bank.
thereby hurting South Asia’s longer-term growth potential.

132

Global Economic Prospects June 2012

South Asia Annex

Figure SAR.11 Terms of trade moved against South
Asian countries in 2010 and 2011 as international
crude oil prices rose

Figure SAR.12 Nominal exchange rates depreciatedin South Asia

Terms of trade, Percent change

125

Local currency/US$ (Jan 2011=100)

15.0

Bangladesh
120

India

10.0

Sri Lanka

5.0

Bangladesh

India

Nepal

Pakistan

Nepal

115

Pakistan

Sri Lanka

110

0.0

105
-5.0

100
-10.0

95
Jan-11

-15.0
2009

2010

Mar-11

May-11

Jul-11

Sep-11

Nov-11

Jan-12Mar-12

May-12

Source: World Bank.

2011

Note: Terms of trade based on Keyfitz import and export
price indices
Source: World Bank.

greater exchange rate flexibility. The Pakistani
rupee and Bangladeshi taka faced depreciationpressures since mid-2011, with a relatively sharp
depreciation of the taka in December. The taka,
however, appears to have stabilized since
February.

ending in March. Strong demand, in particularfor gold partly due to the perceived safety of theasset in a high inflation environment, also
contributed to the deterioration of the current
account position and increased pressure on
reserves, which declined from 9.6 to 6.4 monthsof import cover between October 2010 and
February 2012. Pakistan’s current account wentfrom near balance to a deficit of 1.7 percent of
GDP in the first nine months of the 2011-12
fiscal year ending in June, despite a 21.5 percent
year-on-year increase in remittances to nearly$10 billion during this period.

Private capital flows to South Asia slowed
sharply, but remittances remained robust
Private capital flows to South Asia fell off
sharply during the intensification of the EuroArea debt crisis in second half of 2011, and net
private inflows to the region declined by an
estimated 18 percent in 2011 (figure SAR.13 andtable SAR.1). While portfolio equity and debt
inflows declined by more than 60 percent, net
foreign direct investment (FDI) inflows to theregion—mainly focused on India—rose to $51.6
billion in 2011. Net FDI inflows to Pakistan,
however, shrunk by nearly 50 percent in the firstnine months of the 2011-12 fiscal year mainly
because of deteriorating macroeconomic
fundamentals, energy shortages and a difficult
political environment.

Reflecting the deterioration in India’s externalbalances, the Indian rupee depreciated by nearly
10 percent against the dollar between February
and early June, losing all the gains made inJanuary following a steep depreciation during
the Euro Area debt crisis in the second half of2011 (figure SAR.12). Nepal’s currency
depreciated in step with the Indian rupee due tothe currency peg. Other South Asian currencies
have also faced depreciation pressures requiring
international reserves to be drawn down. The Sri
Lankan rupee depreciated by over 12 percent
between February and April after the central
bank removed the trading band and allowed

Portfolio flows to India rebounded in the firsttwo months of 2012 (figure SAR.13). But
resurgent Euro area turmoil and concerns aboutfiscal and current account deficits, delayed
reforms, and uncertainty about application of the133Global Economic Prospects June 2012

South Asia Annex

proposed General Anti-Avoidance Rule (GAAR)
to cross-border transactions (later postponed
until the start of the 2013-14 fiscal year) again
led to a falloff in private flows in the subsequentmonths. European banking sector deleveraging
resulted in a more than two-third decline insyndicated loans organized and led by European
banks in the six month period ending March
2012. The lowering of the outlook for India’s
BBB- investment grade sovereign credit ratingfrom stable to negative by Standard and Poor’s
in April 2012 has also dampened investor
sentiment.

Net private capital flows to South Asia areprojected to fall a further 24 percent in 2012(table SAR.1), with bank lending and bondinflows declining sharply by more than 70
percent. Portfolio equity flows are expected toalso weaken by a third in 2012 from a low basein 2011, while net FDI inflows are also likely to
weaken by more than 10 percent.
By contrast, remittances sent by international
emigrants have remained resilient. South Asia
received $97 billion in remittances in 2011, an
increase of 18 percent from the previous year
(figure SAR.14). India remains the largest
recipient of remittances among developing
countries, but remittances are more important asa share of domestic product in other South Asian
countries, where they range from 5 to 20 percent
as a share of GDP. Remittance inflows in
nominal dollar terms increased by 27 percent, 25
percent and 17 percent in Pakistan, Sri Lanka
and Nepal, respectively, in 2011, while flows to
Bangladesh grew at a relatively slower pace of
11 percent.

Figure SAR.13 Private capital flows to South revived
in early 2012, but fell off since March
US$ billion (monthly)

US$ billion (3-month moving average)
8

14
Syndicated bank loans
Bond issuance7

12

Equity issuance
6

SAR Gross capital flows [right]

10

5
8

4
6
3

Slower growth in high income countries andtighter immigration policies in some hostcountries has dampened remittances from thesesources. However, sustained labor demand fromoil-exporting Gulf Cooperation Council (GCC)
countries that are benefiting from highinternational crude oil prices (compared to

4

2

2

1
0

0
Jan-10 Apr-10

Jul-10

Oct-10 Jan-11 Apr-11

Jul-11

Oct-11 Jan-12 Apr-12

Sources: Dealogic and World Bank.
Table SAR.1 Annual net capital flows to South Asia
$ billions
2008

2009

2010

2011e

2012f

2013f

2014f

Capital Inflows

64.8

86.2

111.5

90.5

70.4

85.6

109.0

Private inflows, net

55.9

75.2

101.9

83.7

63.3

77.7

100.3

Equity Inflows, net

35.2

59.9

67.4

62.2

52.1

60.5

76.2

FDI inflows
Portfolio equity inflows
Private creditors, net
Bonds
Banks
Short-term debt flows
Other private
Offical inflows, net
World Bank
IMF
Other official

51.1
-15.8
20.7
1.7
11.2
7.9
0.0
8.8
1.4
3.2
4.2

39.4
20.5
15.2
1.9
10.8
2.6
-0.1
11.0
2.4
3.6
5.0

28.0
39.4
34.5
10.1
12.8
11.7
-0.1
9.6
3.3
2.0
4.4

51.6
10.6
21.5
4
6.5
10.9
0.1
6.8
2
0.5
4.3

45.0
7.1
11.2
0.3
2
9.0
-0.1
7.1
..
..
..

48.5
12
17.2
3
3
11.0
0.2
7.9
..
..
..

56.2
20
24.1
3
7
14.0
0.1
8.7
..
..
..

Note :e = es tim ate, f = forecas t

Source: World Bank.

134

Global Economic Prospects June 2012

South Asia Annex

Figure SAR.14 Exponential increase in remittanceflows to South Asia since 2000
US$ billions

inflation expectations have become entrenchedin South Asian countries, and because of
capacity constraints, particularly in Sri Lanka
and Maldives, relatively little progress towarddisinflation is expected. Near-stagnant output inthe Euro area and spillover of the current turmoil
to other high income and developing countries
could dampen South Asia’s export performance.

US$ billions

14

70

12

60
Bangladesh

50

10
Nepal
Pakistan

840

Food grain production in South Asia hasremained buoyant, with annual production
outpacing consumption demand in the 2011-12
crop year (table SAR.2). Although the share of
agriculture in South Asia’s overall GDP has
declined over time, a strong agricultural outturnin the 2012/13 crop year, with production levels
similar to that experienced in the previous year,
is likely to contribute to rural demand andprovide a lift to growth, while reducing
inflationary pressures.

Sri Lanka
630

India [right]

4

20

2

10
0

0
1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Source: World Bank Migration and Development Brief 18

average levels in previous years), and adiversification of migration destinations towards
non-OECD high income countries such as South
Korea and to other developing countries (e.g.,
Malaysia) has contributed to relatively robust
demand for South Asian migrants, and thereby tothe steady growth of remittances.

However, activity levels in the region are
expected to remain subdued in the medium-term
due to the fragile external environment amid
slower growth in high income countries as wellas domestic policy concerns, including fiscal
deficits, high inflation, and energy andinfrastructure constraints. Private capital inflows
are likely to remain below the level reached in2010 (table SAR.1) and could become morevolatile during the course of 2012, particularly
if the ongoing Euro area turmoil worsens and if
European banking sector deleveraging
accelerates. Uncertainty about private capital
inflows would make it difficult to finance South
Asia’s current account deficits. In addition,
remittance inflows in dollar terms are likely toincrease at a slower pace of 7.4-8.4 percent
annually during 2012-14, according to the WorldBank’s Migration and Development Brief 18.
South Asia’s growth is expected to pick-up
modestly during the course of 2013 as global
growth resumes (albeit at a relatively weak pace)
and to gradually increase to 6.7 percent by 2014(see table SAR.3 for the regional forecastsummary and table SAR.4 for country-specificforecasts).

Medium-term outlook
South Asia’s GDP growth is expected to slow
further in 2012 due to weak carry-over from2011
Despite an incipient recovery in industrial
activity and exports in early 2012, South Asia’s
GDP growth is expected to slow further to 6.4
percent in 2012. The weaker than average carryover (see box 3 in the main text) resulting fromthe sharp deceleration of growth in India in thesecond half of 2011, along with domestic policy
uncertainties across the South Asia region and astill-fragile external environment are expected tomoderate regional growth in 2012. The fiscal
balances of South Asian countries are likely toremain under considerable pressure if crude oil
prices remain close to the average level in 2011(see Commodity Annex), and in particular if
adjustment of domestic subsidized prices closer
to international prices is delayed further. Since

GDP growth in India (the largest economy in theregion accounting for about 80 percent of135

Global Economic Prospects June 2012

South Asia Annex

Table SAR.2 South Asia’s grain balances are expected to continue to improve(millions metric tons)
20002001

20012002

20022003

20032004

20042005

20052006

2006200720072008

20082009

20092010

20102011

20112012

20122013(f)Production
y-o-y growth (%)

257
2.2

258
0.3

233
-9.5

258
10.5

255
-1.2

268
5.1

269
0.5

289
7.2

292
1.2

284
-2.7

299
5.1

315
5.4

319
1.5

Consumption
y-o-y growth (%)

239
-3.2

251
5.4

247
-1.7

258
4.2

256
-0.6

261
2.2

268
2.5

281
5.0

279
-0.8

278
-0.3

293
5.2

300
2.4

309
3.2

Net exports
Ending stock

2.1
50.1

5.9
50.8

8.2
28.8

8.3
20.9

4.5
15.2

6.2
15.2

-2.0
18.4

4.1
21.4

-2.4
36.5

1.6
40.7

1.4
45.3

8.9
51.2

7.0
54.1

Sources: U.S. Department of Agriculture and World Bank.

output) slowed to 5.3 percent year-on-year infactor cost terms in the first quarter of 2012—
down from the robust 8.4 percent annual growth
rates recorded in both the 2009-10 and 2010-11
fiscal years. GDP growth slowed to 6.5 percent
in the 2011-12 fiscal year ending in March. A
slow pace of policy reform and reversals on a
range of issues have dented the confidence ofboth domestic and international investors.
Delays in passing legislation on land acquisition;
cancellation of mobile telecom licenses
following concerns about allocation; bans on
mining activity by the courts in Karnataka state(partially lifted in April) and on cotton exportsby the government (lifted in early May); policy
reversal on foreign direct investment in the retailsector; and uncertainty about budget plans to
expand taxation of cross-border acquisitions
involving local assets have contributed towards
creating a relatively uncertain policy
environment for investors. Together with theeffect of loose fiscal policies on credit
availability for the private sector, electricity
shortages, and the weaker external environment,
policy uncertainty appears to have contributed toa slowdown in investment growth in recent
quarters, particularly compared to the robust
rates of increase experienced in the period prior
to the Lehman crisis in 2008 (figure SAR.15).

generation programs and transfer payments) has
provided a boost to the rural economy in recent
years. Monsoon rains during the June-September
period accounting for more than two-third ofIndia’s annual rainfall are expected to be close to
the long-term average, according to India’s
Meteorological Department, although El Nino
conditions could cause rainfall scarcity in someparts of India. GDP growth in India measured atfactor cost is expected to pick up at a modest
pace of 6.9 percent in the 2012-13 fiscal year,
and to rise to 7.4 percent by the 2014-15 fiscal
year. The relatively modest recovery projected
for 2012-13 partly reflects the weak carry overfrom the previous fiscal year and is predicatedon a limited set of reforms, resumption ofmining activity after a partial or full lifting of
Figure SAR.15 India's fixed investment growth has
slowedYear-over-year change, Percent
25

20

15

10

5

Agricultural production in India, accounting fornearly a fifth of the economy and close to half ofoverall employment, has however performed
relatively well due to normal rainfall andabsence of drought. Good agricultural
performance (together with employment

0-52005Q2 2006Q1 2006Q4 2007Q3 2008Q2 2009Q1 2009Q4 2010Q3 2011Q2 2012Q1

Sources: India Central Statistical Office, Datastream
and World Bank.

136

Global Economic Prospects June 2012

South Asia Annex

court-imposed bans, efforts to limit energy andother subsidies, and good agricultural production
following normal monsoon rains. A worseningof the current Euro area turmoil, however, could
result in a less favorable growth outturn in the
2012-13 fiscal year.

crops in some parts of Pakistan could result in
relatively subdued agricultural performance.
Pakistan’s GDP growth is estimated to haveincreased to 3.6 percent in the 2011-12 fiscal
year after the sharp deceleration experienced in
2010-11. Despite the pickup, growth remains
well below the regional average and per capita
growth below 1.5 percent. GDP growth isexpected to remain in the range of 3.8-4.1
percent in the 2012-13 and 2013-14 fiscal years.
Lower foreign investment inflows and IMF debt
repayments coming due could exacerbatebalance of payments difficulties.

Economic growth in Pakistan, the second largest
economy in the region accounting for nearly 10
percent of regional GDP, has remained sluggish.
High inflation, power shortages and the politicalsituation have hampered investment activity andindustrial output, and led to a sharp decline inforeign direct investment. After experiencing
heavy damages during devastating floods in the
2009-10 fiscal year ending in June 2010,
agricultural production in Pakistan revived in
2011-12. However, recurrent power shortages
and heavy rains that have damaged standing

Bangladesh’s economy has suffered frompolitical turmoil and periodic strikes, widespreadelectricity shortages, near-double digit inflation,
fiscal deficits, and deteriorating externalbalances. GDP growth is estimated to have

Table SAR.3 South Asia’s forecast summary(annual percent change unless indicated otherwise)
98-07a

2009

2010

2011

Est. Forecast
2012
2013
2014

GDP at market prices (2005 US$) b,f
GDP per capita (units in US$)PPP GDP d
Private consumption
Public consumption
Fixed investment
Exports, GNFS e
Imports, GNFS e
Net exports, contribution to growth
Current account bal/GDP (%)
GDP deflator (median, LCU)
Fiscal balance/GDP (%)

5.3
3.8
5.3
6.9
9.3
8.9
-7.2
-7.4
0.6
-1.7
8.5
-9.2

8.6
7.1
8.6
7.4
9.6
9.4
13.6
10.6
0.0
-2.5
9.7
-8.4

7.1
5.7
7.1
6.8
5.8
5.9
15.0
16.3
-1.2
-3.5
8.5
-7.9

6.4
5.0
6.4
5.9
5.5
5.2
6.6
7.7
-0.7
-3.2
8.0
-7.5

6.5
4.8
6.5
5.2
5.5
10.0
14.9
11.1
-0.1
-0.4
6.1
-7.0

6.5
5.2
6.5
6.2
5.2
7.6
7.6
7.4
-0.4
-2.4
7.7
-7.3

6.7
5.4
6.8
6.5
4.9
9.6
9.2
8.6
-0.4
-2.0
7.7
-6.9

Memo items: GDP at market prices fSouth Asia excluding India
4.8
3.4
4.9
4.8
5.0
5.2
5.3
India
7.1
9.1
9.6
6.9
6.6
6.9
7.1
at factor cost
8.4
8.4
6.5
6.9
7.2
7.4
Pakistan
4.7
3.6
4.1
2.4
3.6
3.8
4.1
Bangladesh
5.6
5.7
6.1
6.7
6.3
6.4
6.5
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 figures are presented in calendar years (CY) based on quarterly history for India. For
Bangladesh, Nepal and Pakistan, CY data is calculated taking the average growth over the two fiscal
year periods to provide an approximation of CY activity.
d. GDP measured at PPP exchange rates.
e. Exports and imports of goods and non-factor services (GNFS).
f. National income and product account data refer to fiscal years (FY) for the South Asian countries,
while aggregates are presented in calendar year (CY) terms. The fiscal year runs from July 1 throughJune 30 in Bangladesh and Pakistan, from July 16 through July 15 in Nepal, and April 1 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.

137

Global Economic Prospects June 2012

South Asia Annex

slowed to 6.3 percent in the 2011-12 fiscal year
ending in June from 6.7 percent in 2010-11.
Exports have been affected by weaker demand
from key European trade partners, while
infrastructure constraints, especially electricity
shortages, have become acute, in part due to highcrude oil prices. Agricultural output growth isalso estimated to have slowed to less than 2
percent in the 2011-12 fiscal year from theprevious fiscal year’s 5.1 percent. But good crop
harvests are expected for the current agricultural
season due to favorable weather. Monetary

tightening and easing of food inflation are likely
to continue to put downward pressure on overall
inflation. Non-food inflation, however, remains
persistently high partly due to still high cost ofimported inputs and pressures from higher
government spending. Migrant remittances haveremained resilient increasing 11 percent on a
year-on-year basis in the first eleven months ofthe 2011-12 fiscal year to $11.8 billion; but
reserves have been under pressure due to thehigh crude oil import bill. GDP growth isexpected to pick up to 6.5 percent by the 2013-

Table SAR.4 South Asia’s country forecasts(annual percent change unless indicated otherwise)
98-07aCalendar year basis b
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 (%)

Est. Forecast
2012
2013
2014

2009

2010

2011

5.6
0.1

6.0
3.5

6.4
2.4

6.5
0.6

6.4
0.8

6.4
1.0

6.5
1.2

7.0
-0.3

5.7
-2.0

9.5
-2.9

7.6
-3.8

6.7
-3.6

6.8
-2.7

7.0
-2.2

3.8
-1.6

5.3
0.9

4.0
-1.8

3.9
-0.2

4.2
0.6

4.2
0.8

4.3
1.1

4.7
-0.8

1.6
-2.5

3.3
-1.9

3.0
-2.2

3.7
-2.3

4.0
-2.2

4.1
-2.0

4.9
-3.2

3.5
-0.7

8.0
-2.2

8.3
-8.0

6.4
-4.4

6.7
-3.4

7.0
-2.9

Fiscal year basis b
Bangladesh
Real GDP at market prices
5.6
5.7
6.1
6.7
6.3
6.4
6.5
India
Real GDP at market prices
7.1
9.1
9.6
6.9
6.6
6.9
7.1
Memo: Real GDP at factor cost
8.4
8.4
6.5
6.9
7.2
7.4
Nepal
Real GDP at market prices
3.7
4.4
4.6
3.5
4.2
4.1
4.3
Pakistan
Real GDP at market prices
4.7
3.6
4.1
2.4
3.6
3.8
4.1
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.
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 incalendar years (CY) based on quarterly history for India. For Bangladesh, Nepal and Pakistan, CY datais calculated taking the average growth over the two fiscal year periods to provide an approximation of
CY activity.

Source: World Bank.

138

Global Economic Prospects June 2012

South Asia Annex
real estate prices, a surge in imports, and acurrent account deficit in 2010. But the ability ofthe domestic economy to respond to supply
remittance-fueled demand appears to be
improving. Robust demand for migrants anddepreciation of the Nepali rupee (due to thecurrency peg with the Indian rupee) has also
created additional incentives for sending
remittances, contributing to an improvement in
the current account position. Growth is likely tobe subdued in the near term, but increase
gradually over the medium-term.

14 fiscal year.
Sri Lanka’s economy has grown robustly since
the end of civil war with GDP growth of 8.3
percent in the 2011 calendar year, slightly higher
than 8 percent growth registered in 2010. Thisbuoyant growth was mainly due toreconstruction spending, and increases in
tourism arrivals and strong remittance inflows,which grew at 31 percent and 25 percent,respectively, in 2011. However, Sri Lanka’s
external position came under tremendous
pressure because of a nearly 50 percent increasein import demand fueled by rapid domestic
credit growth and robust consumption demand,
together with high crude oil prices compared tothe average levels in previous years. In
consequence, Sri Lanka’s current account deficit
swelled from 2.2 percent of GDP in 2010 tonearly 8 percent of GDP, and the authorities
have had to intervene to support the currency,
drawing down international reserves which
declined from $8 billion in mid-2011 to $5.5
billion or a little over 2 months of import coverby early 2012. Inflation has inched up to 7
percent
in May on a year-on-year basis,suggesting that demand pressures continue toremain strong. The central bank has taken anumber of measures to limit domestic credit
growth and import demand, allowed theexchange rate to depreciate, and taken recourse
to IMF assistance to improve the reserve
position. Growth outturns in the medium term
are expected to be in the range of 6.4-7.0 percent
during 2012-14, a lower but more sustainable
pace compared to that in recent years.

Afghanistan’s economy continues to be
characterized by a heavy reliance on externalaid, weak governance and an uncertain security
situation. GDP growth in Afghanistan surged to
21 percent and 8.4 percent respectively in the
2009-10 and 2010-11 fiscal years mainly
because of donor assistance. But growth slowed
to an estimated 5.7 percent in 2011-12 due to apoor crop and partly since aid has leveled off andis therefore not contributing as much to growth.
The monetary policy transmission mechanismand financial sector also remain weak,particularly in the wake of the Kabul Bank crisis.
The withdrawal of the majority of foreign
NATO forces by 2014 could reduce largely aidfinanced growth to 4-5 percent, according torecent World Bank estimates – necessitating an
adjustment to domestic sources of growth.
Agriculture and services are the mainstay of theeconomy, but recently awarded contracts forgold and oil extraction could see an increase in
the contribution of mining to growth.
Maldives has been beset by politicaluncertainties for much of the last year –adversely affecting tourism revenues. Fiscal
expansion following the change of government,
including increase in public sector wages and theintroduction of universal healthcare, has fed into
import demand and increased inflationarypressures already running in the double digits.

Nepal’s GDP growth is estimated to have picked
up to 4.2 percent in the 2011-12 fiscal year
ending in mid-July from 3.5 percent in 2010-11,
supported by a good agricultural harvest, robust
remittance inflows and tourism revenues.
Although the political situation is much
improved compared to the period of civil
conflict prior to 2007, it remains characterized
by instability due to as yet unresolved
constitutional issues. This uncertainty continues
to hold back investment and industrial activity.
Remittances have supported consumption inrecent years, but strong demand resulted in rising

Fiscal balances in South Asia are likely tocontinue to remain stressed in absence of
substantive action to reduce fuel, electricity andfertilizer subsidies and parallel efforts toimprove revenue performance. India has set a139

Global Economic Prospects June 2012

South Asia Annex

target of reducing overall subsidies to 2.0
percent in the 2012-13 fiscal year, which islikely to require significant upward adjustment
to administered fuel prices. Even after recent
price hikes in Bangladesh and Sri Lanka, energy
products are still subsidized to some extent.
Moreover, elections scheduled in the coming
two years in several South Asian countries and adesire to protect consumers from the inflationary
impact of higher fuel prices could make it
difficult to reduce subsidies and raiseadministered prices closer to cost recovery
levels.

were to rise by $50, South Asia’s current
account and fiscal deficits could be expected torise by 1.5 percent and 0.8 percent of regional
GDP, respectively, by 2013, and GDP could
decline by 1.3 percent relative to the baseline(see scenario in box 6 in the main text).
India’s short term debt obligations remain
elevated, with short-term claims comprisingmore than half of overall foreign currency claimsof international banks that report data to the
Bank for International Settlements (BIS). An
increased reliance on short-term funding, which
is projected to decline at a much smaller pacethan other inflows (table SAR.1), could increase
vulnerability to external events.

Risks and vulnerabilities
South Asia’s growth remains vulnerable toexternal and domestic downside risks. On theexternal front, an escalation of Euro area
uncertainties during the course of the year—inparticular after Greek elections in mid-June—
would likely have a negative impact on South
Asia’s growth prospects. Weaker demand forexports from Europe (figure SAR.16) and lower
and potentially more volatile private capital
flows would put additional strains on the balanceof payments position of South Asian countries,
and delay a recovery in investment and output.
An increase in geopolitical tensions in the Straitof Hormuz that causes a major disruption to
global oil supply would also adversely impact
this net oil-importing region. If global oil prices

The already loose stance of fiscal policy andhigh inflation rates in South Asia imply that
there is limited space for demand stimulus in theevent of a negative external or domestic shock.
Were a crisis to materialize, the burden of
adjustment would fall mainly on private
consumption and investment, in turn depressing
future productivity and growth and potentiallyeroding the recent gains against poverty.
Nonetheless, expansion of demand throughfurther policy easing could provecounterproductive with risk of higher inflation,
crowding out of private investment by everlarger government borrowing, and possibly
greater macroeconomic instability.

Figure SAR.16 South Asian countries have significant trade exposure to European markets

An upside risk for South Asia’s growth is that
alleviating the economic policy, energy andinfrastructure constraints outlined above could
potentially lift South Asia’s growth closer to thepre-crisis trend. Recent progress on reducing
barriers to intra-regional trade in South Asia, if
sustained, could expand markets within theregion and bring significant benefits, inparticular to South Asian economies other thanIndia. However, tackling South Asia’s ―behindthe border‖ constraints remains key to improving
the region’s growth prospects.

Merchandise exports to EU, share of total, 2008-2010 average
60%

50%

40%

30%

20%

10%

Another upside risk for regional growth is that ofcrude oil and international commodity prices
declining over the course of 2012, if global
demand weakens further or if additional supply

0%
Afghanistan

Nepal

India

Pakistan

Sri Lanka

Bangladesh

Sources: UN COMTRADE and World Bank.

140

Global Economic Prospects June 2012

South Asia Annex

comes on stream, which could reduce thepressure on current account positions of South
Asian countries. A 20 percent fall in crude oil
prices could reduce South Asia’s regional
current account deficit by 1.2 percent of GDP
and boost regional GDP by 1 percentage point
relative the baseline in the presence ofgovernment budget financing constraints (seetable 5 in main text). Similarly, a faster than
expected growth of remittances and larger aid
flows would also ease the strain on external
positions. But in the absence of substantive
policy actions to reduce internal imbalances,both domestic and foreign investment are likely
to remain weak, thereby eroding the longer-term
growth potential of the region.

Creating a more predictable policy environment
for both domestic and foreign investment andaccelerating the pace of reforms will help toincrease competitiveness and raise South Asia’s
growth potential. Longer-term sustainablemeasures to address South Asia’s energy andinfrastructure deficit by increasing efficiency of
existing players and creating incentives forinvestment and capacity expansion remains oneof the key elements necessary to sustain South
Asia’s growth performance.

Notes:
1

Policy measures
There is urgent need for policy action in several
areas, including: rebuilding policy buffers, inparticular through credible fiscal consolidation
over the medium-term while protecting the mostvulnerable; creating a stable and predictablepolicy environment for the private sector; andfinding sustainable longer-term solutions to ease
electricity shortages and infrastructure gaps.

The years in the text refer to calendar years
unless otherwise stated. Several South Asian
countries measure output in fiscal years,
which extends from July 1 to June 30 in
Bangladesh and Pakistan, from April 1 toMarch 31 in India, and from July 16 throughJuly 15 in Nepal.

References:Ghani, Ejaz (ed.). 2012. Reshaping Tomorrow:
Is South Asia Ready for the Big Leap? WorldBank and Oxford University Press.

Allowing domestic energy prices to adjust in linewith international prices, reducing leakages inpublic distribution systems, and better targetingcan limit the fiscal burden of fuel and othersubsidies. However, given the amplitude ofspending in these areas, implementation is likely
to be difficult. A policy that explicitly ties
reductions in subsidies to an increase in moretargeted anti-poverty measures may be easier toimplement politically. Moreover, given South
Asia’s weak revenue performance relative toother developing regions, there needs to besustained efforts to broaden the tax base,simplify the tax code, and strengthen tax
collection.

Kochhar, K., U. Kumar, R. Rajan, A.
Subramanian, and T. Ioannis. 2006. ―India's
Pattern of Development: What Happened,
What Follows.‖ Journal of Monetary
Economics Vol. 53(5), pp. 981-1019.
World Bank. 2012. More and Better Jobs inSouth Asia, World Bank.

Recent moves toward greater exchange rate
flexibility in some South Asian countries, if
sustained, will allow exchange rates to better
absorb external shocks, facilitating a faster paceof adjustment of output and prices while
reducing pressures on international reserves.

141

Global Economic Prospects June 2012

Sub-Saharan Africa Annex

Sub-Saharan Africa Region
Overview

Outlook

The recent resurgence of financial market
tensions in the Euro Area increases the risks of
weaker global economic activity going forward,
not withstanding a better than expected start to2012. Though Sub-Saharan African economies
are weakly integrated with global financial
markets, headwinds from a slowing global
economy will impact the region through slower
trade, reduced tourism, and weaker capital flows.
The recent perturbations in financial markets arestill ongoing and the extent to which they will
dampen real side activity is uncertain. However,as an indication of potential effects, the similartensions of the fall of 2011 are estimated to have
reduced GDP growth in Sub-Saharan Africa bysome 0.4 percentage points.

Medium term prospects for the region remainrobust, assuming no serious deterioration of thesituation in high-income Europe. On this basis,
global demand is projected to firm towards theend of 2012 and continue to expand through2014. Domestic demand in Sub-Saharan Africa
is projected to remain robust, and growth isexpected to strengthen to 5 percent in 2012, 5.3
percent in 2013 and 5.2 percent in 2014.
Excluding South Africa, growth is expected toreach 6.4, 6.2 and 6 percent in 2012, 2013 and2014 respectively. Rising incomes, lower
inflation, higher remittance flows (rising to $27
billion by 2014, from $22 billion in 2011) andlower interest rates in some countries are
expected to support growth in private
consumption. Infrastructural investment, particularly from China, India and Brazil, shouldbolster productive capacity. Growth in resourcerich countries (e.g. Angola, Cameroon, Gabon,
Ghana, Mozambique, Sierra Leone and Liberia)
are expected to be supported by the coming on
stream of new exports.

Nevertheless, GDP in Sub Saharan Africa grewat a still robust 4.7% in 2011 (down from 5% in2010). Excluding South Africa, growth in therest of Sub-Saharan Africa was stronger at 5.5
percent. This was a higher rate than thedeveloping country average (excluding China) of
4.9 percent, making Sub-Saharan Africa one of
the fastest growing developing regions in 2011.
Growth was broadly based, with resource-richeconomies, such as Ghana, Mozambique,
Nigeria, and Congo, as well as non-resource richeconomies, such as Rwanda and Ethiopia,
growing by 7 percent or more in 2011.

Risks and vulnerabilities
Projected growth outturns for the region arecontingent on developments in the Euro Area aswell as on the extent of slowdown in China.
If the global growth weakens, commodity prices
could decline, hitting exporters of industrial raw
materials (e.g. oil, metal, and cotton) andtourism-dependent economies in the region
particularly hard. In a crisis scenario, weaker
capital flows, remittances and aid inflows could
also decline sharply, potentially compromisingmacroeconomic stability. With policy buffers
weaker than they were prior to the crisis in 2008,
the ability of government to implement
countercyclicalfiscalpolicymaybecompromised.

Growth in 2011 was driven by resilient domestic
demand and a supportive external environment
during the first half of the year. Rising private
consumption underpinned by higher incomesand productivity enhancing infrastructure
spending supported growth outturns. Higher
commodity prices and improved macroeconomic
and political stability in recent years have also
supported increased investment flows into theregion. Private capital flows increased to $42.4
billion in 2011. Notwithstanding a significant
slowdown in the latter half of 2011, export
volumes increased by 10.6 percent in 2011 andoverall tourist arrivals were up by 6.2 percent.

143

Global Economic Prospects June 2012

Sub-Saharan Africa Annex
Figure SSA.2 Fastest growing Sub Saharan African
economies in 2011

Recent developments
GDP growth remained robust in 2011 despite
slow down in latter half of the year. Slower
global growth in the latter half of 2011 curtailed
economic activity in Sub-Saharan Africa by an
estimated 0.4 percent of regional GDP.
Nevertheless, economic activity remained robustwith GDP growing at 4.7 percent in 2011, below
the 5% registered in 2010 and during the precrisis period (figure SSA.1). Excluding South
Africa, growth in the rest of Sub-Saharan Africa
was stronger at 5.5 percent. Growth in the region
was broadly based. Over a third of countries
grew by 6 percent or more percent, with anotherforty percent of countries growing between 4-6
percent. Among the fast growing economies
were resource-rich countries such as Ghana,
Mozambique, Nigeria, and Congo Republic, as
well as non-resource rich economies such as
Rwanda and Ethiopia, all of whom grew 7
percent or more in 2011 (figure SSA.2).

Fastest growing Sub Saharan African economies in 2011
Ghana

Eritrea
RwandaEthiopia

Nigeria
MozambiqueDem. Rep. of Congo
ZambiaUgandaTanzania

0

6

8

10

12

14

16

main driver of growth. Domestic demand held
steady, with its contribution to GDP broadly
unchanged at 6.8 percentage points in 2011,
versus 6.7 percentage points in 2010 (figure
SSA.3). Higher public investment ininfrastructure, and rising private consumption
supported by higher incomes have underpinned
domestic demand growth performance in recent
years. In contrast, net exports subtracted 2.1
percentage points from regional growth in 2011(versus 1.7 percentage points in 2010), as importdemand remained strong even as exports slowed
in response to the financial and economic
turmoil of the second half of 2011. In contrast,

Resilient domestic demand continues to be the
Figure SSA.1 Sub Saharan Africa continues robust
growthExport growth tapered off in Q3 2011, but has
since rebounded. Supported by high commodity
prices, increased investments in the natural
resource sector and strong demand from large
emerging markets (China, Brazil and India),
export volumes in Sub-Saharan Africa increased
by some 10.6 percent in 2011.

Developing (ex. China)
Sub Saharan Africa (ex. South Africa)
Sub Saharan Africa

8.0

4

Source: World Bank

Besides higher commodity prices that havesupported growth in the resource richeconomies, improved macroeconomic andpolitical stability in recent years has supported
increased private investment flows to both
extractive and non-extractive sectors (e.g.
telecommunication and financial services).

%ch

2

7.0
6.0
5.0

4.0
3.0
2.0

However developments in 2011, were marked by
two distinct phases.

1.0
0.0

 During the first half of the year export-1.0

demand was growing at double digit rates.
Unlike other regions, Sub-Saharan African
exports were not hard hit by the disruptions to
supply chains from Japan’s Tsunami

-2.0

2005

2006

2007

2008

2009

2010

2011

Source: World Bank

144

Global Economic Prospects June 2012

Sub-Saharan Africa Annex

Figure SSA.3 Resilient domestic demand supported
2011 GDP growth in Sub Saharan Africa

Figure SSA.4 Exports declined sharply in H2 2011

percent

200

Net exports contribution to growth
Domestic demand contribution to growth
GDP growth

12
10

150

Agriculture exporters
Oil
Metal and Mineral

8

100

6
4

All SSA

50

2

0

0
-2

-50

-4
-6
2006

2007

2008

2009

2010

-100

2011

2010M01 2010M05 2010M09 2011M01 2011M05 2011M09

Source: World Bank

Source: World Bank.

(excluding South Africa’s automotive
industry), reflecting their weak integration
with Japanese supply chains.

Most recently, the pace of deceleration of tradeappears to have bottomed out. During the threemonths ending January 2012, the regions export
growth was expanding at an annualized pace of
13.6 percent (3m/3m saar) compared with a peak
contraction of 17.1 percent in September 2011.
This pick up was mainly driven by oil exporters(as oil prices recovered), since for the otherexporter groups export values were mostly.
However, given the strengthening in commodity
prices through March 2012 (figure SSA.5),
export values for both agriculture and metal andmineral exporters are likely to have been
expanding in February and March 2012 (data not
yet available).

 In the second half of the year, in response to

the escalation of the Euro Area crisis andpolicy tightening in some large developing
countries, Sub-Saharan exports were also hit,
decelerating through November (latest data).
 The deceleration was broadly-based, cutting

across all categories of SSA exporters.
Reflecting the sharp deceleration in global
industrial production during the latter months of
2011, Sub-Saharan African exporters of metal
and minerals (e.g. Democratic Republic ofCongo and Mauritania) and cotton exporters (e.gBenin and Burkina Faso) were among thehardest hit, with export values falling at aseasonally adjusted annualized pace of -35.4
percent and -37 percent (3m/3m, saar)
respectively in the three months ending inNovember 2011 (figure SSA.4). Some metal andmineral exporters (e.g. Mozambique and Niger)
bucked this trend, as new capacity came
onstream and augmented their output.

Tourist flows to Sub-Saharan Africa slowed in
H2 2011, but appear to have stabilized in early
2012. Overall tourism arrivals in Sub-SaharanAfrica rose by 6.2 percent in 2011, higher than
the global average of 4.4 percent, but lower than
the 9.6 percent recorded for the region in 2010,
when it benefitted from hosting of the FIFA
World Cup. Kenya performed particularly well
as arrivals were up by 15 percent and revenues
by 32 percent, supported by higher spending of
tourists from emerging markets such as China,
India and the Gulf countries.

Though agricultural exporters also suffereddeclines, they were relatively modest comparedwith those of other exporter groups, reflecting
the lower income elasticity of food products.

As with merchandise trade, there was a drop in
the pace of tourist arrivals to Sub-Saharan Africa
in the last quarter of the year, reflecting the145Global Economic Prospects June 2012

Sub-Saharan Africa Annex

Figure SSA.5 Commodity prices begin to recoverfrom slump late last year

slow pace.
Capital flows to Sub Saharan Africa increased
in 2011, and investor sentiment for region
prospects is ticking up. Notwithstanding
increased global financial market volatility,
increased risk aversion and massive equity
market sell-offs that characterized the latter halfof 2011, overall private capital flows to SubSaharan Africa rose (figure SSA.7 and table
SSA.1) by 5% in 2011 to $42.4bn (developing
countries as a whole fell by 6.7%). The muted
response of capital flows to Sub-Saharan Africa
in 2011 reflects the heavy weight that FDI has inoverall flows to the region, and their relative
stability compared with equity and bond flows.
FDI accounts for about 70 percent of private
capital flows to Sub-Saharan Africa, versus
about 60 percent for developing countries as awhole. According to a recent report, the numberof FDI projects to the region increased by 27%
in 2011, with services, manufacturing andinfrastructure projects accounting for the bulk of
new projects. Further, intra-African investment,
which accounted for some 17% of all new
projects, increased by 32% in 2011, reflecting
the growing dynamism of foreign direct
investment from countries such as South Africa,
Nigeria and Kenya to other countries in theregion.

July 2011 = 100
110
105
100
95
90
85

Agriculture

80

Energy75

Metal and minerals

70
2011M01 2011M03 2011M05 2011M07 2011M09 2011M11 2012M01

Source: World Bank

weaker global economy in the latter half of 2011and Europe’s re-entry into recession (figure
SSA.6).
In Mauritius, where European tourist make up
two-thirds of all tourist arrivals and the tourism
sector accounts for some 10 percent of GDP,overall tourist arrivals were up 0.7 percent for2011 but in December alone, tourist arrivals
from Europe fell by -5.3 percent (y/y). With thestabilization of the global economy in 2012,
early indications are that tourist arrivals to SubSaharan Africa are picking up again, even if at a

Excluding FDI, net capital flows to Sub Sahara

Figure SSA.6 As with other regions tourist arrivals to
Sub Saharan Africa declined in Q4 2011

Figure SSA.7 Foreign direct investment increases but
shorter-term capital flows decline in 2011

12

60

10

50

$bn

Q1-11

Q2-11

Q3-11

Q4-11

Net private inflows
Net FDI inflows
Net portfolio equity inflows

40

8

30

6

20
4

10
2

0
0
SSA

Developing

-10

World

2007

Source: World Tourism Organization and World Bank

2008

Source: World Bank

146

2009

2010

2011e

Global Economic Prospects June 2012

Sub-Saharan Africa Annex

Table SSA.1 Net capital flows to Sub-Saharan Africa$ billions
Current account balance

2008
-14.0

2009
-31.8

2010
-23.2

2011e
-15.7

2012f
0.0

2013f
-10.7

2014f
-18.6

Capital Inflows

42.6

47.2

53.5

56.6

49.5

59.3

82.1

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

37.6
31.8
37.5
-5.7
5.9
-0.7
2.2
4.5
-0.1
4.9
1.9
0.7
2.3

37.4
43.0
32.8
10.2
-5.6
1.9
1.6
-9.9
0.8
9.8
3.1
2.2
4.5

40.5
36.5
28.8
8.0
3.9
1.4
0.7
1.5
0.4
13.0
4.0
1.2
7.9

42.4
30.7
32.5
-1.8
11.7
5
8.1
-1.4
0
14.2
4.3
0.8
9.1

36.8
29.3
31.2
-1.9
7.5
4
2.4
1.0
0.1
12.7

50.9
38.9
35.9
3
12.0
5
6
1.0
0
8.4

71.9
53.8
46.8
7
18.1
7
9
2.0
0.1
10.2

Note :e = estimate, f = forecast

Source: World Bank

Africa suffered the same declines that wereobserved elsewhere among developing countries.
Net portfolio equity flows to the region, which
are short-term in nature (stocks, bonds and tradefinance) and thus more susceptible to market
sentiments, fell by about 50 percent (from$8.0bn to $3.9bn). The illiquidity of most SSA
stock markets limited the decline in short–term
instruments to the deeper financial markets in
the region, most importantly South Africa, butalso Nigeria, Kenya, and Mauritius. Between
July and September 2011 the benchmark indicesof these relatively liquid stock exchanges fell byat least 10 percent. And as of April 2012, only
the bourses of South Africa and Botswana hadrecovered their July 2011 levels. Stock markets
in Kenya, Ghana, Mauritius and Nigeria still
remain on average some 15 percent below their
pre-July levels. The ongoing banking sector
deleveraging in Europe is also likely impacting
trade finance flows to Sub Saharan Africa. A
survey carried out in January 2012, shows thatsome 75% of lenders to the region decreased
available credit or liquidity and became more
selective with customers as a result of thebanking sector deleveraging in Europe. Indeed,
trade finance-related data from Dealogic shows a
19% decline in lending activity in the region in
H2 2011 compared to H1 2011. However, for the

first quarter of 2012, there has been a partial
recovery with a 8.1% quarter-on-quarter
increase.
Reflecting the strength in domestic demand,
consumer spending has remained resilient.
With consumer spending accounting for some 60
percent of GDP in Sub-Saharan Africa, thestrength of consumer demand is an importantdriver of growth in the region. However, most
Sub-Saharan African countries do not publish
high frequency data covering retail sales. Whereavailable, as in South Africa for instance, retailsales increased by 10.1 percent on a seasonallyadjusted annualized basis in the three months
ending in December, contributing importantly tothe solid 3.2 percent (q/q, annualized) Q4 2011
GDP growth in South Africa.
We use quarterly passenger car import data toprovide some insight into consumer expenditurein Sub-Saharan Africa (figure SSA.8). On a year
-on-year basis, quarterly import demand of
durable consumer goods expanded in eachquarter of 2011, including during the peak of the
global economic turmoil in Q42011, suggestingthat in general consumer spending remainedrobust during this period. For the majority of
economies in the region, spending on durable

147

Global Economic Prospects June 2012

Sub-Saharan Africa Annex

consumer goods appears to have been buoyed byrising incomes (supported by robust growth),
easing inflationary pressures, and rising
remittance inflows.

account balances (figure SSA.9). However, theextent of the deterioration in individual
economies was shaped by different influences.
Current account balances for metal and mineralexporters, many of which also benefitted frompositive terms of trade effects in 2011, remained
unchanged, even though within this subgroupbalances improved among some and worsenedamong others. Current account balances
deteriorated among metals and mineral exporters
like Sierra Leone where recent discoveries havespurred big increases in investments, but
improved among economies like Mozambiquewhere new mines or additional capacity came online. In others, like Ghana, strong consumption
and/or expansionary fiscal stances have led to afurther widening of the deficit despite newcapacity coming on line.

Not all countries displayed this pattern, withdemand weaknesses having apparently more to
do with local rather than international factors.
Rising and double digit inflation levels andassociated monetary policy tightening in Kenya,
Tanzania, Uganda, Eritrea and Malawi cut real
incomes in Q4 2011 and reduced spending on
durable consumer goods. The fiscal crisis in
Swaziland in 2011 likely dampened consumer
spending, contributing to the negative growth inconsumer’s durable goods expenditures.
With real side activity in most countries on the
upswing compared to the latter half of 2011,
decelerating inflation, and stable or rising
remittance flows, consumer spending is likely tohave continued expanding through Q1 2012.
Macro economic balances diverge across SubSaharan Africa economies. Although for theregion as a whole fiscal and current accountbalances improved in 2011, much of this was
driven by oil exporters, thanks to higher oil
prices as well as production increases from new
wells. For oil importers, higher oil prices andincreased demand to support robust economic
activity led to deterioration in the current

The exports of many resource poor Sub-SaharanAfrican countries suffered from the slowdown inglobal demand, and have also had to contend
with higher fuel costs – resulting in increased
current-account deficits (smaller surpluses).
Many of these economies are fragile or post
conflict economies whose exportables sector
remains seriously constrained by weak
infrastructure and regulatory barriers thereby
rendering them uncompetitive. Fiscal balances inthese economies have also suffered asgovernment revenues are mostly tied to

Figure SSA.8 Q4 2011 growth in imports of passenger cars

Figure SSA.9 Current account balances diverge
across countries in region(%)(%ch, y-o-y)

8.0

Rwanda
Mauritania
Congo, Dem. Rep.
Mali
Congo, Rep.
Zimbabwe
Ethiopia
Namibia
Cameroon
Gabon
GuineaMadagascar
Cote d'Ivoire
ZambiaLesothoMozambique
Sub Saharan Af rica
Botswana
Gambia, The
Burkina Faso
AngolaComoros
Tanzania, United Rep.
UgandaKenya
Malawi
Swaziland
Eritrea
-100

2009

2010

2011

6.0
4.0
2.0
0.0
-2.0

-4.0
-6.0
-8.0
-10.0
Fragile economies
-50

0

50

100

150

200

250

300

Sources: Trade Map, ITC

Source: World Bank.

148

Oil Importers

Oil Exporters

Global Economic Prospects June 2012

Sub-Saharan Africa Annexinternational trade taxes which were impacted byslower global trade. Further, higher oil prices
also meant higher government expenditures due
to increased fuel subsidy payments.

stronger among oil importers (falling from 10.0
percent to 7.6 percent), compared to oil exporters(where inflation has been mostly range boundbetween 10.0 percent and 10.6 percent). While
headline inflation (which is measured on a yearon-year basis) has fallen or stabilized for thedifferent exporter groups in the region, inflation
momentum (measured on a 3 month-on-3 monthmoving average annualized basis) which is abetter measure of changing trends, is diverging
among them. For oil importers inflation
momentum is on a declining trajectory(momentum growth dropped to 8.2 percent inMarch 2012 from 10.3 percent the previous
month). suggesting headline inflation could
continue declining. However for oil importers
inflation momentum accelerated to 16.9 percent
in March 2012 from 14.1 percent the previous
month.

Inflationary pressures are easing but concerns
remain. Higher food and oil prices, coupled withrobust demand, adverse weather conditions insome economies, and expansionary fiscal andmonetary stances in others combined to raise
inflationary pressures in Sub-Saharan Africa in
2011, however headline inflation for the region(on a GDP-weighted basis) has abated somewhat
from its peak of 9.7 percent in October 2011 to
9.2 percent in March 2012 (figure SSA.10).
The recent steady decline in inflation whichshould provide support to consumer spending,reflects policy tightening in some countries,
decelerating food price inflation and the waning
pass-through effects of earlier oil price hikes. In
East African economies, for instance, tightermonetary policy helped bring inflation downfrom the above-20 percent inflation levels
recorded earlier. By April 2012, inflation had
fallen to 20.3 percent in Uganda from a peak of
30.4 percent in October 2011, and to 13.1
percent in Kenya from a peak of 19.6 percent inNovember.

Medium-term outlook
Medium term growth prospects for Sub-SaharanAfrica look promising, despite weak growth inhigh-income countries. Unlike some of the larger
developing countries that are facing capacity
constraints, increased investment andproductivity growth in recent years has helped
expand potential GDP in several Sub-SaharanAfrican economies. Further, due to relatively
slower rebound following the crisis in some of
the region’s largest economies (Angola andSouth Africa), or earlier political unrest (Coted’Ivoire) there still exist some spare capacity in a
number of economies. As global demand firms
through 2012 and 2013 and domestic demandremains robust, growth in Sub Saharan Africa is
expected to strengthen to 5.0 percent in 2012
(from 4.7% in 2011) and 5.3 percent in 2013,
before slowing to 5.2 percent in 2014 when
output gaps in the region would have closed.
Excluding South Africa, growth is expected toreach 6.3 percent in 2012 and 2013, before
slowing to 6.0 percent in 2014 (table SSA.2).

Overall, the decline in headline inflation
observed between October and March was
Figure SSA.10 Headline inflation rates decline in recent months.
(y-o-y, %)
13.0
12.0
11.0
10.0
9.0
8.0
7.0

Oil Exporters

6.0

Oil Importers

5.0

3.0
2010M03

Notwithstanding the weakening of the Euro in2011, inflation in CFA zone economies
remained low, falling from 4.2 percent in April
2011 to 2.7 percent in December 2011,
supported mainly by a fall in food price inflation

Sub Saharan Africa

4.0
2010M09

2011M03

2011M09

2012M03

Source: World Bank, Datastream.

149

Global Economic Prospects June 2012

Sub-Saharan Africa Annex(from 14.6 percent to 2.4 percent during thistime period).

Rising incomes, lower inflation rates, higher
remittance flows (rising to $27 billion by 2014
from $22 billion in 2011) and lower interest rates
in some countries are expected to support growth
in private consumption.

Though weak demand from Europe will impact
exports from Sub-Saharan African countries (atleast in 2012), the increasing diversification of
trading partners should help cushion the effects
of weak demand from Europe. Over the past
decade, Europe’s share in Sub-Saharan African
exports has declined from 40 percent in 2002 toaround 25 percent in 2010, with the share going
to developing Asia having increased
substantially.

Investment in the region is expected to remain
resilient over the forecast horizon. New funding
sources for infrastructural investment
particularly from some large developing
countries (China, India and Brazil) should
continue to play an important role in expanding
productive capacity. Overall, FDI flows to SubSaharan Africa are projected to dip by some 4%
in 2012 due to the heightened financial market
tensions, however a recovery is projected
thereafter with FDI flows forecast to reach arecord $46.8 billion by 2014.

Prospects among resource-rich countries (e.g.
Angola, Cameroon, Gabon, Madagascar,
Mozambique, Sierra Leone, Liberia etc) are
expected to strengthen further in coming years as
new investments in the recent past will support
the coming on stream of new exports of oil, gas,
metal and minerals.

Risks
Fragile global recovery. Should conditions in
Europe deteriorate markedly, the global
economy could return to recession-like
conditions. As discussed in the January edition

While trade expansion in the region will provide
a positive impulse to growth, domestic demandis expected to remain the main driver of growth.
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

2009

2010

2011

Est. Forecast
2012 2013 2014

4.4
1.9
4.7
2.2
5.6
8.8
4.6
7.0
-0.7
-0.8
6.3
-0.6

2.0
-0.5
1.9
1.5
4.3
5.0
-5.6
-4.2
-0.3
-3.0
4.4
-5.7

5.0
2.4
5.2
4.9
9.0
10.6
5.0
7.2
-1.0
-1.6
7.9
-4.0

4.7
2.7
5.0
4.5
6.0
10.4
3.8
11.2
-2.9
-0.7
5.3
-1.7

5.0
3.0
5.3
4.6
5.6
6.2
6.9
7.6
-0.8
0.6
5.5
-2.8

5.3
3.3
5.5
4.8
5.3
7.6
5.9
7.2
-1.0
0.1
5.8
-2.1

5.2
3.2
5.4
4.8
4.9
6.1
5.9
6.2
-0.6
-0.1
5.8
-1.6

Memo items: GDP
SSA excluding South Africa
4.9
4.0
6.1
5.6
6.2
6.3
6.0
Oil exporters e
5.2
4.3
6.1
5.3
6.5
6.5
6.1
CFA countries f
4.0
2.7
4.5
3.1
5.0
5.2
4.7
South Africa
3.7
-1.5
2.9
3.1
2.7
3.4
3.5
Nigeria
5.1
7.0
7.8
7.4
7.0
7.2
6.6
Angola
10.5
2.4
3.4
3.4
8.1
7.4
6.8
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.

Source: World Bank.

150

Global Economic Prospects June 2012

Sub-Saharan Africa Annex
Figure SSA.11 Exports of Servicesof the Global Economic Prospects 2012, GDP in
Sub-Saharan Africa could fall by up to 1.5
percentage points relative to baseline in 2012
and a further 3.5 and 1.8 percentage points in2013 and 2014 respectively.

(Share of GDP, %)Seychelles
Cape Verde
Mauritius
Gambia, The
Kenya
Congo, Rep.
Togo
Tanzania
SenegalSwaziland
Madagascar
Ethiopia
Namibia
Sub-Saharan Africa Avg.

Trade impacts are likely to be most severe forregional exporters of oil, metal and mineral, andagro-industrial raw materials (e.g. cotton)
because sales (prices and volumes) of thesecommodities tend to more sensitive to the global
business cycle. Food exporters will be less hard
hit because food tends to remain stable even as
global activity rises or recedes. Countries likethe Congo Republic, Angola, Zimbabwe, and toa lesser extent Zambia would also be hard hit
because exports represent such a large share of
their GDP. Other smaller economies like
Swaziland, Seychelles Cape-Verde, and Gambia
would be exposed to a sharp decline in global
tourism (figure SSA.11). For economies withweak foreign exchange reserves, unfavorable
terms of trade changes could trigger significant
depreciations and compromise macroeconomic
stability, as occurred in a number of regional
economies during the crisis in 2009 (e.g.
Democratic Republic of Congo, Ghana, andZambia).

0%

20%

40%

60%

80%

Source: World Bank.

their capital investments, a drop in aid flows arelikely to dampen growth prospects among these
economies. As regards remittances, a fall in
remittances, prompted by a further weakening of
the employment situation in advanced
economies, could lead to drop of up to 6.2
percent from the current baseline forecasts.
A harder-landing in major commodity
importers like China is also a risk. Should
China not succeed in engineering the softlanding scenario of the baseline, demand for andprices of major metals and minerals could
decline significantly. Over the past decade SubSaharan African exports to China have increased
from 5 percent to some 19.3 percent in 2010,
with oil (Sudan, Angola, Congo republic) andmetal and mineral exporters (Zambia,
Mauritania, Democratic Republic of Congo)
among the economies whose exports are heavily
dependent on Chinese demand (figure SSA.12).
As China’s share in global metals imports
exceeds 50 percent, versus something like 7
percent for oil, slower growth there is likely to
hit metals exporters hardest, affecting incomes
and therefore domestic demand, government
accounts and current account balances.

Tighter financial conditions in the wake of aEuro Area crisis (as global risk aversion
increases) would likely affect short-term capital
flows to the more financially integrated
economies like South Africa, and to a lesser
extent Nigeria, Mauritius, and Kenya. However,if the crisis endures the FDI inflows, upon whichmuch of the region relies, are also likely to behit.
Aid and remittances. The baseline assumes flat
ODA inflows in 2012 and 2013 before picking
up modestly in 2014. In the case of a more
serious downturn, even these conservative
assumptions may not be met. This remains a
credible risk, as in 2011 ODA flows to Sub
Saharan Africa declined in real terms by 0.9
percent on account of fiscal consolidation taking
place in high-income economies. With manyfragile and post-conflict economies in the region
heavily dependent on ODA inflows to support

Domestic risks. While external risks are mostprominent – a number of domestic challenges
could also cause outturns to sour. Disruptions to
productive activity from political unrest are151Global Economic Prospects June 2012

Sub-Saharan Africa Annex

Figure SSA.12 Share of exports going to China

strong foundation for much of the surge in SubSaharan Africa’s recent growth performance.
However, without investments to increase theproductive capacities in a number of countries in
the region, ongoing expansionary fiscal policy orlax monetary policy, risks overheating these
economies, bringing about macroeconomic
instability and compromising long term growthprospects. In a few countries (e.g. Ethiopia)
persistence of high inflation rates suggest
potential overheating, particularly where output
gaps have been closed or nearly closed (figure
SSA.13).

80%
70%
60%
50%
40%
30%
20%
10%
Sudan
ZambiaAngola
Mauritania
Congo, Dem. Rep.
Congo, Rep.
Gambia, The
RwandaTanzania
Burkina Faso
Central African
Zimbabwe
Sub‐Saharan Africa
Mali
Ethiopia
NamibiaSouth Africa
Gabon
Madagascar
Cameroon
Benin
Mozambique

0%

2010

Figure SSA.13 Overheating remains a concern in a
number of economies

2000‐2002 Average

35
Inflation rates (%)

Source: UN COMTRADE, WITS.

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
there and in 2012, there has been political unrest
in Mali.

30

ETH

25
20
15
10

UGA
KEN
BDI

GHA

5
0

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 (andan even higher share of employment), and withmuch of the sector dependent on good rains, theimpact of poor rains on GDP growth in theregion can be significant. However the effects ofpoor rains are not limited the agricultural sector
but also has implications for the services andindustrial sector as they depend on thegeneration of power from hydroelectric sources.
The drought and poor rains in the Horn of Africa
is estimated to have curtailed Kenya’s GDP
growth in 2011 (4.3 percent) by between 0.7 and
1.0 percentage points.1 Already in 2012, poor
rains are forecast for the eastern Horn of Africa
as well as the Sahelian zone, affecting parts ofMauritania, Mali and Niger.

‐5

‐3

‐1

1

3

5

Output gap as share of GDP (%)
Source: World Bank.

Notes:
1

Macroeconomic instability is a concern inselect economies. Prudent macroeconomic
management in recent years has provided a

152

Demombynes, G and J. Kiringai, The
drought and food crisis in the Horn ofAfrica: Impacts and proposed policy
responses. World Bank Economic PremiseNote, Number 71, November 2011.

Global Economic Prospects June 2012

Sub-Saharan Africa Annex

Table SSA.3 Sub-Saharan Africa country forecasts(annual percent change unless indicated otherwise)
98-07a 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$) b
Current account bal/GDP (%)
Equatorial Guinea
GDP at market prices (2000 USD) b
Current account bal/GDP (%)
Eritrea
GDP at market prices (2005 US$) b
Current account bal/GDP (%)

9.7
-0.9

2.4
-8.9

3.4
9.7

3.4
12.7

8.1
16.2

7.4
11.2

6.8
8.6

3.8
3.8
-7.7 -11.4

3.0
-4.7

3.4
-3.9

4.3
-9.3

4.7
-7.2

4.5
-7.2

4.7
9.5

-4.9
-2.7

7.0
1.0

5.1
1.6

5.5
2.2

6.5
2.2

5.3
2.6

4.8
-13.2

3.5
-9.4

7.9
-0.9

4.9
-0.8

5.2
-5.0

5.4
-2.2

5.4
-1.0

1.8
3.5
-20.5 -19.7

3.9
4.2
4.2
4.1
4.0
-15.0 -15.6 -16.6 -17.3 -17.9

5.9
3.6-10.8 -15.1

5.4
5.8
5.8
6.2
6.4
-11.2 -14.6 -16.6 -15.2 -13.0

3.4
-2.4

2.0
-5.0

3.2
-3.8

3.8
-2.9

4.1
-3.3

4.6
-3.2

4.6
-3.3

0.8
-4.6

1.7
-8.0

3.3
-8.8

4.0
-8.3

3.5
-8.6

3.9
-7.7

3.2
-6.9

8.0 -1.6-36.5 -28.9

13.0
6.0
6.5
4.0
3.0
-22.4 -20.0 -20.7 -21.9 -22.5

1.9
-4.0

2.1
-8.2

1.8
-5.9

1.9
2.8
-3.6 -13.0

153

Est. Forecast2010 2011 2012 2013 2014

2.3
2.5
3.1
4.0
-8.7 -10.1 -10.3 -10.5

7.2
7.0
7.2
-17.7 -16.3 -11.0

7.0
-4.4

6.5
0.5

2.9
7.5
1.2 -10.6

8.8
3.9

5.1
10.1

6.0
7.0

6.1
6.4

5.8
5.9

0.0
0.7

3.8
7.2

3.0
6.9

-5.1
2.3

6.0
1.5

5.5
0.0

5.5
-1.3

20.7
5.3
6.7 -18.0

-0.8
-6.0

7.1
-9.2

4.0
-7.4

6.8
-5.7

2.5
-4.6

-0.1
-18.9

2.2
-2.7

14.0
-2.9

1.0
-3.4

7.0
-3.5

3.5
-3.6

3.9
-6.5

Global Economic Prospects June 2012

Sub-Saharan Africa Annex(annual percent change unless indicated otherwise)
98-07a 2009
Ethiopia
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Gabon
GDP at market prices (2005 US$) 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 (%)

6.5
-5.3

10.1
-5.4

7.5
-7.1

7.2
-7.8

7.5
-6.3

7.2
-6.2

0.4 -1.4
10.9 13.5

5.7 5.7 4.3 4.0 4.1
11.3 14.9 19.6 18.6 12.6

3.4
-9.4

6.2
4.0

5.0 3.0 3.2 5.5 5.8-11.7 -12.2 -12.9 -12.4 -12.0

4.6
-6.3

4.7
-3.6

6.6 14.4-6.1 -7.9

7.2 7.0 6.5-8.6 -10.7 -12.0

2.8 -0.3-6.1 -10.2

1.9
-7.3

4.3
-7.4

5.0
-7.0

6.0
-7.0

6.5
-6.0

1.8 3.0-7.3 -13.6

3.5
-10.6

4.8
-9.0

4.7
-8.5

4.2
-8.4

4.6
-8.2

3.4
-4.9

2.6
-5.5

5.8 4.4-7.8 -11.8

5.0
-8.2

5.1
-7.4

4.7
-6.6

10.2
-3.5

3.1
-0.1

3.6 3.1 5.1 4.9 4.8-19.1 -23.8 -17.3 -12.6 -12.2

3.2 -4.6-9.5 -15.4

1.6
-8.3

2.6
-8.7

3.0
-8.5

4.8
-8.5

5.0
-8.5

2.8 7.6-11.1 -11.9

7.1
-7.0

5.0
-7.4

4.5
-7.7

5.0
-7.8

5.6
-7.9

5.1
-7.9

4.5
-7.6

5.4
-8.0

4.0
-8.5

5.2
-8.5

5.9
-8.3

4.5
-7.3

4.1 -1.2-5.8 -13.2

5.0 5.1 4.8 5.2 4.9-10.2 -11.2 -11.9 -11.5 -10.6

3.6
-1.2

3.0
-7.4

4.2 4.1 3.6 4.3-8.2 -11.1 -11.2 -10.1

4.5
-9.0

6.8 6.3-14.6 -12.5

6.8 7.1 6.7 7.2-11.9 -12.2 -12.1 -10.5

7.8
-8.4

6.6
-1.8

4.4
-3.9

4.4
4.0

154

8.8
-6.9

Est. Forecast2010 2011 2012 2013 2014

-0.4
1.9

3.6
-6.4

4.2
-2.6

4.4
-3.9

Global Economic Prospects June 2012

Sub-Saharan Africa Annex(annual percent change unless indicated otherwise)
Niger
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Nigeria
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
RwandaGDP at market prices (2005 US$) b
Current account bal/GDP (%)
SenegalGDP at market prices (2005 US$) b
Current account bal/GDP (%)
Seychelles
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Sierra Leone
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
South Africa
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Sudan
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Swaziland
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Tanzania
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
Togo
GDP at market prices (2005 US$) b
Current account bal/GDP (%)
UgandaGDP at market prices (2005 US$) b
Current account bal/GDP (%)
ZambiaGDP at market prices (2005 US$) b
Current account bal/GDP (%)

98-07a 2009

Est. Forecast2010 2011 2012 2013 2014

2.7 -1.2-7.4 -25.1

8.8
6.0
9.5
6.8
6.1
-24.5 -24.7 -22.7 -20.3 -17.6

5.0
11.0

7.0
7.8

7.8
1.3

7.4
7.6

7.0
10.4

6.8
-6.0

4.1
-7.3

7.2
-5.9

8.6
7.4
-7.3 -10.0

7.7
7.2-9.7 -10.4

4.0
-7.0

2.1
-6.8

4.1
-6.6

2.0
-7.5

4.9
5.2
-9.6 -10.0

4.4
-9.2

155

6.6
4.5

2.1
0.7
-15.3 -11.5

6.2
5.0
4.0
4.2
3.9
-34.3 -25.1 -20.4 -18.7 -14.8

7.5
3.2-12.2 -15.7

4.9
5.6 44.5-27.2 -49.7 -11.1

11.1
-9.1

7.6
-7.6

3.7
-2.1

-1.5
-4.0

2.9
-2.8

3.1
-3.3

2.7
-4.6

3.4
-5.0

3.5
-4.7

5.9
-6.9

4.0
-6.2

4.5
-0.5

5.0
-2.9

4.9
-3.0

5.0
-2.9

5.5
-2.4

2.2
1.2
-1.3 -13.7

2.0
0.3-16.7 -10.8

-2.0
1.4

1.0
-5.5

1.9
-6.2

5.9
-5.8

6.0
-9.0

7.0
-4.2

6.4
-4.7

8.0
-3.0

6.4
-3.6

7.0
-3.4

1.9
-9.5

3.2
-5.6

3.4
-7.6

3.7
-7.0

4.0
-7.8

4.4
-7.7

4.6
-7.6

6.4
-5.4

7.2
-6.7

5.2
6.7
4.0
7.0
-10.4 -11.7 -14.8 -10.2

7.3
-5.2

4.2
-13.7

6.4
1.9

7.6
2.4

6.8
3.6

6.9
2.5

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.
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.
Source: World Bank.

7.2
7.2

6.3
3.9

6.0
3.4

www.worldbank.org/globaloutlook