A World Bank Group
Flagship Report

25thanniversary
editionJUNE 2016

GlobalEconomic
Prospects
Divergences and Risks

JUNE 2016© 2016 International Bank for Reconstruction and Development / The World Bank
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Global Economic Prospects at 25
This year marks the 25th anniversary of the Global Economic Prospects, a World Bank Group flagshipreport prepared by the Prospects Group in the Development Economics Vice Presidency.
In the early 1970s, the World Bank started producing notes on “Prospects for Developing Countries.”
These began to be made public in the late 1970s. In 1991, the outlook section of the World
Development Report was converted into a stand-alone report. In May 1991, the first Global Economic
Prospects report—called “Global Economic Prospects and the Developing Countries”—was launched asa formal publication for wide dissemination.
Since its inception in 1991, the Global Economic Prospects report has examined international economic
developments and the outlook for growth, with a special focus on emerging market and developing
economies. It has analyzed a wide range of topical macroeconomic, financial, and structural policy
challenges these economies face.
Emerging markets and developing economies had an extremely challenging period in the early 1990s.
Unfortunately, many of today’s difficulties appear to be echoes of the 1991 edition:“Today, rising uncertainties from different, yet related, directions portend difficulties to come… Individually,none of these dark economic clouds would be sufficient to dampen the short-term prospects for the world
economy. But together they present compelling evidence that the world economy is in for a turbulent period in
the short term.”“… The impact of external circumstances on developing countries will depend crucially on how individual
countries manage these contingencies. Policies in industrial countries will need to be sensitive to the concerns of“emerging and developing countries” and make it easier for them to restore momentum to the growth process.
This would be especially important for low-income countries that have relatively few strategic options open tothem for sustained development.”
Global Economic Prospects, May 1991

Table of contents
Foreword.................................................................................................................................. xi
Acknowledgments .................................................................................................................. xiii
Abbreviations .......................................................................................................................... xv
Chapter 1

Global Outlook: Divergences and Risks ................................................................ 1
Summary and key messages ................................................................................. 3
Major economies: Recent developments and outlook............................................... 7
Global trends .....................................................................................................12
Emerging market and developing economies: Recent developments and outlook .......17
Box 1.1 Low-income countries: Recent developments and outlook...........................20
Outlook ........... ................................................................................................24
Box1.2 Regional perspectives: Recent developments and outlook ............................26
Risks to the outlook............................................................................................28
Policy challenges ................................................................................................35
References .........................................................................................................46

Special Focus 1 Recent Credit Surge in Historical Context .......................................................... 55
Introduction ...................................................................................................... 57
Evolution of private sector credit.......................................................................... 58
Recent credit growth in light of past episodes ........................................................ 62
Current credit levels: Warning signs? .................................................................... 64
Conclusion ........................................................................................................ 65
Annex SF1.1 Robustness exercises ........................................................................ 67
References ......................................................................................................... 74
Special Focus 2 Quantifying Uncertainties in Global Growth Forecasts ......................................... 77
Selected risk indicators ........................................................................................ 79
Risk indicators and global growth......................................................................... 81
Balance of risks to global growth .......................................................................... 83
Conclusion ........................................................................................................ 83
Annex SF2.1 Estimating the distribution of the global growth forecast ..................... 85
References ......................................................................................................... 92v

Chapter 2

Regional Outlooks ............................................................................................. 97
East Asia and Pacific ......................................................................................... 99
Recent developments ....................................................................................... 99
Box 2.1.1 Macroeconomic policy developments in selected EAP countries ........... 100
Outlook ....................................................................................................... 101
Risks ............................................................................................................ 103
Policy challenges ........................................................................................... 103
Europe and Central Asia ..................................................................................109
Recent developments ..................................................................................... 109
Outlook ....................................................................................................... 112
Risks ........................................................................................................... 113
Policy challenges ........................................................................................... 114
Latin America and the Caribbean ......................................................................119
Recent developments ..................................................................................... 119
Box 2.3.1 Sub-regional divergence in Latin America and the Caribbean .............. 121
Outlook ....................................................................................................... 124
Risks ............................................................................................................ 126
Policy challenges ........................................................................................... 127
Middle East and North Africa ...........................................................................131
Recent developments ..................................................................................... 131
Outlook ....................................................................................................... 134
Risks ............................................................................................................ 136
Policy challenges ........................................................................................... 137
South Asia .......................................................................................................141
Recent developments ..................................................................................... 141
Outlook ....................................................................................................... 144
Risks ............................................................................................................ 145
Policy challenges ........................................................................................... 146
Sub-Saharan Africa ..........................................................................................151
Recent developments ..................................................................................... 151
Outlook ....................................................................................................... 153
Box 2.6.1 Macroeconomic effects of low commodity prices in Sub-Saharan Africa 154
Risks ............................................................................................................ 157
Policy challenges ........................................................................................... 158
References ....................................................................................................... 161

vi

Statistical Appendix ................................................................................................................ ..167
Figures

1.1

Global prospects ............................................................................5

1.2

Global prospects (continued) ..........................................................6

1.3

Activity and policy space in major advanced economies ......................7

1.4

United States.................................................................................8

1.5

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

1.6

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

1.7

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

1.8

Financial markets......................................................................... 12

1.9

Financial markets (continued) ....................................................... 13

1.10

Commodity markets .................................................................... 14

1.11

Commodity markets (continued)................................................... 15

1.12

Global trade ............................................................................... 16

1.13

Activity in EMDEs ...................................................................... 17

1.14

External and fiscal buffers in EMDEs............................................. 19

1.1.1

Recent developments and outlook in LICs ...................................... 20

1.1.2

Recent developments and outlook in LICs (continued) .................... 21

1.15

Private indebtedness in EMDEs .................................................... 24

1.16

Growth outlook for EMDEs ......................................................... 25

1.2.1

Regional Growth ......................................................................... 27

1.17

Risks to global growth prospects .................................................... 29

1.18

Catch-up of EMDEs] income to advanced economies...................... 30

1.19

Risks: China and commodity exporters .......................................... 31

1.20

Geopolitical risks and policy uncertainty ........................................ 32

1.21

Financial market fragilities ............................................................ 33

1.22

Stagnation in advanced economies ................................................. 34

1.23

Slower globalization and risk of protectionism................................. 35

1.24

Unrealized gains from low oil prices ............................................... 36

1.25

Monetary policy in advanced economies......................................... 37

1.26

Fiscal policy in advanced economies............................................... 38

1.27

Structural reforms in advanced economies ...................................... 39

1.28

China’s macroeconomic and structural policies ............................... 40

1.29

Monetary policy in EMDEs .......................................................... 41

1.30

Fiscal policy in EMDEs ............................................................... 42
vii

viii

1.31

Structural reforms in EMDEs ......................................................... 43

1.32

Poverty in commodity-exporting countries....................................... 44

SF1.1

Credit growth in EMDEs .............................................................. 58

SF1.2

Credit to corporates and households................................................ 59

SF1.3

Composition of credit to corporates ............................................... 59

SF1.4

Corporate bond and equity markets ............................................... 60

SF1.5

Characteristics of credit booms ...................................................... 61

SF1.6

Macroeconomic developments during credit booms .......................... 62

SF1.7

Characteristics of deleveraging episodes .......................................... 63

SF1.8

Macroeconomic developments during deleveraging episodes ............. 64

SF1.9

Comparison: Credit and early warning indicators ............................. 65

SF1.10Risks............................................................................................ 65

Annex SF1.1

Developments during credit booms ................................................. 67

Annex SF1.2

Developments during deleveraging episodes ..................................... 68

SF2.1

Uncertainty and balance of risks for risk factors ................................ 81

SF2.2

Risks to global growth ................................................................... 82

Annex SF2.1

Risks to growth: January and June 2016 .......................................... 87

Annex SF2.2

Probability of growth outcomes ...................................................... 88

2.1.1

EAP growth................................................................................ 101

2.1.2

China: Activity, exchange rates, and, external accounts .................... 102

2.1.3

EAP excluding China: Selected indicators ...................................... 103

2.1.4

EAP excluding China: Selected indicators (continued)..................... 104

2.1.5

Vulnerabilities ............................................................................ 105

2.1.6

Policy issues................................................................................ 106

2.2.1

Key indicators............................................................................. 110

2.2.2

Remittances................................................................................ 111

2.2.3

Terms of trade ............................................................................ 112

2.2.4

Recent developments at the country level....................................... 113

2.2.5

External financing ....................................................................... 114

2.2.6

Monetary and fiscal policy............................................................ 115

2.3.1

GDP growth: Latin America and the Caribbean ............................. 120

2.3.2

Exchange rates and sovereign bond spreads .................................... 120

2.3.3

Export growth and current account balances .................................. 122

Tables

2.3.4

Inflation rates and policy rates ......................................................123

2.3.5

Fiscal indicators .........................................................................124

2.3.6

Regional outlook ........................................................................125

2.3.7

External debt ..............................................................................126

2.3.8

Total factor productivity growth and infrastructure quality ............. 128

2.4.1

Growth and oil production ........................................................ 132

2.4.2

Macroeconomic conditions in oil-importing countries ................... 133

2.4.3

Macroeconomic conditions in oil-exporting countries ................... 134

2.4.4

Growth outlook ......................................................................... 135

2.4.5

Policy outlook in oil-exporting countries ...................................... 136

2.4.6

Risks......................................................................................... 137

2.4.7

Policy challenges ....................................................................... 138

2.5.1

Domestic growth ....................................................................... 142

2.5.2

Foreign direct investment and PMIs............................................. 142

2.5.3

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

2.5.4

Fiscal indicators ........................................................................ 143

2.5.5

Current account balances and remittances..................................... 144

2.5.6

Banking sector vulnerabilities ...................................................... 147

2.6.1

Economic activity ...................................................................... 152

2.6.2

External sector developments ...................................................... 153

2.6.3

Exchange rates and inflation developments ................................... 156

2.6.4

Fiscal developments ................................................................... 157

2.6.5

Outlook .................................................................................... 158

1.1

Real GDP ..................................................................................... 4

1.1.1

Low-income countries: Real GDP...................................................23

Annex 1

List of emerging market and developing countries ...........................45

Annex SF1.1

Review of selected literature: Vulnerabilities arising from credit
surges ..........................................................................................69

Annex SF2.1

Global growth dispersion weights: VAR estimates ............................88

Annex SF2.2

Global growth skewness weights: OLS estimates ...............................88

Annex SF2.3.A Literature review: Fan chart construction methodology .....................89
Annex SF2.3.B Literature review: Estimation of weight parameters for risk factors...... 91
Annex SF2.3.C Literature review: Measurement of dispersion and skewness .............. 91

ix

x

2.1.1

East Asia and Pacific forecast summary .......................................... 107

2.1.2

East Asia and Pacific country forecasts........................................... 107

2.2.1

Europe and Central Asia forecast summary .................................... 116

2.2.2

Europe and Central Asia country forecasts ..................................... 117

2.3.1

Latin America and the Caribbean forecast summary........................ 129

2.3.2

Latin America and the Caribbean country forecasts......................... 130

2.4.1

Middle East and North Africa forecast summary ............................ 139

2.4.2

Middle East and North Africa country forecasts ............................. 140

2.5.1

South Asia forecast summary........................................................ 148

2.5.2

South Asia country forecasts......................................................... 149

2.6.1

Sub-Saharan Africa forecast summary............................................ 159

2.6.2

Sub-Saharan Africa country forecasts............................................. 160

Foreword
Although the global financial crisis is now sevenyears behind us, the world’s economy is still
struggling to regain momentum. Growthcontinues to falter in advanced economies and,while there is considerable divergence ofperformance across emerging market anddeveloping economies, their overall growth
remains below potential.
Looking ahead, the prospects of global growth
remain muted. Emerging market and developing
economies face challenges, including the fall-out
of sluggish advanced economy growth, tighter
financial conditions, and stubbornly low
commodity prices, though the latter impacts
economies differently, depending on their natureof trade. Exporters of oil and other key
commodities have been particularly hard hit, while
their importers have been more resistant toeconomic headwinds. Overall, the global outlook
faces pronounced risks of another stretch of muted
growth. This is the somber message that underlies
the June 2016 issue of the World Bank Group’s
Global Economic Prospects.
In addition to presenting detailed outlooks for the
global economy and for each of the world’s
emerging market and developing regions, thisreport analyses two topical policy challenges forpolicymakers to navigate.
The first charts an important vulnerability thatrisks sidetracking economic recovery in emerging
and developing economies: the rapid increase in
private-sector credit since 2010. This buildup has
been greatest among commodity exporting
countries, where credit levels had been modest. In
contrast, credit has been stagnant or shrinking
among commodity importing countries, wherepreviously it had been considerably higher than incommodity exporters.
The second has to do with tools for assessing therisks surrounding prospects for the world economy
and concludes that forecast uncertainty has
increased since January 2016, while the balance ofrisks for global growth has further tilted to thedownside.

The world economy is projected to expand at 2.4
percent in 2016, roughly at the same insipid pace
we experienced last year. On the plus side,
commodity importers will maintain their relatively
high growth, as the low prices become stable. On
the other hand, commodity exporters willcontinue to face challenges, though even in these
economies there should be a slow positive upturn,
as commodity prices stabilize and they slowly
begin to diversify their economy.
Although global growth is projected to accelerate
gradually, a wide range of risks threaten to derail
the recovery, including a sharper-than-expected
slowdown in major emerging markets, sudden
escalation of financial market volatility,
heightened geopolitical tensions, slowing activity
in advanced economies, and diminishedconfidence in the effectiveness of policies to spur
growth. These risks are compounded by the factthat for many countries policy buffers have eroded
substantially, particularly in commodity exporting
emerging and developing countries.
Against this backdrop of weak growth,pronounced risks, and limited policy space,policymakers in emerging and developing
economies should put a premium on enacting
reforms, which, even if they seem difficult in the
short run, foster stronger growth in the medium
and the long run.
Among these measures, efforts to invest in
infrastructure and education, health and otherhuman skills and wellbeing, as well as initiatives topromote economic diversification and liberalize
trade, will boost growth prospects and improvestandards of living. The international community
has an important role to play in the pursuit ofthese goals.

Kaushik Basu
Chief Economist and Senior Vice President
The World Bankxi

Acknowledgments
This World Bank Group Flagship Report is a product of the Prospects Group in the Development
Economics Vice Presidency. The project was managed by Ayhan Kose and Franziska Ohnsorge,
under the general guidance of Kaushik Basu.
Many people contributed substantively to the report.
Carlos Arteta coordinated Chapters 1 and 2. Chapter 1
was prepared by Carlos Arteta and Marc Stocker with
contributions from John Baffes, Vandana Chandra,
Christian Eigen-Zucchi, Eung Ju Kim, Boaz Nandwa,
Ekaterine Vashakmadze, and Dana Vorisek.
The first Special Focus, on the Recent Credit Surge inHistorical Context, was prepared by Shu Yu and Lei
Sandy Ye. The second Special Focus, on Quantifying
Uncertainties in Global Growth Forecasts, wasprepared by Franziska Ohnsorge, Yirbehogre ModesteSome, and Marc Stocker with research assistance fromPeter Williams. Box 1.1 was prepared by Gerard
Kambou. Box 1.2 was prepared by Derek Chen,
Christian Eigen-Zucchi, Allen Dennis, Gerard
Kambou, Ekaterine Vashakmadze, and Dana Vorisek.
Chapter 2 (Regional Outlooks) was supervised by
Carlos Arteta and Franziska Ohnsorge. The authors
were Ekaterine Vashakmadze (East Asia and Pacific),
Christian Eigen-Zucchi (Europe and Central Asia),
Derek Chen (Latin America and the Caribbean), Dana
Vorisek (Middle East and North Africa), Allen Dennis(South Asia), and Gerard Kambou (Sub-SaharanAfrica).
Modeling and data work were provided by Jungjin Lee,assisted by Mai Anh Bui, Xinghao Gong, Qian Li,
Yiruo Li, Liwei Liu, Trang Nguyen, Shituo Sun, andPeter Williams.
The online publication was produced by a teamincluding Graeme Littler, Praveen Penmetsa, Mikael
Reventar, and Katherine Rollins, with technical support
from Marjorie Patricia Bennington. Phillip Hay andMark Felsenthal managed media relations and thedissemination. The print publication was produced by
Maria Hazel Macadangdang, Adriana Maximiliano, andQuinn Sutton.
Many reviewers offered extensive advice and comments.
These included: Kishan Abeygunawardana, Ahmad
Ahsan, Dalia Al Kadi, Sara Alnashar, Kassia
Antoine, Kiatipong Ariyapruchya, Enrico Blanco
Armas, Marina Bakanova, Ulrich Bartsch, Monika

Blasziewiczk, Hans Anand Beck, Eduardo Borensztein,
César Calderón, Kevin Carey, Jasmin Chakeri,
Shubham Chaudhury, Jean-Pierre Chauffour, Ajai
Chopra, Karl Kendrick Tiu Chua, Punam ChuhanPole, Kevin Clinton, Brett Coleman, Andrea Coppola,
Tito Cordella, Damir Cosic, Barbara Cunha, KevinThomas Garcia Cruz, Shantayanan Devarajan, Tatiana
Didier, Makhtar Diop, Doerte Doemeland, Ralph Van
Doorn, Andrei Silviu Dospinescu, Joost Draaisma,
Bakyt Dubashov, Erik Feyen, Cornelius Fleischhacker,
Michael Geiger, Anastasia Golovach, Poonam Gupta,
Gohar Gyulumyah, Lea Hakim, Keith Hansen, Birgit
Hansl, Marek Hanusch, Wissam Harake, Marco
Hernandez, Santiago Herrera, Sandra Hlivnjak, Bert
Hofman, Sahar Hussain, Elena Ianchovichina, Stella
Ilieva, Fernando Gabriel Im, Alain Ize, Ivailo V.
Izvorski, Evans Jadotte, Satu Kahkönen, Leszek Pawel
Kasek, Tehmina Khan, Edith Kikoni, Markus
Kitzmüller, Friederike Norma Koehler, Naoko Kojo,
Christos Kostopoulos, Auguste Tano Kouame, Aart
Kraay, Jean-Pierre Lacombe, Daniel Lederman, Sodeth
Ly, Julio Ricardo Loayza, Dorsati Madani, Sanja
Madzarevic-Sujster, William Maloney, Miguel Eduardo
Sanchez Martin, Khalid El Massnaoui, Gianluca Mele,
Elitza Mileva, Rafael Munoz Moreno, Lili Mottaghi,
Zafer Mustafaoglu, Khwima Nthara, Antonio
Nucifora, Vivian Malta Nunes, Rei Odawara, Luiz
Edgard Ramos Oliveira, Harun Onder, John Panzer,
Miria Pigato, Samuel Jaime Pienknagura, Juan Pradelli,Mona Prasad, Martin Rama, Jaime Rigolini, David
Robinson, Pedro Rodriguez, Daniel Francisco Barco
Rondan, David Rosenblatt, Michele Ruta, Pablo
Saavedra, Yaye Seynabou Sakho, Federico Gil Sander,
Ilyas Sarsenov, Cristina Savescu, Marc Tobias
Schiffbauer, Sergio Schmukler, Philip Schuler, Luis
Servén, Sudhir Shetty, Raju Singh, Karlis Smits, Nikola
Spatafora, Naotaka Sugawara, Abdoulaye Sy, Congyan
Tan, Ashley Taylor, Fulbert Tchana Tchana, MarkThomas, Hans Timmer, Volker Treichel, Augusto de la
Torre, Laura Tuck, Sergey Ulatov, Sona Varma, Julio
Velasco, Jan Walliser, Ayberk Yilmaz, Albert Zeufack,and Luan Zhao. Regional Projections and write-ups
were produced in coordination with country teams,
country directors, and the offices of the regional chief
economists.
xiii

Abbreviations
AEadvanced economies

ASEAN

Association of Southeast Asian Nations

bbl

barrelBRICS

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

BVAR

Bayesian vector autoregression

CDS

credit default swap

CY

calendar year

DSGE

dynamic stochastic general equilibrium

EAP

East Asia and Pacific

ECA

Europe and Central Asia

ECB

European Central BankEM

emerging market economies

EMBI

Emerging Markets Bond Index

EMDE

emerging markets and developing economies

EU

European Union

FDI

foreign direct investment

FOMC

Federal Reserve Open Market Committee

FY

fiscal year

GCC

Gulf Cooperation Council

GDPgross domestic product

GEP

Global Economic Prospects

GST

goods and services tax

ICT

information and communications technology

IMF

International Monetary Fund

LAC

Latin America and Caribbean

LIC

low-income country

MNA

Middle East and North Africa

NPLs

nonperforming loans

OECD

Organisation for Economic Co-operation and Development

OLS

ordinary least squares

OPEC

Organization of the Petroleum Exporting Countries

PMI

purchasing manager’s index

PPPpurchasing power parity

RHS

right-hand side (in figures)

SAR

South Asia Region

SOEstate-owned enterprise

SSA

Sub-Saharan Africa

xv

xvi

TFP

total factor productivity

TPP

Trans-Pacific Partnership

VAR

Vector Autoregression

WEO

World Economic Outlook

WTI

West Texas Intermediate

WTO

World Trade Organization

CHAPTER 1

GLOBAL OUTLOOKDivergences and Risks

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

C H A P TE R 1

Growth prospects have weakened throughout the world economy. Global growth for 2016 is projected at 2.4
percent, unchanged from the disappointing pace of 2015, and 0.5 percentage point below the January forecast.
Emerging market and developing economies (EMDEs) are facing stronger headwinds, including weaker growthamong advanced economies and persistently low commodity prices, as well as lackluster global trade and capital
flows. Divergences between commodity exporters and importers persist. Conditions remain markedly challenging
for commodity exporters, which continue to struggle to adjust to the new era of depressed prices. In contrast,
commodity importers are showing greater resilience to headwinds, although the expected growth windfall fromlow energy prices has been surprisingly modest. Global growth is projected to pick up slowly to 3.0 percent by
2018, as stabilizing commodity prices provide support to commodity exporting EMDEs. Downside risks havebecome more pronounced. These include deteriorating conditions among key commodity exporters, softer-thanexpected activity in advanced economies, rising private sector debt in some large emerging markets, andheightened policy and geopolitical uncertainties. While policy space for monetary and fiscal stimulus is narrow,structural reforms could boost growth both in the short and the long term.

Summary and key
messages
Since the publication of the January 2016 Global
Economic Prospects, weakness in the global
economy has persisted and risks have become
more pronounced. Among emerging market anddeveloping economies (EMDEs), the divergencein economic conditions between commodity
exporters and importers has widened. Some of thedownside risks identified in January havematerialized,
includingsofter-than-expected
growth in advanced economies and further
declines in commodity prices that have only
partially reversed in recent months. Thesedevelopments have been accompanied byheightened political uncertainties, concerns about
the effectiveness of monetary policy stimulus insome advanced economies, the pace of monetary
policy normalization in the United States, andpolicy makers’ ability or willingness to use
expansionary fiscal policy if needed. In addition,for oil importers, the sizable positive terms of trade
shock represented by falling prices has nottranslated into the large boost to growth initially
expected, as other headwinds and uncertainties
have held back activity.
Global growth this year is likely to remainunchanged relative to the disappointing pace ofNote: This chapter was prepared by Carlos Arteta and Marc
Stocker, with contributions from John Baffes, Vandana Chandra,
Christian Eigen-Zucchi, Eung Ju Kim, Boaz Nandwa, Ekaterine
Vashakmadze, and Dana Vorisek. Research assistance was provided
by Xinghao Gong, Qian Li, Liwei Liu, Trang Thi Thuy Nguyen,
Shituo Sun, and Peter Davis Williams.

2015. Growth for 2016 is now forecast at 2.4
percent, down 0.5 percentage point from January
projections (Figure 1.1). EMDEs account for
about half of this downward revision, in large partdue to a significant downgrade to the growthforecasts for commodity exporters, amid
heightened domestic uncertainties and a morechallenging external environment.
Advanced economies are expected to expand by
1.7 percent in 2016, 0.5 percentage point below
January projections. Investment continues to besoft amid weaker growth prospects and elevatedpolicy uncertainty, while export growth has slowedreflecting subdued external demand. Despite an
expected boost from lower energy prices, and theongoing improvement in labor markets, growth isprojected to level off in 2016 rather thanaccelerate.
EMDEs started 2016 with weaker manufacturing
activity. Investment growth has also slowed
substantially, especially in commodity exporters,
partly reflecting tightened domestic policies andweak capital inflows. In China, a gradual domestic
rebalancing is under way, with robust growth inservices and policy support measures mitigating
the slowdown in industrial activity. Brazil and theRussian Federation are still mired in recession.
Global merchandise trade remains subdued,reflecting rebalancing in China and weaker
demand from commodity exporters, which
together contributed to an outright contraction in
overall EMDE merchandise imports in 2015.
For 2016, EMDE growth is forecast at 3.5
percent, 0.6 percentage point below previous

3

4

C H A P TE R 1

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

TABLE 1.1 Real GDP1
(percent change from previous year)
Percentage point differences fromJanuary 2016 projections

World
Advanced economies
United States
Euro Area
Japan
Emerging and developing
economies (EMDEs)
Commodity exporting EMDEs
Other EMDEs
Other EMDEs excluding
China
East Asia and Pacific
China
Indonesia
ThailandEurope and Central Asia
RussiaTurkeyPolandLatin America and the Caribbean
BrazilMexicoArgentina
Middle East and North Africa
Saudi Arabia
Iran, Islamic Rep.
Egypt, Arab Rep2
South Asia
India2
Pakistan2
Bangladesh2
Sub-Saharan Africa
South Africa
Nigeria
AngolaMemorandum items:
Real GDP1
High-income countries
Developing countries
Low-income countries
BRICS
World (2010 PPP weights)
World trade volume3
Commodity prices
Oil price4
Non-energy commodity priceindex
Capital inflows to EMDEs(percent of GDP)5

2013
2.4

2014
2.6

2015e
2.4

2016f
2.4

2017f
2.8

2018f
3.0

2015e
0.0

2016f
-0.5

2017f
-0.3

2018f
-0.1

1.1
1.5
-0.3
1.4

1.7
2.4
0.9
-0.1

1.8
2.4
1.6
0.6

1.7
1.9
1.6
0.5

1.9
2.2
1.6
0.5

1.9
2.1
1.5
0.7

-0.1
-0.1
0.1
-0.2

-0.5
-0.8
-0.1
-0.8

-0.2
-0.2
-0.1
-0.4

-0.1
-0.1
-0.1
-0.6

4.7

4.2

3.4

3.5

4.4

4.7

0.0

-0.6

-0.3

-0.2

3.2
5.9

2.1
5.9

0.2
5.9

0.4
5.8

2.4
5.7

3.0
5.8

0.1
0.0

-1.2
-0.1

-0.8
-0.1

-0.3
-0.1

3.9

4.3

4.7

4.7

4.9

5.0

0.0

-0.2

-0.2

-0.2

7.1
7.7
5.6
2.7
2.3
1.3
4.2
1.3
2.9
3.0
1.4
2.9
2.0
2.7
-1.9
2.1
6.1
6.6
3.7
6.0
4.8
2.2
5.4
6.8

6.8
7.3
5.0
0.8
1.8
0.7
3.0
3.3
1.0
0.1
2.3
0.5
2.9
3.6
4.3
2.2
6.8
7.2
4.0
6.1
4.5
1.5
6.3
3.9

6.5
6.9
4.8
2.8
-0.1
-3.7
4.0
3.6
-0.7
-3.8
2.5
2.1
2.6
3.4
1.6
4.2
7.0
7.6
4.2
6.5
3.0
1.3
2.7
2.8

6.3
6.7
5.1
2.5
1.2
-1.2
3.5
3.7
-1.3
-4.0
2.5
-0.5
2.9
1.9
4.4
3.3
7.1
7.6
4.5
6.3
2.5
0.6
0.8
0.9

6.2
6.5
5.3
2.6
2.5
1.4
3.5
3.5
1.2
-0.2
2.8
3.1
3.5
2.0
4.9
4.2
7.2
7.7
4.8
6.8
3.9
1.1
3.5
3.1

6.1
6.3
5.5
3.0
2.8
1.8
3.6
3.5
2.1
0.8
3.0
3.0
3.6
2.3
4.7
4.6
7.3
7.7
5.1
6.0
4.4
2.0
4.0
3.4

0.1
0.0
0.1
0.3
0.0
0.1
-0.2
0.1
0.2
-0.1
0.0
0.4
-0.2
0.6
-0.3
0.0
0.0
0.3
0.0
0.0
-0.3
0.0
-0.6
-0.2

0.0
0.0
-0.2
0.5
-0.4
-0.5
0.0
0.0
-1.3
-1.5
-0.3
-1.2
-1.1
-0.5
-1.4
-0.5
-0.2
-0.2
0.0
-0.4
-1.7
-0.8
-3.8
-2.4

0.0
0.0
-0.2
0.2
-0.1
0.1
0.0
-0.4
-0.9
-1.6
-0.2
1.2
-1.0
-0.9
-1.8
-0.2
-0.3
-0.2
0.0
0.0
-0.7
-0.5
-1.8
-0.7

-0.1
-0.2
0.0
0.3
0.0
0.3
0.2
-0.4
-0.3
-0.7
-0.2
0.0
-0.5
-0.6
-1.3
-0.2
-0.2
-0.2
0.3
-0.8
-0.3
0.4
-1.3
-0.4

1.2
5.3
6.5
5.7
3.2
3.3

1.7
4.9
6.1
5.1
3.4
3.8

1.6
4.3
4.5
3.8
3.1
3.1

1.5
4.3
5.3
4.2
3.1
3.1

1.9
4.9
6.3
5.1
3.6
3.9

1.9
5.1
6.6
5.3
3.7
4.1

0.0
0.0
-0.6
-0.1
0.0
-0.5

-0.6
-0.5
-0.9
-0.4
-0.5
-0.7

-0.2
-0.4
-0.3
-0.2
-0.2
-0.4

-0.2
-0.2
0.0
-0.1
-0.2
-0.4

-0.9

-7.5

-47.3

-25.7

32.5

6.5

-0.8

-17.2

25.3

-0.7

-7.2

-4.6

-15.0

-12.2

10.5

2.3

-0.2

-10.4

8.6

0.4

5.4

4.3

1.8

3.2

3.8

4.2

-0.5

-0.1

-0.4

-0.2

Source: World Bank.
Notes: PPP = purchasing power parity; e = estimate; f = forecast. World Bank forecasts are frequently updated based on new information. Consequently, projections presented here may
differ from those contained in other Bank documents, even if basic assessments of countries’ prospects do not differ at any given moment in time. Country classifications and lists ofEmerging Market and Developing Economies (EMDEs) are presented in Annex Table 1. BRICS include: Brazil, Russia, India, China and South Africa.
1. Aggregate growth rates calculated using constant 2010 U.S. dollars GDP weights.
2. GDP growth values are on a fiscal year basis. Aggregates that include these countries are calculated using data compiled on a calendar year basis.
3. World trade volume for goods and non-factor services.
4. Simple average of Dubai, Brent, and West Texas Intermediate.
5. Balance of payments data for net capital inflows of foreign direct investment, portfolio investment, and other investment (BPM6).

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

projections. However, these numbers mask
ongoing divergences between commodity
exporters and importers. Commodity exporting
EMDEs—in particular energy exporters—are
struggling to adjust to persistently low commodity
prices. In 2015, this group grew at a 0.2 percent
pace—the slowest since the global financial
crisis—and, for 2016, their growth forecast has
been reduced to 0.4 percent, 1.2 percentage points
below January projections. In contrast,
commodity importing EMDEs have shown
resilience to headwinds, reflecting solid domestic
demand. For this group, growth is expected toremain steady at 5.8 percent throughout theforecast period, a rate close to its long-run
average.1 Activity in commodity importing
EMDEs excluding China has picked up and is
expected to continue to accelerate.

FIGURE 1.1 Global prospects

In low-income countries (LICs), growth slowed to
4.5 percent in 2015. Although growth is projected
to pick up to 5.3 percent this year, lower
commodity prices and persistent security andpolitical challenges have trimmed 0.9 percentage
point from the previous forecast. While thedifficult external environment confronting LICs
will likely continue, projected growth is supported
by resilience of domestic investment and the
expected implementation of reforms.

C. Contributions to global growthrevisions

1Annex Table 1 presents the list of commodity exporting and commodity importing EMDEs.

Weak global growth is persisting in 2016. The recovery in major advanced
economies has stalled. Further commodity price declines have worsened
the prospects for commodity exporting emerging and developing
economies (EMDEs). These factors have contributed to downgrades ofglobal growth forecasts since January, and continue to dampen global
trade. In contrast, commodity importing EMDEs are showing greater
resilience and steady growth. A large proportion of low-income countries(LICs) register slower growth than their long-term average as they face a
combination of external and domestic headwinds.
A. Global growth

B. Commodity price forecasts

World
Advanced economies
Emerging and developing economies

Percent
108
6

US$ nominal, index =100 in 2011
Agriculture
EnergyMetals
90

110

4
70

2
0

50

-0.3
-0.4
-0.5

Percent
14
12
10
8
6
4
2
0
-2

-0.6

2018

2017

2016

2015

2014

2013

2012

F. LICs with growth below long-term
average

2011
2012
2013
2014
2015
2016

EMDE
commodity
importers

EMDE
commodity
exporters

Advanced
economies

2016

2011
2012
2013
2014
2015
2016

EMDEs

2014

2011
2012
2013
2014
2015
2016

2

2012

4

2010

6

Share of countries
Commodity importers
Energy exporters
Metal exporters
Agricutlure exporters

80
70
60
50
40
30
20
10
0

2008

1990-2008 average
2003-2008 average

8

0

EMDEs

2006

E. Growth by country group
Percent
10

World

2017

2004

2016

1990-2008 average
2003-2008 average

2011
2012
2013
2014
2015
2016

-0.2

2011

2018

2017

2016

2015

2014

2013

2012

-0.1

D. Import volume growth

2002

0.0

EMDE commodity exporters
EMDE commodity importers
Advanced economies

30

2000

Percentage points

2011

2010

2009

2008

2007

-4

2011
2012
2013
2014
2015
2016

-2

2011
2012
2013
2014
2015
2016

Downside risks to the outlook have become more
pronounced. Rising policy related and politicaluncertainties, geopolitical risks and eroding
confidence in policy effectiveness could set backglobal growth and trigger financial market
turbulence. A synchronous slowdown in majoradvanced or key emerging market economies
could have large negative spillover effects across
EMDEs (Figure 1.2), while the impact of financial
market stress could be acute among EMDEs withelevated private sector debt. Prolonged stagnationin advanced economies and weaker growthpotential in EMDEs could exacerbate protectionist
sentiments. The materialization of some of theserisks could slow the catch-up of EMDE income
per capita relative to advanced economy levels andset back poverty alleviation.

5

C H A P TE R 1

Sources: World Bank, Haver Analytics.
A. B. Shaded area indicate forecasts.
B. Solid lines show the current forecasts, dotted lines show the World Bank January 2016 GEP
assumptions.
C. Contribution to global growth revisions measured in constant 2010 U.S. dollars. Cumulative contributions from individual country growth revisions can differ from global growth revisions reported inTable 1.1 due to decimal rounding.
D. 2016 is a forecast.
F. Long-term growth averages calculated over the period 1996-2008. Sample includes 28 low-income
countries.

Slow growth is eroding policy buffers tocounteract shocks, leaving the global economy lessprepared to confront these downside risks. Thereis also a degree of divergence in policy buffers
between commodity exporters and importers.

6

C H A P TE R 1

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

FIGURE 1.2 Global prospects (cont.)
An unexpected growth decline in advanced or key emerging economies
could have substantial negative spillovers to EMDEs. Financial market
stress could be associated with a significant slowing of activity in thosecountries, particularly where the private sector is highly leveraged. Suchshocks could slow the catch-up of EMDEs’ income per capita towardadvanced economy levels. Amid weak growth, monetary and fiscal buffers
are eroding, particularly among commodity exporting EMDEs, while spacefor further monetary policy accommodation in advanced economies has
narrowed.
A. Impact of 1ppt decline in G7 and
BRICS growth on other emerging
markets

B. Leverage and growth aroundprevious financial stress episodes

GDP per capita, Index = 100 in 0

Percentage points
0.0

Rising leverage

110
-0.4

Stable leverage

105

-0.8

100
G7

-1.2

95

BRICS

90
-1.6
On impact

1 year0

2 years

1

2

Year

3

C. Years to catch-up to 2015 U.S. GDP
per capita

D. Median EMDE inflation

Number of years
120 1993-2008

Percent
7.0

100

2003-0880

2013-15

Number of years
400
300

40

100

20
0
Frontier
markets

LICs (RHS)

US$/bbl

60
50
40
30
20
10
0

Iraq

Kuwait

Qatar

Oman

Algeria

BahrainRussiaKazakhstan

Iran

Fiscal balance, 2014-15 change
Oil price assumed in 2016 budget (RHS)
WB 2016 oil price forecast (RHS)
Nigeria

3.0

F. Policy interest rate expectations

Percentage points change
percent of GDP

Brazil4.0

1.0
2010 2011 2012 2013 2014 2015 2016

E. Fiscal balances among oil
producers

MexicoOil importers

6.0

2.0

0
Emerging
markets

Angola

5

5.0
200

60

5
0
-5
-10
-15
-20
-25
-30

Oil exporters

4

Percent
2.0 Dashed line: December 2015
Solid line: current
United States
1.5
1.0
0.5

Japan

0.0
-0.5

Euro Area

-1.0
2016

2017

Sources: World Bank, Conference Board, Haver Analytics, International Monetary Fund, Bank forInternational Settlements.
A. Cumulative impulse responses of emerging market growth (excluding BRICS) to a 1 percentage
point decline in G7 and BRICS growth (World Bank 2016b).
B. GDP per capita relative to the base year of two crisis episodes: the 1997 Asian crisis and the 2008
global financial crisis. Countries with “rising leverage” are defined as those having experienced anincrease in private sector non-financial debt to GDP ratios of more than 15 percentage points during
the three years preceding the crisis episode. Sample includes 14 EMDEs and 24 advanced
economies. Unweighted average across countries.
C. Real GDP per capita. Figure shows the number of years needed to catch-up with 2015 real per
capita GDP level in the United States, assuming average growth rates over each period denoted foreach group. Excludes Qatar and Serbia due to data availability. LICs include 25 economies.
D. Last observation is April 2016. Sample includes 104 oil importers and 29 oil exporters.
F. Policy rate expectations derived from forward swap rates. Last observation is May 25, 2016.

Rapidly diminishing foreign reserves and fiscal
buffers have already forced many commodity
exporting EMDEs to tighten policy. In
commodity importing EMDEs, event though low
commodity prices have reduced fiscal and external
vulnerabilities as well as inflation, the scope for
expansionary fiscal policy remains limited becauseof weak starting positions. In advanced economies,
actual and expected inflation remain below policy
objectives. Scope for further cuts to policy interest
rates is limited. Large-scale unconventionalmonetary policy accommodation by major central
banks has succeeded to some extent in bolstering
demand, through its positive impact on financial
markets and lending conditions. However, thesetools may over time have diminishing returns andraise financial stability risks. Expansionary fiscal
policy could provide support to activity in a
number of advanced economies in the event ofadverse shocks.
In an environment of weak growth, rising risks,and limited policy buffers, growth-sustaining
structural policies are urgently needed. These
measures would boost medium- and long-term
growth, reduce vulnerabilities, and signal toinvestors that authorities are committed toreinforcing long-term prospects. If well targeted,they could also support short-term aggregate
demand. Greater investment—in infrastructure,
productivity enhancing technology, and humancapital—could lay the foundation for stronger
growth. Policies should aim to fill public
infrastructure gaps, encourage foreign direct
investment, strengthen human capital, foster
diversification, and reduce barriers to trade.
However, countries with diminishing fiscal space
may have a limited ability to finance investments
in infrastructure and human capital. International
cooperation efforts could include commitments toimplement expansionary fiscal policy if large
downside risks materialize, channel pooled global
resources into infrastructure, and strengtheninternational safety nets for the most fragile
countries. In a context mediocre global demandand limited fiscal space across EMDEs, and amid
extremely low global interest rates, multilateralorganizations have an important role to play in thefinancing of infrastructure and human capital
investment.

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

Major advanced economies are at different stagesof their post-crisis recovery but are expected tostabilize around a weak growth trajectory (Figure1.3). Rising or high public debt and monetary
policy rates at or near the zero lower bound could
reduce the effectiveness of counter-cyclicalpolicies, leaving these economies more vulnerable
to domestic and external shocks. At the sametime, declining productivity growth and aging
populations exert a more fundamental drag on
potential growth.
United States: Growth stabilizing
Softer-than-expected activity since the start of2016 has led to downward revisions to growth
projections. Sectors that rely on oil-related
activities or exports, have faced increasing
headwinds. Low oil prices, and associated financial
stress, has led to a collapse of capital expenditurein the energy sector (Figure 1.4). As for external
trade, a strong U.S. dollar and weakening demand
from emerging markets contributed to stalling
exports.
In contrast, above-trend gains in real disposable
income, on the back of robust job creation andfalling energy prices, continue to support private
consumption as the main engine of growth. Labor
market slack is diminishing, but a cyclical recovery

Major advanced economies are at different stages in their post-crisis
recovery. Record-low interest rates limit the room for additional monetary
policy accommodation, and put greater emphasis on counter-cyclical fiscal
policy. However, large public debt stocks could constrain the effectivenessof fiscal expansion.
A. GDP level

B. Public debt and nominal policy
rates in G3 countries
Percent of GDP
Percent
Policy interest rate Public debt (RHS)
140

Japan

4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0

90

2016

2015

2014

80

2013

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

90

100

2012

95

110

2011

100

120

2010

105

130

2009

110

2008

115

2007

Euro Area2006

Index = 100 in 2007
United States

120

2008

Prospects for major advanced economies havedeteriorated, amid weak global trade andmanufacturing activity. Growth is now generally
expected to level off in 2016, rather than strengthen,despite the positive effects on real incomes from lower
oil prices and improving labor market conditions.
With increasing downside risks to growth, andinflation persistently below target, the European
Central Bank (ECB) and Bank of Japan are
pursuing further policy accommodation, while theU.S. Federal Reserve will normalize policy interest
rates more slowly than expected in January. China
continues its gradual slowdown and rebalancing, as
reforms are implemented and their impact iscalibrated by policy easing.

FIGURE 1.3 Activity and policy space in major advanced
economies

2007

Major economies: Recent
developments and outlook

7

C H A P TE R 1

Sources: World Bank, Haver Analytics.
A. GDP in constant 2010 U.S. dollar. Shaded area indicates forecast.
B. Public debt to GDP ratios and policy rates are GDP-weighted averages of the United States,
Japan, and Euro Area. Last observation is 2016Q1 for policy rates and 2015Q4 for public debt.

in labor participation and a still elevated numberof discouraged and involuntary part-time workers
suggests a persistent and sizable pool ofunderutilized labor. Wage growth is expected togradually strengthen, in line with evidence of a
relatively flat slope of the Phillips curve in the post-crisis period (Blanchard, Cerutti and Summers
2015; Kiley 2015). Evidence of an increasingly
entrenched slowdown in productivity growth
contributed to downward revisions to growth
projections. Labor productivity was recently
dampened by a deceleration in the capitalintensive manufacturing and energy-producing
industries (Van Zandweghe 2016), but around an
already weak post-crisis trend. This trend isunlikely to reverse in the short-term, as corporate
investment remains low, employment growth has
mainly concentrated in services, and the benefitsof IT-related boost of the mid-1990s has faded. In
all, U.S. GDP growth is expected to step back to
1.9 percent in 2016, 0.8 percentage point lower
than projected in January, and to remain only
slightly above 2 percent for the rest of the forecast
period, providing modest support to global
growth.
Over the last two years, members of the Federal
Reserve Open Market Committee (FOMC) haverevised down their projections for the federal

8

C H A P TE R 1

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

FIGURE 1.4 United States
Declining oil prices have led to a collapse of capital expenditure in theenergy sector, but supported resilient consumer spending, which willremain the main engine of growth this year. Labor market slack continues
to diminish, pointing to a gradual strengthening of wage inflation. The U.S.
Federal Reserve revised the projected path of policy interest rates further
down, reflecting in part growing external risks.
A. Mining and exploration investment

US$/ Barrel

Percent of non-financial
corporations’ investment
10
Mining and exploration
investment
8
Oil price (RHS)

140
120
100
80

4

60

2

40
20

0

0

Percent
3.5

Since June 2014

Since 1990

3.0

2.5

2.0
GDP

1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016

6

B. Private consumption andhousehold income growth

Privateconsumption

Disposable
incomeD. Unemployment

Percent
6
5
4
3
2
1
0

Percent of labor force
Unemployment rate
12
Marginally attached and underemployed
Natural rate of unemployment
10

2016

2015

8

Euro Area: Modest momentum

4

Imports

Exports

Investment

6
Consumption

GDP

C. GDP growth and components

2
0
2005

2007

2009

2011

2013

2015

E. Core inflation and wage growth

F. Contribution to FOMC’s Federal
Funds rate forecast revisions sinceJune 2014

Percent, year-over-year
CPI less food and energy
Average hourly earnings (RHS)
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0

Percentage points
0.5
0.0
-0.5
-1.0
-1.5

Total

Other Factors-2.0

Inflation

4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0

Unemployment

2007
2007
2008
2009
2009
2010
2010
2011
2011
2012
2013
2013
2014
2014
2015
2016

funds rate expected at the end-2016 by an averageof more than 180 basis points. Revisions to
FOMC projections for core inflation andunemployment are estimated to account for about
a 50-basis point reduction in the appropriate levelof the federal funds rate over the same period.
This reinforces the view that rising external risks
and downward revisions to long-run projections of
the policy rate have been major drivers of thedelayed tightening cycle in the United States(Yellen 2016). While monetary policy should
remain accommodative well into 2017, fiscal
policy has eased to a broadly neutral stance, but
uncertainty over the medium-term fiscal outlook
remains (Congressional Budget Office 2016). A
persistently low rate of potential growth is likely
over the medium term. Investment growth
remains modest, demographic pressures areintensifying, and a significant turnaround in
productivity growth is unlikely in the short-term(Gordon 2016; Byrne, Fernald, and Reinsdorf
2016).

Sources: World Bank, Haver Analytics, Bureau of Labor Statistics, Federal Reserve Economic Data
(FRED).
A. Last observation is 2016Q1.
B. Average since 1990 exclude recession periods (1990Q3-91Q1. 2001Q1-04, 2007Q4-2009Q2).
Last observation is 2016Q1.
D. "Marginally attached and underemployed" includes people currently not in the labor force but
wanting a full time job and having actively looked for work sometime in the past 12 months, as well as
those employed part-time for economic reasons (defined as the difference between the U6 and U3
rates of unemployment). The natural rate unemployment is the mid-point of the central tendency of
the FOMC's forecast of the unemployment rate in the longer run in the Summary of Economic
Projections. Last observation is April 2016.
E. Last observation is April 2016. Dotted line indicates 12-month moving average.
F. Forecast revisions for end-2016 Federal Funds rate levels from June 2014 to March 2016.
Decomposition is derived from the Taylor rule described in Yellen (2015) and the median of Federal
Open Market Committee (FOMC) forecasts for unemployment and core inflation. The Taylor Rule isdefined as R = RR* + p+ 0.5(p − 2) −(U − U*), where R denotes the Taylor Rule federal funds rate,
RR* is the estimated value of the real natural rate of interest, p is inflation (core PCE forecast in thiscase), U is the unemployment rate, and U* is the equilibrium unemployment rate (longer-run FOMC
forecast of the unemployment rate in this case). RR* can also be considered the time varying
residual as it is done here, labeling it "Other Factors."

The recovery in the Euro Area is proceeding at amoderate pace, supported by an exceptional levelof monetary policy accommodation, low oil prices,and slightly expansionary fiscal policies. However,weak external demand, renewed domestic
uncertainties and broader geopolitical risks
continue to weigh on confidence and activity.
Private consumption has been resilient, andpersistently low oil prices and improved labormarket conditions should help consolidate gains in2016 (Figure 1.5).
Despite aggressive unconventional monetary
policy measures, bank lending to non-financial
corporations is only recovering slowly, particularly
among peripheral economies, where deleveraging
pressures and asset quality issues have kept
borrowing costs at higher levels. In addition,
inflation projections have continued to be
downgraded, complicating further deleveraging
efforts. Overall, a 1 percentage point
undershooting of inflation from target over a fiveyear period has been estimated to raise private
debt by around 6 percentage points of GDP(Draghi 2016). The ECB announced additional

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

B. Unemployment rate

Germany
Italy
Portugal

FranceSpain
Euro Area

27
22
17

7

2016

2015

2014

2013

2012

2011

2010

2009

2

2008

Portugal

Spain

Italy

12

Euro Area

Germany

Percent
32

Netherlands

FranceIreland

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

C. GDP growth and components

D. Unemployment and consumer
confidence

Percent
6

Percent balance
Percent change
Change in unemployment (inverted RHS)
5 Consumer confidence
-1.0

0.0
0.5
1.0

2016

2014

2012

2010

2008

1.5

F. Inflation and Consensus inflation
forecasts

Sources: World Bank, Haver Analytics, European Central Bank, Consensus Economics.
A. GDP level is measured in 2010 US$.
B. Last observation is March 2016.
D. Blue area shows 6-month changes in the Euro Area unemployment rate with an inverted scale.
Last observation is April 2016 for consumer confidence and March 2016 of unemployment rate.
E. Last observation for non-performing loans is 2014H1, and for borrowing costs is March 2016.
F. Last observation is April 2016.

business sentiment, a strengthened yen anddisruptions associated with the April earthquake inKumamoto, growth is expected to be 0.5 percent
in 2016, broadly unchanged from 2015 but
significantly weaker than previously envisaged.

2021

2020

2019

2018

ActualOct-12 forecast
Oct 13 forecast
Oct-14 forecast
Oct-15 forecast
Apr-16 forecast

2017

3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0

2014

40
35
30
25
IRL
20 DEU FRA ITA NLD
15
MLT
10
PRT
5
AUT ESP0
1.5 FIN 2.5
3.5
4.5
Borrowing cost, percent

2013

Percent, year-over-year

2012

Percent of total loans
CYP
45

2016

E. Non-performing loans and averageborrowing costs

-0.5

2015

Imports

Exports

Investment

0

Consumption

2
1

0
-5
-10
-15
-20
-25
-30
-35

2006

3

2004

5
4

2002

2015

2000

2016

2011

Japan continues to fluctuate between periods ofmodest growth and contraction.
Privateconsumption remains weak, falling short of thegains in real income, which have themselves beenmodest (Figure 1.6). Exports are also subdued,
dampened by weak external demand and limited
benefits of past yen depreciation. Despite weakgrowth, labor market conditions continue to show
signs of tightening against the backdrop of anaging population. The unemployment rate
remains slightly above 3 percent, the active job
openings-to-applicants ratio has risen steadily, andthe perception of labor shortages has heightened.
Jobs creation continues at a moderate pace,supported by gains in the services sector, as
manufacturing employment continues to decline.
A shrinking and aging labor force remains a key
factor weighing on growth, investment and savings
patterns (Sher 2014, Kang 2014). Amid weak

A. GDP change since 2008Q2

2010

Japan: Continued stagnation

The recovery in the Euro Area is proceeding at a moderate but unevenpace, with persistent differences in output growth and unemployment rates
across countries. Export growth is expected to moderate this year, butdomestic demand should help stabilize growth at 1.6 percent. Declining
unemployment is being accompanied by improved consumer confidence
and spending. A large stock of non-performing loans continues to keep
borrowing costs at higher levels in some countries. Inflation projections
have been further downgraded, and are below target, despiteextraordinary monetary policy accommodation.

GDP

Notwithstanding some progress since 2015, theongoing recovery in the Euro Area is subdued incomparison with the recoveries following systemicbanking crises in other advanced economies, suchas the United States, the United Kingdom, andSweden in 2008-09 (Ruscher and Vašíček 2015).
Problems associated with structural rigidities andpersistent imbalances, although being gradually
addressed, are still significant. After a long periodof consolidation that dampened activity, fiscal
policy is also expected to be slightly expansionary
this year, reflecting in part additional public
spending associated with the refugee crisis, which
is projected to add about 0.2 percentage point to2016 GDP growth. Rising flows of migrants tothe European Union are creating notablechallenges. E.U. countries have agreed to arelocation plan to help countries most affected by
the influx, but implementation has been very slow
(Merler 2016).

FIGURE 1.5 Euro Area

Non-performing loansmonetary policy easing measures in March,
including cuts in its deposit rate further into
negative territory, and long-term refinancing
operations for banks at below-zero interest rates.
Overall, growth is expected to stabilize at 1.6
percent over the period 2016-18, broadly
unchanged from its pace in 2015.

9C H A P TE R 1

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FIGURE 1.6 Japan
Private consumption remains subdued, falling short of modest real income
gains, while jobs continue to shift from industry to services. A shrinking andaging labor force has been an important factor weighing on aggregate
investment and savings. Growth in GDP per capita has been closer toadvanced economy averages. Ongoing policy stimulus and falling energy
prices should help a gradual recovery in 2016, albeit at a subdued pace.
The recent appreciation of the yen, despite negative interest rates,
represents an additional headwind.
A. Consumption and income growth

B. Job creation since 2007 by sector

Percent, year-over-year
4

Thousands

3
2
1

IncomeIndustry
Services
Total

300

Consumption

200

China: Ongoing rebalancing

100

0
-1
-2

0
-100
-200

-3
-4

2016

2015

2014

2013

2012

2011

2010

2009

Mar-152008

Mar-14

2007

-300

-5
Mar-13

C. Demographics, savings andinvestment

D. Average GDP per capita and population growth since 2007

Percent of GDP
Index = 100 in 1995
Gross national savings
32
105
Total investment
30
Active age population (RHS)
100
28
95
26

Percent
8
7
6
5
4
3
2
1
0
-1
United States

24

90

22
85

20

2014

2012

2010

2008

2006

2004

2002

2000

1998

80

1996

18

GDP per capita growth
Population growth

Japan

Euro Area

E. GDP growth and components

F. Nominal and real effective
exchange rates

Percent
4

Index, 100 = 2010
Nominal
140

2016

2015

Real

3
2

120

1

2016

2014

2012

2010

2008

2006

2004

2002

60

2000

Imports

Exports

Investment

80
Consumption

100

GDP

0
-1
-2

about the effectiveness of monetary policy
measures. On the fiscal side, a supplementarybudget with additional stimulus measures is
expected to provide some support in 2016,
although further delaying a planned return to abalanced primary budget. A decision by thegovernment to postpone the consumption tax hiketo 10 percent, scheduled for April 2017, could
lead to stronger growth in the short term but slow
fiscal consolidation.

Sources: World Bank, Haver Analytics, Consensus Economics.
A. Real income is defined as compensations of employee in constant 2005 yen. Last observation is
2016Q1.
B. Cumulative change in employment levels since January 2007. Industry includes construction. Lastobservation is March 2016
D. GDP per capita in constant 2010 U.S. Dollar.
F. Real effective exchange rate calculated on the basis of relative consumer prices. Last observationis May 2016.

Because of growth disappointments andpersistently low consumer price and wage
inflation, the Bank of Japan continued to ease in2016, introducing a negative interest rate policy inJanuary. Market yields dropped, but measures ofinflation expectations remained low, and theJapanese yen appreciated. This has raised concerns

Growth in China decelerated further, to 6.9
percent in 2015, and to 6.7 percent in the firstquarter of 2016, reflecting weak exports andslowing investment. Gradual domestic rebalancing
is under way. A sharp slowdown in industrial
activity has thus far been mitigated by steady
growth in the services sector (Figure 1.7). In 2015,
the services sector accounted for half of GDP and
the majority of new urban jobs. This helped tooffset layoffs in shrinking industrial sectors andkept urban labor markets tight (Lardy 2016). In
addition, consumption growth continued to berobust, contributing 4.6 percentage points to
GDP growth in 2015, compared to a contributionof 2.5 percentage points from investment.
As a response to the pronounced slowdown in theindustrial sectors and in real estate, a range of
expansionary policy measures were implemented
in the second half of 2015. These included cuts inreserve requirements and interest rates, increased
public spending on infrastructure projects, and tax
cuts for small businesses. Further policy easing in2016 has been increasingly focused on fiscal
measures. Policy accommodation has contributed
to a rebound in investment and a significant
turnaround in house prices, raising renewed
concerns about overvaluation in some market
segments (Chivakul et al. 2015). Fiscal support
measures and tax cuts widened the central
government deficit to a six-year high of 2.3
percent of GDP in 2015, and to an expected 3
percent of GDP in 2016.
China’s slowdown has been unfolding against the
backdrop of weak exports and increased financial
market volatility (World Bank 2016a). The

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

Although somewhat eroded, policy buffers remain
substantial and provide space to support growth.

A. Growth

B. House prices

Percent
14

Industry

Percent, year-on-year
40

Services

12

30

10

1st tier
1st tier (excl. Shenzhen)
2nd tier
3rd tier

20

8
10

6

0

4

-10
2010

2011

2012

2013

2014

2015

E. GDP growth and components

F. Balance of payments

Percent
8

US$ billions

2016

2015

400

4

200

Apr-15Oct-140

2Imports

Exports-200
Investment0

Current accountNet capital flows
Change in reserves

600

6

Apr-14Oct-13Apr-13Oct-12

Apr-12

Q116

Q315

Q115

Q314

-1

Q114

0

90

Q313

100

Q113

1

Q312

110

Q112

120

130

Oct-11

Percent, year-on-year
10Consumer price index
8
Production price index
6
4
2
0
-2
-4
-6
-8

Percent
Onshore vs offshore rate spread (RHS)
3
Nominal vs $US
Real effective2

Apr-11

Index. Jan. 2010=100

Oct-10D. Inflation

Apr-10C. Exchange rates

Apr-160

Oct-15

Apr-11
Aug-11
Dec-11
Apr-12
Aug-12
Dec-12
Apr-13Aug-13
Dec-13Apr-14Aug-14
Dec-14Apr-15Aug-15
Dec-15
Apr-162

Consumption

Baseline projections envisage that growth in China
will continue to slow moderately, to 6.7 percent in2016 and to an average of 6.4 percent in 2017-18,
assuming reforms proceed as expected and theirimpact is smoothed by additional policy action.
Positive tailwinds from lower oil prices and policy
stimulus will continue to offset further declines of
output in overcapacity sectors. Producer pricedeflation, underway since 2012, showed signs ofbottoming out at the start of 2016, while
industrial profits recovered. The labor market is
expected to remain robust and support private
consumption growth. The shift toward services
will continue, facilitated by policies to easebusiness regulations.

A slowdown in industrial activity has thus far been mitigated by steady
growth in the services sector. Fueled by policy support, house priceinflation increased in some market segments. The renminbi has remained
broadly stable against the dollar and in real trade-weighted terms since thestart of 2016. Consumer price inflation picked-up at the start of 2016, while
producer price deflation showed signs of bottoming out. Reflecting gradualrebalancing, consumption has become a major driver of growth. Capitaloutflows in 2015 contributed to a depletion of about 20 percent of foreign
reserves, but these have stabilized in 2016.

Q311

The pace of decline of foreign reserves slowed ascapital outflows, which had reached record levels
in 2015 (US$500 billion), eased in early 2016.
About 40 percent of capital outflows in 2015reflected repayment of short-term external debt,
partly replaced by domestic debt, in an effort bycorporates to reduce net foreign currency
exposures. Some 10 percent of the outflowsreflected a continued increase in foreign direct
investment abroad as a result of new policy
initiatives.

FIGURE 1.7 ChinaGDP

deterioration in global growth prospects, a shift inpolicy focus away from the bilateral exchange ratewith the U.S. dollar towards a basket of currencies
in December 2015, the expected expiration of
temporary market stabilization measures taken insummer 2015, and the introduction of circuit
breakers, contributed to renewed stock market
turbulence in January 2016. Improved
communications on exchange rate policy (WorldBank 2016a), combined with the strong
commitment to the new, lower growth target
approved in early 2016 (6.5-7 percent in 2016
and at least 6.5 percent average growth for 201620), helped calm financial markets. The pressure
on the renminbi subsided and the difference
between onshore and offshore renminbi valuation
narrowed. The currency has remained broadly
stable against the dollar and in real trade-weighted
terms since the start of 2016.

11

C H A P TE R 1

-400
-600
-800
2011

2012

2013

2014

2015

Sources: Haver Analytics, World Bank, International Monetary Fund.
B. The numeric system of tiered cities in China was classified by the government. 1st tier cities
indicate the most densely populated with significant economic, cultural and political influence. Lastobservation is April 2016.
C. Last observation is 2016Q1. Real effective is the trade-weighted exchange rate deflated by relative
consumer prices. An increase denotes an appreciation.
D. Last observation is April 2016.

General government debt, including off-budget
liabilities, is estimated at around 60 percent of
GDP and is predominantly held domestically. The
net foreign asset position amounts to 14 percent ofGDP, at the end of the third quarter of 2015
(Prasad 2016). International reserves ($3.2 trillion,

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FIGURE 1.8 Financial markets
A worsened outlook for the global economy, and concerns about balance
sheet exposure and profitability of highly leveraged energy companies andbanks, led to a sudden re-repricing of credit risks, and a sharp stock
market selloff at the start of 2016. Subordinated bank debt came underpressure in the Euro Area, where the stock of legacy assets and nonperforming loans is still elevated.
A. Bonds and CDS spreads

B. Global equity indexes

Percent
24

Index = 100 in Jan 2014120
All

Bouts of volatility amid tightening financing
conditions

Oil and gas

Banks

110
100

12

90

Apr-16

Jan-16

Jul-15Oct-15

Apr-15Jan-1560

Jan-14

U.S.
energyhigh yield

U.S. highyield

Emerginghigh yield

70

Global high
yield

80

0

EMDE oilcompany
CDS

4Jul-148

Oct-1416

Range since 2010
Jan-Feb
Current

Apr-1420

C. Change in bank CDS spreads in2016

D. Nonperforming loans in the UnitedStates and Euro Area

Basis point
200

Percent of total loans
10150

Peak year-to-date change

8Year-to-date changeEuro Area

United States

2006

2012

100
6

50

4

SubordinatedU.S.

EuropeU.S.

Europe0

Senior

2
0
2000

2003

2009

commodity prices fell significantly in early 2016 and,
although they have retraced some of their declines, aregenerally lower than anticipated at the start of theyear. Global trade prospects have been significantly
downgraded for 2016 and 2017, reflecting a
combination of cyclical and structural factors.

2015

Sources: World Bank, Bloomberg, JP Morgan, Bank for International Settlements, Merrill Lynch,
ITraxx, Markit.
A. Bond spreads during January 2010 - May 2016. Global high yield includes both corporate andsovereign debt rated below investment grade and is capitalization weighted. Emerging high yield
includes high yield corporate debt of issuers with primarily emerging market exposures. EMDE Oil
Companies is a 2013 total assets weighted average of the CDS spreads for Petroleos Mexicanos SA,
Petroleo Brasileiro SA, and Rosneft Oil Company. Current value is May 25, 2016.
B. Last observation is May 23, 2016.
C. Last observation is May 25, 2016.
D. Last observation is 2015.

or 30 percent of GDP) are still ample to meet aspike in demand for foreign currency in case ofrenewed financial market volatility. Capital
controls on portfolio investment and banklending, as well as a largely state-owned financial
system, limit the risk of financial instability arisingfrom disorderly capital outflows. However, they
are gradually being loosened in line with external
liberalization objectives.

Global trends
Following bouts of volatility at the start of 2016,
financial market conditions have improved, but
capital flows to emerging and developing economies
remain vulnerable to sudden changes in investors’risk appetite. Oil and, to a lesser degree, other

Financial markets had a turbulent start of the year,
reflecting concerns for the global economic
outlook, amplified by a sudden re-repricing ofcredit risks (Figure 1.8). The market sell-off wasshort-lived but abrupt, affecting in particular
highly leveraged energy firms and banks.
Energy companies. A further sharp slide in oil
prices in early 2016 led to a notable increase incredit spreads for companies in the oil and gas
industry, which briefly escalated to levels last seen
in 2008-09 on heightened concerns about default
risks. Energy sector companies are among themost leveraged in EMDEs, with the build-up
driven by earlier expectations of high oil prices
and continued strong demand growth (IMF
2015a, Bank for International Settlements 2016).
Bond issuance from major state-run oil companies
in Latin America has surged 80 percent since2010, and the share of bond issuance by energy
companies worldwide jumped from 16 percent to32 percent over the same period. As plunging oil
prices have led to sharply lower revenues andreduced collateral values, weakened balance sheets
could lead to a rise in default rates in the sector(Caruana 2016). Creditor losses would be mostpronounced in bond markets where EMDE oil
and gas companies raised most of their externalfunding. Exposures of banks’ balance sheets to theenergy sector remain on the whole limited. In the
United States, for example, the claims on theenergy industry account for up to 6 percent ofassets among the largest banks.
Banks. Beyond their exposure to credit risks in theenergy sector, concerns about bank balance sheetsat the start of the year mainly reflected fear ofslowing growth in advanced economies andprospects of persistently low or negative interest
rates hurting profitability. For now, many

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

Emerging market assets and capital flows.
Following a period of intense volatility at the startof the year, financing conditions and capital flows
to EMDEs have improved, as major central banks
committed to keep interest rates low for longer,
and commodity prices and the U.S. dollar
stabilized. The correlations of EMDE asset
valuation with oil prices and the U.S. dollar havebeen particularly elevated since the start of 2015
(Figure 1.9). A recovery of the former andweakening of the latter have coincided with arebound in EMDE equity, bond, and currency
markets.
Additionalmonetary
policyaccommodation in Europe and Japan has also
helped reduce pressures from the anticipatednormalization of U.S. monetary policy, andprovided additional funding opportunities
through euro-denominated credit markets.
Improved market conditions, which also reflecteda stabilization in China’s activity indicators, led toa resurgence of international bond issuance byboth sovereign and corporate borrowers in
EMDEs, clearing a backlog accumulated inprevious months.
However, a sustained recovery in portfolio andbank capital flows might prove elusive in theabsence of improving economic fundamentals.
Rating agencies are continuing to reassess credit
risks of EMDE borrowers, particularly ofcommodity exporters, several of which have been

FIGURE 1.9 Financial markets (cont.)
The correlation of EMDE assets with oil prices and the U.S. dollar has been
particularly high since the start of 2015. A stabilization in commodity prices
and the U.S. dollar have triggered a renewed appetite for EMDE assets
and supported a rebound in capital inflows since February. However, risk
premia have been trending upwards, and the rebound in capital flows
could prove short-lived in the absence of improved economic
fundamentals, particularly for commodity exporters.
A. Correlation of EMDE assets with oil
prices and US$
Correlation

Since Jan. 20152010-2014

1
0.5

Index, Jan.2 2015 =100
Currency vs US$
Equities110
USD bonds
Local currency bonds
105
115

100

0

95
90

-0.5

85

C. Bond issuance by EM borrowers
US$, billions

Non-financial corporations
Financial corporations
General government

Percent
12
10

80

8

60

6

40

4

20

2
2010 2011 2012 2013 2014 2015 2016

May-16

Jan-16

Mar-16

Nov-15

D. EMDE bond and energy company
CDS spreads

1000Jul-15

With US$

Sep-15

With oil prices

SharesMay-15

SharesMar-15Currencies

Jan-15

80

-1

120

B. Emerging markets financial assets

02008High yield sovereigns
Investment grade sovereigns
Oil companies' CDS

2010

2012

2014

2016

E. Fund flows in EMDE commodity
importers and exporters

F. Net capital flows to EMDEs

US$, billions, 12-month cumulative sum
Commodity importers ex. China
Commodity exporters
50
China
40
30
20
10
0
-10
-20
-30
-40
-50
2008
2010
2012
2014

US$, billions, 4-quarter cumulative sum
FDI inflows
Porfolio inflows
2000
Other inflows
FDI outflows
1500

Porfolio outflows
Net inflow

Other outflows

1000
500
0
-500
-1000
2016

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

international banks have been able to offset
declining interest revenues with higher lending
volumes, lower risk provisioning, increased fees,
and capital gains. But sustained low or negative
policy rates may begin to cut more deeply intobank profits, particularly in the Euro Area andJapan. Low interest rates account for a significant
proportion of the reduction in net interest margins
across advanced economies (Claessens, Coleman,and Donnelly 2016). Stress at the start of 2016
was concentrated in bank equity and subordinateddebt markets. Concerns about Euro Area banks
were heightened by a large stock of legacy assets
and non-performing loans, whereas banks in the
United States implemented a more thorough postcrisis balance sheet restructuring. Among EMDEs,
bank profitability may be affected by the impact oflow growth and tighter financing conditions.

13

C H A P TE R 1

Sources: World Bank, Dealogic, Bloomberg, Emerging Portfolio Fund Research.
A. “Currencies” is the J.P. Morgan EMCI and “Shares” is the MSCI Emerging Markets Index.
B. Last observation is May 23, 2016
C. Last observation is 2016Q1. 2016Q2 is estimated based on pipeline issuances.
D. CDS stands for Credit Default Swap. Emerging Market Bond Index spreads. “Oil companies’ CDS”
is the 2013 total assets weighted average of the CDS spreads for Petroleo Mexicanos SA, Petroleo
Brasileiro SA, and Rosneft Oil Company. Last observation is May 25, 2016.
E. Sample include 24 commodity exporters and 19 commodity importers. Last observation is May 18,
2016.
F. Sample includes 23 emerging market economies. Last observation is 2015Q4.

downgraded since the start of the year (including
Bahrain, Brazil, Kazakhstan, Oman, and Saudi
Arabia). Liquidity conditions in global financial
markets, including major advanced economies,
remain fragile, and leave markets prone to sudden
reversals (World Bank 2015a). Foreign direct

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FIGURE 1.10 Commodity markets
Commodity prices recovered from January lows but remain low on theback of abundant supply and weak demand. U.S. oil production declined
for the first time in more than four years. Oil prices are expected to recoverslowly as supply is gradually cut back and demand strengthens later in theyear. Average oil production costs have been declining in recent years andare currently below $40 per barrel across most producing countries.
A. Industrial commodity prices
US$ nominal, Index =100 in 2010
160
140
120
100
80
60
Agriculture
Energy40
Metals20

B. U.S. oil production
Million barrels, year-on-year change
Lower 48
Gulf of Mexico

1.5
1.0
0.5
0.0
-0.5
-1.0

C. OECD crude oil stocks

D. Cost of oil production

Million barrels
1,300

BrazilUnited States
Nigeria
China
MexicoLibya
Venezuela, RB
Algeria
RussiaIran, Islamic Rep.
UAE
Iraq
Saudi Arabia
Kuwait

1,200
1,100
1,000

2009

2011

2013

2015

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

-1.5

2007

Jan-11
May-11
Sep-11
Jan-12
May-12
Sep-12
Jan-13May-13
Sep-13Jan-14May-14
Sep-14Jan-15May-15
Sep-15Jan-16
2016

0

900
2007

Alaska2.0

Operating
Capital

0

20

40

60
US$/bblSources: World Bank, International Energy Agency, Rystad Energy, U.S. Department of Agriculture.
A. Last observation is April 2016. Diamond dots represent World Bank forecasts for 2016 as of April
2016 Commodity Market Outlook.
B. Last observation is April 2016. Shaded area (from May 2016) denotes IEA forecast. Lower 48
indicates the rest of states in U.S. besides Alaska and Gulf of Mexico.
C. Last observation is April 2016.
D. Based on data from more than 15,000 oil fields across 20 nations. The production costs were
calculated by including a mix of capital expenditures and operational expenditures. Capital
expenditures included the costs involved with building oil facilities, pipelines and new wells.
Operational expenditures included the costs of lifting oil out of the ground, paying employee salaries
and general administrative duties.

investment (FDI) flows to EMDEs are generally
more stable and relatively less affected by shortterm fluctuations in global financing conditions.
However, the low commodity price environment
has negatively impacted mining and exploration
investment and hence FDI prospects in EMDEs.
As in previous years, reinvested earnings and intercompany loans are expected to account for morethan half of FDI inflows in 2016, with aparticularly significant contribution in China.
Low commodity prices
The weakness of commodity prices, especially forenergy, persisted into 2016 (Figure 1.10), pushingsome prices to new lows at the start of the year.
Abundant supplies and stocks across mostcommodity sectors, softening global growthprospects, and a strong U.S. dollar have allcontributed to the weakness. Prices have since
generally recovered from their lows, on
expectations of reduced supplies going forward,
and some short-covering in futures markets.
However, most commodity markets remain well
supplied with large stocks, making significant
price increases unlikely.
Energy markets. Crude oil prices rallied from lessthan $30 per barrel in mid-January to $46 perbarrel in May, reflecting rising investor sentiment,a weaker U.S. dollar, strong crude import demandin China, and supply disruptions in a number ofoil exporting countries (Iraq, Nigeria, the United
Arab Emirates). More importantly, December
2015 marked the first reported year-on-year
decline in U.S. oil production in more than four
years, and the U.S. Energy Information
Administration estimates that, in the fourth
quarter of 2016, U.S. oil production will be 12
percent lower than the previous year. On thepolicy front, in mid-April, OPEC and several nonOPEC oil producers failed to agree to freeze crude
production at January 2016 levels. The oil market
remains well-supplied, with OECD stocks atrecord levels, but is expected to rebalancematerially in the second half of 2016 due to falling
non-OPEC output.
Oil prices are expected to average $41 per barrel
for 2016 (down from an assumption of $51 per
barrel in the January Global Economic Prospects)
and $50 per barrel for 2017. Low and volatile oil
prices have taken their toll on investment anddrilling, particularly in the United States, despite
the industry’s efforts to reduce costs and improve
efficiency. Non-OPEC production is projected by
the International Energy Agency to fall by nearly
0.8 million barrels per day in 2016, with the bulkof the decline in the United States. With thenotable exception of Canada and Russia, mostother oil producers are expected to record
moderate declines in 2016. As a result, global
production is expected to fall to a level more inline with global consumption. Downside risks tothe price forecast include more resilient nonOPEC supply and weaker global demand growth,
while the main upside risk for oil prices is acoordinated supply restraint by major producers.

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

Agricultural commodity markets. Agricultural
prices continued their downward trend during thefirst quarter of 2016, the seventh consecutive
quarterly decline. Ample supplies during thecurrent and past two seasons have kept most grain
and oilseed markets well-supplied (Figure 1.11).
Local supply disruptions due to El Niño
(especially in South America and East Asia) were
not strong enough to have a material impact on
global markets. Since agriculture is an energyintensive sector, weakness in agricultural prices has
also reflected the pass-through from lower energy
prices (Baffes and Haniotis 2016). A 10 percent
decline in energy prices is associated with a 1.5 to

Ample production during the current and past two seasons have kept mostgrain and oilseed markets well-supplied. Since agriculture is an energyintensive sector, weakness in agricultural prices also reflect the passthrough from lower energy prices.
A. Commodity price indices change

B. Global grain production andconsumption

Percent
0-5-10Billion metric tons
2.3
Production
2.1
Consumption

2011Q1-2015Q1

2015Q1-2016Q1

-15
-20
-25
-30
-35
-40

1.9
1.7
1.5

C. Energy intensity

D. Elasticity of food prices to oil
pricesPercent

Elasticity
0.30

China

0.25

Brazil

0.20

EU-12

0.15

United States

0.10

World

0.05

0

10

20

All food

Soybeans

Sub-Saharan Africa

0.00

Palm oil

Manufacture
Agriculture

Turkey

Maize

India

Wheat

Canada

2016

2014

2012

2010

2008

2006

2004

1.3

2002

Oils and Grains Beverages Other
Raw
meals
food materials

2000

Metals markets. Metal prices have also ralliedfrom January lows on expectations of stronger
demand, and ongoing supply rebalancing fromproduction cuts and lower investment in new
capacity. As with crude oil, production of metals
has held up better than expected because of lower
input costs and depreciating currencies in
producing countries. Iron ore and steel prices
increased on restocking at Chinese mills ahead of
the construction season. The government’s added
stimulus measures and revival of construction
activity could continue to provide support despite
the unwinding of seasonal demand. However,markets remain oversupplied, with large stocks
and prospects for continued increases in capacity
resulting from earlier large investments, notably
for iron ore (Australia), copper (Peru) andaluminum (China). The closure of large zincmines in 2015 (Australia and Ireland) is expected
to support zinc prices. Metal prices are projected
to decline 15 percent in 2016 and to risemoderately in the medium term as the expansionof capacity slows, but the timing will vary byindividual metals.

FIGURE 1.11 Commodity markets (cont.)

Rice

Natural gas prices continue to decline due toample supply, with exports from new liquefied
natural gas capacity in the United States andAustralia expected to keep prices low in the threemain markets (United States, Europe, and Asia).
Excess production is encouraging buyers toincreasingly import low-priced spot gas, to replacegas delivered through pipelines on higher-priced
long-term contractual agreements.

15

C H A P TE R 1

Sources: World Bank, International Energy Agency, U.S. Department of Agriculture, GTAP database,Baffes and Haniotis (2016), Rystad Energy.
A. Price changes are based on quarterly averages.
B. Grain includes maize, wheat and rice. 2016 based on May 2016 USDA forecasts.
C. Calculations based on the GTAP database. The energy intensity reflects the share of energy in thecost of agriculture and manufacturing industries and accounts for both direct and indirect use ofenergy. Data are of 2007.
D. Elasticities are derived from a panel regression based on annual data (1960-2015) of real prices
which are regressed on stocks-to-use ratio (a measure of crop conditions), real GDP (as measure ofincome), macroeconomic fundamentals (U.S. 3-month T-bill and the US$ against a broad index of
currencies) and energy prices. All variables (except interest rate) are expressed in logarithms (Baffes
and Haniotis 2016).

2 percent decline in agricultural commodity
prices. Input costs for agricultural commodities
have also eased because policy-driven demand forbiofuels, crops that compete with agriculturalcommodities for land, has leveled off. Prices ofagricultural commodities are expected to decline
marginally in 2016, with favorable weather
conditions in the Southern Hemisphere for mostgrains and oilseeds—except for rice, which has
been subjected to some El Niño-related
disruptions in East Asia. Upside risks arise from La
Niña, which may affect crop conditions later in
2016.2
2La Niña is characterized by unusually cold ocean temperatures inthe Equatorial Pacific, compared to El Niño, which is characterized
by unusually warm ocean temperatures in the same region. La Niña
often follows El Niño.

16

C H A P TE R 1

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

FIGURE 1.12 Global trade
Global trade growth reached a post-crisis low in 2015, reflecting a marked
deceleration in import demand from EMDEs. Consumer goods andservices trade showed greater resilience, but global trade forecasts
continued to be downgraded, reflecting expectations of weak investment
worldwide, and a slower pace of supply chain integration and tradeliberalization.
A. Import volume growth

B. Goods import value from majorcommodity importers

1990-2008 average
2003-2008 average

Percent
14
12
10
8
6
4
2
0
-2

Nominal $US value, Index = 100 in Jan 2012
130
120
110
100
90

Consumer goods
Raw materials
Manufactured goods

2011
2012
2013
2014
2015
2016

2011
2012
2013
2014
2015
2016

2011
2012
2013
2014
2015
2016

80

World

EMDEs

Advanced

C. Services and merchandise export
value growth

70
60
2012

2014

2015

D. Global trade growth forecasts

Percent growth, 2013-15, nominal $US
15
Range
10
Average
5
0
-5
-10
-15
Merchandise Services Merchandise Services
Commodity importers

2013

Commodity exporters

Percent

June 14

6.5
6.0
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0

June 15
June 16
Avg. 1990-08
Avg. 2010-15

2013

2014

2015

2016

2017

2018

Sources: World Bank, World Trade Organization , CPB Netherlands Bureau for Economic Policy
Analysis, UN Comtrade.
A. Goods and non-factor services import volume. 2016 is a forecast.
B. Major commodity importers are United States, China, and Euro Area. Consumer goods are definedas Foods, Tobacco, Beverages, and Automobile Vehicles. Raw materials are defined as Crude
Materials, Mineral Fuels, Animals and Vegetable Oils, Chemical and Related Products. Industrial
goods are defined as Industrial Supplies and Materials, Manufactured Goods, Machinery andTransport Equipment, Miscellaneous Manufacturing Articles, Commodities and Transactions. Lastobservation is March 2016.
C. Selected emerging and developing economies are 6 commodity importers (Mexico, Turkey,
Philippines, Thailand, India, and China) and 5 commodity exporters (Russia, Brazil, Indonesia, South
Africa, and Malaysia). Average of growth for the period of 2013Q1- 2015Q4.
D. Global trade measured as the sum of import and export volumes of goods and non-factor services.

Weak global trade
Following years of weak performance, global
merchandise trade growth reached a post-crisis low
in 2015, largely reflecting a marked decelerationin import demand from commodity exporters andslowing activity and economic rebalancing in
China (Figure 1.12). The slowdown reflected a
combination of structural and cyclical headwinds,with the latter accounting for about two thirds ofthe observed deceleration in global trade last year
(Constantinescu, Mattoo, and Ruta 2016). Manyof the factors underpinning the recent slowdown
are expected to persist in 2016.

Weak intermediate and industrial goods trade.
Declining commodity prices; China’s shift
towards a slower, more sustainable, growth path;and soft activity in advanced economies appear tohave been mutually reinforcing drivers for weakermerchandise trade growth. Lower commodity
prices have reduced real incomes and led to
sharply depreciating currencies in commodity
exporters, which contributed to notably lower
imports. The import contraction was particularly
pronounced in Brazil and the Russian Federation,
but a broad-based slowdown was also observed
across most commodity exporters. Since
commodity exporters attract about 20 percent ofother EMDEs’ exports, this has had an adverse
impact on other emerging economies. The gradualshift from investment to consumption and slowing
industrial activity in China lowered its importdemand for industrial commodities andintermediate goods. This was compounded by
subdued industrial activity and capital expenditurein the manufacturing sector in the United States
and the Euro Area. Feeble global investment—
reflecting mediocre growth, deleveraging pressuresin advanced economies, and a maturing credit
cycle in EMDEs—could continue to cap thegrowth of goods trade throughout 2016.
More resilient services trade. Global services tradeappears to be more resilient than goods trade,
supported by strengthening consumer spending
and income growth among major oil importing
economies. Services trade now accounts for onefifth of global trade volumes and half of global
trade value-added (Hollweg et al. 2015). Whilebarriers to service sector trade have fallen globally,
they have remained stable across smaller
economies (Anderson et al. 2015). Over time, theshare of services trade should continue to increase,especially in sectors related to information
technologies and data transfer (Freund 2016,
Manyika et al. 2016).
Despite the resilience of services, global trade is
expected to remain weak in 2016. Following apattern of repeated and significant downward
revisions, global trade forecasts for 2016-17 havebeen downgraded again, consistent with evidenceof a persistent deterioration in the relationshipbetween global trade and activity. After growing

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

Recent developments
Growth in EMDEs decelerated to 3.4 percent in2015—about half of the pre-crisis average growthrate, and in line with the rate expected in January

A. GDP growth

Share of countries
20
Commodity exporters
Commodity importers

16
12

2011
2012
2013
2014
2015

2011
2012
2013
2014
2015

2011
2012
2013
2014
2015

8
2011
2012
2013
2014
2015

8
6
4
2
0
-2
-4

B. Countries with three consecutive
years of declining growth
1990-2008 average
2003-2008 average

Percent

4

Commodity
importers

Commodity
importers ex.
China

Com modity
exporters ex.
Brazil andRussiaBrazil andRussia

0
1990

1995

2000

2005

2010

C. GDP growth components, 2015

D. Contribution to EMDEs growth

Percent

Percentage points Brazil
10
China
9
Commodity importers
Commodity exporters
8
Russia
7
6
5
4
3
2
1
0
-1
2003-08 2010-14
2015

Metal exporters

Oil exporters
ex.Russia

Imports

Exports

Investment

Consum ption

Imports

Exports

Investment

Consum ption

1995-2008 average

Imports

9
7
5
3
1
-1

Exports

The weakness in emerging market and developing
economies in 2015 has extended into 2016.
Aggregate growth for EMDEs is projected at 3.5
percent for 2016, marginally above the disappointing
pace of 3.4 percent in 2015. However, this forecast
masks a marked difference between commodity
exporters and importers. After stagnating last year,
growth in commodity exporting EMDEs for 2016 is
expected to be 0.4 percent—substantially below the
1.6 percent envisaged in January, reflecting further
downward revisions to commodity price forecasts,
weak global trade, volatile capital flows, andpersistent domestic challenges. In contrast, growth
projections for commodity importing EMDEs arelittle changed, at 5.8 percent for 2016, and are
expected to be broadly stable at that level through2018. In low-income countries, growth in 2016 is
projected at 5.3 percent. Policy buffers continue toerode in commodity exporting EMDEs, especially inoil exporting countries, reducing their ability towithstand further downside shocks.

The weakness in EMDEs in 2015 was mainly accounted for by the growing
difficulties of commodity exporters. Brazil and Russia continue to face a
combination of external and domestic headwinds, which have resulted indeep recessions. In contrast, commodity importing EMDEs have shown
resilience and steady growth. Excluding China, growth in commodity
importers has picked up, reflecting robust domestic demand growth.

Investment

Emerging market anddeveloping economies:
Recent developments
and outlook

FIGURE 1.13 Activity in EMDEs

Consum ption

roughly in line with GDP in 2015, global trade is
expected to marginally outperform global growthover the forecast period. In the medium-term,
maturing supply chains, a slower pace of tradeliberalization, and persistent weakness in global
investment are expected to hold back global trade
growth. Lingering weakness in global merchandise
trade diminishes the scope for productivity gains
through increasing specialization and diffusion oftechnologies in global value chains (Melitz 2003,
Ahn et al. 2016). As global value chains grow at a
slower pace, global trade is expected to expand
more in line with global output. A shortening of
global supply chains towards regional ones could
accentuate this process (Srinivasan et al. 2014).

17

C H A P TE R 1

Commodity
importers ex.
China

Sources: Haver Analytics, World Bank.
B. Share of commodity exporters and importers out of 151 countries in sample.
D. Commodity exporters exclude Brazil and Russia; Commodity importers exclude China.

(Figure 1.13). Overall, 2015 marked the fifth
consecutive year of declining growth for EMDEs,
which now account for about half of global
growth compared to more than 60 percent in2010-14. About 90 percent of the countries thathave experienced this protracted slowdown werecommodity exporters, especially oil exporters.
Growth in commodity exporting EMDEs in 2015
was 0.2 percent—the slowest pace since the global
financial crisis—reflecting the persistent impact ofnegative terms of trade shocks and, in many cases,
domestic challenges.
In contrast, growth in commodity importing
EMDEs in 2015 remained resilient to headwinds,
at 5.9 percent—close to its long-term average of
6.1 percent. Moreover, growth in commodity
importing EMDEs excluding China—a groupthat accounts for about a third of EMDE
output—actually picked up in 2015 to 4.7 percent

2015

2016

18

C H A P TE R 1

from 4.3 percent the previous year, above its longterm average of 4.1 percent, reflecting generallyrobust domestic demand. The difference between
the sharp slowdown in commodity exporters andthe muted growth pickup in importers partly
reflects the greater magnitude of the terms of trade
shock as a proportion of commodity exporting
economies (World Bank 2016f).
Following last year’s disappointing performance,
aggregate activity in EMDEs has been tepid thus
far in 2016. The external environment at the startof the year continued to be challenging, with
subdued global trade and rising borrowing costs.
Manufacturing activity diverged, with commodity
importing EMDEs performing better thancommodity exporters. Brazil and Russia, which
together account for about two-fifths ofcommodity exporting EMDE output, are expected
to contract again in 2016. External headwinds
these two economies face, particularly low
commodity prices, have combined with persistentdomestic challenges. In addition, República
Bolivariana de Venezuela is experiencing a deep
and worsening contraction.
Tighter policies put forward to adjust to lower
commodity prices are weighing on domestic
demand in commodity exporting economies,
especially in oil exporting economies, which havecome under significant pressure since mid-2014,
when oil prices began to collapse (World Bank
2016b). Investment in extractive industries
declined sharply in 2015 and continues to ease in2016 amid tighter financing conditions. Many oil
exporters (Angola, Azerbaijan,
Colombia,
Ecuador,Kazakhstan,
Nigeria,
República
Bolivariana de Venezuela) struggle with sharply
deteriorating current accounts, exchange ratepressures, and falling fiscal revenues. Persistenthigh inflation prompted several central banks inoil exporting countries to continue hiking rates ortightening foreign exchange restrictions (Angola,
Azerbaijan, Nigeria) in the first months of 2016.
Non-energy commodity exporters, whose terms oftrade have deteriorated more gradually since mid2011, are showing some signs of stabilization.
Growth remains broadly stable in this group as
adjustment to lower non-energy commodity prices

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

seems to be well advanced, including for somemetal exporters (Indonesia, Peru) and agriculture
exporters (Tanzania, Senegal, Uganda). However,
performance varied considerably among thecountries reflecting country-specific vulnerabilities
and policy responses. Headwinds included sharply
falling
remittances(Armenia,
Moldova,
Tajikistan), conflict (Burundi), unwinding
financial vulnerabilities (Mongolia), droughtdamage to agricultural production (Botswana,South Africa, Zambia), electricity shortages (South
Africa, Zambia), and natural disasters (PacificIslands).
Among commodity importing EMDEs, lowenergy prices and modest but ongoing growth inadvanced economies are supporting activity,
particularly in parts of Europe and Central Asia
(Poland, Romania, Turkey), East Asia (thePhilippines, Vietnam), Middle East and North
Africa (Morocco), South Asia (Bhutan, India,
Pakistan), and Sub-Saharan Africa (Rwanda,
Senegal, Uganda). However, the sizable positive
terms of trade shock has been partly offset byother headwinds, reducing some of the expected
windfall gains. These headwinds included politicalinstability in the region (Haiti, Lebanon,
Moldova), policy uncertainty (Maldives, Turkey),
spillovers from large oil exporting trading partners(Georgia, Moldova), drought (Eritrea, Morocco),
and natural disasters (Dominica, Nepal).
The recent slowdown in EMDE growth partly
reflects an unwinding of cyclically strong, policysupported, post-crisis growth and the end of thelatest commodity super cycle (World Bank
2015a). However, it also has a considerable
structural component (World Bank 2016b; Didier
et al. 2015; Asian Development Bank 2016). In
addition to external factors, the slowdown reflects
adverse domestic factors—slowing productivity
growth related to supply side constraints,
demographic pressures, especially in parts of EAP,
ECA, and LAC, and several years ofunderinvestment(EuropeanBank
for
Reconstruction and Development 2016; WorldBank 2015b). Moreover, sharply lower oil prices
have contributed to a notable reduction in
investment in the oil and gas industry. Moregenerally, declining corporate profitability andG L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

Mounting vulnerabilities
Persistent weakness in activity has widened
vulnerabilities in commodity exporting EMDEs(Figure 1.14). In 2015, current account and fiscal
balances deteriorated and government debt rose,
while inflation increased—in many cases to above
target levels. Investor concerns about growthprospects and rising vulnerabilities have beenreflected in numerous recent sovereign rating
downgrades, as well as depreciations earlier in theyear despite foreign reserve interventions and useof sovereign wealth fund assets.3
In contrast, in several large commodity importing
EMDEs, fiscal and current account deficits
narrowed in 2015 (Turkey, India, Pakistan).
3Sovereign rating downgrades in 2016 include Angola, Armenia,
Azerbaijan, Bahrain, Barbados, Brazil, Republic of Congo, Costa
Rica, Croatia, Gabon, Kazakhstan, Mozambique, Oman, Poland,
Saudi Arabia, Sri Lanka, and Surinam.

Weak growth in commodity exporting countries contributed to a
deterioration of external and fiscal buffers in 2015. Current account andfiscal deficits widened and government debt and debt service costs rose inmany countries. In contrast, deficits and debt levels were declining or
stable in commodity importing countries. A spate of sovereign credit
downgrades was reflected in waning investor confidence.
B. External sustainability: commodity
importers

Share of countries
60

Share of countries
60

15

0

0

2014

2015

Decline in foreign
reserves
> 10%

30

15
Decline in foreign
reserves
> 10%

30

NEER
depreciation
> 10%

45

Gross external
debt/GDP
> 60%

45

NEER
depreciation
> 10%

2015

Gross external
debt/GDP
> 60%

2014

Current accountbalance/GDP< -5%

A. External sustainability: commodity
exporters

Current accountbalance/GDP< -5%

Share of countries
50

Share of countries
50

2016e

30

30

20

20

10

10

0

0

Sovereigncreditdowngrade

40

Interest on
debt/revenue
> 10%

40

2014

2015

2016e

Sovereigncreditdowngrade

2015

Interest on
debt/revenue
> 10%

2014

Government
debt/GDP> 70%

D. Fiscal sustainability: commodity
importers

Primarybalance/GDP< -3%

C. Fiscal sustainability: commodity
exporters

Government
debt/GDP> 70%

Within the EMDE group, growth in low-income
countries (LICs) slowed in 2015, averaging 4.5
percent, down from 6.1 percent in 2014 and thelowest since 2009 (see Box 1.1). The slowdown
has been especially pronounced in commodity
exporters (Chad, Eritrea, Sierra Leone,
Zimbabwe). In many of these countries, theadverse impact of low commodity prices was
exacerbated by a severe drought, which curtailed
agricultural production (Haiti, Zimbabwe). In anumber of LICs, political tensions or electoral
uncertainties (Burundi, Haiti, Nepal), security
challenges (Afghanistan, Chad, Niger) andterrorist attacks (Burkina Faso, Mali) haveweighed on activity. However, growth has
remained robust in some commodity exporters
with a diverse export base (Democratic Republicof Congo, Mozambique, Uganda). Among net oil
importers, growth was strong in Ethiopia, Rwanda
and Tanzania, supported by public infrastructure
investment, construction, and a growing services
sector, while activity in Cambodia continued to
expand at a steady pace driven by garments exports
and construction.

FIGURE 1.14 External and fiscal buffers in EMDEs

Primarybalance/GDP< -3%

return on equity has weakened investor sentimentand capital inflows.

19

C H A P TE R 1

Sources: International Monetary Fund, Haver Analytics, Bloomberg, Standard & Poor’s, World Bank.
Note: Bars for current account balance, external debt, primary balance, government debt, and interest
on debt reflect data as of year-end 2014 and 2015. Bars for NEER (nominal effective exchange rate)
depreciation, foreign reserves, and sovereign credit ratings reflect the share of countries thatexperienced changes of more than the indicated percentages during the course of the year. Based ondata for 44-87 commodity exporters and 21-62 commodity importers depending upon the data series.
C. D. For sovereign credit downgrades, 2016e refers to year-to-date downgrades.

Foreign exchange reserves are broadly stable orincreasing, and inflation below target levels, inmost commodity importers. These improvements
notwithstanding, corporate borrowing continued
to grow rapidly in some major oil importing
countries. While government debt to GDP and
inflation in commodity importers are well below
median levels in the mid-1990s, credit growth isabove the median of that period.
In many commodity exporting and importing
countries alike, high and rising credit to theprivate sector has become an increasingly
important vulnerability (see Special Focus 1).
Fueled by low post-crisis borrowing costs andrising financing needs, credit to the nonfinancial
private sector increased by 14 percentage points ofGDP, to 85 percent of GDP in the five years to

C H A P TE R 1

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

BOX 1.1 Low-income countries: Recent developments and outlook
Growth in low-income countries (LICs) slowed sharply to 4.5 percent in 2015 as a result of persistently low commodity prices, asevere drought in parts of Sub-Saharan Africa, and security and political challenges. Average growth in LICs is projected to rise to
5.3 percent in 2016 and above 6 percent in 2017-18. This forecast is predicated on strengthening global activity and successful
implementation of growth-sustaining reforms in LICs. Risks are heavily tilted to the downside.

This box was prepared by Gerard Kambou.

A. Growth forecast, 2016

Percent
8
7
6
5
4
3
2
1

LIC

Commodityexporting LIC

2017

2016

2015

2014

2013

2017

2015
2016

2014

2013

2017

0

2016

In a number of LICs, political and security related
uncertainties held back activity. Afghanistan’s economy
continued to face headwinds from the gradual pullout ofNATO troops and decline in foreign aid. Sustained
insurgent attacks complicated the implementation ofreforms and undermined the government’s efforts todevelop the mining sector, a potential source of growth,and improve regional trade linkages. In Nepal, despite thepassing of two constitutional amendments aimed at
reducing political inequalities, large-scale political protests
by minority ethnic groups continued to weigh on
economic growth, as did the closure of land trading routes
through India. In Haiti, activity slowed amid rising
political risk, with the indefinite postponement of thesecond-round presidential election. Political tensions andsecurity threats intensified in several Sub-Saharan Africa
LICs, on account of electoral disputes (Burundi,
Democratic Republic of Congo), Boko Haraminsurgencies (Chad, Niger) and terrorist attacks (Burkina
Faso, Mali), with the resulting increase in uncertainty
adversely impacting activity.

Growth has slowed sharply in low-income countries(LICs), to 4.5 percent in 2015 down from 6.1 percent in2014. Persistently low commodity prices, a severe
drought in parts of Sub-Saharan Africa, and security andpolitical challenges took a toll on activity in low-income
countries. Current account positions weakened among
oil exporters, and deficits remain large among somemetal exporters.

2015

The slowdown has been pronounced in oil and metals
exporters (Figure 1.1.1). Growth in 2015 more thanhalved in Chad, while GDP is estimated to havecontracted by more than 5 percent in South Sudan, as low
oil prices reduced government revenues. Several metalexporting countries (Niger, Sierra Leone, Zimbabwe) also
saw a sharp slowdown in economic activity. Sierra Leone,
emerging from the Ebola crisis, contracted by a fifth as low
commodity prices led to the closure of iron ore mining
operations. In several countries, the adverse impact of low
commodity prices was exacerbated by a severe drought(Chad, Haiti, Niger, and Zimbabwe), which curtailed
agricultural production growth. In Guinea and Liberia,
activity was further affected by the Ebola crisis, whichbegan to recede in late 2015.

FIGURE 1.1.1 Recent developments andoutlook in LICs

2014

Growth setbacks. Growth in low-income countries (LICs)
slowed sharply to 4.5 percent in 2015, down from 6.1
percent in 2014. Persistently low commodity prices, asevere drought in parts of Sub-Saharan Africa, natural
disasters, and security and political challenges are major
factors that took a toll on activity in low-income countries.

2013

20

Other
LIC

B. Current account balance, 2015

Percent of GDP
0

-10

-20

October 2014
April 2016-30
Oil-exporting LIC

Metals-exporting
LIC

Other LIC

Sources: World Bank, International Monetary Fund.
B. Metals exporting LIC includes Central African Republic, Guinea,
Mozambique, and Niger. For Central African Republic and Guinea current
account balances deteriorated. Oil exporting LIC includes Chad and South
Sudan. Other LIC includes 22 low-income countries for which data are
available.

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

C H A P TE R 1

BOX 1.1 Low-income countries: Recent developments and outlook (continued)
FIGURE 1.1.2 Recent developments andoutlook in LICs (cont.)
Currencies have depreciated and fiscal positions have
weakened in many countries. Oil exporters and otherresource-rich countries faced a substantial decrease incommodity revenues. In a number of countries, spending
increased, causing fiscal deficits to widen.
A. Exchange rate depreciation

Percent, year-on-year
0
-2
-4
-6
-8
-10
-12

Dec-15
Latest-14-16
Metals-exporting LIC

Other LIC

B. Fiscal balance, 2015

Percent of GDP
4

October 2014
April 2016

2
0
-2
-4
-6
-8
Oil-exporting LIC

Metals-exporting
LIC

Other LIC

Sources: World Bank, International Monetary Fund.
B. Metals exporting LIC includes Central African Republic, Guinea,
Mozambique, and Niger. For Central African Republic and Guinea current
account balances deteriorated. Oil exporting LIC includes Chad and South
Sudan. Other LIC includes 22 low-income countries for which data are
available.

In contrast, the slowdown has been less pronounced incommodity exporters with relatively diverse export bases,
as well as in agricultural-exporting countries (Democratic
Republic of Congo, Mozambique, Uganda). Compared to
the LIC average, growth has remained robust in thesecountries, helped in part by lower oil prices. Among net oil
importers, growth was strong in Ethiopia and Rwanda,

supported by public infrastructure investment, private
consumption and a growing services sector. Elsewhere,
activity continued to expand at a steady pace, driven bygarments exports (Cambodia), agriculture (Guinea-Bissau),and construction (Tanzania, Togo).
Deteriorating current account balances. External positions
have weakened across LICs. The current account deficit
widened significantly among oil exporters, with oil pricedeclines compounded by production cuts. The current
account deficit also widened across non-energy exporters(Democratic Republic of Congo, Ethiopia, Niger), in part
because of exports weakness but also due to stronger
import growth on the back of large public investment
projects. However, in many of these countries, the current
account deficit has remained well funded by FDI. In
Nepal, goods and services imports increased as a result of
post-earthquake reconstruction efforts. On average,
external debt levels increased moderately across LICs,
reflecting continued access to concessional financing.
However, external debt levels rose significantly in a
number of countries (The Gambia, Mozambique,Tanzania, Uganda), driven in part by large currency
depreciations.
Reserve drawdowns and currency depreciations. Increased
external pressures were met with reserves drawdowns andcurrency depreciations in many countries (Figure 1.1.2).
Reserve drawdowns were most pronounced among somemineral exporters (Niger, Sierra Leone) and in countries
facing sharp currency depreciations (Burundi, The
Gambia, Rwanda). Monetary authorities in countries witha flexible exchange rate regime responded to externalpressures by allowing depreciations (Haiti, Mozambique,Tanzania, and Uganda), and by tightening monetary
policy through an increase in reserve requirements(Cambodia) and policy rates (Mozambique). The
currencies of several LICs, including the Mozambican
metical and Ugandan shilling, sustained large depreciations
against the U.S. dollar. The pass-through of nominal
exchange rate depreciation contributed to a sharp rise ininflation in some countries (Haiti, Madagascar,
Mozambique). However, reflecting strong external
disinflationary pressures from lower food and oil prices,
inflation has eased in many countries (Cambodia, Malawi,
Tanzania, Uganda), or turned negative in some(Afghanistan). In the CFA zone, where the pegged CFA
franc remained broadly stable, inflation remained in single
low digits.
Weakening fiscal positions. Fiscal positions weakened inmany countries. Oil exporters and other resource-rich

21

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22

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BOX 1.1 Low-income countries: Recent developments and outlook (continued)
countries faced a substantial decrease in commodity
revenues. Some countries (Chad, Mozambique, andRwanda) cut expenditures in response. However, the cuts
matched the reduction in revenues in only a few countries(Chad, Rwanda). In a number of countries, spending wasincreased even as revenues slowed or fell (Burundi,
Cambodia, Ethiopia, Madagascar, Malawi, Tanzania),
causing fiscal deficits to widen. In Guinea and Liberia,
which struggled with the Ebola crisis, fiscal deficits haveincreased sharply. As a result, public debt burdens haverisen, most significantly in Malawi, Mozambique, Togo,
and Zimbabwe. In some countries (Mozambique, Niger),the increase in government debt reflected risinginfrastructure spending or the construction of mining
projects that should support potential growth over the
medium term.
Softening outlook. The external environment confronting
low-income countries is expected to remain difficult in thenear-term. Commodity prices are expected to remain low
despite a gradual pickup in global activity. Against thisbackdrop, average growth in LICs is projected to rise to
5.3 percent in 2016 and above 6 percent in 2017-18. This
forecast is predicated on strengthening global activity andsuccessful implementation of growth-sustaining reforms in
LICs. The implications for individual LICs will vary:••

Oil and other commodity exporters are expected tosee a modest pickup in growth in 2016 as they
continue to adjust to low commodity prices. Growthis expected to remain low in Chad as oil production
falls. In Mozambique, delayed investment into the
LNG sector and rising inflation will weigh on growthin 2016. Growth is also expected to slow in the
Democratic Republic of Congo as the copper sector
continues to struggle and political uncertainty weighs
on investor sentiment.
Growth in countries emerging from the Ebola crisis(Guinea, Liberia, and Sierra Leone) and natural
disasters (Haiti, Nepal) is expected to remain modest
in 2016. Aid-driven infrastructure investment andsome limited growth in iron ore exports should help
boost real GDP growth in Guinea, Liberia, and Sierra
Leone. Growth is expected to remain subdued in
Haiti in 2016 as the country’s elevated political risk
keeps investment growth low despite large postearthquake reconstruction needs. Activity is expected

to weaken further in Nepal as disruptions of crossborder traffic restrict access to critical inputs, thetourism industry struggles to recover from theearthquakes, and sub-optimal monsoon rainfalls
hamper agricultural production.
•

Political and security uncertainties and drought are
expected to remain a drag on economic activity in a
number of countries. In Afghanistan, growth in 2016is expected to be marginally higher than that of 2015,
as attacks by insurgents continue to delay the
implementation of government’s reforms andundermine private sector confidence. Politicaluncertainty and threats of terrorist attacks will holdback activity in Burundi, Burkina Faso, Mali, andNiger. Drought is expected to weigh on growth inEthiopia.

•

For most other countries, growth is projected toremain robust, supported by strong domestic
investment and lower oil prices. In some oil importing
countries – notably Cambodia, and Tanzania –growth is projected to average 7 percent in 2016.

Risks tilted heavily to the downside. The balance of risks
to the outlook remains firmly tilted to the downside, withboth external and domestic risks.
•

External risks. A sharper-than-expected slowdown in
China, and rebalancing toward consumption andservices, would weigh against commodity prices andinvestment in resource sectors and further weaken
activity in commodity exporters. Weaker-thanexpected growth in the Euro Area could further
weaken external demand for LIC exports, especially in
Sub-Saharan Africa, and reduce investment flows aswell as official aid.

•

Domestic risks. Delays in adjustment to external shocks
in affected countries would create policy uncertainties
that could weigh on investor sentiment and weaken
the recovery. A worsening of drought conditions
would dampen growth in agriculture, increase foodinsecurity, and accentuate inflationary pressures.
Militant insurgencies and terrorist attacks remain aconcern in West Africa, while political risks are highin Afghanistan, Burundi, Democratic Republic ofCongo, Haiti, and Nepal.

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

C H A P TE R 1

BOX 1.1 Low-income countries: Recent developments and outlook (continued)
TABLE 1.1.1 Low-income countries: Real GDPa
(Annual percent change unless indicated otherwise)
Percentage point differences fromJanuary 2016 projections

Low Income Country, GDPb

Afghanistan
Benin
Burkina Faso
BurundiCambodia
Chad
Comoros
Congo, Dem. Rep.
Eritrea
Ethiopiac
Gambia, The
GuineaGuinea-Bissau
HaiticLiberia
Madagascar
Malawi
Mali
Mozambique
NepalcNiger
RwandaSierra Leone
South Sudan
Tanzania
Togo
Ugandac
Zimbabwe

2013

2014

2015e

2016f

2017f

2018f

2015e

2016f

2017f

2018f

6.5
2.0
5.6
6.7
4.6
7.4
5.7
3.5
8.5
1.3
10.5
4.8
2.3
0.8
4.2
8.7
2.4
5.2
1.7
7.3
3.8
4.6
4.7
20.1
13.1
7.3
5.1
4.4
4.5

6.1
1.3
5.4
4.0
4.7
7.1
6.9
3.0
9.0
1.7
9.9
0.9
-0.3
2.9
2.8
0.7
3.0
5.7
7.2
7.4
6.0
6.9
7.0
7.0
3.4
6.8
5.7
4.7
3.8

4.5
1.5
5.2
4.0
-2.5
7.0
1.8
2.3
7.7
3.0
9.6
-2.5
0.1
5.1
1.2
0.3
3.0
2.8
5.5
6.3
2.7
4.2
7.1
-21.5
-6.3
7.0
5.5
5.0
1.1

5.3
1.9
5.5
5.2
3.0
6.9
-0.4
2.4
6.3
4.0
7.1
-4.0
4.0
5.7
0.9
3.8
3.7
3.0
5.3
5.8
0.6
5.4
6.8
6.5
3.5
7.2
5.6
5.0
1.4

6.3
2.9
5.8
5.5
3.5
6.8
1.6
3.0
7.7
4.3
9.4
4.5
5.0
6.0
1.9
5.3
3.7
4.1
5.1
7.7
4.7
6.3
7.2
5.3
6.9
7.1
5.0
5.9
5.6

6.6
3.6
6.1
6.0
4.0
6.8
5.2
3.1
8.5
4.3
8.6
5.5
6.0
6.0
2.2
5.6
3.7
5.4
5.0
8.3
4.4
7.0
7.1
5.4
7.4
7.1
5.5
6.8
3.5

-0.6
-0.4
-0.5
-0.4
-0.2
0.1
-2.3
0.0
-0.3
2.1
-0.6
-6.5
-0.3
0.7
-0.5
-2.7
-0.2
0.0
0.5
0.0
-0.7
-0.2
-0.3
-1.5
-1.0
-0.2
0.4
0.0
0.1

-0.9
-1.2
0.2
-0.8
-0.5
0.0
-5.3
-0.1
-2.3
2.0
-3.1
-8.5
0.5
0.8
-1.6
-1.9
0.3
-2.0
0.3
-0.7
-1.1
0.1
-0.8
-0.1
0.0
0.0
0.7
0.0
-1.4

-0.3
-1.0
0.7
-1.5
-1.3
0.0
-4.5
-0.1
-1.3
2.1
0.4
-0.8
1.0
0.7
-0.9
-1.5
0.1
-1.7
0.1
0.5
-1.1
-3.0
-0.4
0.0
-0.1
0.0
0.3
0.1
2.6

0.0
-1.4
1.0
-1.0
-0.8
0.0
-1.3
0.0
-0.5
2.1
-0.4
0.2
1.8
0.7
-0.8
-1.2
0.1
-0.4
0.0
1.1
-0.1
1.3
-0.5
0.1
0.4
0.0
0.8
1.0
0.5

Source: World Bank.
World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from thosecontained in other Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time.
a. Central African Rep., Democratic People's Republic of Korea, and Somalia are not forecast due to data limitations.
b. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars.
c. GDP growth based on fiscal year data.

23

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FIGURE 1.15 Private indebtedness in EMDEs
Rising private sector indebtedness has become a major source ofvulnerability in some EMDEs. Historically, countries with rapidly risingleverage in the years leading up to a period of financial stress haveexperienced a more protracted slowdown or a deeper recession in its
aftermath. Current debt rollover risks remain limited in the short term but
could increase in 2017 as a greater stock of debt is due for refinancing.
A. Private sector credit in EMDEs
Percent of GDP
200

B. Private sector credit in selected
EMDEs
Percentage points of GDP

Range

Average

160

60

80
40

40

150

20

100

0

50

-20

0

2015

2013

2011

2009

2007

2005

2003

2001

1999

1997

1995

0

C. debt service burden of private nonfinancial sector
Percent of income

200

China
TurkeyThailandBrazilMalaysia
PolandRussiaIndonesia
Saudi
India
HungarySouth Africa

120

Percent of GDP
250

Change since 2007Q4
Latest (RHS)80

D. GDP per capita around the 1997-98
Asian crisis
Index, 100=1997

25
20

Current

Pre-crisis

115

Rising leverage

Stable leverage

110

15
10

105

5
0

MexicoIndonesia

PolandIndia

South Africa

ThailandHungary

RussiaTurkeyMalaysiaBrazil

China

100

1998

1999

2000

2001

2002

E. GDP per capita around the global
financial crisis

F. Stock of EMDE bonds maturing

Index, 100=2008
110
Rising leverage

Percent of gross bond issuance in 2015
80
Sovereign70

Corporate

60

105

50
40
30

100

20
10
95
2008

0
2009

2010

2011

2012

2013

In the past, credit booms over a sustained period
were sometimes followed by slowing growth and,in the presence of financial stress, increased theseverity of the subsequent recession (Claessens,
Kose, and Terrones 2012; Jordà, Schularick, andTaylor 2013). During both the Asian crisis in
1997-98 and the global financial crisis in 2008-09,
emerging economies with more rapid credit
growth in preceding years suffered larger GDP
declines. When external financing conditions
tightened and global trade slowed, capital flows
reversed, asset prices collapsed, non-performing
loans surged, and activity dropped (Kose andTerrones 2015).

95
90
1997

Stable leveragesome sectors (energy, metals and mining,
construction), increased indebtedness has partly
reflected rapid foreign currency borrowing inrecent years (Chui, Kuruc, and Turner 2016). A
broad-based decline in corporate profitability
would accentuate balance sheet vulnerabilities, andmight aggravate the impact of market volatility on
investment and growth.

2015

2016

2017

2018

Sources: World Bank, Haver Analytics, Bloomberg, Bank for International Settlements.
A. Sample includes 14 emerging economies. Data are the market value of private sector non-financial
credit to GDP. Last observation is 2015Q3. Average data are GDP-weighted.
B. Last observation is 2015Q3.
C. Debt service burden is calculated as the ratio of interest payments plus amortizations to income.
Gross disposable income (income after interest payments and, for non-financial corporations, dividends) is the default measure of income. Last observation is 2015Q3.
D., E. “Rising leverage” countries are defined as those that experienced an increase in private nonfinancial corporate credit to GDP ratios of more than 15 percentage points over the previous three
years. Countries with “rising leverage” are defined as those having experienced an increase in private
sector non-financial debt to GDP ratios of more than 15 percentage points during the three years
preceding the crisis episode. Sample includes 14 emerging and developing economies and 24 advanced economies. Unweighted average across countries.

September 2015 in the 14 largest EMDEs—and,in some cases, by 30 percentage points of GDP or
more (Figure 1.15). In addition to rising private
sector debt, exchange rate depreciations and risingrisk spreads have increased debt service costs in a
number of countries (Hofmann et al. 2016). In

Current debt rollover risks appear limited in the
short term, given the modest stock of debt
maturing in 2016, but could increase in 2017 asrefinancing pressures intensify. In sectors wherestate ownership is pervasive (e.g. energy),
deteriorating creditworthiness or financial stresscould weaken sovereign balance sheets andpropagate credit risks (Claessens, and Kose 2014;
Bachmair 2016; Jordà, Schularick, and Taylor
2016). This—combined with weak institutions,shallow markets and under-developed debt
resolution mechanisms—could amplify the impact
of corporate deleveraging on growth.
Widening external, fiscal, and corporate
vulnerabilities are increasingly eroding EMDE
policy makers’ ability to support output should
one or more risks materialize. For commodity
exporters, rising inflation, weak exchange rates,
and financial stability risks would oblige theirmonetary policy makers to adopt tighter stances.
Even if government debt currently remains
manageable in most countries, widening fiscal
deficits will constrain governments’ ability to
implement effective and sustained fiscal stimulus(World Bank 2015c).

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

The external environment confronting lowincome countries is expected to remainchallenging in the near term, with lower
commodity prices and a more subdued recovery inglobal activity than previously projected, but it
will be somewhat offset by sustained investment
growth and falling oil prices that benefit theA. Growth forecasts, commodity
exporters

B. Growth forecasts, commodity
importers

Percent
7

Percent
7

2018

C. Growth around oil price declines,
commodity exporters
Percent

D. Growth around oil price declines,
commodity importers
Percent
15

Range of previous episodes
Average of previous episodes
2014Q2

8
6
4
2
0
-2
-4
-6
-8

Range of previous episodes
Average of previous episodes
2014Q2

18

16

12

14

12

9

10

8

6

6

3
4

-4

-2

0
2
Quarter

4

6

8

0
-8

-6

-4

-2

0
2
Quarter

4

Percent
10

Percent
8

2015

2016

2017-18

6

6

2

4

-2

2015

2016

2017-18

Cambodia

F. Growth forecasts, commodity
importers

MexicoE. Growth forecasts, commodity
exporters

6

8

Haiti

-6

Afghanistan

2-8

EMDE commodity
exporters

LIC commodity
exporters

EMDE commodity
importers

Nepal

Eritrea

TurkeyPoland

India

0
China

UgandaCongo, D.R.

Mozambique

Tanzania

Ethiopia

BrazilRussia2
Saudi Arabia

-6

2018

0

Jun-162017

1

0

Jan-162016

2

1

Jun-15

2012

3

2

2017

4

3

2016

5

4

2015

5

2014

6

2013

6

2015

Jun-162014

Jan-162013

Jun-15

2012

Among commodity exporting EMDEs, theoutlook has once again been downgraded (Figure1.16). This reflects the sharp decline in oil andother commodity prices, as well as weak
investment, soft global manufacturing trade, andtightening financing conditions. At 0.4 percent,
growth in these countries will be well below the
1.6 percent projected in January. The expectationof a further decline in the average price of oil, to$41 per barrel for this year (versus $51 projectedin the January GEP) will weigh on growth in2016. Although the slowdown in commodity
exporters has been less sharp so far than during
past episodes of steep oil price declines, a quick
rebound is unlikely. In contrast, the outlook forcommodity importing countries has been broadly
unchanged over the past two years, and the
expected pace of growth in these countries of 5.8
percent in 2016 is not much below their 19902008 average of 6.1 percent. The divergence in theprospects for commodity exporters and importers
is also reflected in notable differences acrossregional outlooks (see Box 1.2). While 2016
projections for EMDE regions with a large
number of importers (East Asia and Pacific, SouthAsia) are broadly unchanged from January, thosefor regions with a sizable number of exporters(Latin America and the Caribbean, the Middle
East and North Africa, Sub-Saharan Africa) weresignificantly revised down.

The outlook for commodity exporting and commodity importing EMDEs has
diverged appreciably over the past three forecasting cycles. Growth
expectations have deteriorated for exporters, but remained more stable forimporters. Compared to historical episodes of sharp declines in oil prices,
the current episode has seen a shallower decline in growth, which is likely
to be followed by a relatively weak recovery.

Argentina

Activity in EMDEs will likely remain subdued in
the short term, with growth expected to be 3.5
percent in 2016, down 0.6 percentage point fromJanuary. Going forward, growth is projected tofirm to 4.4 percent in 2017 and 4.7 percent in
2018, reflecting an expected recovery incommodity exporting countries, predicated on amodest upturn in oil prices and the end ofrecessions in Russia in 2017 and Brazil in 2018.

FIGURE 1.16 Growth outlook for EMDEs

Indonesia

Outlook25

C H A P TE R 1

LIC commodity
importers

Sources: World Bank, Haver Analytics.
A. B. Forecasts are preliminary for June 2016.
C. D. GDP growth is quarterly year-on-year growth. Gray areas show range of growth outcomes
during previous episodes. For all episodes, t=0 in the quarter prior to the start of the decline: 1997Q4,
2001Q3, 2008Q3, and 2014Q2. Sample includes 12 (1997Q4), 15 (2001Q3), 19 (2008Q3), and 22(2014Q2) oil exporting countries, and 9 (1997Q4), 14 (2001Q3), 16 (2008Q3), and 17 (2014Q2) oil
importing countries.
E. F. Figures show five largest country members of each group in terms of GDP in 2010 U.S. dollar.

majority of LICs that are oil importers. Against
this backdrop, growth in LICs is projected to pickup to 5.3 percent in 2016, 0.9 percentage point
below January projections. Growth is expected toaccelerate to an average of about 6.5 percent in26

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BOX 1.2 Regional perspectives: Recent developments and outlook

Differences in recent developments and prospects across EMDE regions reflect in part the divergences between
commodity exporters and importers. Broadly speaking, the 2016 growth forecasts for East Asia and Pacific and South
Asia are little changed from the start of the year. In contrast, baseline 2016 forecasts for regions with majorcommodity exporting economies—Europe and Central Asia, Latin America and the Caribbean, the Middle East andNorth Africa, and Sub-Saharan Africa—have been downgraded since January .
East Asia and Pacific. Growth is estimated to haveslowed to 6.5 percent in 2015 from 6.8 percent in2014, broadly in line with January projections. This
reflects the gradual slowdown in China. This offset avery modest pickup in the rest of the region, whichshowed signs of bottoming out in 2015. The
moderation of growth in commodity exporters wasoffset by solid performance in commodity importers,
especially Vietnam and the Philippines, and a modest
recovery in Thailand on the back of robust domestic
consumption. While Chinese growth is expected tocontinue to gradually slow down, growth in the restof the region is expected to pick up to 5 percent on
average in 2016-18, as commodity prices stabilize
and reforms are implemented to spur investment.
Downside risks include a sharper-than-expected
slowdown in China and tighter global financing
conditions against the backdrop of high corporateand household leverage in the region. Key policy
challenges include strengthening medium-term fiscal
and macroprudential frameworks and structuralreforms to support long-term growth (World Bank
2016b).
Europe and Central Asia. Activity in EMDEs in theregion contracted by 0.1 percent in 2015 (asestimated in January) from a 1.8 percent expansion in2014, driven by the deep recession in the RussianFederation. Excluding Russia, regional growth in2015 was 2.5 percent, broadly unchanged from therate of expansion in 2014, as continued economic
dynamism in Turkey and several large oil importersin Western Europe and Central Asia (Bulgaria,
Poland, Romania) offset a contraction in Ukraine
and slowing growth among commodity exporters. Oil
exporters (Azerbaijan, Kazakhstan, Russia) continue
to adjust to low oil prices as fiscal buffers erode(World Bank 2016c). Subdued growth in the EuroThis box was prepared by Derek Chen, Allen Dennis, Christian Eigen-Zucchi, Gerard Kambou, Ekaterine Vashakmadze, and Dana Vorisek.

Area and continued weakness of external demandpose further headwinds. While low commodity prices
are helping importers in the western part of theregion, the benefits have yet to translate fully intorobust consumption and investment. Growth isexpected to pickup modestly to 1.2 percent in 2016,as the Russian economy bottoms out. With a return
to positive growth in Russia and the Ukraine,
regional growth is expected to increase to an averageof 2.6 percent in 2017-18. Downside risks include
geopolitical flare-ups, lower oil prices, a deeper
recession in Russia, less favorable external financing
conditions as substantial bond repayments come due,and political tension.
Latin America and the Caribbean. Regional output
shrank 0.7 percent in 2015, broadly in line with
January estimates, after expanding 1.0 percent in2014. GDP was dragged down by depressedcommodity prices, tighter regional monetaryconditions, and domestic challenges among theregion’s largest economies. Brazil and, particularly,
República Bolivariana de Venezuela are both miredin deep recessions, while Argentina has embarked on
macroeconomic policy reforms aimed at moresustainable growth (World Bank 2016d). Mexico,Central America, and the Caribbean expanded
steadily in 2015, boosted by robust growth in exports
and tourism. As regional weakness carries over to
2016, and with Brazil expected to experience anotheryear of severe contraction, economic activity in Latin
America and the Caribbean is expected to shrink 1.3
percent (excluding Brazil, regional growth in 2016 is
projected at 0.5 percent). A gradual recovery in 2017-18 will be supported by strengthening net exports
and an easing of substantial domestic obstacles.
Significant domestic and external downside risks
persist, as the South American economy has yet tobottom out and commodity prices could continue todecline.

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

C H A P TE R 1

BOX 1.2 Regional perspectives: Recent developments and outlook (continued)

FIGURE 1.2.1 Regional GrowthDifferences in recent developments and prospects
across EMDE regions reflect in part the divergences
between commodity exporters and importers.
A. Regional growth (weighted average)

Percent
10

1990-08 average

2003-08 average

8
6
4
2
0
2014
2015
2016
2017

2014
2015
2016
2017

2014
2015
2016
2017

2014
2015
2016
2017

East Asia
andPacific

2014
2015
2016
2017

-2
2014
2015
2016
2017

Middle East and North Africa. Growth in the region
was an estimated 2.6 percent in 2015, slightly downfrom 2.9 percent in 2014 and broadly in line with
January estimates. The sharp slide in oil prices overthe past two years has contributed to a deteriorationof buffers and a growth slowdown in most oil
exporting countries. The impacts of low oil prices arenecessitating significant policy adjustment that got
underway in 2015. Performance in oil importing
countries in 2015 was mixed. Growth in the Arab
Republic of Egypt and Morocco gathered pace but
was not expected to be sustained in 2016 and activity
slowed in most other countries. Conflicts in theregion have resulted in significant output losses indomestic and neighboring economies (Devarajan andMottaghi 2016). Regional growth is projected to riseslightly in 2016, to 2.9 percent, before recovering to
an average of 3.6 percent in 2017–18. The
improvement reflects an expected economic growth
spurt in the Islamic Republic of Iran following theremoval of sanctions in January, rapidly rising oil
sector activity in Iraq, and a recovery of oil prices in2017. Risks to the outlook are mainly to thedownside and include a further slide in oil prices andadditional negative impacts of poor security
conditions.

EuropeLatin
MiddleandAmerica East andCentral and theNorth
Asia Caribbean Africa

South
Asia

SubSaharanAfricaB. Regional growth (unweighted average)

Percent

1990-08 average

2003-08 average

10
8
6
4
2
2014
2015
2016
2017

2014
2015
2016
2017

2014
2015
2016
2017

2014
2015
2016
2017

2014
2015
2016
2017

0
2014
2015
2016
2017

South Asia. Growth in the region rose to 7.0 percent
in 2015, in line with previous projections. Thus far in
2016, economic activity—led by India—hasremained robust, supported mainly by domestic
demand. Inflation remains benign, even if picking up
in some countries. Net exports continue to exert adrag on activity due to sluggish global growth;
however, remittance inflows to the region have held
steady. GDP growth is expected to be roughly stable
at 7.1 percent in 2016, and to pick up to 7.3 percent
by 2018, with strengthening global activity.
Domestic demand will continue to be the main
driver of growth. In the near term, consumption
spending will continue to benefit from low oil prices,
although this will wane over the medium term.
Further, an accommodative monetary stance, public
investments in infrastructure, and progress on
structural reforms, including new bankruptcy laws inIndia, should support a pickup in private investment.
Risks to the forecast are weighted to the downside.

East Asia
andPacific

EuropeLatin
MiddleandAmerica East andCentraland theNorth
Asia
Caribbean Africa

South
Asia

SubSaharanAfricaSource: World Bank
A. Since largest economies of each region account for almost 50 percent ofregional GDP in some regions, weighted average predominantly reflects
developments in the largest economies in each region.
B. Unweighted average regional growth to ensure broad reflection of regional
trends across all countries in the region.

External risks include volatility in global financial
markets and significant declines in remittanceinflows. Domestic risks include slow progress in the
structural reform agenda (e.g., power sector reforms,
tax reforms, and land reforms), vulnerabilities incorporate and banking sector balance sheets, andfiscal challenges in some of the region’s economies.

27

28

C H A P TE R 1

BOX 1.2 Regional perspectives: Recent
developments and outlook (continued)

Sub-Saharan Africa. Regional growth slowed
noticeably to 3.0 percent in 2015, down from 4.5
percent in 2014, and 0.3 percentage point lower thanJanuary estimates. The slowdown was most severe inoil exporters (Angola, Nigeria), where low oil prices
sharply slowed activity (World Bank 2016f). The
decline in metal prices led to a substantial fall inrevenues and exports in non-energy mineralexporting countries. Other adverse developments
included drought (South Africa, Zambia), electricity
shortages (Nigeria, South Africa, Zambia), the Ebola
crisis (Guinea, Liberia, Sierra Leone), and conflict(Burundi, South Sudan). Growth remained robust inother oil importing countries, supported by ongoing
infrastructure investments, private consumption, andincreased agricultural production. Regional growth isexpected to slow further to 2.5 percent in 2016, amid
depressed commodity prices, rising to an average of
4.1 percent in 2017-18, reflecting a gradualimprovement in the region’s largest economies—
Angola, Nigeria, and South Africa. Domestic
downside risks include delays in implementing thenecessary adjustment to deteriorating terms of trade
or in the realization of reforms, and worsening
drought conditions. Political and security-relatedrisks remain high in several countries. On theexternal side, a further decline in commodity prices,
weaker-than-expected
growthinadvanced
economies, and tighter global financing conditions
could intensify pressures on fiscal and current
account positions and affect foreign direct
investment, aid, and other external flows.

2017–18, assuming global activity strengthens andscheduled domestic reforms are successfully
implemented. Growth in countries emerging fromthe Ebola epidemic (Guinea, Liberia, Sierra
Leone) and natural disasters (Haiti, Nepal) is
projected to remain modest. Political and security
uncertainties are expected to continue to weigh on
growth in Afghanistan, Burundi, Burkina Faso,
Mali, and Niger.

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

Risks to the outlook
In a weak growth environment, the global economy isfacing increasingly pronounced downside risks. These
are associated with deteriorating conditions among
key commodity exporters, disappointing activity inadvanced economies, rising private sector debt inlarge emerging markets, and heightened policy andgeopolitical uncertainties. Other major downside
risks over the medium term include increased
protectionism and slower catch-up of large emerging
markets toward advanced economy income levels.
The possibility of delayed benefits from lower energy
prices remains an upside risk.
Global headwinds have been consistently
underestimated in recent years, reflecting thefaster-than-expected slowdown in major emerging
markets and weaker-than-expected recovery ofadvanced economies (Figure 1.17). Since the startof 2016, some of the previously identified risks
have materialized, including additional headwinds
among commodity exporters and deterioratingprospects among major advanced economies. The
terms of trade shock from low energy prices
among net exporters has been amplified bydomestic uncertainties and tightened policy.
Furthermore, incomplete deleveraging and weak
productivity growth continue to hamper aggregate
demand prospects in both exporters andimporters. With growth moderating in China,
stabilizing around a weak trajectory in advanced
economies, and stagnating in major commodity
exporters amid lingering vulnerabilities, theexpected global recovery could be weaker. Global
trade growth, which reached a post-crisis low in
2015, could remain depressed, further hampering
prospects across emerging and developing
economies. In this weak growth environment andamid rising vulnerabilities, even an incremental
deterioration in economic conditions could lead tosudden market adjustments and heightened risk
aversion.
Current uncertainty about global growth forecasts
is estimated to be slightly above the historical
median, having increased since the January GEP(see Special Focus 2). The balance of risks is tilting
increasingly to the downside, as upside risks

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

The outlook for global growth has been consistently overestimated inrecent years. A further deterioration in economic conditions could increasefinancial market volatility. Uncertainty surrounding global growth forecasts
has increased since the January 2016 Global Economic Prospects and isslightly above the historical median, while downside risks have increased.

A. Evolution of global growthforecasts
Percent
4.5

Jun-16
Jan-15Jan-16Jun-14B. Global manufacturing activity andfinancial market volatility since 2005
VIX, Index
70

Jun-15

60

4.0

50

3.5

40
30

3.0

20
2.5

10

2018

2017

2016

2015

2014

2013

2012

2.0

2011

The realization of downside risks could set backgrowth in EMDEs for a prolonged period, slowing
the pace of catch-up in GDP per capita toadvanced economies. About 85 percent of theworld’s population live in EMDEs, of which a
number are at risk of stalling progress or evenreversing in the case of some commodity exporters(Eichengreen, Park, and Shin 2013; Gill andKharas 2015; Didier et al. 2015). Already since2013, there has been a notable decline in the shareof EMDEs where GDP per capita continued tocatch up to U.S. levels—i.e. countries where thegap in GDP per capita narrowed from last year
(Figure 1.18). Whereas, pre-crisis, the average
EMDE could expect to reach advanced country
income levels within a generation, the low growthof recent years has extended this catch-up period
by several decades.

C. Risks to global growth prospects

Percent
90 percent
5
80 percent
50 percent
Baseline
90 percent JAN16

0
30

40
50
60
Global Manufacturing PMI, Index

D. Probability of global growth being 1
percentage point below baseline
forecasts

5

Percent
20
15

3

3

1

1

Average 2006-16

10

Commodity exporters remain particularly exposed
to risks of further growth setbacks and credit
rating downgrades (Figure 1.19). The adverse
impact of deteriorating terms of trade and procyclical policy tightening is amplified in somecases by rising political uncertainty, which tends
to diminish confidence and increase financial
market volatility (Julio and Yook 2013). Highleverage of major energy companies has increased
their vulnerability to rising borrowing costs and,to the extent it is foreign-currency denominated,exchange rate depreciations. Acute financial stressin one or more of the major emerging markets
could increase global risk aversion, with wider
repercussions for capital flows to EMDEs.
A continued deterioration in growth prospects
across major emerging markets and declining
commodity prices could be mutually reinforcing.
A further deterioration in growth prospects for key
commodity exporting EMDEs would negatively
affect regional trading partners. For instance, a 1

2017

2016

2015

2014

5

Further slowdown in major emerging
markets

29

FIGURE 1.17 Risks to global growth prospects

2010(especially from lower oil prices) have receded.
That said, the probability that growth falls 1
percentage point below the baseline remains
broadly in line with the average over the past
decade.

C H A P TE R 1

0
Current year (2016)

Next year (2017)

Sources: World Bank, Haver Analytics, Bloomberg.
B. Monthly data from 2005 to April 2016.
C. D. See Special Focus 2 “Quantifying Uncertainties in Global Growth Forecasts” for details on
methodology. “90 percent in January 2016” stands for the 90 percent confidence interval of the fanchart based on information available at the cut-off date of the January 2016 Global Economic
Prospects report.

percentage point decline in growth in Brazil or
Russia could reduce growth in neighboring
countries by up to ½ percentage point on averageover two years (World Bank 2016b).
In the short-term, a sharper-than-expected
slowdown or more pronounced rebalancing in
China (although a low-probability scenario) could
have significant implications for both EMDE andadvanced economy prospects. China’s corporate
debt increased to new highs in early 2016,reaching levels that surpassed those of mostadvanced economies. Corporate indebtedness ishighlyconcentrated
amongstate-owned
enterprises, particularly those in industries thathave significant overcapacity and deteriorating
profitability (IMF 2015a). Financial distressamong highly-leveraged entities could cause rising
corporate defaults, and a sharper-than-expected

30

C H A P TE R 1

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

FIGURE 1.18 Catch-up of EMDE income to advanced
economies
The materialization of downside risks to growth in EMDEs could setback
the catch-up of EMDE income per capita toward advanced economy
levels. The share of EMDEs where GDP per capita advanced relative to2015 U.S. levels has already declined and the number of years needed toclose the gap lengthened.
A. Share of EMDEs catching-up with
U.S. GDP-per-capita levels

B. Years to catch-up with 2015 U.S.
GDP per capita levels

Percent
100

Number of years
120 1993-2008

80
60

100

2003-0880

2013-15

Number of years
400
300
200

60
40

40

100

20
0

2015

2013

2011

2009

2007

2005

2003

2001

1999

1997

1995

1993

20

0
Emerging
markets

Frontier
markets

LICs (RHS)

Source: World Bank.
A. Real GDP per capita. Figure shows the share of EMDEs with the gap in GDP per capita with theUnited States narrowing from the previous year. Sample includes 114 EMDEs for which data are
available from 1993 to 2015. Dotted line is the third order polynomial trend.
B. Real GDP per capita. Figure shows the number of years needed to catch-up with 2015 real per
capita GDP level in the United States, assuming average growth rates over each period denoted foreach group. Excludes Qatar and Serbia due to data availability. LICs include 25 economies.

slowdown in investment. For now, policymakers
have room to stem an undesirably sharp growth
slowdown by loosening monetary and fiscal policy,
but financial stability risks could render stimulus
measures less effective over time. Renewed capitaloutflows could continue to erode reserve buffers.
A synchronous slowdown in major emerging
markets could sharply set back global prospects,
particularly if combined with rising global risk
aversion and bouts of financial market volatility.
For example, a 1 percentage point growth
slowdown across the BRICS countries (Brazil,
Russia, India, China, and South Africa) as awhole, combined with a 100 basis points increasein emerging market bond spreads, could result in a
reduction of global growth of 0.9 to 1.2
percentage points after two years (World Bank
2016b). The effect on other emerging and frontiermarkets would be particularly pronounced,
reducing growth by 1.3-1.5 percentage points overthe same period.
Potential spillovers associated with weakening
prospects in major EMDEs could be larger thanpreviously estimated (World Bank 2016b).

Emerging markets where prospects havedeteriorated the most over the last two years had
previously made a sizable contribution to global
growth. In particular, BRICS countries accounted
for about 40 percent of global growth from 2010
to 2015, up from about 10 percent during the
1990s. They together now account for more than
one-fifth of global activity—as much as theUnited States, and more than the Euro Area.
Rising policy uncertainty
Sustained policy related and political uncertainties
could significantly weigh on activity andinvestment decisions in both advanced economies
and EMDEs (Figure 1.20). The debate
surrounding the U.K. referendum on European
Union membership has been accompanied bysoftening activity in the United Kingdom, lower
confidence and pressure on the pound sterling.
The economic losses associated with leaving theEuropean Union have been estimated by the U.K.
government to amount to 6 percent of GDP after
two years in a scenario of severe financial
disruption, and up to 9.5 percent of GDP after 15
years in the absence of a negotiated bilateral trade
agreement with the European Union (H.M.
Treasury 2016). The United Kingdom represents
more than 15 percent of E.U.’s GDP, 25 percentof the E.U.’s financial services activity, and 30
percent of the E.U.’s stock market capitalization.
The European Union, in turn, is a key export
market and source of FDI for many EMDEs.
International trade and financial market spillovers
could be significant, particularly for countries in
Europe and Central Asia and Sub-Saharan Africa(OECD 2016, World Bank 2015a). Financial
market volatility around a decision to leave theEuropean Union could lead to heightened global
risk aversion, hampering already weak capital
flows to EMDEs. A build-up of protectionist
rhetoric during the U.S. general election, andconcerns about the effectiveness of Abenomics inJapan, could also weigh on sentiment.
In large emerging markets, attention to policyrelated economic uncertainty increased or remains
elevated (Baker, Bloom, and Davis 2016). Across
EMDEs, domestic policy uncertainty increased in2015 as a result of elections or political unrest,

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

Average sovereign rating
Commodity exporters
11
Commodity price index (RHS)

Percent

An unusual degree of uncertainty surrounding theeffectiveness of expansionary monetary policy
measures in major economies could contribute tosudden adjustments in expectations and bouts offinancial market volatility. In Europe and Japan,
central banks have continued to implement
unconventional
policies,
complementing
expanded asset purchase programs with negativeinterest rate policies. Some of these measures havebeen met with mixed market reactions. In
particular, negative interest rates have raised

Index
1000

EnergyMetalsAgricultural

10

BB+

5

11.5
BB

12

500

0
-5

12.5
BB-

13

-10

2015

2013

2011

2009

2007

2005

0

C. Average impact of 1 percentage
point growth decline on neighboring
economies
Percentage points
0

-2

-1

Percent of GDP
United States
Germany
China
200

-0.2
-0.3

0
Quarter

1

2

D. Private sector credit

250

-0.1

Japan
Spain

150

-0.4

100

-0.5

E. Capital outflows from China

US$, billions
US$, billions
FX reserves-12 month change
4500
FX reserves (RHS)
4000
3500
3000
2500
2000
1500
1000
500
0

2016

2014

2012

2010

2008

2015

2010

2005

2000

1995

1990

1985

F. FDI flows to and from China

1000
800
600
400
200
0
-200
-400
-600
-800

2006

1980

Brazil1975

Russia

1970

50

-0.6

2000

Financial market fragility

B. Commodity prices around BRICS
slowdowns

2004

A flaring up of geopolitical risks in the Middle
East is possible, as tensions have increased and non-conflict countries have been affected by terrorist
activity (Egypt, Tunisia). Security concerns also
remain prominent in some Sub-Saharan countries(Cameroon, Chad, Kenya, Mali, Niger, Nigeria)
as well as in Europe and Central Asia (Armenia,
Azerbaijan, Ukraine) and South Asia, where
Afghanistan remains afflicted by domestic security
and insurgency challenges. Waves of migration
generated by fragile security situations could be asource of political tension in host countries(Adhikari 2013; Davenport, Moore, and Poe
2003; Melander and Ӧberg 2006).

A. Sovereign ratings and commodity
prices

2003

The terrorist attacks in Brussels in March 2016,
following similar events in Paris in November
2015, have heightened security concerns.
Experience from past terrorist attacks in majoradvanced economies suggests that isolated eventsare unlikely to have lasting economic
consequences (World Bank 2016b). Repeatedthreats, however, could undermine confidence inan already-weak recovery and generate larger
growth setbacks.

Commodity exporters remain exposed to risks of further growth and credit
rating downgrades, with potential adverse trade and financial spillover
effects for other EMDEs. In China, high corporate indebtedness in sectors
with declining profitability heightens the risk of defaults, and of a sharper
slowdown in growth and investment. Capital outflows could continue toerode reserve buffers in China, while a retrenchment of outward FDI could
affect many EMDEs.

2002

Persistent geopolitical risks

FIGURE 1.19 Risks: commodity exporters and China

2001

rising terrorist threats, and displacement of
population. In Brazil, political uncertainty might
delay the approval of key policy initiatives needed
to regain investors’ confidence. Counter-cyclicalfiscal and monetary policies may be harder toimplement when investors focus on rising
uncertainty and the potential for political tensions
to block structural reforms.

31

C H A P TE R 1

Percent of global FDI stock10

2003-08

2010-1486420
FDI inflows

FDI outflows

Sources: World Bank, Bank for International Settlements, Bloomberg, United Nations.
A. Sample includes 44 EMDE commodity exporters. Unweighted average. Last observation is May
2016.
B. Time 0 = 1998Q1, 2000Q4, 2003Q1, 2004Q4, 2006Q2, 2008Q4, 2011Q3. The events are sevenslowdowns over the period 1997 to 2015.
C. Based on estimates of a structural VAR. Average cumulative impulse response after two years ofneighboring country’s real GDP growth to a 1 percentage point decline in Russia’s or Brazil’s growth.
For Russia, list of affected neighboring countries are Armenia, Kazakhstan, Romania, Slovak
Republic, Turkey, Poland and Ukraine. For Brazil, they are Argentina, Chile, Colombia, Ecuador,
Paraguay and Peru. For each country, the variables included in the model are: G7 growth, EMBI,
growth of source country, trade-weighted average commodity prices, growth of the affected countries,
the real effective exchange rate of the affected countries. The model includes a dummy that captures
the global financial crisis of 2008-09.
D. Last observation is 2015Q3.
E. Last observation is April 2016.

32

C H A P TE R 1

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

FIGURE 1.20 Geopolitical risks and policy uncertainty
Bouts of policy or geopolitical uncertainty could weigh on prospects.
Among advanced economies, policy uncertainty has increased, and isparticularly elevated in Europe, reflecting challenges associated with large
flows of refugees, security concerns after the recent terrorist attacks, andthe referendum on U.K.’s European Union membership. In large emerging
markets, policy uncertainty increased in China and remains elevated in
Russia, despite the recent decline. In a number of EMDEs, conflict andpolitical unrest continue to affect confidence.
A. Impact of policy uncertainty

B. Policy uncertainty in the UnitedStates and Europe

Percentage point deviation after 1 year
0.5

Index
USA

180

0.0

Europe140-0.5Confidence interval

100

Impact

-1.0

60
-1.5

C. U.K “Brexit” and Pound Sterling
Exchange rate
0.74
GBP vs US$

2016

2015

2014

2013

2012

2011

2010

2009

D. Policy uncertainty in large EMDEs

Search intensity index
100

Index

India

China

Russia200"Brexit" - Google trends

0.72

2008

Unemployment

2007

Industrial production

2006

2005

20
-2.0

80
150

0.7

earnings have been heightened by the expectationthat negative rates may prevail for longer,squeezing interest margins if banks are not able topass on negative rates to depositors. A prolonged
period of very low, or negative, interest rates might
eventually reduce the effectiveness of monetary
policy and distort asset valuation in ways that
could breed future financial turbulence (WorldBank 2015a).
In the United States, the gap between policy
interest rate expectations by market participants
and members of the Federal Reserve Open Market
Committee remains significant. Investors could
abruptly revise their policy rate projections, andrequire increased inflation risk premia over the
medium-term (World Bank 2016b, Abrahams etal. 2015). This could trigger a sudden increase inlong-term interest rates and financial market
volatility, affecting in particular riskier assets,
including emerging market debt and currencies(Arteta et al. 2015).

60

0.68

100
40

0.66

50

0.64

20

0.62
Jan-150

E. Terrorist attacks

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

Jan-162006

Jul-152005

0F. Share of EM with presidential andparliamentary elections

Search intensity index
Number of attacks
Number of attacks
16060
140 "Terrorism" + "Terrorist Attack" 50
Googletrends
120
40
100
80
60
40
20
0

30

Percent of countries
50
40
30
20

20
10

2018

2017

0

2016

Apr-16

Jan-16Oct-15

Jul-15

Apr-15Jan-15

0

2015

10

Sources: World Bank, Bloom et al. (2015), Haver Analytics, Bloomberg, Wikipedia.
A. Estimates from Bloom et al. (2015) for 12 countries. Impulse response functions for industrial
production and unemployment to a policy uncertainty innovation with 90 percent confidence bands.
B. Data are a 12-month moving average of the underlying indices. Last observation is April 2016
C. Last observation is May 21, 2016.
D. Data are a 12-month moving average of the underlying indices. Last observation is April 2016
E. Data do not include state-sponsored terrorist attacks or what are believed to be targeted assassination. Google Trends search for “Terrorism” and “Terrorist Attacks.” Last observation is April 2016.
F. Sample includes 24 emerging market economies.

concerns about detrimental effects on banks’profitability and financial stability (Genay andPodjasek 2014, Hannoun 2015, World Bank.
2015a, Cliffe 2016, BIS 2016). On such concerns,bank equity valuations dropped sharply in early2016 (Figure 1.21). Uncertainty about banks'

In addition, divergent monetary policies between
the United States, Europe, and Japan could
contribute to further volatility in currency markets
and lead to renewed upward pressure on the U.S.
dollar, with significant repercussions forborrowing costs. The broad-based appreciation of
the U.S. dollar since 2014 has already contributed
to higher cost of debt refinancing and balance
sheet pressures across EMDEs. Over the last two
years, countries that have experienced relatively
larger depreciations against the U.S. dollar have
faced rising credit default risks, which havecontributed to tighter credit conditions(Hofmann, Shim, and Shin 2016). Continued
depreciation against the dollar might expose
balance sheet vulnerabilities in emerging market
banking sectors, particularly where the stock of
non-performing loans is already elevated.
Considering the inverse correlation between
commodity prices and the dollar, this effect could
be reinforced by a negative income effect for raw
materials exporters (Druck, Magud, and Mariscal
2015). In emerging markets, heightened
uncertainty could contribute to a greater
sensitivity to economic news, and fragile liquidity
conditions could amplify volatility in periods ofmarket stress.

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

B. Interest margins of Euro Areabanks

Index, 100=beginning of decline
110

4-week moving average, basis points
8

100

6
4
2
0

90
80
70 Previous episodes

C. Gap between market and FOMC
expectations for policy rates at end
2017

Apr-16Oct-15Jan-16

D. U.S. Federal Funds rates during
tightening cycles

Feb-94Jun-99Jun-04
Dec-15

Basis points

Basis point spread
160
140
120
100
80
60
40
20
0

Jul-15

Apr-15Jan-15

Jul-14Day

Oct-14

80

70

60

50

40

30

350
300
250
200
150
100

May-16

Mar-16

Dec-15

Sep-15

50
0
-18

-12

-6

0

6

12

E. Currency pressures and credit
default spreads in EMDEs

F. Liquidity conditions in EMDE
sovereign bond markets

Depreciation against US$ since 2012, percent
0
CHN
-10
THA
POL
HUN
-20
MEX
MYS
-30
IND
TUR
-40
ZAR
BRA
-50
RUS
-60
-600
-400
-200
0
200
400

Monthly rolling big-ask spread, basis points
9
Average
Median
8
7
6
5
4
3
2
1
0

2015

2014

2013

2012

2011

2010

2009

2008

2007

Mon thly r ollin g bid-

2006

Change in 5-year CDS spreadsince 2012

18

Month

2016

20

10

40

Apr-1450 Fall 2008

Jan-14

-2
-4
-6
-8

60 Current episode2005

An alternative view suggests that low growth
mainlyreflects
deteriorating
supply-side
conditions, which might have become more
apparent in the post-crisis period. The
anticipation of lower future growth may lead to adecrease in current consumption and investment,
hence depressing aggregate demand (Blanchard,
L’Huillier, and Lorenzoni 2013). Adverse supplyside factors include increased demographic
headwinds, which weigh on labor supply
and could also contribute to a lower rate of returnon capital and thus reduce productivity growth(Baker, Delong, and Krugman 2005; Rachel andSmith 2015). Declining returns on innovation
also raise the possibility that the widespread
slowdown in productivity growth over the last
decade could persist for a considerable period(Gordon 2016). This second interpretation of sub

A. Bank equity prices around episodes of financial stressJun-15

One view suggests that advanced economies still
face the lasting consequences of the global
financial crisis, with ongoing deleveraging
pressures dampening investment and real interest
rates. This process could be protracted, as private
debt remains above pre-crisis levels in mostadvanced economies (Figure 1.22). But thedeleveraging pressures could eventually subside,
implying a return to higher growth than thatextrapolated from recent performance (Lo andRogoff 2015). In this interpretation, aggressive
monetary policy should help the transition toward
more balanced growth, eventually stabilizing
output around potential, inflation around target,
and real interest rates close to pre-crisis levels(Yellen 2015). This view implies a modest
likelihood of long-term stagnation. In the presenceof hysteresis in output and employment, ashortfall in aggregate demand could potentiallyinflict permanent damage to activity, reinforcing
the need for aggressive monetary and fiscal policy
in a downturn (Summers 2015).

Rising credit risks and very low or negative interest rates have contributed
to renewed concerns about bank balance sheets in the Euro Area. A
sizable gap in U.S. policy rate expectations between market participantsand Fed policy makers could cause a sudden increase in bond yields anda retrenchment of capital flows from EMDEs. Fragile liquidity conditions
could amplify volatility in periods of market stress.

0

The causes and risks associated with a prolonged
period of weak growth, low inflation, and low
interest rates in advanced economies are a sourceof debate. The two interpretations put forward in
the debate have starkly different policy
implications (Kose and Terrones 2015).

FIGURE 1.21 Financial market fragilities

Mar-15

Stagnation in advanced economies

33

C H A P TE R 1

Sources: World Bank, Bloomberg, U.S. Federal Reserve Board, European Central Bank, Standard
and Poor’s.
A. Episodes are defined as any sustained period of a 15 percent or more decline in the Standard andPoor’s Global Financials Index, plotted from its local maximum. The 10 identified episodes begin on:
7/20/1998, 6/25/2001, 5/17/2002, 8/22/2002, 5/2/2008, 8/29/2008, 1/2/2009, 4/15/2010, 6/21/2011,
and 12/4/2015.
B. Net interest margin is proxied by net interest spread, without compensating for the fact that theearning assets and the borrowed funds may be different instruments and differ in volume. Last observation is May 25, 2016.
C. FOMC is the Federal Reserve Open Market Committee. Median expectation of individual FOMC
members. Policy rate expectations derived from forward swap rates. Last observation for FOMC
expectations is March 2016. Last observation for market expectations is May 25, 2016.
D. Basis points difference in federal funds rate levels from the start of the tightening cycle (0) in:
February 1994, June 1999, June 2004, and December 2015. The forecast for the current tightening
cycle is implied by overnight indexed swap rate forwards. Last observation is May 25, 2016.
E. Last observation is May 25,2016.
F. Bid-ask is defined as the difference between the bid yield to maturity and the ask yield to maturity
for the given country's five-year government bonds. This spread can be seen as a measure of thecost of transacting in the sovereign debt markets for these countries. The sample begins with 7
EMDEs and ends with 15 EMDEs. Last observation is May 25,2016.

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FIGURE 1.22 Stagnation in advanced economies
Persistently low interest rates are a symptom of a weak post-crisis recovery
in advanced economies. The ongoing process of deleveraging could
continue to cap aggregate demand in the short term. Demographicpressures and weak productivity growth will increasingly weigh onprospects over the medium term. A further decline in growth acrossadvanced economies would have pronounced negative effects for EMDE
growth.

Percent
3

Percent of GDP
Latest value
120
100
80
60
40
20
0

1990s 2000-08 2009-13 Latest

FOMC
forecast
by end2017

C. Active age population growth

0.15
0.10

Euro AreaJapan

D. Impact of 1 percentage point decline in G7 and BRICS growth onother emerging market economies

World
United States
Euro Area
Japan

Percent

United States

Non-financial
corporations-2

Households

0-1

Non-financial
corporations

1

2002-07 average

Households

2

Non-financial
corporations

B. Private non-financial sector credit

Households

A. Real U.S. policy interest rates

Percentage points
0.0
-0.4

0.05
-0.8

0.00
-0.05

-1.2

G7

BRICS

2030

2025

2020

2015

2010

2005

2000

1995

1990

-0.10
-1.6
On impact

1 year

2 years

Sources: World Bank, U.S. Federal Reserve Board, Bank for International Settlements, United
Nations.
A. FOMC forecast is the median expectation of individual members of the FOMC in March 2016.
B. Latest value is 2015Q3.
D. Cumulative impulse responses of emerging market growth (excluding BRICS) to 1 percentage
point decline in G7 and BRICS growth (World Bank 2016b).

-par growth in advanced economies puts greater
emphasis on structural reforms and their likely benefits for aggregate demand, while
pointing to the risk of excessively accommodative
macroeconomic policies.
Persistent stagnation in major advanced economies
could have broad-ranging consequences for
EMDEs. Advanced economies constitute about 60
percent of global import demand and remain asubstantial source of global financial spillovers.
Continued disappointments in those economies
could lead to significantly weaker outcomes for
EMDEs, further setting back global trade andinvestment prospects.

Increased protectionism andslower globalization
Persistently low growth could intensify
protectionist tendencies that would further
weaken growth prospects. Although there is noclear evidence of an acceleration in trade
restrictions in 2015, past trade barriers are being
removed only slowly, and efforts to further reduce
trade costs are facing increasing opposition (Figure
1.23; Evenett and Fritz 2015, WTO 2015). Since
the global financial crisis, highly visible tariffbarriers have not been erected on a large scale, butmore subtle micro-restrictions such as local
content requirements, public procurement
discrimination against foreign firms, export taxes
and quotas, and trade distorting subsidies haveproliferated (Hufbauer and Jung 2016). New
discriminatory measures were most frequently
imposed on manufactured goods whose trade fell
most rapidly. Emerging markets are frequently
targeted by temporary trade barriers and importprotection measures (Bown 2014). The foregone
benefits of trade liberalization appear to besignificant, particularly for emerging anddeveloping countries. During the 1990s, GDP per
capita grew more than three times faster indeveloping countries that lowered trade barriers
than in those that did not (World Bank 2010).
In the post-crisis period, financial globalization
also stalled, contributing to a growing “home bias”
in investment, as gauged by the correlation
between domestic investment and domestic
savings, which should be low with high capital
mobility. By 2007, home bias had fallen tohistoric lows, but it increased significantly during
the crisis, and has thereafter remained near mid1990s levels. This has mainly reflected aretrenchment of inter-bank lending acrossdifferent jurisdictions (Forbes 2014). Shrinking
cross-border bank flows may limit the propagationof global financial stress. But it may also reduce
avenues for consumption smoothing during
country-specific stress, and may weaken theefficiency of capital allocation and economic
specialization (World Bank 2016b; Islamaj andKose forthcoming).

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

A. Trade volumes

B. Trade measures from 2009 to 2015

Index = 100 in 2008
150
140
130
120
110
100
90
80
70
60
50

Number of measures
600
Pre-crisis trend

400
300
200
100

2
0

Policy challenges
Challenges in major economiesInadvanced economies,
monetary policy
accommodation will be needed until economic slack
has been absorbed and inflation moves back in linewith policy objectives. However, policy interest rates
are close to their lower bound, and unconventional
measures might yield diminishing returns. Limited
room for additional monetary policy accommodationmeans that, in the event of a further negative shock,fiscal stimulus would be appropriate for countries
that have the fiscal space. Redirecting public spending
toward infrastructure investment, and implementing
growth-enhancing tax, product, and labor market
reforms, could help raise income and restore fiscal
and monetary policy space. In China, policymakers
need to strike a balance between reducing highleverage and other financial vulnerabilities andpromoting the reforms needed for sustainable andbalanced medium-term growth.

Advanced economies

Pre-crisis trend

2014

4

US$, trillions
50
45
40
35
30
25
20
15
10
5
0

2012

6

D. Cross-border bank flows

2010

8

Liberalizing

2008

10

Discriminatory

2006

Percentage point, change in real income
12

0

2004

C. Impact of 50 percent reduction in
tariffs and trade barriers

EMDEs

500

2002

There are two main reasons why the benefits oflower oil prices to growth may yet materialize.
First, the abrupt decline in oil prices has put severe
strains on oil exporting countries, as investor
confidence worsened and fiscal or monetary
policies tightened (Figure 1.24; Baffes et al. 2015).
While adjustments to the negative terms of trade
shock will continue, the acute financial stressassociated with sharply declining prices might
diminish if some stability in oil prices is restored.
Second, consumers across major oil importers havereacted to the positive terms of trade shock withcaution, increasing both spending andprecautionary savings. As uncertainties about
growth prospects are resolved, a delayed boost to
private consumption remains a possibility.

Past trade barriers are being removed only slowly, and efforts to further
reduce trade costs are facing increasing opposition. The cost of new
restrictions and the foregone benefits of trade liberalization can besignificant, particularly for EMDEs. Cross-border banking flows have also
diminished since the crisis, limiting the propagation of global financial
stress, but reducing avenues for smoothing country-specific stress.

2000

The expected positive effects of falling oil prices
on global activity has been surprisingly muted sofar, but could still become more visible over time,
as prices stabilize at a low level. This would
represent an upside risk to current projections.

FIGURE 1.23 Slower globalization and risk ofprotectionism

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

Upside risk: Unrealized gains from low oil
prices35

C H A P TE R 1

Sources: World Trade Organization, Bank for International Settlements, United Nations HighCommissioner for Refugees, World Bank, International Monetary Fund, United Nations Commission
on Trade and Development, CPB Netherlands Bureau for Economic Policy Analysis.
A. Pre-crisis trend is extrapolated from 2000-06 period. Last observation is March 2016.
B. Number of measures implemented through October 31, 2015.
C. Weighted averages taken using 2014 GDP in US$. Estimates from World Bank (2010).
D. Bank external liabilities. Pre-crisis trend is extrapolated from 2000-06 period. Last observation is
2015Q3.

Monetary and financial policy in advanced
economies
Monetary policies in major advanced economies
should remain accommodative. In the UnitedStates, inflation and employment continue toconverge towards the Federal Reserve’s objectives,
justifying a gradual withdrawal of stimulus.
However, external risks and continued downward
revisions to the level of policy interest rates
expected to prevail over the medium term point toa very gradual tightening cycle ahead (Figure1.25). This could leave limited space for policy
accommodation during the next downturn. In
Europe and Japan, negative interest rates andexpanding asset purchase programs have been
implemented, contributing to a record-high share

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FIGURE 1.24 Unrealized gains from low oil prices
The speed of the decline in oil prices has put severe strains on major oil
exporting countries, where domestic demand, particularly investment, hasplummeted. Stress could wane as oil prices stabilize. In large oil importing
countries, consumers have been increasing their spending cautiously,
accumulating precautionary savings. Pent-up demand could support
stronger growth if uncertainty diminishes.

Percent of disposable income

2013

2011

2009

2007

2005

2003

2001

GDP weighted
Oil consumption weighted

1999

13
12
11
10
9
8
7
6
5
4

1997

Percentage points
GDP
Consumption
Investment
Exports
0
-1
-2
-3
-4
-5
-6
-7
World Advanced EMDE oil EMDE oil
economies exporters importers

B. Household saving rates in oilimporting countries

1995

A. Revisions to 2016 forecasts sinceJune 2014

Sources: World Bank, Organization for Economic Cooperation and Development, International
Energy Agency.
A. Revisions to forecasts from June 2014 to June 2016 for GDP, consumption, investment, andexport growth in 2016.

of government debt trading at negative yields.
Large-scale
unconventional
interventions—quantitative easing, negative policy interest rates,and other credit easing measures—have helped
improve borrowing conditions, and have provided
needed support to demand (Draghi 2016; Engen,Laubach, and Reifschneider 2015). However, thebenefit of these unconventional policies might
diminish over time, and financial stability risks
could emerge from prolonged use of such policies.
Banks in advanced economies have strengthened
their capital base and liquidity buffers, but theirprofitability is generally low and they remain
vulnerable to market pressures—particularly in theEuro Area, where an elevated stock ofnonperforming loans warrants close supervision.
Increased loss-absorbing capacities, reinforced
counter-cyclical buffers, and improved macroprudential supervision could enhance resilience,and help a better transmission of monetary policy
accommodation to credit conditions and to thereal economy (IMF 2016b).
Fiscal policy in advanced economies
Low inflation and weak growth have adversely
affected debt dynamics in most advanced
economies, despite past consolidation efforts. The
average ratio of government debt to GDP remains
above 100 percent and is expected to remainbroadly unchanged in coming years (Figure 1.26).
Over the coming decade, slowing or shrinking
population growth and rising dependency ratios
will put pressure on fiscal revenues and social
spending. Nevertheless, in the event of adverse
shocks, the use of counter-cyclical measures toconfront slowing growth would remain
appropriate for a number of advanced economies,
in view of the environment of persistently low
interest rates and increasingly constrainedmonetary policy. Some countries (Canada,
Germany, United States) retain fiscal room tomaneuver (European Commission 2016, U.S.
Congressional Budget Office 2016). Others(France, Ireland, Spain) have more limited space
while some have exhausted it altogether (Greece,
Portugal).4
Irrespective of the available space for countercyclical policy, a more growth-enhancing mix ofspending and tax reforms is possible in virtually all
countries. Public investment has been on a secular
downward trend and suffered disproportionatelyfrom fiscal consolidation plans after 2010. The
combination of low interest rates; positive returns
on public investment; and possible crowding in ofprivate investment in infrastructure, education,and research makes the case for a significant
reorientation of public expenditure in that
direction (Ball, De Long, and Summers 2014).
Structural policy in advanced economies
Supportive macroeconomic policies and structuralreforms are mutually reinforcing and should be
implemented in tandem to maximize theirrespective effects on growth (Bordon, Ebeke, andShirono 2016). However, following an initial post-crisis uptick, structural reform efforts in advanced
economies have stalled recently, including incountries facing important crisis legacies andwhere unemployment is high (Figure 1.27). In thecurrent fragile environment, reforms that canbolster long-term growth while supporting
aggregate demand in the short term should be
4Fiscal room is lacking particularly among economies where
demand support is most needed. In the context of the Euro Area, thisemphasizes the need for effective policy coordination and appropriate
use of European financial instruments to support countries with morebinding fiscal constraints (European Commission 2016; IMF 2016a).

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37

C H A P TE R 1

more actively pursued. Such measures include
filling public infrastructure gaps, reducing barriers
to entry in protected services, freeing up fiscal
space through entitlement reforms, facilitating
labor mobility through housing and labor market
reforms, and reducing skill mismatches andbarriers to business entry.

FIGURE 1.25 Monetary policy in advanced economies

Challenges in China

A. Real neutral policy rate in the U.S.
implied by FOMC forecasts

B. Share of government debt tradingat negative yields

Percent2

Percent
70

Fiscal policy. Short-term fiscal stimulus measures
to avoid a sharp slowdown in growth remainadequate, provided they are undertaken within theoverall medium-term fiscal framework (WorldBank 2016a). Going forward, the planned threepronged approach will help reduce fiscal risks.
First, the prospect of persistent revenue weakness
may warrant accelerated tax reforms. The
extension of VAT to remaining services was
implemented in May 2016 (The State Council of
the People’s Republic of China 2016a), and thegovernment is planning to revise tax-sharing

Europe

Japan

60
50
40
30

0

20
10

Current

Apr-16

Mar-16

Feb-16

Jan-16

Dec-150

Nov-15Long-run

2018

2017

2016

2015

-1

C. Share of government debt held bycentral banks

D. Long-term inflation expectations

Percent of debt outstanding
35
Bank of Japan
U.S. Federal Reserve
30
European Central Bank
25

Percent, year-on-year

20

1.0

15

0.5

2.5
2.0
1.5

10

0.0

5

-0.5

0
2010

2011 20122013

United States
Euro Area
Japan

2014 20152016

Jan-15
Feb-15Mar-15
Apr-15May-15Jun-15
Jul-15Aug-15
Sep-15Oct-15
Nov-15
Dec-15Jan-16
Feb-16
Mar-16
Apr-16May-16

Monetary and financial policy. While China still
has the policy buffers and tools to support growth,
additional credit-based policy easing would further
raise corporate debt, and possibly delay theunwinding of financial vulnerabilities (Figure1.28). A focus on strengthening the financial
sector via prudential measures would help buttressfinancial stability. Recent turmoil in domestic
equity and currency markets suggests that
accelerated financial market reforms could beaccompanied by volatility. Clear communicationof policy objectives and actions by the authorities
will help reduce policy uncertainty and foster
confidence.

Jun-14
Dec-15Mar-161

2014

The key policy challenges in China are to ensure a
gradual slowdown and sectoral rebalancing, and to
reduce the financial vulnerabilities arising fromhigh debt. The reallocation of resources associatedwith rebalancing creates risks of a sharper-thanexpected slowdown in overall activity. The
stepwise liberalization of financial and currency
markets might be accompanied by bouts ofinvestor uncertainty over prospects and policy
direction. Eroding repayment capacity in highly
leveraged and stagnating industrial sectors
generates financial stability risks (IMF 2015b).

The trajectory of future policy rates continued to be revised down by theFederal Reserve, reflecting a number of factors including a reassessmentof the level of interest rates expected to prevail over the long run. In Europe
and Japan, negative interest rates and expanding asset purchaseprograms have led to a rising share of government debt traded at negative
yields and held by central banks. Despite the extraordinary monetary
policy easing, inflation expectations generally remain below central banks
inflation objectives.

Sources: World Bank, Bloomberg, U.S. Federal Reserve Board, European Central Bank, JP Morgan.
A. Real neutral policy rates are derived from the Taylor Rule: R = RR* + p+ 0.5 (p − 2) − (U − U*),
where R denotes the Taylor Rule federal funds rate, RR* is the estimated value of the real natural rateof interest, p is expected inflation, U is the unemployment rate, and U* is the equilibrium
unemployment rate (longer-run FOMC forecast of the unemployment rate in this case).
B. Europe aggregate includes bonds from Belgium, Denmark, France, Germany, Netherlands, Spain,
and Sweden. Current data reflects May 25, 2016.
C. Latest observation is 2015Q4 for Bank of Japan, 2015Q1 for U.S. Federal Reserve and theEuropean Central Bank.
D. Inflation expectations are the market implied five-year forward five-year level of inflationcompensation, derived from the inflation swaps market in the respective countries. Last observation is
May 25, 2016.

mechanisms with local governments. Second, ashift in fiscal expenditure from public
infrastructure investment toward education,
health, and social assistance can help witheconomic rebalancing, and reform of the social
security system should boost its sustainability (Liand Lin 2016). Third, the pace of the government-related debt buildup may be slowed through theimplementation of the new budget law and thelimitation of the use of local government financing
vehicles (LGFV). Efforts to restructure LGFVdebt to local government bonds (World Bank
2015d) and to better align local revenues withexpenditures should also continue.

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FIGURE 1.26 Fiscal policy in advanced economies
Weak growth and low inflation have adversely affected debt dynamics inadvanced economies, despite past consolidation efforts. Over the coming
decades, slowing population growth and rising dependency ratios will put
pressure on fiscal revenues and social spending. The combination of low
interest rates and well-planned public infrastructure spending could
support growth.
A. Public debt

B. Change in structural fiscal balance

Percent of GDP
300
Japan
250

Percent of GDP
2.0

United States

Euro Area

2010-152016-18

1.6

200
1.2

150
100

0.8

50

0.4

2020

2015

2010

2005

2000

0

C. Share of dependent population
Percent
80

2015

2030

0.0
United States

Euro AreaJapan

D. Infrastructural Quality Index
Index
4.5

2007

2014

60
4
40

SOEs (Leutert 2016; Peng, Shi and Xu 2016).
Some recent reforms aim to increase market entry
for private and international investors.6 Also, in
2016, the state will further deepen the reform of
key industries, such as electricity, and promote themixed-ownership reform of SOEs (The StateCouncil of PRC 2016b). Barriers to production
have also been lowered to stimulate private sector
activity, particularly through tax reforms.7 A seriesof reforms have been implemented to cut red tapeand make operation easier for private companies.
This resulted in a boom in the registration ofprivate firms: in 2015, 3.6 million firms werecreated, almost double the number in 2013.
Going forward, better corporate governance,enhanced auditing and accounting standards, andstronger regulatory frameworks will encourage amore efficient reallocation of resources. Delays in
implementing the planned reform agenda could
set back growth, worsen the debt overhang, andheighten risks to the financial system (Prasad
2016, Ross 2016).

3.5

20
0
World

UnitedStates

Euro
Area

China

Japan

3
United States

Japan

Euro Area

Sources: World Bank, International Monetary Fund, United Nations.
D. Quality of trade and transport-related infrastructure. Survey conducted by the World Bank in
partnership with academic and international institutions and private companies and individuals
engaged in international logistics. Respondents evaluate eight markets on six core dimensions on ascale from 1 (lowest quality) to 5 (highest quality). The markets are chosen based on the mostimportant export and import markets of the respondent's country, random selection, and, forlandlocked countries, neighboring countries that connect them with international markets.

Structural policy. In 2013, the government
announced a comprehensive structural reform
agenda to support a sustainable long-term growthpath. Subsequent policy statements, including the13th Five-Year plan adopted in 2016, havereaffirmed the commitment to the main tenets of
the agenda—increased market mechanisms andgreater transparency to encourage reallocation of
credit, land and labor toward more productive
sectors.5 Cautious progress continues to be madein implementing the planned reforms. For
instance, the government envisages opening
sectors dominated by state-owned enterprises(SOEs) to competition, leveling the playing fieldfor SOEs, and encouraging the exit of inefficient
5The 13th Five-Year Plan for 2016-2020 envisages supply-side
reforms to encourage growth, restructure state-owned enterprises, toreduce overcapacity in key sectors such as steel and coal, to create newurban jobs, and to liberalize interest rates.

Challenges in emerging and developing
economies
Many EMDEs face reduced monetary policy space tosupport growth, with substantial variation between
commodity importers and commodity exporters.
Commodity exporters are generally struggling tomaintain an accommodative monetary policy stanceamid weakening currencies and inflationarypressures. In contrast, declining inflation is providing
central banks in some commodity importers scope toease. Similarly, fiscal policy challenges vary acrosscommodity importers and exporters; however, in mostcountries the scope for expansionary fiscal policy
remains limited. Structural policies are needed to lift
growth prospects and rebuild policy buffers. In
particular, investment in infrastructure and humancapital would boost long-term growth, although
6For example, the People’s Bank of China issued new rules tomake it easier for international investors to access China’s interbank
bond market, which was a step toward opening its capital markets
and making the renminbi an international currency. The oil and gas
industry has seen moderate market-access openings for private capital(and foreign investors through joint ventures) in exploration as wellas crude oil processing (Klein and Weill 2016).
7Preliminary evidence from pilot areas suggests that the transition
to VAT has led to a decrease in the tax burden of small- and medium-sized enterprises (Lam and Wingender 2015).

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39

C H A P TE R 1

additional spending to that end may be challenging
amid eroding fiscal buffers. Efforts to pursue
diversification would improve resilience to largecommodity price fluctuations.

FIGURE 1.27 Structural reforms in advanced economies

Monetary and financial policy

A. Reform progress

B. Reform progress andunemployment rate

Monetary policy has been diverging between
commodity importers and exporters, but most are
struggling to maintain a policy stance that allows
for counter-cyclical action. In commodity
importing EMDEs, low commodity prices are
putting downward pressure on inflation (Figure1.29), as well as relieving pressure on the balanceof payments (Bangladesh, India, Turkey). This has
provided some scope for more accommodative
monetary policy, if needed (Baffes et al. 2015).
However, central banks face the risk thatdisinflation might be transient, once the passthrough from lower commodity prices has
dissipated.

Percent of recommended reforms
70
2011-12

Reform progress, average 2011-15
1.0

A post-crisis uptick in structural reform implementation, particularly ineconomies more severely affected by the crisis, has stalled recently.
Reducing skill mismatches and barriers to business entry raises thepromise of significant growth and productivity windfalls.

60

2013-1450

2015

R² = 0.3534

0.8

40

0.6

30

0.4

20
10

0.2

0
Advanced Euro Area Euro Area Other
economies deficit
surplus advanced
countries countries economies

0.0
0

5

Macroprudential policies can contain financial
vulnerabilities arising from the sharp rise in

15

20

C. Share of workers with skill
mismatch

D. Ease of Doing Business andproductivity levels

Percent
40

Doing Business score, 2016
45

30

40

20

35

10

30

0

25

Italy

Spain

Germany

Japan

FranceUnitedStatesUnitedStatesFranceUnitedKingdom
Italy

In commodity exporting EMDEs, numerous
national currencies have come under intermittent
pressure, depreciating sharply in early 2016 before
recouping some of their losses. Currency pressures
have been accompanied by rising inflation,
growing debt service obligations of corporates, andweak capital inflows, despite the recent rebound.
Several central banks (Angola, Azerbaijan,
Colombia, Nigeria, South Africa) responded byraising interest rates in early 2016. Nevertheless,inflation remains well above target in many
commodity exporters, while policy rates seem tobe below levels that would stabilize inflation.
While high interest rates might relieve some of theinflation and depreciation pressures, they further
weigh on activity. Thus, policymakers in thesecountries face difficult trade-offs between
monetary accommodation to support growth on
the one hand, and tightening to maintain stableinflation, ease currency and capital accountpressures, and boost investor confidence on theother. Going forward, the adoption of monetary
policy frameworks that enhance policy credibility
could help anchor inflation expectations (Svensson
2010; Carneiro et al. 2008).

10

Unemployment rate in 2010

Japan

Germany

Spain

20
70
75
80
Hourly labor productivity level, 201585

Sources: World Bank; Organisation for Economic Cooperation and Development.
A. The reform progress indicator is based on a scoring system in which each priority set in theprevious edition of the OECD’s Going for Growth takes a value of one if “significant” action is taken
the following year, and zero if not. Euro Area deficit countries are: Estonia, France, Greece, Italy,
Ireland, Portugal, the Slovak Republic, Slovenia and Spain.
C. Percentage of workers either over or under-skilled in 2012. Definition of skill mismatch as in
Pellizzari and Fichen (2013).
D. Ease of Doing Business score is relative to the best performance observed in each of theindicators across all economies in the Doing Business survey.

corporate indebtedness in both commodity
exporters and importers (Claessens 2014).
Macroprudential measures can enforce greater
capital and liquidity buffers in financial
institutions exposed to leveraged corporates.
Strengthened governance practices in state-owned
enterprises can help contain the further buildup of
corporate debt. Reforms to solvency andbankruptcy laws, such as the one recently enacted
in India, could help a more rapid and orderly
resolution of distressed companies.
Fiscal policy
Commodity importers and exporters are facing
increasingly divergent fiscal policy challenges but
both groups have limited fiscal buffers foraccommodative fiscal policy (IMF 2016c). The
lack of fiscal space—high debt, wide deficits, and40

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FIGURE 1.28 China’s macroeconomic and structural
policies
While China still has policy buffers and tools to support growth, additional
credit-based policy easing would further raise corporate debt or delay theunwinding of financial vulnerabilities. Short-term counter-cyclical fiscal
measures have helped avoid a sharper slowdown in growth. Better
corporate governance, enhanced auditing and accounting standards, andstronger regulatory frameworks will encourage a more efficient reallocationof resources.
A. Contributions to loan growth

B. General government’s revenue,
expenditure, and structural balance

Percentage points
Overseas
Domestic to non-fin enterprises
Domestic to households
14
12
10
8
6
4
2
0
2012
2013
2014
2015 2016Q1

Percent of GDP
40

Percent of GDP
Fiscal balance (RHS)
Revenue
Expenditure
1

30

0
-1

20

-2

2016

2015

2014

2013

2012

2011

2010

-4

2009

-3

0

2003-08

10

Sources: World Bank, Haver Analytics, World Economic Forum, Heritage Foundation, Transparency
International.
A. Last observation is 2016 Q1. Overseas loans are loans extended by nonresidents to Chinese
residents.

unsustainable fiscal paths—undermines the scopefor fiscal policy to stimulate the economy (WorldBank 2015c). In particular, the erosion of fiscal
space in commodity exporters has resulted inmuch smaller fiscal multipliers relative tocommodity exporters (Figure 1.30).
For commodity importing EMDEs, smaller
outlays on fuel subsidies have reduced fiscalpressures, though consistent implementation
remains a challenge (Kojima 2016). However,given that many were starting from a position ofhigher government debt and wider deficits, thescope for expansionary fiscal policy is constrained.
Unless severe downside risks materialize, thepriority in many countries is therefore likely to be
the rebuilding of policy buffers and theimplementation of fiscal reforms. Efforts could
include actions to broaden tax bases and improvethe efficiency and transparency of tax collection, as
well as measures to improve in the quality of
public spending consistent with medium-term
expenditure frameworks.
Many commodity exporting EMDEs are facing
severe revenue shortfalls. While starting from a
position of stronger buffers (low public debt,
substantial sovereign wealth funds, and budget
surpluses), these buffers are swiftly eroding ascommodity prices fail to rebound. Policymakers
are recognizing the need for substantial
adjustment, especially in oil exporters that arefacing ratings downgrades or negative outlooks(Hanusch and Vaaler 2015). Some countries haveroom to borrow or draw down the fiscal savings
previously accumulated, while others might needto frontload fiscal adjustments amid depleted
buffers and rising sovereign risk premia. The needto reduce spending is also reflected in widespreadreforms of fuel subsidies among major oil
producers (Mottaghi 2016). Resource-richcountries that heavily depend on commodity
based revenues need to improve their non-resource
tax system, broaden their tax base, and strengthen
their tax administration.
Several institutional arrangements can facilitate
the use of expansionary policy in commodity
exporting EMDEs (Budina et al. 2012, WorldBank 2015c). Many commodity exporting
countries operate sovereign wealth funds whichhave helped reduce pro-cyclicality of fiscal policy(Bleaney and Halland 2016, World Bank 2016d).
However, their current fiscal pressures suggest thatthe rules governing these funds could be
strengthened to ensure greater counter-cyclicality
in the presence of temporary shocks. Chile has
been cited as an example of a success in insulating
commodity revenues from political considerationsin its practices related to copper mining (WorldBank 2015c). Stronger fiscal rules, to set andgovern procedures on revenues and spending overa multi-year horizon would help establish fiscal
sustainability in commodity exporting EMDEs.
Structural policy
While expansionary macroeconomic policies areuseful in narrowing negative output gaps, they do
not ensure higher potential growth. Structural
policies and reforms are needed to lift mediumand long-term growth, reduce vulnerabilities, andsignal to investors that the authorities arecommitted to strengthening long-term growthprospects.
If
adequately
targeted
andimplemented, they can also support short-term
aggregate demand. Efforts to invest in
infrastructure, human capital, and productivity
enhancing new technologies, as well as actions toG L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

Investment in human capital. Improved
education and skills training can facilitate
reallocation of labor into the most productive
sectors, boosting productivity and long-term
growth, and contributing to economic
diversification (de la Torre et al. 2015). In many
EMDEs, government spending on education iswell below that in advanced economies, andinternational testing outcomes are weak. Even
within existing resource envelopes, better quality
education and closer alignment with employers’

The fall in commodity prices has helped lower inflationary pressures incommodity importers, providing some scope for monetary policy
accommodation. For commodity exporters, exchange rate depreciations
have contributed to keeping inflation above target, and have been met withpro-cyclical monetary tightening in some cases. Macroprudential policies
could help manage vulnerabilities associated with elevated private sector
debt.
A. Inflation in commodity importers

B. Gap between inflation and inflation
targetPercent, year-on-year1025th-75th percentile

Percentage points
15
Range

Median 12

2

4

0

2

-5

-2

0

-10

Mean

Median

10
5
0

2016

2015

6

2014

8

4

2013

6

2012

10

2011

8

2010

Commodity
exporters

Commodity
importers

C. Nominal effective exchange rate

D. Policy interest rates

Index, 100 = 2010
Commodity exporters
104
Commodity importers
102

Percent
10

Commodity exporters
Commodity importers

9

100

8

98

E. Changes in monetary policy rate

F. Private non-financial sector debt

Number of countries
30

Percent of GDP
250

Hikes

Cuts

25

200

20
15

150

10

100

5

2016

2015

2014

2013

2012

2010

2016

2015

4

2014

5

90

2013

6

92

2012

94

2011

7

96

2011

Infrastructure investment. The ongoing weakness
in investment across EMDEs highlights the needto close infrastructure gaps (Figure 1.31). Closing
these gaps could help ease constraints that deter
capital formation and reduce bottlenecks that
impede trade (Kohli and Basil 2011, Bourguignon
and Pleskovic 2008, Calderon and Serven 2004).
However, in the current environment ofdiminishing fiscal space, the financing of
infrastructure investment is an increasing
challenge, and attempts to close infrastructure
gaps have occasionally led to widening deficits andincreasing debt levels, particularly in low-income
countries. A thorough expenditure review may
reveal current expenditures that can be moreproductively reallocated towards infrastructure
investment targeted to meet well-identified needs(IMF
2016c).
Fostering
public-private
partnerships and creating incentives for the private
sector, such as institutional investors, to provide
longer maturity investment in investableinfrastructure projects (toll roads, power
generation and supply, water) could help easebudgetary pressures (World Bank, 2015e). Public
infrastructure investment could be complemented
by renewed efforts to attract foreign direct
investment. As long as it is carefully managed,
FDI can bring productivity enhancing technology,
knowledge transfer, and better jobs (Echandi,
Krajcovicova and Qiang 2015).

FIGURE 1.29 Monetary policy in EMDEs

2010

pursue greater diversification and foster trade, canlay the foundation for stronger and more equitable
future growth. Such efforts include well-designed
government spending (which can also provide
stimulus in the short run), as well as policies toreduce the cost of doing business and attract
foreign investment.

41

C H A P TE R 1

RangeMedian

50

0
2014

2015

2016

Commodity
exporters

2014

2015

2016

Commodity
importers

02010

Latest2010

LatestCommodity exporters Commodity importers

Sources: Haver Analytics, World Bank, Bank for International Settlements, Consensus Economics,
Central Bank Rates, International Monetary Fund.
A. Last observation is March 2016. Sample includes 56 EMDE commodity importers.
B. Figure shows data for all 22 EMDEs with formal or informal inflation target and with a gap between
actual inflation and inflation target of more than 1.5 percentage points; excludes Ukraine, where
inflation of 41 percent as of January 2016 was 32 percentage points above the target rate.
C. Last observation is April 2016. Simple average. Sample includes 42 commodity exporters and 25
commodity importers.
D. Last observation is May 2016. Simple average. Sample includes 29 commodity exporters and 21
commodity importers.
E. Number of countries adjusting rates at least once. The data for 2014 cover 21 commodity exporters
and 19 commodity importers. The data for 2015 cover 27 commodity exporters and 18 commodity
importers. The data for 2016 cover 13 commodity exporters and 9 commodity importers. Last observation is may 25, 2016.
F. Latest observation is 2015Q3. Commodity exporters include Argentina, Brazil, Indonesia, Malaysia,
Russia, Saudi Arabia, and South Africa. Commodity importers include China, Hungary, India, Poland,
Thailand, and Turkey.

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FIGURE 1.30 Fiscal policy in EMDEs
Counter-cyclical fiscal policy has been constrained by a decline in fiscal
space. Commodity exporting EMDEs, especially oil exporters, haveexperienced rising fiscal deficits. Measures to improve fiscal buffers
include establishing fiscal rules that encourage surpluses during boom
years.
A. Fiscal balance in 2015

B. Implied fiscal multiplier in 2015

Oct. 2014 forecast
April 2016 estimate

Percent of GDP
0

Fiscal multiplier
1.2

-1

1.0

-2

0.8

-3

0.6

-4

0.4

-5

0.2

Oct. 2014 forecast
April 2016 estimate

0.0

-6

Commodity exporters Commodity importers

Commodity exporters Commodity importers

C. Share of countries with fiscal rules

D. MENA oil producers fiscal
breakeven oil prices

Percent

US$ per barrel
350

2000

2014

70
60

300
250

50

200

40

150
100

30

2014
2015
2016
Oil price forecast, 2016

Kuwait

UAE

Qatar

Iraq

Algeria

Oman

Iran, IR

Oil importers

S. Arabia

Oil exporters

Libya

0

Bahrain

10

Yemen

50
0

20

Sources: World Bank, International Monetary Fund.
A. Oct. 2014 forecast from the October 2014 World Economic Outlook. April 2016 estimate from theApril 2016 World Economic Outlook.
B. Based on estimates from an Interactive Panel VAR model where fiscal multipliers depend on fiscal
balances (Word Bank 2015c). Bars represent the fiscal multiplier at the two-year horizon implied by
the level of fiscal balances shown in A.
C. The data for 2000 cover 12 oil exporters and 88 oil importers, while the data for 2014 cover 15 oilexporters and 85 oil importers.
D. Fiscal breakeven prices are oil prices associated with balanced budget.

needs can remove skill mismatches that contributeto underemployment (Sondergaard and Murthi2012). Despite some narrowing, gender gaps inschool enrollment persist in many EMDEs. Efforts
targeted at removing these gaps could
simultaneously make growth more equitable andmake available a new source of better-skilled labor
supply amid population aging (World Bank
2012). Such initiatives are especially critical in late
- and post-demographic-dividend countries where
the share of the working age population has
peaked and is now falling (World Bank 2015b).
Diversification. Amid persistently depressedcommodity prices, diminishing the overdependence on the production and export ofparticular commodities is a major challenge inresource-based economies. Diversification would
also help alleviate the over-reliance on volatilecommodity-based revenues. Encouraging highvalue added activities, promoting exports from
non-resource intensive sectors, and bolstering
education and worker training to boost privatesector employment are important steps toward
economic diversification (Gill et al. 2014).
Other policy actions include improvements ofthe business climate, infrastructure, and tradelogistics to facilitate the entry of young, efficient
domestic and foreign firms in the non-resourcebased sector; and encouraging labor flows fromtraditional, mostly nontradable, to modern partsof the economy (Jaud and Freund 2015;
Hausmann, Hwang, and Rodrik 2007; McMillan,
Rodrik, and Verduzco-Gallo 2014; IMF 2016d)
The successful diversification experience of someoil exporters (Malaysia, Mexico) points to theimportance of technological upgrading forincreased competitiveness (Callen et al. 2014).
Trade liberalization. In a context of subdued
global trade, it is critical for both advanced
economies and EMDEs to resist protectionism
and take additional steps to reduce harmful tradebarriers. This is particularly important given thepotential for increasing trade among EMDEs. The
empirical
literaturesuggests that
trade
liberalization generally has positive effects on
growth and poverty alleviation (Kis-Katos andSparrow 2015; McCaig. 2011; Viet 2014;
Winters, McCulloch, and McKay 2004; Winters
and Martuscelli 2014; Zhu et al. 2016).8 A
renewed commitment to trade liberalization
should help promote production efficiency,
exploitation of economies of scales, technology
transfer, and competition (OECD, ILO, World
Bank, and WTO 2010). In particular, theresilience of services trade and the available roomfor further liberalization imply significant growth
opportunities for EMDEs (Mattoo, Rathindran,and Subramanian 2006). Additional gains fromservice trade liberalization for emerging anddeveloping economies include rising FDI andtransfers of technology and skills (Hodge 2002).
More generally, the pursuit of comprehensive
8However, empirical evidence on the impact of trade liberalization
on income inequality is more ambiguous (Lederman 2013; Goldberg
and Pavcnik 2007; Harrison, McLaren, and McMillan 2011),
suggesting that additional steps to ensure an adequate distribution of
the gains from trade are needed.

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

regional trade agreements, such as the TransPacific Partnership, is a concrete policy step that
could potentially imply substantial economic
benefits for EMDEs, and foster other domestic
reforms (World Bank 2016b, Hoekman andJavorcik 2006, Baccini and Urpelainen 2014a,b).9
Given the expected net gains from these trade
agreements, efforts should be made to identify andsupport individuals who can be adversely affected(Hornok and Koren 2016, Petri and Plummer2016).

FIGURE 1.31 Structural reforms in EMDEs
Infrastructure investment gaps in EMDEs are sizable. In many EMDEs,
government spending on education is well below that in advanced
economies, international testing outcomes are weak, and education
enrollment gender gaps are large. Many EMDEs are overly dependent oncommodity exports. Structural reforms to boost infrastructure and humancapital and to pursue greater economic diversification are key to support
EMDE growth.
A. Global infrastructure investment
gap

B. Education gap between EMDEs andadvanced economies

Percent of global GDP

Index
2.0

0.58

3.5

0.71

International policy coordination
In an environment of sluggish growth, reduced
policy buffers, and rising risks, there is scope forinternational policy cooperation and coordination
9Other potentially beneficial integration initiatives include theASEAN Economic Community and the Regional Comprehensive
Economic Partnership.

Total

Telecom

Water

Power

Airports

Ports

12
9

1.6

0.12
0.27 0.04

Rail

Roads

1.01

Percent of GDP

1.8

0.75

Poverty alleviation. These policy challenges comein a context where the indirect impact of the sharp
growth slowdown in energy- and metal-exporting
EMDEs may outweigh the direct benefits fromlower consumer prices due to depressedcommodity prices. The commodity price slide
since 2010 has affected a wide range of EMDEs:
62 percent of EMDEs and 73 percent of LICs arecommodity exporters. Commodity exporting
economies are especially prevalent in Sub-SaharanAfrica and Latin America and the Caribbean(Figure 1.32) whereas in South Asia, for example,
only two countries (Bhutan and Sri Lanka) arecommodity exporters. Although commodity
exporting EMDEs account for less than a third of
the global population, they are home to more thanhalf of the global poor. Growth remains the mostimportant source of poverty reduction. For
example, almost two-thirds of the cross-country
variation in incomes of the poorest 20 percent of
the population is due to growth in average
incomes (Dollar, Kleineberg, and Kraay 2013).
Thus, the pronounced deceleration in commodity
exporting EMDEs, if sustained, represents a
notable challenge to the objective of reducing
extreme poverty to below 3 percent by 2030
(World Bank 2015c). This underpins the criticalrole of growth-enhancing policies and structuralreforms—and of appropriate pro-poor safety nets.

43

C H A P TE R 1

1.4

6

1.2

3

1.0

0
Advanced

EMDE

Education attainment
score

Advanced

EMDE

Education spending(RHS)

C. Trade diversification, 2014

D. Importance of resource sector,
2014

Export Diversification Index
1.0

Percent
60

Oil exporters
Metal exporters

50

0.8

40

0.6

30
0.4
0.2

Range
Median

20
10

0.0

0
Oil
Metals Agriculture Other
exporters exporters exporters EMDEs

Exports

Government
revenues

GDP

Sources: World Bank, International Monetary Fund, Organisation for Economic Cooperation andDevelopment, McKinsey Global Institute.
A. This depicts global investment in infrastructure (share of GDP) required over 2015-30, as projectedby McKinsey Global Institute (2015).
B. Education gender gap index defined as the ratio of girls to boys in primary and second
school enrolment rates. A higher index denotes a narrower gap between girls’ and boys’ educational
enrolment. Educational score is unweighted country average of PISA scores for math. A higher scoreindicates higher average test performance. Education spending indicates government spending on
education in percent of GDP. The orange markers are the median of each subgrouping.
C. The Export Diversification Index (DX) for a country is defined as: DXj = (sum |hij – hi |) / 2 where hij
is the share of commodity i in the total exports of country j, and hi is the share of the commodity inworld exports. A higher index denotes lower diversification.
D. Sample includes Algeria, Angola, Azerbaijan, Bahrain, Colombia, Ecuador, Egypt, Gabon, Ghana,Indonesia, Islamic Rep. of Iran, Iraq, Kazakhstan, Kuwait, Libya, Malaysia, Nigeria, Oman, Qatar, Russia, Saudi Arabia, Turkmenistan, Uzbekistan, United Arab Emirates, and Venezuela, RB.

to respond to adverse shocks. This is particularly
important in a context of limited policy space that
limit individual countries’ ability to invest in
infrastructure and human capital. In the shortterm, concerted actions could include increased
fiscal spending in countries that have fiscal space
to boost global aggregate demand (Furman andShambaugh 2016). They could also include
strengthened international safety nets for the mostfragile countries—particularly those with elevatedpoverty rates—that are vulnerable to additional
growth setbacks or financial stress.

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FIGURE 1.32 Poverty in commodity exporting countries
Almost two-thirds of EMDEs—especially LIC countries and countries in
Sub-Saharan Africa, and Latin America and the Caribbean—arecommodity-exporters. Although commodity exporting EMDEs account forless than a third of the global population, they are home to more than half
the global poor, with commodity exporting LICs accounting for a significant
share.
A. Share of commodity exporting
countries among EMDEs

B. Share of world population andworld poor living in commodity exporting EMDEs

Percent of countries in each group
90
80
LIC
70
All EMDE
60
50
40
30
20
10

Percent of world
60
50
40
30
20
10
0

0
SSA

LAC

MNA

EAP

ECA

Agricultural exporters
Energy exporters
Metals exporters

SAR

Poor in
EMDE

Poor in Population Population
LIC
in EMDEin LIC

Sources: World Bank PovcalNet, United Nations, World Bank (2015c, 2016b).
A. Sample includes 87 energy, metals, and agricultural commodity exporting EMDEs. Commodity
exporters are countries for which commodity exports account for at least 30 percent of exports orindividual commodities account for at least 10 percent of exports.
B. Latest available data for the number of poor (typically 2012-2013); data for 2015 for population.
World Bank definition of LICs.

In the medium term, policy coordination could
include the mobilization of pooled resources—
for example, through international financial
institutions—to catalyze additional investment ininfrastructure and human capital, and thedecisive support of free trade of goods andservices. In a context of extremely low global
interest rates (and, in some cases, negative
yields), which limits global borrowing costs,
multilateral organizations could have an
important role to play in the coordination andfinancing of infrastructure and human capital

investment, especially in EMDEs with narrowfiscal space and deteriorating creditworthiness.
Policy makers representing the G20 countries haverecognized that the weak global growthenvironment represents a shared challenge. They
have repeatedly affirmed their commitment toinclusive and sustainable growth-enhancing
policies—to be implemented in a cooperative
manner (G20, 2016). This does not constitute thetype of urgent “internationally coordinated action”
seen at the height of the global financial crisis, but
it does communicate a fundamental message thateach country should do its share to support global
growth, and that coordination can support
improved outcomes (Frankel 2015). That said,
since countries are at different stages in theirbusiness cycles, the appropriate policies to lift
growth will vary—and, as in the past, thechallenge lies in the effective implementation ofthese policies at the national level.
The historically high number of refugees suggests
the need for a more coordinated response. Whilelarge inflows of refugees are creating significant
challenges in Europe, host countries in Africa andthe Middle East are shouldering a heavy burden(Aiyar et al. 2016). Supporting the welfare of
refugees constitutes a global public good. A more
effective development response will requireinnovative approaches and close coordination
between humanitarian, development, and global
partners, including governments.

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

C H A P TE R 1

45

ANNEX TABLE 1 List of emerging market and developing economies1
Commodity Exporters2

Commodity Importers3
Afghanistan

Algeria*

MalawiAngola*Malaysia*

Albania

Palau

Argentina

Mali

Antigua and Barbuda

PolandArmenia

Mauritania

BahamasRomania

Azerbaijan*

Mongolia

Bangladesh

Samoa

Bahrain*Mozambique

Barbados

SerbiaBelizeMyanmar*

Belarus

Seychelles

Benin

Namibia

Bosnia and Herzegovina

Solomon Islands

Bhutan*Nicaragua

Bulgaria

St. Lucia

Philippines

Bolivia*

Niger

Cabo Verde

Swaziland

Botswana

Nigeria*

Cambodia

ThailandBrazil

Oman*

China

Tunisia

Burkina Faso

PanamaComoros

TurkeyBurundiPapua New Guinea

Croatia

TuvaluCameroon*

Paraguay

Djibouti

Vanuatu
Vietnam

Chad*

Peru

Dominica

Chile

Qatar*

Dominican Republic

Colombia*

Russian Federation*

Egypt, Arab Rep.

Congo, Dem. Rep.

RwandaEl Salvador

Congo, Rep.*

Saudi Arabia*

EritreaGeorgia

Costa Rica

SenegalCôte d'Ivoire

Sierra Leone

Haiti

Ecuador*South Africa

Hungary

Equatorial Guinea*

South Sudan*

India

Ethiopia

Sri Lanka

JordanFiji

St. Vincent and the Grenadines

Kiribati

Gabon*

Sudan*

KosovoGambia, The

Tajikistan

Lao PDR

Ghana*

Tanzania

Lebanon

GuatemalaTimor-Leste*

LesothoGuineaTrinidad and Tobago*

Liberia

Guinea-Bissau

Togo

Macedonia, FYR

GuyanaTonga

Maldives

Honduras

Turkmenistan*

Marshall Islands

Indonesia*

Uganda

MauritiusIran, Islamic Rep.*

UkraineMexicoIraq*

United Arab Emirates*

Micronesia, Fed. Sts.

Jamaica

Uruguay

Moldova

Kazakhstan*

Uzbekistan

Montenegro

Kenya

Venezuela, RB*

Morocco

Kuwait*West Bank and Gaza

Nepal

Kyrgyz RepublicZambiaPakistan

Libya*

Zimbabwe

Madagascar
1 Emerging Market and Developing Economies (EMDEs) includes all those that are not classified as advanced economies. Advanced economies include Australia; Austria; Belgium;
Canada; Cyprus; Czech Republic; Denmark; Estonia; Finland; France; Germany; Greece; Hong Kong SAR, China; Iceland; Ireland; Israel; Italy; Japan; Korea; Latvia; Lithuania;
Luxembourg; Malta; Netherlands; New Zealand; Norway; Portugal; San Marino; Singapore; Slovak Republic; Slovenia; Spain; Sweden; Switzerland; United Kingdom; and United States.
2 An economy is defined as commodity exporter when, on average in 2012-14, either (i) total commodities exports accounted for 30 percent or more of total goods exports or (ii) exports ofany single commodity accounted for 20 percent or more of total goods exports. Economies for which these thresholds were met as a result of re-exports were excluded. When data was notavailable, judgment was used. Energy exporters are denoted by an asterisk. This taxonomy results in the classification of some well-diversified economies as importers, even if they areexporters of certain commodities (e.g. Mexico).
3 Commodity importers are all EMDE economies that are not classified as commodity exporters.

46

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Recent Credit Surge inHistorical Context

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S P E C I AL FO C U S 1Special Focus 1:
Recent Credit Surge in Historical Context
Benign financing conditions since the global financial crisis and, more recently, rising financing needs have
fueled a rapid increase in credit to the nonfinancial private sector, especially to the corporate sector, in emerging
markets and developing economies. Credit growth has been most pronounced, and nearing the pace associatedwith past credit booms, in commodity exporting countries. In contrast, in commodity importers, credit-to-GDP
ratios are elevated but have been stable or shrinking over the past few years. That said, in a few, mostly energy
exporting, emerging and developing countries, credit to the private sector is now near levels that have in the past
been associated with episodes of financial stress.

Introduction
Since the global financial crisis, credit to thenonfinancial private sector has risen rapidly inseveral emerging markets and developing
economies (EMDEs, Figure SF 1.1). This postcrisis credit growth has reflected a rotation inborrowing from households to corporates: incontrast to 2006-10, most of the post-crisis
increase in EMDE private sector credit has been to
nonfinancial corporates. Credit growth has beenaccompanied by rapidly rising corporate bondissuance since the crisis, especially for oil and gas
companies (until 2014) and metals and mining
companies. Some of the most indebted corporates
include energy and construction companies.
A large literature has identified credit booms as an
early warning indicator of macroeconomic or
financial stress (e.g. Dell’Ariccia et al. 2014;
Eichengreen and Arteta 2002; Gourinchas andObstfeld 2012; Schularick and Taylor 2012;
Claessens, Kose, and Terrones, 2012; Annex Table1). In the past, such credit booms have often beenaccompanied by an accumulation of nonperforming bank loans that were revealed once theboom subsided. A typical credit boom raised nonperforming loans from 2.5 percent to 10 percent
of gross loans (Mendoza and Terrones 2008).1
Note: This Special Focus was prepared by Franziska Ohnsorge
and Shu Yu, with contributions from Lei Sandy Ye.
1Similarly Elekdag and Wu (2011) found that the ratio of nonperforming loans over total assets exceeds its trend by 2 percentage
points during credit booms.

Several factors have encouraged post-crisis private
sector credit growth in EMDEs. Exceptionallyaccommodative monetary policy by major central
banks has fostered benign borrowing conditions
for EMDEs, notwithstanding bouts of volatility.
Rising financing needs have increased demand forborrowing, especially among energy and metals
exporters since the sharp decline in metals and oil
prices in 2011 and 2014, respectively. Post-crisis
credit growth was partly also a continuation of atrend increase in the scale of EMDE corporates’
business operations and international reach. As
EMDE corporates have become increasingly
globally active and expand their internationalsales, production, and supply chains, borrowing
needs have risen with more sophisticated liquidity
management, centralized treasury operations andlarger working capital needs, including in foreign
currency (Acharya et al. 2015).
There is a concern that, once again, financial
vulnerabilities may be revealed as borrowing costs
rise further. This could be triggered by a sharp
increase in domestic or global interest rates or bydepreciation, including in the wake of, or in
anticipation of, diverging monetary policy
decisions in major advanced economies. The debt
service burden would rise, especially on unhedged,
floating-rate, short-term, or foreign currency
denominated debt. Corporates (and households)
with stretched balance sheets could struggle toservice debt at rising cost. The subsequentdeleveraging process would impair growth at atime when EMDEs are already struggling to adjust
to a difficult external environment.

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G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

FIGURE SF1.1 Credit growth in EMDEs
Rapid private sector credit growth in emerging markets and developing
economies since the global financial crisis has been fueled by benign
borrowing conditions and rising financing needs. On average, private
sector credit growth is well above historical averages—especially incommodity exporters—and has raised credit-to-GDP ratios above those in
the 1990s. Among several commodity importers, credit growth has begun
to slow from high levels.
A. Credit to the nonfinancial private
sector

B. Credit to the nonfinancial private
sector

Percent of GDP

Percent of GDP
210

1996

90

1997

2010

2015Q3Range
MedianAverage

180

80

150

70

120
90

60

60

50
Commodity
Commodity
exporters importers excl.
China

30

All

0
1990-99

C. Credit to the nonfinancial private
sector in 14 EMDEs

D. Credit growth (broader sample)

Percent of GDP
250

100

0

RU
BR
MY
ID
ZA
AR
SA
CN
TR
TH
PL
MX
IN
HU

50

Commodity exporters Commodity importers

E. Credit-to-GDP (broader sample)

2010
2011
2012
2013
2014
2015Q3

2010

150

2003-2008
1995-2008

2010
2011
2012
2013
2014
2015Q3

4
3
2
1
0
-1
-2
-3

2010
2011
2012
2013
2014
2015Q3

Percentage points of GDP

2015

200

2015

Commodity
exporters

Commodity
importers excl.
China

All

F. Number of EMDEs with post-crisis
peak in credit (broader sample)

Number of countries

Percentage points of GDP
60

30

55

24

50

2010-2014

2015

18

45

6

2015

2014

2013

2012

2011

2010

2009

2008

35

2007

Against the current background, this Special Focus
essay addresses the following questions:• How has credit to the nonfinancial private
sector—and, specifically, the corporate sector—
evolved in EMDEs?
• How does recent credit growth compare withpast episodes of credit booms?
• How near are current credit-to-GDP ratios tothresholds identified in the literature as early
warning indicators?

Evolution of private sector
credit12

Commodity exporters
Commodity importers, excl. China

40

Financing conditions have already begun totighten. Broadly favorable financing conditions for
EMDEs have tightened sharply as capital inflows
shrank by 18 percent and bond issuance dropped
by 22 percent between 2014 and 2015. This has
especially affected oil and gas companies andmetals and mining companies, which arestruggling to adjust to sharply lower oil and metals
prices, and highly cyclical industrial companies
such as in the construction industry. For EMDE
industrial companies and metals and mining
corporates, average bond maturities haveshortened by 2½ years between 2014 and 2015,
and equity prices have undergone double-digit
declines since mid-2014. Pressures may increase
with the sharp rise in redemption obligations
anticipated for 2017.

0Commodity importers Commodity exporters

Sources: Bank for International Settlements, International Monetary Fund‘s International Financial
Statistics, World Bank.
A. Unweighted average of claims (from residents and nonresidents) on the nonfinancial private sector
in 14 emerging markets and developing economies. Commodity exporters include Argentina, Brazil,
Indonesia, Malaysia, Russia, Saudi Arabia, and South Africa. Commodity importers include China,
Hungary, India, Mexico, Poland, Thailand, and Turkey.
B. Data availability as in A. Data for Brazil is only available from 1994Q1, Saudi Arabia only from
1993Q1, and for Russia only from 1993Q4. 2015 data are for 2015Q3.
C. 7 commodity exporters (AR = Argentina, BR = Brazil, ID = Indonesia, MY = Malaysia, RU =Russia, SA = Saudi Arabia, and ZA = South Africa) and 7 commodity importers (CN = China, HU =Hungary, IN = India, MX = Mexico, PL = Poland, TH = Thailand, and TR = Turkey).
D. Unweighted averages for broader sample. Credit growth is the average annual change in the credit-to-GDP ratio (in percentage points of GDP). Broader sample includes 55 EMDEs. Please see themain text for a detailed description of the sample and the classification of commodity importers andexporters. Data for 2015 are unavailable for Bahrain, Cote d’Ivoire, Gabon, Nigeria, Peru, Senegal,
Sri Lanka, Venezuela, RB, Croatia, Jordan, Mauritius, and Tunisia.
E. Unweighted averages. Data availability as in D.
F. Data availability as in D.

Database. Credit to the nonfinancial private sector
consists of claims—including loans and debt
securities—on households and nonfinancial
corporates by the domestic financial system as well
as external creditors. From 1980, data for thisbroad definition of credit are available from the
Bank for International Settlements for 14
EMDEs, including seven commodity exporters(Argentina, Brazil, Indonesia, Malaysia, theRussian Federation, Saudi Arabia, South Africa)and seven commodity importers (China, Hungary,

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

Data from Bank for International Settlement is not available forArgentina until 1994, Brazil until 1993, China until 1984, Hungary
until 1989, Poland until 1992, Russia until 1995, Saudi Arabia until
1993 and Turkey until 1986.
3This includes eleven commodity importers (Bangladesh, Bulgaria,
Croatia, Egypt, Georgia, Jordan, Mauritius, Pakistan, Philippines,
Serbia, Tunisia) and thirty commodity exporters (Azerbaijan,
Bahrain, Bolivia, Botswana, Colombia, Chile, Costa Rica, Coted’Ivoire, Gabon, Ghana, Guatemala, Honduras, Jamaica,
Kazakhstan, Kenya, Kuwait, Mongolia, Namibia, Nigeria, Oman,
Panama, Paraguay, Peru, Qatar, Senegal, Sri Lanka, Ukraine,
Uruguay, República Bolivariana de Venezuela, Zambia).
2

Two thirds or more of private sector credit growth since 2010 has been to
corporates. Credit to corporates now accounts for almost two-thirds ofcredit to the nonfinancial private sector.
A. Contribution to private sector credit
growth, annual average 2010-2015Q3

B. Credit to the nonfinancial private
sector, 2015Q3

Percentage points of GDP
3
Corporates
Households
Total
2

Corporates
Percent of GDP
Households
90
Total
80
70
60
50
40
30
20
10
0
Commodity
CommodityAllexporters importers excl.
China

1

0
Commodity
exporters

Commodity
importers excl.
China

All

D. Credit to households

Percent of GDP
1802015 Q3
160
Post-crisis peak
140
2010
120
100
80
60
40
20
0

Percent of GDP
1802015 Q3
160
Post-crisis peak
140
2010
120
100
80
60
40
20
0

MY
ZA
BR
RU
ID
SA
AR
TH
CN
PL
HU
TR
MX
IN

C. Credit to nonfinancial corporates

CN
HU
IN
TH
PL
TR
MX

Private sector credit growth. Private sector credit
growth is measured as the change in the ratio ofcredit to the nonfinancial private sector to GDP(in percentage points of GDP). Fueled by low post-crisis borrowing cost and rising financing needs,
credit to the nonfinancial private sector increasedby 14 percentage points of GDP, to 84.5 percent
of GDP, in the five years to the third quarter of2015 in the 14 EMDEs, for which suchcomprehensive data are available and in some cases
by about 30 percentage points of GDP or more.
On average among these countries, credit to thenonfinancial private sector now exceeds levels of
the 1990s (Figure SF 1.1). Credit growth wasparticularly pronounced in commodity exporting
economies, where it has been well above the longterm average. As a result, in almost all these
EMDEs, credit to the nonfinancial private sector
reached post-crisis peaks by 2015.

59

FIGURE SF1.2 Credit to corporates and households

MY
RU
BR
SA
ZA
ID
AR

India, Mexico, Poland, Thailand, Turkey).2 These
countries account for the bulk of emerging market
and developing country debt (McCauley,
McGuire and Sushko 2015) and have an
established history of international financial
market access. Other EMDEs typically accessinternational financial markets to a lesser extent
and typically have less developed domestic bondmarkets. For these countries, credit from thedomestic banking system remains the main sourceof credit. For them, annual data on claims bybanks on private sector, provided by the IMF’s
International Financial Statistics, are used as
proxies for missing data for credit to thenonfinancial private sector. This extends the
sample by another 41 countries, mainly from2000 onwards.3 The combined sample, of 55
countries, consists of 37 commodity exporters and
18 commodity importers.

S P E C I AL FO C U S 1Commodity exporters Commodity importers

Commodity exporters Commodity importers

Source: Bank for International Settlements.
Note: Unweighted average credit (from residents and nonresidents) to nonfinancial corporates andhouseholds in 7 commodity exporters (AR = Argentina, BR = Brazil, ID = Indonesia, MY = Malaysia,
RU = Russia, SA = Saudi Arabia, and ZA = South Africa) and 7 commodity importers (CN = China,
HU = Hungary, IN = India, MX = Mexico, PL = Poland, TH = Thailand, and TR = Turkey).

FIGURE SF1.3 Composition of credit to corporates
Despite a post-crisis rise, debt securities and cross-border credit remain amodest fraction of credit to EMDE corporates.
A. Credit to corporates by instrument

B. Contribution of debt securities tononfinancial corporate credit growth

Percent of GDP
60
Other instruments
Debt securities
50

Percentage points
40
Contribution of debt securities
Contribution of other instruments
30

40
20

30
20

10

10
0

0

2007

2010

2015

2000-2007

2007-20102010-2015

C. Credit to corporates by creditor

D. Contribution of cross-border credit
to nonfinancial corporate credit
growthPercent of GDP
60
Domestic

Percentage points
40

50

Cross-border

Domestic
Cross-border

30

40
30

20

20

10

10
0

0
2007

2010

2015

2000-2007

2007-20102010-2015

Sources: Bank for International Settlements, World Bank.
Notes: Same sample as in Figure SF 1.2. Unweighted averages.
B. D. Contributions to average annual corporate sector credit growth.
C. D. Data are not unavailable for China, India, Indonesia in 2000 and South Africa before 2010.

60

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FIGURE SF1.4 Corporate bond and equity markets
Emerging markets corporate bond spreads surged during the second halfof 2015, especially in the metals and mining sector, but started to ease in
the beginning of 2016. While corporate bond issuance started to drop from2013, redemptions are estimated to surge in 2017 and stay at historicallyhigh levels through 2020. About two-thirds of bond issuance was placed ininternational debt markets, almost entirely in foreign currency
denominations.
A. Corporate bond spreads

B. Contributions to cumulative equity
market change since end-June 2014

Basis points
1000 All (Spread)Industrial
Metals and Mining
800 Oil and Gas
All (Option-adjusted spread)

Percent
0

-20

600
-40

400

EnergyOther-60

Mar-16

Sep-15Jun-15Mar-15

Dec-15200

BrazilColombia Kazakhstan(Ibovespa) (COLCAP) (KASE)

C. Corporate bond issuance

Nigeria(NGSE)

D. Corporate bond redemption

US$, billions
100
Industrial (LHS)
Oil and Gas (LHS)
80
Metals and Mining (LHS)
Total (RHS)
60

200
150
100

US$, billions
60
Industrial (LHS)
Oil and Gas (LHS)
50
Metals and Mining (LHS)
Total (RHS)
40

120
100
80

30

60

20

40

10

20

0

0
2020

2018

2016

2014

2012

2010

2008

2006

2004

2014

2012

2010

2008

2006

2004

2002

0

2000

0

2002

50

2000

40
20

E. Corporate bond in the international
marketF. Average corporate bond maturity

Percent of credit to corporates
80

Year
12

2007
2010
2015

10

60

8
6

40

4
20

2
0

0
2007

2010

2015

of 2015. The divergence between commodity
exporters and importers is even more pronounced
among this group. By the third quarter of 2015, as
financing needs expanded following the sharp oil
price decline since mid-2014, credit to thenonfinancial private sector rose by more than 20
percentage points in some oil exporters. In othercountries, credit to the nonfinancial private sector
has begun to ease from 2013-14 peaks, especiallyin oil and metals exporters adjusting to lower
commodity prices and in commodity importers
tightening policies after the Taper Tantrum of
2013. At the firm level, this build-up of debt has
also been reflected in deteriorating firm solvency(Alfaro et al. 2016).

MetalsOil andand mininggas

Industrial

Average

Sources: Bloomberg, Institute of International Finance, Bank for International Settlements.
Note: Figures A, C, D, E and F refer to bond in the international market.
A. Option-adjusted spread (OAS) is the spread relative to a risk-free interest rate that equates thetheoretical present value of a series of uncertain cash flows of an instrument to its current market
price. Due to the limited amount of data on credit default swaps (CDS) for corporate debt, OAS isused as a model-based proxy for credit risk among corporates.
E. Date are available for Argentina, Brazil, China, Hungary, Indonesia, Malaysia, Mexico, Poland,
Russia, South Africa, Thailand, and Turkey. Unweighted averages.

Similar private sector credit growth is evident in a
broader sample of 55 EMDEs. Among these
EMDEs, credit to the nonfinancial private sector
increased by about 10 percentage points since2010, to 60 percent of GDP in the third quarter

Increase in credit to corporates. Since 2010, mostof the increase in credit to the nonfinancial private
sector has reflected credit to corporates, as
corporates in both commodity exporters andimporters have taken advantage of low financing
costs. Credit to corporates has accounted for morethan three quarters of the increase in credit to thenonfinancial private sector since 2010 incommodity-exporting EMDEs, where financing
needs have risen sharply, and more than half incommodity-importing EMDEs (Figure SF 1.2).
As a result, credit to the corporate sector now
accounts for about two-thirds of credit to thenonfinancial private sector, and somewhat morein commodity-exporting EMDEs. While, on
average, credit to corporates rose at a similar pacein commodity importers and exporters alike, thepace of credit growth to households in commodity
importers (excluding China) was less than half thepace in commodity exporters. This more muted
rise in credit to households in commodity
importers may reflect the anemic post-crisis
recovery in some countries or policy tightening inothers.
Shifting composition of credit to EMDE
corporates. The composition of credit to EMDE
corporates has gradually shifted (Financial
Stability Board 2015, Figure SF 1.3).
Foreign currency. In contrast to sovereign (andaggregate) debt, which is gradually shifting
towards local currency, the share of foreignG L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

currency-denominated credit in credit to nonfinancial corporates has increased (McCauley,
McGuire and Sushko 2015; Chui, Kuruc andTurner 2016). Foreign currency-denominateddebt raises exchange rate risk. In addition,
nonresident portfolio asset funds holding
correlated portfolios amplify any impact of
exchange rates on corporate balance sheets(Miyajima and Shin 2014). That said, in mostcountries, and on average, the share of credit(loans or securities) denominated in foreign
currency remains moderate around 20 percent,and the bulk of the corporate credit growth isaccounted for by domestic currency denominatedcredit.4
Bond issuance. Since 2004, credit to nonfinancial
corporates has shifted from bank loans to bondissuance (Chui, Fender, and Sushko 2014;
Cortina, Didier, and Schmukler forthcoming;
Feyen et al. 2015; Ayala, Nedeljkovic, and
Saborowski 2015). Although bond maturities may
shorten, bond market activity has been lessprocyclical and more resilient during the global
financial crisis than bank lending (Cortina, Didier,and Schmukler forthcoming; Contessi, Li, andRuss 2013; Adrian, Colla, and Chin 2013, Figure
SF1.4). However, despite strong corporate bondissuance since 2010, the bulk of corporate credit
growth continued to be contributed by nonsecurities credit. Debt securities accounted for
only 19 percent of credit to the corporate sector in2015 (compared with 16 percent in 2007). The
predominance of bank lending may reflect limitedaccess for smaller EMDE corporates to bondmarkets. For EMDE corporates, access to bondmarkets tends to be restricted to a few large
corporates that have been able to shift towards
bond finance, often at longer maturities and lower
cost(Didier,
Levine,and
Schmukler
forthcoming).
Cross-border credit. Cross-border credit from aforeign bank could be considerably more volatile
than credit from a domestic bank if the foreign
4Turkey, Poland, and Hungary are exceptions among the 14
EMDEs in the sample, with foreign currency-denominated credit
accounting for more than 25 percent of credit from domestic banks.

61

S P E C I AL FO C U S 1

FIGURE SF1.5 Characteristics of credit booms
During a typical credit boom, credit to the nonfinancial private sector grows
by more than 6 percentage points of GDP. On average, credit booms lastless than two years and about one-third are followed by at least mild,
deleveraging over the next three years. On average, recent private sector
credit growth has been nearing levels associated with past credit booms incommodity exporters. In commodity importers, credit-to-GDP ratios havebeen considerably higher than in past credit booms but have beenstagnant or declining.
A. Evolution of credit

B. Evolution of credit growth

Percent of GDP

Percentage points of GDP

100

20

2012-2015 commodity exporters
2012-2015 commodity importers
MedianUpper and lower quartiles

80

15

60

10

2012-2015 commodity exporters
2012-2015 commodity importers
MedianUpper and lower quartiles

5

40

0

20

-5

0
-3

-2

-1

0
Year

1

2

3

-10
-3

-2

-1

0
Year

1

2

3

C. Duration of credit booms

D. Deleveraging after credit booms

Number of episodes
30
25

Percent of credit booms
60
Mild deleveraging
Sharp deleveraging

20

40

15
20

10
5

0

0
1

2

3

Years

4

5

1

3
Years

5

Sources: Bank for International Settlements, Haver Analytics, International Monetary FundInternational Financial Statistics and World Economic Outlook.
Notes: A credit boom is defined as an episode during which the cyclical component of thenonfinancial private sector credit-to-GDP ratio (derived using a Hodrick-Prescott filter) is larger than
1.65 times its standard deviation in at least one year. The episode starts when the cyclical component
exceeds one standard deviation and ends in a peak year when the nonfinancial private sector creditto-GDP ratio declines in the following year. “0” is the peak of the credit boom event. To address theend-point problem of a Hodrick-Prescott filter, the dataset is expanded by setting the data for 2016-18
to be equal to the data in 2015. Figures show the medians of credit to the nonfinancial private sector
and of its change (red diamond) and their corresponding upper and lower quartiles during a boom
episode (dashed blue line). The solid orange (commodity exporters) and blue (for commodity
importers) lines for 2012-15 show the sample means for t=0 at 2015Q3. For 2012-2015, the sample
is restricted to countries where the data are available in 2015. Data are not available in 2015 for
Bahrain, Cote d’Ivoire, Croatia, Gabon, Jordan, Mauritius, Nigeria, Peru, Senegal, Sri Lanka, Tunisia,
Venezuela, RB. Data are not available for Argentina until 1994, Brazil until 1993, China until 1984,
Hungary until 1989, Poland until 1992, Russia until 1995, Saudi Arabia until 1993 and Turkey until
1986. Please see the main text for a detailed description of the sample.
A. Credit to the private non-financial sector in percent of GDP.
B. The annual change in credit to the nonfinancial private sector as a percent of GDP.
C. Blue bars denote the number of credit boom episodes that lasted for 1-5 years. Events that are stilldeveloping in 2015 are dropped.
D. The (cumulative) percent of credit boom episodes followed by mild deleveraging (defined as
private sector credit-to-GDP ratio falling 1 standard deviation below the HP-filtered trend) or sharpdeleveraging (defined as private sector credit-to-GDP ratio falling 1.65 standard deviations below
trend) over 1, 3, and 5 years. The horizontal axis shows the number of years after a credit boom.
Events that are still developing in 2015 are dropped.

bank does not consider the EMDE a core market
with long-established lending relationships (deHaas and van Lelyveld 2012; Cetorelli andGoldberg 2009 and 2012; de Haas and van Horen
2012; Claessens and van Horen 2012). Despite amodest increase since 2010, the share of cross-

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FIGURE SF1.6 Macroeconomic developments duringcredit booms
Credit booms in the EMDEs were accompanied by widening current
account deficits and faster real GDP growth.
A. Current account balance

B. Inflation

Percent of GDP

Percent

66

2012-2015 commodity exporters
2012-2015 commodity importers
MedianUpper and lower quartiles

4

2012-2015 commodity exporters
2012-2015 commodity importers
MedianUpper and lower quartile

4

2

2

0

0

-2

-2

-4

-4

-6

-6
-3

-2

-1

0
Year

1

2

3

-3

-2

-1

0
Year

C. Monetary policy interest rate

D. Growth

Percent

Percent deviation from trend15

2012-2015 commodity exporters
2012-2015 commodity importers
MedianUpper and lower quartiles

2

3

Recent credit growth in lightof past episodes

2012-2015 commodity exporters
2012-2015 commodity importers
MedianUpper and lower quartiles

6
4

12

1

2

9

The shifting composition of credit to thecorporate sector may have reduced vulnerabilities
to bank funding shocks and to foreign bankfunding shocks through cross-border credit but
has increased vulnerabilities to exchange rate risk
and liquidity risk in capital markets.
Notwithstanding these gradual shifts, the bulk ofcredit to EMDE corporates remains from thedomestic banking system (more than 80 percent)and, on average, denominated in domestic
currency (80 percent). Similarly, the bulk of thecredit growth has been accounted for by credit
from the domestic banking system and indomestic currency.

0
6

-2

3

-4

0

-6
-3

-2

-1

0
Year

1

2

3

-3

-2

-1

0
Year

1

2

3

Sources: Bank for International Settlements, Haver Analytics, International Monetary FundInternational Financial Statistics and World Economic Outlook.
Notes: See note in Figure SF 1.5 for the definition of credit booms. Data availability as in Figure SF
1.5.
A. The cyclical component of the current account in percent of GDP (derived using a Hodrick-Prescottfilter). Data not available for China until 1997.
B. The cyclical component of the inflation rate (derived using a Hodrick-Prescott filter). Hyper-inflation
episodes are dropped. Data are not available for Argentina until 1991, Mexico until 1987, Russia until
1996, Thailand until 1984, and Turkey until 1995.
C. Data are available for Bahrain (2007), Brazil (1999), Georgia (2008), Guatemala (2005), Honduras(2005), Indonesia (1990), Jordan (2004), Kazakhstan (2005), Kenya (2006), Malaysia (2004),
Mauritius (2006), Mexico (2008), Mongolia (2007), Paraguay (2011), Peru (2003), Philippines (2001),
Qatar (2002), Russia (2011), Saudi Arabia (1999), South Africa (1980), Thailand (2000), Turkey(1999), and Uruguay (2008).
D. The cyclical component of real GDP (in millions of U.S. dollars) in percent of its trend (derived
using a Hodrick-Prescott filter).

border credit remains modest at less than 20
percent in the third quarter 2015, well below the
2000-07 average. Since 2010, credit from thedomestic banking system has continued to be themain source of corporate credit growth.
Lending to commodity companies. Corporate
borrowing has been fastest in the oil and gas sector
and mining sector (Didier et al forthcoming;
Domanski et al. 2015), and cyclical industries (e.g.
construction; IMF 2015a). Since 2006, theoutstanding syndicated loans and debt securities ofstate-owned energy corporates grew at doubledigit average annual rates and the stock of debt ofoil and gas firms has more than tripled (Domanski
et al. 2015).

Event study. A rich literature has documented
that credit booms are sometimes followed by sharpdeleveraging episodes in subsequent years (e.g.
Barajas et al. 2010; Elekdag and Wu 2011). Boththe credit booms and the subsequent sharp or
gradualdeleveraging
cycleshave
been
accompanied by considerable macroeconomic
volatility. To illustrate the developments duringcredit cycles in EMDEs, an event-study is used. As
in Mendoza and Terrones (2008 and 2012), a
credit boom is defined as an episode during which
the private sector credit-to-GDP ratio is morethan 1.65 standard deviations above its HodrickPrescott filtered trend (i.e. outside the 90 percent
confidence interval) in at least one year. An
episode starts when the deviation exceeds one
standard deviation and ends when the credit-toGDP ratio begins to fall. Conversely, adeleveraging episode is defined as an episodeduring which the private sector credit-to-GDP
ratio is more than 1.65 standard deviations below
trend in at least one year. The deleveraging
episode starts when the ratio falls more than one
standard deviation below trend and ends when thecredit-to-GDP ratio begins to climb.5 Credit
booms and deleveraging episodes are studied
5The results are robust to using thresholds of 1.75 or 1.55 standard
deviations.

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

63

S P E C I AL FO C U S 1within a 7-year event window that covers theirpeak or trough years (t=0), the three prior years,
and the three following years. Since 1980 (2000
for the broader sample), there have been 56 credit
booms and 28 deleveraging episodes in EMDEs.6

FIGURE SF1.7 Characteristics of deleveraging episodes

Characteristics of credit booms. In a credit boom,
private sector credit grows, on average, by morethan 6 percentage points of GDP per annum andprivate sector credit peaked at 52 percent of GDP,on average (Figure SF 1.5).7 The average credit
boom lasted 1.7 years, with the longest episodelasting five years.8 Until the credit boom peaked,
current account deficits rose by almost 2
percentage points of GDP above their long-run
trend but subsequently narrowed sharply (Figure
SF 1.6). Real GDP rose by 1-2 percent above
trend in the two years before the credit boom
peaked but, within two years, fell below trend.9

A. Evolution of credit

B. Evolution of credit growth

Percent of GDP

Percent of GDP

Characteristics of deleveraging episodes. Within
three years of the end of the credit boom, about
one-third of booms were followed by at least amild deleveraging episode (in which the private
sector credit-to-GDP ratio fell more than 1
standard deviation below trend). During adeleveraging episode, private sector credit
contracted by almost 2 percentage points of GDP
per year and private sector credit fell to 35 percent
6The event study uses the broader sample that covers the 14
EMDEs, for which comprehensive data on credit to the nonfinancial
private sector are available from Bank of International Settlements,
and another 41 EMDEs where data on claims on the private sector isavailable from IMF’s International Financial Statistics. The resulting
frequency of credit boom (5 percent), as defined as the average
number of booms per country per year. It is somewhat higher thanprevious studies partially because the sample has been expanded tocover recent credit booms. Using a looser boom identification
strategy, Elekdag and Wu (2011) found the ratio to be about 3
percent. Arena et al. (2015), Dell’ Ariccia et al. (2014), and Mendoza
and Terrones (2008) found the frequency of credit booms to beabout 2 percent.
7 Annex SF1.1 discusses statistically significant differences between
event and non-event years .
8This is within the range found by other authors. Using growth inreal claims on the private sector and different thresholds toidentifying boom episodes, Elekdag and Wu (2011) show that the
typical boom lasts about two years. Mendoza and Terrones (2008)
find a considerably longer duration (about 7 years) using moresmoothed data and a lower threshold for the starting and ending
points for a boom.
9Mendoza and Terrones (2008), Elekdag and Wu (2011), andArena et al. (2015), also found that growth tends to rise before booms
and decline towards the end of it. Jorda et al. (2013) further suggestthat faster credit growth tends to be followed by deeper recessions
and slower recoveries.

Deleveraging episodes are associated with a period of mild declines inprivate debt. On average, deleveraging episodes last about 1.5 years.
About one-third of deleveraging episodes are preceded by credit booms in
the preceding three years.

100

MedianUpper and lower quartiles

Median10Upper and lower quartiles

80
5

60
40

0

20
0

-5
-3

-2

-1

0
Year

1

2

3

-3

-2

-1

0
Year

1

2

3

C. Duration of deleveraging episodes

D. Credit booms before deleveraging
episodesNumber of episodes
24
20

Percent of deleveraging episodes
60
Mild credit boom
Sharp credit boom

16

40

12
20

8
4

0

0
1

2

3

Years

4

1

3
Years

5

Sources: Bank for International Settlements, Haver Analytics, International Monetary FundInternational Financial Statistics and World Economic Outlook.
Notes: A deleveraging episode is defined as an episode during which the nonfinancial private sector
credit-to-GDP ratio (derived using a Hodrick-Prescott filter) is more than 1.65 standard deviations
below its Hodrick-Prescott-filtered trend in at least one year. The episode starts when the ratio falls
more than 1 standard deviation below trend and ends in a trough year when the private sector creditto-GDP ratio starts to rise in the following year. “0” is the end (trough) year of the deleveraging
episode. To address the end-point problem of a Hodrick-Prescott filter, the dataset is expanded by
setting the data for 2016-18 to be equal to the data in 2015. Figures show the medians of credit-toGDP ratio and of its increase (red diamonds) and their upper and lower quartiles (dashed blue lines)
during a deleveraging episode. The solid orange (commodity exporters) and blue (for commodity
importers) lines for 2012-15 show the sample means for t=0 at 2015Q3. For 2012-2015, the sample
is restricted to countries where the data are available in 2015. Data are not available in 2015 for
Bahrain, Cote d’Ivoire, Croatia, Gabon, Jordan, Mauritius, Nigeria, Peru, Senegal, Sri Lanka, Tunisia,
Venezuela RB. Data are not available for Argentina until 1994, Brazil until 1993, China until 1984,
Hungary until 1989, Poland until 1992, Russia until 1995, Saudi Arabia until 1993 and Turkey until
1986. Please see the main text for a detailed description of the sample.
A. Credit to the nonfinancial private sector as a percent of GDP.
B. The annual change in credit to the nonfinancial private sector as a percent of GDP.
C. Blue bars denote the number of deleveraging episodes that lasted for 1-3 years. Events that are
still developing in 2015 are dropped.
D. The (cumulative) percent of deleveraging episodes preceded by mild credit booms (defined as
private credit-to-GDP ratio more than 1 standard deviation above the Hodrick-Prescott-filtered trend)or sharp credit booms (defined as private credit-to-GDP ratios rising more than 1.65 standard
deviations above the trend) over 1, 3, and 5 years. The horizontal axis shows the number of years
before the deleveraging event. Events that are still developing in 2015 are dropped.

of GDP, on average (Figure SF 1.7). The averagedeleveraging episode lasted over 1.4 years, with thelongest episode lasting four years.10 Only one-thirdof deleveraging episodes were preceded by, at least
mild, credit booms in the previous three years.
Deleveraging episodes were associated with
10This is broadly in line with findings of other authors (Barajas etal. 2010).

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FIGURE SF1.8 Macroeconomic developments during
deleveraging episodes
Deleveraging episodes were associated with improved current accounts
but, weaker growth. As deleveraging episodes ended, inflation began toease.
A. Current account balance

B. Inflation

Percent of GDP

Percent
6

Median6Upper and lower quartiles

44MedianUpper and lower quartile

-2

0
Year

2

2
0

0

-2

-2

-4

-4

-6

-6
-3

-2

-1

0
Year

1

2

3

-3

-1

C. Monetary policy interest rate

D. Growth

Percent
20

Percent deviation from trend
6

MedianUpper and lower
quartile

15

1

2

3

MedianUpper and lower quartile

-2

0
Year

4
2

10

0
-2

5

-4
0

-6
-3

-2

-1

0
Year

1

2

3

-3

-1

1

2

By the third quarter of 2015, private sector credit
exceeded levels associated with past booms in only
a few countries.

Current credit levels:
Warning signs?
Early warning indicators. A large literature
examines potential thresholds for private sector
credit growth that may be an early warning
indicator of impending macroeconomic andfinancial stress. For example, credit to the private
sector was typically about 10 percentage points of
GDP above its long-run trend before a financial
crisis (Drehman 2013). In Central and Eastern
European EMDEs, most past banking crises werepreceded by about 9 percentage points of GDP
deviation of credit to the private sector from its
long-term trend (Gourinchas and Obstfeld 2012).
When applied to 1996 or 1997 data, these early
warning
indicators
correctly
highlighted
heightened vulnerabilities in Indonesia, Thailand,and Malaysia (Figure SF 1.9).

3

Sources: Bank for International Settlements, Haver Analytics, International Monetary FundInternational Financial Statistics and World Economic Outlook.
Notes: See note in Figure SF 1.7 for the definition of deleveraging episodes. Data availability as in
Figure SF 1.7.
A. The cyclical component of the current account in percent of GDP (derived using a Hodrick-Prescottfilter). Data not available for China until 1997.
B. The cyclical component of the inflation rate (derived using a Hodrick-Prescott filter). Hyper-inflation
episodes are dropped. Data are not available for Argentina until 1991, Mexico until 1987, Russia until
1996, Thailand until 1984, and Turkey until 1995.
C. See Note C of Figure SF 1.6 for data availability.
D. The cyclical component of real GDP (in millions of U.S. dollars) in percent of its trend (derived
using a Hodrick-Prescott filter).

considerable current account improvements(about 2 percentage points of GDP, Figure SF
1.8). Real GDP fell, on average, by almost 2
percent below trend during the deleveraging
episode.
Recent developments in historical comparison.
Since 2012, levels of credit in commodity-importing
EMDEs have been considerably higher thanduring previous credit booms but credit growthhas been well below levels associated with pastbooms. In contrast, commodity-exporting countries’
credit and credit growth have been near levels
associated with past credit booms (Figure SF 1.5).

Most EMDEs are still some distance away fromthe thresholds identified by these studies (Figure
SF 1.9). The few EMDEs where private sector
credit exceeded these thresholds in in the third
quarter of 2015, were mostly energy exporting
countries. Microdata for EMDE corporates
suggest similarly that median firm leverage inmany EMDEs is near or above levels thatpreceded the 1997-98 crisis in some East Asian
countries (Alfaro et al. 2016).
Long-term debt overhang. Even if a credit boom
does not end in a crisis, a debt overhang can weighon long-term growth as the necessary balance
sheets repair proceeds gradually (Lo and Rogoff
2015, Buttiglione et al. 2014). Private sector
credit above 80-100 percent of GDP has beenfound to be no longer growth-enhancing (Arcand
et al. 2012; Cecchetti, Mohanty, and Zampolli2011). Again, credit-to-GDP ratios in most
EMDEs are still well below these thresholds, withfew exceptions in which credit to the private, or
corporate, sector exceeds 80 percent of GDP.

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65

S P E C I AL FO C U S 1

FIGURE SF1.9 Comparison: Credit and early warning
indicators

Conclusion
The main findings of this Special Focus are as
follows.
• How has credit to the private sector—and,specifically, the corporate sector—evolved in
EMDEs? Credit to the nonfinancial private sector
and, especially, the corporates has grown rapidly
since the global financial crisis, fueled by benign
borrowing conditions and, in commodity
exporters, by rising financing needs. Credit growth
was most rapid in commodity exporting EMDEs,
although from a starting point of modest credit-to-GDP levels. In contrast, in commodity importing
EMDEs, average credit-to-GDP ratios are
considerably higher than in commodity exporting
countries but are now stagnant or shrinking. On
average, private sector credit-to-GDP ratios haverisen above 1990s averages.
• How does credit growth compare with past
episodes of credit booms? Since 2012, credit to thenonfinancial private sector in commodityimporting EMDEs has been considerably higher(in percent of GDP) than in previous
credit booms but its growth has been subdued. In
contrast, credit growth in commodity-exporting
EMDE has been rapid, near the pace and levels of

In most EMDEs, private sector credit is still some distance away from thethresholds identified by previous studies as being associated with financial
stress.

A. Credit to the private sector
compared to thresholds, 1997

B. Credit to the private sector
compared to thresholds, 2015Q3

Percent of GDP
60
Range

Percent of GDP
20 Range
MedianMedianThresholdThreshold

50
40

10

30
20

0

10
-10

0
-10

-20

-20

Drehman (2013)

Gourinchas andObstfeld (2012)

Drehman (2013)

Gourinchas andObstfeld (2012)

Sources: Bank for International Settlements, Haver Analytics, International Monetary FundInternational Financial Statistics and World Economic Outlook.
Notes: Orange lines show the thresholds identified by previous studies for deviation of the private
sector credit-to-GDP ratio from its trend (derived using a Hodrick-Prescott filter, Drehman 2013,
Gourinchas and Obstfeld 2012). Blue bars indicate the ranges of these measures; red diamonds
show medians.
A. Data are available for 14 EMDEs (Argentina, Brazil, Indonesia, Malaysia, Russia, Saudi Arabia,
and South Africa, China, Hungary, India, Mexico, Poland, Thailand, and Turkey).
B. Broader sample (55 EMDEs) is used here. Data are not available for Bahrain, Côte d’Ivoire,
Croatia, Gabon, Jordan, Mauritius, Nigeria, Peru, Senegal, Sri Lanka, Tunisia, Venezuela.

credit-to-GDP ratios associated with past credit
booms.
• How near are current credit-to-GDP ratios tothresholds identified in the literature as early
warning indicators? Most EMDEs are still somedistance away from the thresholds identified bythese studies.

FIGURE SF1.10 Risks
Private debt stress, perhaps triggered by a sharp increase in borrowing costs, can eventually result in banking sector losses which, in turn,
could require fiscal support to banks as it happened in some previous episodes. In several emerging markets, credit to nonfinancial private
sector has risen rapidly at the same time as fiscal buffers have eroded and as government debt has been set on or neared unsustainable
paths.
B. Government debt during crises

C. Emerging market bond redemption profile

Percentage Points
18
Russian Crisis
16

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

US$, billions

1997-2000 2001-05

2006-10

2011-15

2001

2009

50

2007

1996

150

Sovereigns
Financial corporates
Non-financial corporates

100

1998

1998

Global Crisis(Oct 2008)

1996

14
12
10
8
6
4
2
0

(Oct 1998)
Dot-Com bubble
crash (MAR 2000)

2002

A. Government borrowing cost0
LatviaArgentina

2016

2017

Sources: Bloomberg, Bank for International Settlements, Haver Analytics, International Monetary Fund International Financial Statistics and World Economic Outlook.
C. Data are available for Argentina, Brazil, China, Hungary, India, Indonesia, Malaysia, Mexico, Poland, Russia, Saudi Arabia, South Africa, Thailand, and Turkey.

2018

2019

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S P E C I AL FO C U S 1

In general, policy buffers to respond to financial
stress are considerably higher than in the 1990s.
On average in EMDEs, reserves (in percent ofGDP) are now more than 60 percent higher thanin the 1990s; government debt is 10 percentage
points of GDP and external debt is 16 percentage
points of GDP below 1990s levels.
These buffers notwithstanding, fiscal risks could
compound a growth slowdown that would
accompanyapost-boom
deleveraging.
Deteriorating corporate balance sheets may
weaken the balance sheets of exposed domestic
banks. In a tail risk scenario, large private sector
losses could require governments to provide
substantial financial support. In past episodes offinancial stress, such outlays markedly increased
public debt above and beyond the increases
attributable to the fiscal deficit (Laeven andValencia 2012; Claessens et al. 2014; Bova et al.
2016; World Bank 2015b). As in previous
episodes, fiscal space can shrink rapidly andborrowing cost can rise steeply during periods ofelevated financial stress (Figure SF 1.10). ThisG L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

could force governments to tighten fiscal policy inthe midst of a growth slowdown.
Various policy options could help contain risks
from rapid credit growth while maintaining abroadly accommodative monetary policy stance(World Bank 2011, 2013, 2014; Arteta et al.
2015). Measures commonly considered to slow
household credit growth include tighter ceilings
on debt service-to-income ratios of lower-income
households; more pronounced risk-based pricing
of household lending; and differential loan-tovalue ceilings on first and second mortgages.
Other measures can help contain risks from thecorporate credit growth, for example, increased
stress testing of listed corporates’ balance sheets;and pre-emptive legislative and regulatory steps tofacilitate restructuring of nonperforming loans andcorporate resolution. Measures to contain foreign
currency risks in lending to corporates include
more intensive stress tests; more intrusive
monitoring of liquidity ratios in foreign
currencies; and additional hedging requirements.

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S P E C I AL FO C U S 1

ANNEX SF1.1 Robustness exercises
This technical annex presents a detailed analysis of
the difference between event and non-event
episodes discussed in the main text of the Special
Focus.
A credit boom is defined as an episode during
which the cyclical component of the private sector
credit-to-GDP ratio (derived using a HodrickPrescott filter) is larger than 1.65 times its
standard deviation (i.e. outside the 90 percent
confidence interval). The episode starts when thecyclical component of private sector credit-toGDP exceeds one standard deviation and it ends
in a peak year when the credit-to-GDP ratio
begins to fall. “0” is the peak year of the credit
boom. To address the end-point problem in
estimating a Hodrick-Prescott filter, the dataset isexpanded by setting the data for 2016-18 to beequal to the data in 2015.

ANNEX FIGURE SF1.1 Developments during credit
booms
During credit booms, credit-to-GDP ratios rise significantly above nonevents. Current account balances widen, inflation rises, and growth increases significantly more than in non-events.
A. Evolution of credit

B. Evolution of credit growth

Percentage points of GDP

Percentage points of GDP

40

15

2012-15 commodity exporters
2012-15 commodity importers
Deviation from non-event years
95 percent confidence interval

30

2012-15 commodity exporters
2012-15 commodity importers
D eviation from non-event years
95 percent confidence interval

10
5

20

0
-5

10

-10
-15

0
-3

-2

-1

0
Year

1

2

-3

3

-2

C. Current account balance

D. Inflation

Percentage points of GDP
6
Deviation from non-event years

10

-1

0
Year

1

2

3

Percentage points
Deviation from non-event years
95 percent confidence interval

95 percent confidence interval

35

An ordinary least squares regression is estimatedfor the private sector credit-to-GDP ratio (inpercent of GDP), real GDP, current accountbalances (in percent of GDP), the monetary policyrate, and inflation on dummy variables for each of
the 3 years before the peak of a boom or trough ofa deleveraging episode, the peak or trough year,
and each of the 3 years after the peak or trough.
All variables except monetary policy rates are
expressed as deviations from their long-term trend.
Country fixed effects are included to control forother country-specific factors.

0
0

-3
-5

-6
-3

-2

-1

0
Year

1

2

E. Monetary policy interest rate

F. Growth

Percentage points
Deviation from non-event years
30
95 percent confidence interval

10

During a credit boom, credit-to-GDP ratios are
statistically significantly, and about 25-30
percentage points of GDP, higher; current
account deficits are about 3 percentage points of
GDP wider; and inflation is about 5 percentage
points more elevated than during non-event years.
In the run-up to the peak of the boom, real GDP
growth is statistically significantly (2-3 percentage

-2

-1

0
Year

1

2

3

Percent deviation from trend
Deviation from non-event years
95 percent confidence interval

20
5

10
0

0

-10
-5

-20

The coefficient estimates for each of the dummy
variables (red diamonds in Annex Figures SF 1.1–
SF1.2) indicate the deviation in each of thesevariables during an event from a non-event. The
95 percent confidence intervals are shown in
dotted blue lines.

-3

3

-3

-2

-1

0
Year

1

2

3

-3

-2

-1

0
Year

1

2

3

Sources: World Bank, IMF International Financial Statistics, Bank for International Settlements.
Notes: Credit booms and their peak years are defined as the same as in Figure SF 1.5. “0” is thepeak year of a credit boom. Data availability as in Figure SF1.5. Figures show the estimated deviation(red diamond) of each variable (their cyclical components derived using a Hodrick-Prescott filter
except monetary policy interest rate) and its corresponding 95 percent confidence intervals (bluedotted line) from non-event years during the event window (three years before the peak, the peak
year, and the three years after the peak).
A. Credit to the nonfinancial private sector in percent of GDP. The solid orange (commodity
exporters) and blue (for commodity importers) lines for 2012-15 show the differences between thesample means for t=0 at 2015Q3 and those during non-event years.
B. The annual change in credit to the nonfinancial private sector in percentage points of GDP. The
solid orange (commodity exporters) and blue (for commodity importers) lines for 2012-15 show thedifferences between the sample means for t=0 at 2015Q3 and those during non-event years.
C. The cyclical component of the current account in percent of GDP (derived using a Hodrick-Prescottfilter). Data are not available for China until 1997.
D. The cyclical component of the inflation rate (derived using a Hodrick-Prescott filter). Hyper-inflation
episodes are dropped. Data are not available for Argentina until 1991, Mexico until 1987, Russia until
1996, Thailand until 1984, and Turkey until 1995.
E. Data are available for Bahrain (2007), Brazil (1999), Georgia (2008), Guatemala (2005), Honduras(2005), Indonesia (1990), Jordan (2004), Kazakhstan (2005), Kenya (2006), Malaysia (2004),
Mauritius (2006), Mexico (2008), Mongolia (2007), Paraguay (2011), Peru (2003), Philippines (2001),
Qatar (2002), Russia (2011), Saudi Arabia (1999), South Africa (1980), Thailand (2000), Turkey(1999), and Uruguay (2008).
F. The cyclical component of real GDP (in millions of USD dollars) in percent of its trend (derived
using a Hodrick-Prescott filter).

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ANNEX FIGURE SF1.2 Developments during
deleveraging episodes
During deleveraging episodes, the credit contractions, narrowing of current
account deficits and growth slowdowns are statistically significantly larger
than during non-events.
A. Evolution of credit

B. Evolution of credit growth

Percentage points of GDP
Deviation from non-event years
15
95 percent confidence interval

Percentage points of GDP
Deviation from non-event years
10
95 percent confidence interval

10

5

5
0
0
-5

-5

-10

-10
-3

-2

-1

0
Year

1

2

-3

3

C. Current account balance

-2

-1

0
Year

1

2

3

D. Inflation

Percentage points of GDP
Deviation from non-event years
6
95 percent confidence interval

Percentage points
Deviation from non-event years
95 percent confidence interval

10

3
5
0
0

-3

-5

-6
-3

-2

-1

0
Year

1

2

-3

3

-2

-1

0
Year

1

2

E. Monetary policy rate

F. Growth

Percentage points
Deviation from non-event years
60
95 percent confidence interval

Percent deviation from trend
Deviation from non-event years
4
95 percent confidence interval

40

2

20

0

0

-2

-20

3

-4
-3

-2

-1

0
Year

1

2

3

-3

-2

-1

0
Year

1

2

3

Sources: Bank for International Settlements, Haver Analytics, International Monetary FundInternational Financial Statistics and World Economic Outlook.
Notes: Deleveraging episodes and their trough years are defined as the same as in Figure SF 1.7. “0”is the trough year of a credit deleveraging episode. Data availability as in Figure SF1.7. Figures show
the estimated deviation (red diamond) of each variable (their cyclical components derived using a
Hodrick-Prescott filter except monetary policy interest rate) and its corresponding 95 percent
confidence intervals (blue dotted line) during the event window (three years before the trough, thetrough year, and the three years after the trough) from non-event years.
A. Credit to the private nonfinancial sector as a percent of GDP.
B. The annual change in credit to the nonfinancial sector as a percent of GDP.
C. The cyclical component of the current account in percent of GDP (derived using a HodrickPrescott filter). Data are not available for China until 1997.
D. The cyclical component of the inflation rate (derived using a Hodrick-Prescott filter). Hyper-inflation
episodes are dropped. Data are not available for Argentina until 1991, Mexico until 1987, Russia until
1996, Thailand until 1984, and Turkey until 1995.
E. Data are available for Bahrain (2007), Brazil (1999), Georgia (2008), Guatemala (2005), Honduras(2005), Indonesia (1990), Jordan (2004), Kazakhstan (2005), Kenya (2006), Malaysia (2004),
Mauritius (2006), Mexico (2008), Mongolia (2007), Paraguay (2011), Peru (2003), Philippines (2001),
Qatar (2002), Russia (2011), Saudi Arabia (1999), South Africa (1980), Thailand (2000), Turkey(1999), and Uruguay (2008).
F. The cyclical component of real GDP (in millions of U.S. dollars) in percent of its trend (derived
using a Hodrick-Prescott filter).

points) higher than during non-events. However,at the very peak of the credit boom, growth slows
towards the pace during non-event years.
In contrast, during deleveraging episodes, private
sector credit falls statistically significantly (by over
5 percentage points of GDP) below that in nonevents. Current account deficits turn into
surpluses and growth falls statistically significantly(although only at the 10 percent confidence level)
below growth in non-events.

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S P E C I AL FO C U S 1

69

ANNEX TABLE SF1.1 Review of selected literature: Vulnerabilities arising from credit surges
Authors

Abiad et al.
(2011)

Data Coverage

Methodology

Results

23 OECD countries
and 25 EM,
1970-2009

Panel data
analysis, probit
analysis anddifference-indifference method

Creditless recoveries—defined as episodes where real credit growth isnegative in the first three years following a recession—follow about one infive recessions. While they seem to be more common in developing
countries and emerging markets, they also occur in advanced economies.
On average, income growth during credit-less recoveries is about 3.9
percent, as opposed to 4.3 percent for recoveries with credit.

Adrian et al.
(2013)

U.S. corporations,
1998-2010

Descriptive
analyses and
DSGE

While loans show the typical procyclical pattern of rising during a boom andcontracting sharply in a downturn, bond financing surges during downturns.
During the 2007-09 crisis, the total amount of new issuances of loans andbonds decreased by 50 percent. Loans decreased 75 percent, but bondissuance rose two-fold. The cost of both types of financing increase steeply(four-fold increase for new loans, and threefold increase for bonds).

Alfaro et al.
(2016)

21 EM, 1992-1997
and 2009-2014

Descriptive
statistics

While corporate vulnerability levels are not as severe as the run-up to theEast Asian crisis, corporates in a broader spectrum of emerging markets
display weaker liquidity and solvency indicators after 2008-2009.

Amri et al.
(2014)

31 EM and 5
troubled eurozone
economies,
1981-2010

Descriptive
statistics

Two methods identify credit booms: (1) 1.75 standard deviations away fromthe country specific trend in real credit-to-population; and 2) 1.55 standard
deviations away from the country specific trend in log real credit. The
unconditional probabilities that a credit boom is preceded by a capital flow
surge range from 40 to 71 percent. Meanwhile, the unconditional
probabilities that a capital flow surge will be followed by a credit boom range
from 11 to 38 percent.

Cross-country
and panel
analysis

Finance starts having a negative effect on output growth when credit to theprivate sector reaches 100 percent of GDP. The true relationship between
financial depth and economic growth is non-monotone. Findings are notdriven by output volatility, banking crises, low institutional quality, or bydifferences in bank regulation and supervision.

Descriptive
analysis, stylized
facts

Credit booms in developing countries, defined as episodes when the cyclicalcomponent of real credit is larger than 1.65 times its standard deviation, aresimilar in their duration and magnitude but differ in their macro-economic
implications. Surges in capital inflows precede credit booms, especially in
middle-income countries. Credit booms followed by banking crises areassociated with depreciations (by 2 percent on average), drops ininvestment, consumption, and GDP (by 10 percent, 3-4 percent, and 3
percent, respectively, on average) and current account surpluses (by 1.5
percentage points of GDP, on average).

Arcand et al.
(2012)

Arena et al.
(2015)

Ayala et al.
(2015)

Barajas et al.
(2010)

108 countries,
1970-2000

135 developing
countries,
1960-2011

47 EM, 2000-2013

18 MENA
economies,
1983-2008

Censored panel
regressions with
fixed effects

Panel data
analysis

Institutions and macro fundamentals (e.g. current account ratio) create anenabling environment for bond market development. During the recent
boom, however, global cyclical factors accounted for most of the variation ofbond shares in total corporate debt. The sensitivity to global factors varies
with relative bond market size rather than local fundamentals. Foreign banklinkages help explain why bond markets increasingly substituted for banks inproviding liquidity to EMs.
Credit booms defined by a country-year in which the credit-to-GDP ratio
exceeds its trend by 1.5 times the country-specific historical standard
deviation, or an absolute increase of 5 percentage points of GDP. Credit
slowdowns are often preceded by credit booms. Credit booms account for3.5 percent of the sample, (country-year pairs). Factors driving lower credit
growth are bank funding position deterioration, lending capacity and loan
quality tightening; and poor macroeconomic conditions. Expansionary
monetary policy helps cushion these negative effects.

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ANNEX TABLE SF1.1 Review of selected literature (continued)
Authors

Data Coverage

Methodology

Results

Bech et al.
(2012)

24 AE, 1960-2016

Panel data
analysis

Deleveraging during financial crisis-led recessions is associated withstronger subsequent recoveries. A decline in private debt by 10
percentage points of GDP during the recession is associated with a 0.6
percentage point increase in average output growth during the recovery
phase.

Cecchetti,
Mohanty, andZampolli(2011)

18 OECD economies,
1980-2010

Panel data
analysisGovernment, corporate, and household debt above 85 percent, 90
percent, and 85 percent of GDP, respectively, reduces growth. Higher
financial fragility and higher probability of credit booms and busts arepotential channels.

Cetorelli andGoldberg(2009)

U.S. Banks, 2000-2008

Descriptive
analysis

Global banks played a significant role in the transmission of the current
crisis to emerging-market economies. Adverse liquidity shocks todeveloped-country banking, such as those that occurred in the UnitedStates in 2007-08, have reduced lending in local markets throughcontractions in cross-border lending to banks and private agents and also
through contractions in parent banks’ support of foreign affiliates.

Cetorelli andGoldberg(2012)

50 U.S. banks withforeign affiliates,
2006Q1-2010Q1

Panel regression

During the 2008-09 crisis, U.S. banks experiencing funding shocks
reduced their internal funding more to peripheral than to core (i.e. large)
foreign affiliates.

Descriptive
analysis; OLS
analysis

A decline in the private sector leverage ratio by 10 percentage points
over the 5 years of the typical deleveraging episode is associated with anincrease in annual growth of about 0.4 percentage points over thesubsequent 5 years. Deleveraging episodes tend to last about five years,
during which debt falls by about 15 percentage points of GDP. An annual
decline in private sector debt ratio by one percentage point during thedeleveraging episode is associated with higher annual average real
growth rate in the next 5 years by 13-24 basis points.

Chen et al.
(2015)

12 EM and 24 AE,
1960-2013

Claessens,
Kose andTerrones(2012)

44 countries,
1960Q1-2010Q4

Descriptive
statistics;
Duration analysis

By analyzing the interactions between business and financial cycles, it isfound that there are strong linkages between the different phases ofbusiness and financial cycles. In particular, recessions associated withfinancial disruptions, notably house and equity price busts, tend to belonger and deeper than other recessions. Conversely, while recoveries
following asset price busts tend to be weaker, recoveries associated with
rapid credit growth and house prices are stronger.

Claessens andvan Horen(2012)

Bank balance sheets in
129 countries,
1995-2009

Descriptive
statistics

Bank loans behaved in a markedly procyclical manner (with a lag) during
the recent financial crisis, while bond markets did not.

Contessi, Li,
and Russ(2013)

U.S., 1952Q1-2013Q1

Descriptive
statistics

Bank loans behaved in a markedly procyclical manner (with a lag) during
the recent financial crisis, while bond markets did not.

De Haas et al.
(2012)

1294 banks,
1999-2009

Panel regression

During the 2008-09 crisis, both domestic and foreign banks cut lending
but banks participating in the Vienna Initiative were more stable lenders.

Panel regression

International banks cut cross-border lending sharply during the 2008-09
crisis. However, they continued to lend more to countries in which they
maintained close relations with borrower (e.g. because they operated a
local subsidiary, they were geographically close, or they had built up
more lending experience).

De Haas andvan Horen(2013)

Individual syndicatedloans, 2000-09

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71

ANNEX TABLE SF1.1 Review of selected literature (continued)
Authors

Data Coverage

Methodology

De Haas andvan Lelyveld(2014)

48 international banks
and 2,020 domestic
banks, 1992-2009

Panel regression

During the 2008-09 crisis, multinational bank subsidiaries had to slow
lending almost three times as fast as domestic banks.

170 economies,
1960-2010

Panel data
analysis

Bank credit booms are episodes when the credit-to-GDP ratio is morethan 1.5 times its standard deviation above its trend and the annual
average credit growth exceeds 10 percentage points of GDP; or when
the annual growth rate of the credit-to-GDP ratio exceeds 20 percent.
During boom years, in comparison to non-boom years, growth improvesby two percentage points, current account deteriorates by one
percentage points and investment growth is 100 percent higher. About
60 percent of credit booms are followed by economic underperformance.
About one-third of credit booms are followed by banking crises.

DemirgucKunt and
Detragiache(2005)

N/A

Literature/methodology
surveyCredit growth (defined as the rate of growth of real domestic credit to theprivate sector) is a statistically significant determinant of banking crises
in a multinomial logit approach. Estimated banking crisis probabilities
from the multivariate logit approach are higher than those derived fromprofessional forecasts by 2-12 percentage points.

Didier et al.
(forthcoming)

Firm-level data for EM,
2008-2015

Descriptive
analysis.

Leverage increased more in energy sector firms than in other firms.

Descriptive
analysis.

The credit-to-GDP gap is defined as the difference between the credit-toGDP ratio and its long-term trend. Compared to the bank credit-to-GDP
gap, using the total credit-to-GDP gap (including securitized credits heldby the non-bank financial sector and cross-border lending), increases theprediction precision on incidence of banking crises by 5-30 percent.

Signals
approach; Casestudy

In an extension of the basic signals approach used to predict crises,
vulnerability to crisis is signaled when one or more "indicatorvariables" (on current account, capital account, real sector and financial
sector) deviate significantly (more than 2.5 standard deviations) fromtheir behavior during non-crisis periods. Short-term debt to reserve ratio
is found to be the best predictor while the change in domestic credit to
GDP ratio is one of the best predictors of financial crises in Asia.
Measures such as declines in reserves by more than 50 percent weremoderately successful in predicting financial crises in Mexico.

Dell’Ariccia etal. (2014)

Drehmann(2013)

Edison(2000)

39 EM and AE,
1970-2010

20 EM and AE,
1970-2009

Results

Elekdag and
Wu (2011)

21 AE and 43 EM,
1960-2010

Descriptive
analysis, stylized
facts

Credit booms, defined as episodes when the cyclical component of realcredit is larger than 1.55 times its standard deviation, are associated withworsening bank and corporate balance sheets. While corporates’
leverage ratio increases by 7-16 percent, banks’ credit to total assets
ratio and non-performing loan ratios grow by about 5 percentage points.
Credit boom are also associated with higher capital inflows (by 1-6
percent), current account deficits (about 2-4 percent of GDP), higher
asset prices (by 7-10 percent) and stronger domestic demand (about 2-7
percent). Booms typically last for three years.

Financial
Stability
Board(2015)15 AE and 12 EM,
1999-2014

Descriptive
analysis

Against the backdrop of ample global liquidity and prolonged low global
interest rates, nonfinancial corporate bond issuance in major EMDEs has
risen sharply.

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S P E C I AL FO C U S 1

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ANNEX TABLE SF1.1 Review of selected literature (continued)
Authors

Feyen et al.
(2015)

Gourinchas andObstfeld (2012)

IMF (2015a)

IMF (2015b)

IMF (2015c)

Jassaud andKang (2015)

Data Coverage

71 emerging anddeveloping countries
and 7 industrial
sectors, 2000-2014

22 AEs and 57 Ems,
1973-2010

40 EM, 2004-13

China, 2007-14

128 countries,
1980-2013

Italy, 2007-14

Methodology

Results

Panel regression

Global factors are important drivers of emerging and developing
economies bond issuance. A decrease in U.S. expected equity market(or interest rate) volatility, U.S. corporate credit spreads, and U.S.
interbank funding costs and an increase in the Federal Reserve's
balance sheet (1) raise the odds that the monthly issuance volume of acountry-industry is above its historical average; (2) decrease individualbond yields and spreads; and (3) raise bond maturities, after controllingfor country pull factors, bond characteristics.

Discrete panel data
analysis

For EM, domestic credit growth and real currency appreciation are themost effective predictors of financial crises. A 9 percentage point
increase in the credit to GDP ratio increases the probability of banking
crisis in the next three years by 6.4 percent. For emerging markets, a 4
percentage point increase in the reserves to GDP ratio are associatedwith a lower likelihood of banking crisis by 5.2 percent.

Descriptive andpanel data analysis

Global factors, such as the inverse of the U.S. shadow rate and theglobal oil prices, have become more important drivers of EM corporate
leverage, as opposed to domestic and firm-specific factors. The shareof variation in leverage explained by global factors increased from 6
percentage points in 2007 to 45 percentage points in 2011 (30percentage points in 2013).

Descriptive andpanel data analysis

The post-global-financial-crisis credit boom in China resulted in a large
credit gap that is around 15 percent of GDP. Corporate debt, the main
driver for the credit boom, has risen from 78.9 percent of GDP in 2007
to 111.5 percent of GDP in 2014. The rise in corporate debt has been
driven by SOEs, real estate firms, and sectors with overcapacity.

Panel data analysis

The effect of financial development on economic growth is bell-shaped:
it weakens at higher levels of financial development (between 0.4 and0.7 with 1 being the maximum). When financial development proceeds
too fast, deepening financial institutions can encourage greater riskraking and high leverage, which leads to economic and financial
instability.

Descriptive analysis

The buildup of nonperforming loans (NPLs) in Italy since the global
financial crisis reflects both the prolonged recession as well as
structural factors that have held back NPL write-offs by banks. The
impediments to NPL resolution in Italy and fostering a market for
restructuring distressed assets could support corporate and financial
restructuring.

Local projection
methodFinancial-crisis recessions are more painful than normal recessions,and the credit intensity of the expansion phase is closely associatedwith the severity of the recession phase for both types of recessions.
After five years, the financial-crisis recession path of real GDP per
capita is about 5 percent lower than the normal-recession path.

Jorda,
Schularisk, andTaylor (2013)14 advanced
countries, 1870-2008

Kaminsky,Lizondo, andReinhart (1998)

5 industrial, 15
developing
economies, 1970-95

Signals approach,
OLS analysis

A “signals” approach helps predict currency crises. Among all, the realexchange rate serves as the most effective predictor of currency crises:
57 percent of crises were signaled. For credit growth (defined as thechange in the ratio of domestic credit to GDP), the average lead time
for the domestic credit to GDP ratio to signal a crisis is 12 months.

Lo and Rogoff(2015)

Canada, Japan, UK,
U.S., and Euro Area,
2000-15

OLS analysis

Literature survey on persistently slow growth across advanced
economies six years after the onset of the financial crisis.

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

S P E C I AL FO C U S 1

73

ANNEX TABLE SF1.1 Review of selected literature (continued)
Authors

Mendoza andTerrones (2008)

Mendoza andTerrones (2012)

Milesi-Ferretti and
Tille (2010)

Reinhart, Reinhart,
and Rogoff (2012)

Data Coverage

27 AEs and 22 Ems,
1960-2006

61 emerging andindustrial countries, 1960-2010

75 countries

14 AEs1800-2011

Schularick andTaylor (2012)14 AEsShin (2014)

NA

1870-2008

Methodology

Results

Trend
decomposition,
Panel data
analysis

Credit booms, as defined by 1.75 times the standard deviations
from the trend (1 standard deviation for starting and ending
dates), are associated with economic expansion (2-4 percent),
increasing housing (15 percent) and equity prices (10-30 percent),
real appreciation (about 9 percent above trend), and larger current
account deficits (around 2 percentage point of GDP); and viceversa for credit contractions. Credit booms tend to last about 6-7
years.

Trend
decomposition,
Panel data
analysesCredit booms, as defined by 1.65 times the standard deviations
from the trend (1 standard deviation for starting and ending
dates), often lasts for 4-5 years. Credit booms show threesimilarities in industrial and emerging economies: (1) booms are
similar in duration and magnitude; (2) banking crises, currency
crises or sudden stops often follow credit booms (at similarfrequencies in industrial and emerging economies); and (3) credit
booms often follow surges in capital inflows, TFP gains, andfinancial reforms, and are far more common with managed
exchange rates.

Panel regression

During the 2008-09 crisis, international banking activity contracted
both in terms of cross-border lending and operations throughforeign affiliates, with magnitude being more pronounced for cross-border operations.

Descriptive
analysis

The major public debt overhang episodes in the advanced
economies since the early 1800s, characterized by public debt to
GDP levels exceeding 90% for at least five years, are associatedwith growth over one percent lower than during other periods. The
growth effects are significant even in the many episodes wheredebtor countries were able to secure continual access to capital
markets at relatively low real interest rates.

Panel data
analysis

In the pre-war era (1870-1939), credit and money growth aretightly linked. Both the credit-to-GDP ratio and the money-to-GDP
ratios are about 0.5. During the post-war era (1945-2008), credit
growth was not backed by monetary growth. While the credit-toGDP ratio is around 1, the money-to-GDP ratio stays below 0.65.
High credit growth serve as an early warning indicator of financial
crises: an increase in average real loan growth over 5 years by
one standard deviation (7 percent) increases the probability ofcrisis by 2.45-2.8 percentage points.

Descriptive
analysis

Global bank financing has increasingly given way to asset
managers and other “buy side” investors who have global reach.

74

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SPECIAL FOCUS 2
Quantifying Uncertainties
in Global Growth Forecasts

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S P E C I AL FO C U S 2Special Focus 2:
Quantifying Uncertainties
in Global Growth Forecasts
An assessment of forecast uncertainty and the balance of risks is critical to support effective policy making. This
Special Focus presents the approach used in the Global Economic Prospects to quantify risks to baseline global
growth forecasts in a fan chart, using information extracted from option pricing and survey-based data. Forecast
uncertainty has increased since January 2016 while the balance of risks to global growth forecasts has tilted
further to the downside.
Global and regional growth projections have an
important bearing on the assessment of individual
country prospects and policy choices. However,these projections are subject to a range of
uncertainties that could also influence policy
decisions. Such uncertainties around baseline
forecasts could be caused by low-probability but
high-impact events, persistent forecast errors inmodels or expert judgment, or heightened
volatility around economic turning points or
during episodes of financial stress. The likelihoodof actual outcomes deviating from projections istherefore significant, and might vary over time.
Policy makers need to be informed about risks
prevailing at the time of the forecast, and how
these risks translate into confidence intervals
around baseline projections.
A quantification of risks around global growthforecasts can be achieved in different ways. A first
approach is to look at past prediction errors as arough guide to likely future forecast deviations.
This provides an objective but static andunconditional measure of uncertainty, which does
not reflect current circumstances that might affectforecast errors. A second approach to partly
address this shortcoming is to undertake scenario
analysis. In this case, results will be largely
dependent on the properties of the specific model
used for simulations whereas most institutions
derive their baseline forecasts from a variety ofmodels and expert judgment. Measures of
uncertainty should reflect this process, linking
Note: This Special Focus was prepared by Franziska Ohnsorge,
Yirbehogre Modeste Some and Marc Stocker, with research assistancefrom Peter Williams. Going forward, the fan chart developed in thisanalysis will be updated on a semi-annual basis, maintaining fixedweights over three-year windows.

actual forecast errors with uncertainty regarding
underlying assumptions.
This Special Focus essay derives confidence
intervals around global growth projections by
mapping the distribution of forecast errors to thatof selected risk factors; including option prices on
equities and oil prices as well as consensus
forecasts for term spreads, i.e., the difference
between long- term and short- term interest rates),
across G20 economies (which account for 64
percent of global GDP). Signals from the marketimplied or consensus forecast distribution of theseforward-looking indicators are extracted andweighted to derive a fan-chart around global
growth projections.
This Special Focus describes the fan chart
approach, answering the following three questions:
1. What are the selected risk indicators used
to assess forecast uncertainty?
2. How can different risk factors be
combined in a single fan chart?
3. What is the current balance of risks toglobal growth?

Selected risk indicators
Various market— and survey-based indicators
have been suggested as useful measures of forecast
uncertainty. In particular, the pricing of options
used by investors to hedge can provide
information on market perception of underlying
risks (Moschini and Lapan 1995; Carter 1999)
and has predictive power in forecasting future
uncertainty of the underlying assets (Christensen
and Prabhala 1998; Andersen and Bondarenko

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S P E C I AL FO C U S 2

2007; and Busch, Christensen and Nielsen 2011).
The degree of disagreement among private sector
forecasters can also capture diverging signals on
the outlook, and is particularly large aroundcyclical turning points (Geraats 2008; Siklos2014). The evolution of such disagreements has
been shown to affect the probability distributionof forecast errors (Bachman, Elstner and Sims
2012; Patton and Timmerman 2010). Three risk
indicators are used in this exercise:•

Equity prices. Equity prices futures—especially
the Standard and Poor’s S&P500 Index—are
positively correlated with prospects for the
U.S. and global economy.

•

Term spreads. Term spreads (difference
between long and short-term nominal interest
rates) embed both inflation and real
equilibrium interest rate expectations, both ofwhich are tightly connected to growthprospects. A global term spread is proxied by
GDP-weighted term spreads across G20
economies.
Average of Brent and WTI crude oil forward
prices. Abrupt changes in oil prices makegrowth prospects more uncertain. A supplydriven decline in oil prices tends to improveglobal growth prospects.

•

For each risk factor, its forecast distribution
captures both the degree of uncertainty and thebalance of risks:
The degree of uncertainty surrounding eachrisk factor is captured by the dispersion of its
forecast distribution. The dispersions for the
Brent and WTI prices and S&P 500 returns
risk factors are measured by the implied
volatility of at-the-money forward option
prices.1 For the June GEP forecast vintages,
the 6-month maturity implied volatility isused for current year forecast whereas 18month maturity implied volatility is used fornext year forecast.2 For global term spread, the•The data sample is from January 2006 to April 2016.
Ideally, the fan chart would extend into 2018. However, reliable
market-based indicators derived from liquid option markets are notavailable at this horizon.
1
2

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

dispersion is computed from the monthly
Consensus Economics survey for each countryof the G20 and aggregated using real GDP
weights.3•

The balance of risks for each factor is capturedby the skewness of its forecast distribution. A
negative skewness indicates a balance of risks
that is tilted to the downside. The skewnessof the risk-neutral probability distributions ofoption price on S&P 500 returns as well as on
Brent and WTI prices are approximated fromthe slope of their respective implied volatility
curves, following the methodology of Mixon(2011).4 For the term spread, the skewness iscomputed from the monthly Consensus
Economics survey for each country of the G20
and aggregated using real GDP weights.

Several episodes of heightened uncertainty standout from the analysis of these risk factors (Figure
SF 2.1). The first one is the global financial crisisof 2008-09. Its unexpected severity was associatedwith financial market disruptions and a broadbased increase in volatility and risk aversion (Stockand Watson 2012; Allen, Bali, and Tang 2012).
This was also reflected in the rising degree of
uncertainty of all three risk factors. The second
and third, albeit milder, episodes were around
intensifications in the Euro Area sovereign debt
crisis in 2011 and 2012, when financial market
indicators also pointed towards a greater level of
uncertainty surrounding global growth forecasts.
Recent episodes of market stress, such as those
associated with the Taper Tantrum in 2013,
3Only countries with available data on interest rates are used in theaggregations. These include: Australia, Canada, France, Germany,
India, Indonesia, Italy, Japan, Netherlands, Republic of Korea,
Sweden, Spain, Switzerland, the United Kingdom, and the UnitedStates.
4The skewness is approximated based on the following measure of
implied volatility skew: (25 percent Delta Call implied volatility-25
percent Delta Put implied volatility)/50 percent Delta implied
volatility where Delta is the degree to which an option is exposed toshifts in the price of the underlying asset. The framework assumes
that the option-implied distribution generates a volatility curve that islinear in delta. This model is considered as more empirically plausible
than one assuming linearity in the percentage strike model (Mixon
2011). Among measures based on the slope of the implied volatility
curve, this measure is the least correlated with the level of implied
volatility. Robustness checks are undertaken with alternative skew
measures such as the widely used (90 percent moneyness implied
volatility – 110 percent moneyness implied volatility)/100 percent
moneyness implied volatility measure, with largely similar results.

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

B. S&P500: Balance of risks

Implied volatility
Current year
Current year median50

Skewness
Current year
Current year median-0.6

Next year
Next year median40

Next year
Next year median

-0.8

30

-1.0

20
-1.2

10

C. Term spread: Degree of uncertainty

D. Term spread: Balance of risks

Standard deviation
Current year
Current year median
0.6

Skewness
Current year
Next year
Current year median Next year median
0.5

Next year
Next year median

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2016

2015

2014

2013

2012

2011

2010

2009

2008

2006

-1.4

0

2007

0.3

0.5

0.1

0.4

E. Oil price: Degree of uncertainty

F. Oil price: Balance of risks

Implied volatility
Current year
Current year median60

Skewness
Current year
0.1 Current year median

Next year
Next year median

2016

2015

2014

2013

2012

2011

2010

2009

2008

2006

2016

2015

2014

2013

2012

-0.7
2011

-0.5

0.1
2010

-0.3

0.2
2009

0.3

2007

-0.1

2008

In order to calculate the degree of uncertainty andbalance of risks of global growth forecasts from theselected risk factors, a number of assumptions areneeded regarding the functional form of theirrespective distributions, as well as the weight given
to individual risk factors. In line with otherauthors (Blix and Sellin 1998 and Kannan andElekdag 2009), a two-piece normal distribution isused to characterize both global growth forecasts
and individual risk factors. The uncertainty andbalance of risks (measured by the dispersion andskewness) of global growth forecasts is recoveredfrom the corresponding statistics of the
distribution of the three risk factors, assuming alinear relationship between them.

A. S&P500: Degree of uncertainty

2006

To characterize the evolution of uncertainty
around global growth forecasts, a similar approachto that proposed by Blix and Sellin (1998) and
Kannan and Elekdag (2009) is used. Morespecifically, changes in the degree of uncertainty(dispersion) and balance of risks (skewness) ofunderlying risk factors are used to assess thepotential size and direction of forecast errors at
any point in time.

Uncertainty. The implied current-year volatility of equity price options andnext-year volatility of term-spread forecasts have edged up since
the second half of 2015 but remain near their historical medians. In
contrast, the implied volatility of oil price futures widened to post-crisis
highs, pointing to increased uncertainty. Balance of risks. The distributionof future equity prices is increasingly tilted to the downside while thatof oil price futures is tilted to the upside. Movements in the skewnessof term spread forecasts are mixed. Together, these developmentssuggests higher uncertainty and rising downside risk to global growth for2016 and 2017.

2007

Risk indicators and global
growthFIGURE SF2.1 Uncertainty and balance of risks for risk
factors

2006

sharply declining oil prices since mid-2014 andthe ongoing emerging market slowdown have also
raised forecast uncertainty. Around these episodes,
downside risks to growth have been moreprevalent.

81

S P E C I AL FO C U S 2

Next year
Next year median

0.0

50

-0.1
40

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2016

2015

2014

2013

2012

2011

2010

2009

-0.5

2008

-0.4

10

2007

-0.3

20

2006

-0.2

30

2006

To aggregate risk factors into a measure of global
risk, weights of each risk factor need to be
estimated. A first option is to use model
simulations to estimate the risk weights(Österholm 2009; Michal et al 2014; Alvaro andMaximiano 2003). This consists of simulating theforecast distribution under alternative scenarios
and then minimizing the distance between thebaseline forecast distribution and a weighted
average of the distributions under each scenario.
This approach provides a useful illustration to
discuss forecast uncertainty, but depends heavily
on individual model properties and scenario
assumptions.

Sources: World Bank, Bloomberg, Consensus Economics.
Note: Gray areas represent the global financial crisis of 2008-09, the intensifications of the Euro area
debt crisis in 2010 and 2012.
A. The implied volatility of option prices on the S&P 500 is recovered using the Black-Scholes formulafrom 6- and 18-month-ahead put and call option contracts. B. The skewness of option prices on the
S&P 500 is approximated using (25 Delta Put volatility-25 Delta Call volatility)/50 Delta volatility
where Delta stands for the degree to which an option is exposed to shifts in the price of theunderlying asset. This skewness measure is scaled down by a factor of 3 to match the equivalentskewness parameter of the risk neutral density function (Mixon 2011). C.D. The degree of uncertainty(proxied by dispersion) and balance of risks (proxied by skewness) of current and next-year term
spread forecasts are compiled from monthly surveys of professional forecasters.

S P E C I AL FO C U S 282

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FIGURE SF2.2 Risks to global growth
Uncertainty surrounding global growth forecasts has increased since theJanuary 2016 Global Economic Prospects and is slightly above thehistorical median. Upside risks have decreased while downside risks forthe current year have reached post-crisis highs. The probability of a 1
percentage point decline below current global growth projections in 2016
is estimated at 12.5 percent.
A. Risks to global growth

B. Uncertainty of global growthforecasts

Percent
50 percent
5
80 percent
90 percent
Baseline
90 percent in JAN16
3

5Standard deviation
Current year
Current year median

2.0

Next year
Next year median

1.6
3

1.2
0.8
0.4

C. Contribution of risk factors to forecast uncertainty

D. Balance of risks of global growthforecasts

Variance
3.0

Skewness
Current year
Current year median
0.3

2.5
2.0

Oil
S&P500Term spread
Other factors
Total

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

0.0

2017

2016

2015

1

2014

1

Next year
Next year median

0.2
0.1

1.5
1.0

0.0

0.5

-0.1

E. Contribution of risk factors to thebalance of risks to global growth

F. Probability of global growth being
1 percentage point below baseline
forecasts

Skewness
0.2

Percent
20

0.1

Oil
S&P500Term spread
Total

2016

2015

2014

2013

2012

2011

2010

2017

2009

2017 (GEP
JAN16)

2008

2016

2007

2016 (GEP
JAN16)

2006

-0.2

0.0

Average 2006-16
15

0.0

10

-0.1
5
-0.2
2016 (GEP
JAN16)

20162017 (GEP
JAN16)

2017

0
Current year (2016)

Next year (2017)

Sources: World Bank. Bloomberg, Consensus Economics.
Notes: The methodology is discussed in detail in Annex SF2.1. “GEP JAN16” stands for Global
Economic Prospects in January 2016.
A. “90 percent in JAN16” is the 90 percent confidence interval of a fan chart based on data available
for the January 2016 Global Economic Prospects report.
B. Dispersion is measured by the standard deviation. Gray areas represent the global financial crisisof 2008-09 and the intensification of the Euro area debt crisis in 2010 and 2012.
C. “Other factors” denotes the contribution of own shocks of global growth forecast error in VAR
variance decomposition.
D. The balance of risk is measured by the skewness. Gray areas represent the global financial crisisof 2008-09 and the intensification of the Euro area debt crisis in 2010 and 2012.

Kannan and Elekdag (2009) and Blix and Sellin(1998) use a simpler approach, estimating
elasticities of global growth with respect to risk
factors by running an OLS regression on each risk
factor individually. The same OLS coefficients areused as weights for the skewness and variance at all
forecast horizons, ignoring any lag structure andpotential interactions between risk factors.5
However, the lag structure and interactions may
matter. For example, the performance of the yield
curve predictor of future growth depends on theforecast horizon (Ang et al. 2006; Wheelock andWohar 2009). More refined approaches toestimating the risk weights include Bayesian
methods (Cogley et al. 2005) and Vector
Autoregressive analysis (Novo and Pinheiro 2003,
Smets and Wouters 2004).
The baseline approach adopted here departs fromthe OLS-based approach proposed by Kannan andElekdag (2009) in two ways: in the selection of
the risk factors and in the estimation of the weightparameters used in the aggregation of risk factors.
In the approach used here, the weights assigned toeach risk factor in the aggregation into global risks
are different and vary over the forecast horizon.
The weights for the computation of the global
growth forecast uncertainty are estimated as theshare of the variance of the global growth forecast
error explained by each risk factor at various
forecast horizons (see technical discussion in
Annex SF2.1).
Instead of using the same weights for uncertainty
and balance of risks (as in the OLS-based
approach), the weights to aggregate the balance ofrisks of individual risk factors into a global balanceof risks are the impulse responses of global growthto each risk factor at different forecast horizon.
This approach allows individual risk factors to tilt
the global balance of risks differently at different
forecast horizons. The variance decomposition
and impulse responses are derived from therecursive identification also used in the analysis of

5In Kannan and Elekdag (2009) the risk factors selected include
inflation, term spread, S&P500 and oil prices. Inflation is excluded
here for two reasons: first, changes in oil prices will eventually feed
into inflation and, second, monetary policy tightening risk in
response to increases in inflation is captured by the term spread.

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

spillovers (World Bank 2016a).6 Using thisweighted average global uncertainty and balanceof risks, a fan chart can be drawn around thebaseline global growth forecast (Figure SF 2.2).7

Balance of risks to global
growthThe resulting fan chart shows confidence intervals
at 50, 80 and 90 percent probability around thegrowth projections in the June 2016 Global
Economic Prospects (Figure SF 2.2). The fan chartuses information available up to May 2016. It
illustrates that the uncertainty surrounding global
growth forecasts has risen marginally above thelong-term average and increasingly tilted to thedownside.
The period around the global financial crisis inlate 2008– early 2009 illustrates the risks captured
in the fan chart. After sharp corrections in mostasset prices (financial, housing, or commodities),
the balance of risks may have been on the upside.
However, this bias was negligible compared to therecord-high uncertainty that opened up.
Uncertainty about growth forecasts for 2016 and2017 is estimated to be near the historical medianbut has increased since early January 2016,
especially for 2017. This reflects heightened
volatility in oil prices, term spreads and equity
prices since the start of 2016. That said, forecast
uncertainty remains significantly below levels
observed during the Euro Area crisis in late 2011,let alone the global financial crisis of 2008-09.
The balance of risks is tilting increasingly to thedownside for 2016. Rising downside risks reflect,
especially, growth concerns captured in falling
equity price futures.

S P E C I AL FO C U S 2strengthening growth. For 2017, risks may beturning more balanced. Downside risks to oil
prices could boost global growth in 2017 andexpectations for rising term spreads may signal
receding recession risks. Similarly, a sharp
deterioration in investor sentiment could disrupt
financial markets and present a downside risk toglobal growth.
Some of the downside risks have materialized since
the January forecasts, resulting in forecast
downgrades for 2016 and 2017. That said, theprobability of global growth being 1 percentage
point lower than currently projected in 2017
remains around the average for the decade(19 percent as of May 2016), still well below
the probability in 2008 on the eve of the global
financial crisis (26 percent).8 The probabilityof growth falling to or below 1 percent (thegrowth rate likely associated with global recession)
is somewhat above the 10-year average for 200616.9

Conclusion
A complete assessment of global economic
prospects requires baselines forecasts as well as an
assessment of risks. The latter conveys to policy
makers a sense of the uncertainty prevailing at thetime of forecasting, which might vary withincoming data, past forecast performance, andchanging expectations. In this special focus threequestions have been addressed:•

What are the selected risk indicators used toassess forecast uncertainty? Three risk factors
were chosen for their tight connection with
global growth prospects: equity prices, term
spreads, oil prices.
Changes in the
distribution of forecasts for these underlying
risk factors are mapped into a distribution ofrisks for global growth.
How can different risk factors be combined ina single fan chart? Signals extracted from the
distribution of individual risk factors are

Compared to the January 2016 projection, upsiderisks to the baseline forecast have decreased, withequity markets suggesting a lower probability of•

6The ordering of the variables used in the Cholesky decompositionis as follows: global term spread, stock-market returns (S&P500), oilprices, and global growth. The variance decomposition results show
that, historically, other factors not included in the analysis explain
more the variance of global growth forecast errors than the threeselected risk factors in the short-run (see Annex Table SF2.1)
7The risk weights can be adjusted to reflect judgment when there
are significant divergences between market perceptions and WorldBank Group assessments of risks (Blix and Sellin 1997).

8The probability of global growth being 1 percent lower thancurrently projected for next year averaged 18 percent during 2006
and 2015, peaking at 26 percent in 2008.
9The probability of growth falling below 1 percent is 5 percent,just above the 2006-16 average (excluding the global recession 2009)of 3.5 percent for the current year and 10 percent for the next year.

83

84

S P E C I AL FO C U S 2•

aggregated using weights estimated from avector autoregression model of global growthon the risk indicators. This approach allows
individual risk factors to impact forecast
uncertainty and the balance of risks differently
at different forecast horizons.
What is the current balance of risks to global
growth? Uncertainty about growth forecasts
for 2016 and 2017 is estimated to be near thehistorical median but has increased since early
January 2016, especially for 2017. Thebalance of risks to global growth forecasts for

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

2016-17 has tilted further to the downside
since January 2016.
Some downside risks have materialized since theJanuary 2016 forecasts. As a result, a forecast
downgrade has accompanied rising uncertainty
around global growth forecasts and a balance ofrisks that is increasingly tilted to the downside.
Given the already-weak global growth prospects in
2016, the probability of global growth falling to or
below 1 percent in 2016 is above its historical
average.

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

S P E C I AL FO C U S 2

ANNEX SF2.1 Estimating the distributionof the global growth forecast
This annex provides the technical details ofassessing the uncertainty surrounding the GEP
global growth forecast. For computational
tractability and in line with previous authors, a
two-piece normal distribution is used tocharacterize both global growth forecasts andindividual risk factors.10 The assumption of a twopiece normal distribution for global growth allows
asymmetry to be captured by a combination of themode and standard deviation of two individual
normal distributions. The skewness and standard
deviations of the risk factors are directly computedfrom the distributions of the market-based andsurvey-based data.

global investors’ risk aversion (Adrian andShin 2014, Bekaert, Hoerova and Lo Duca2013). The implied volatility of the S&P 500
returns at 6- and 18-months-ahead option
contracts at 100 percent moneyness isobtained from Bloomberg and used as a proxyfor equity market uncertainty.
•

Term spreads. Term spreads (difference
between long and short-term nominal interest
rates) embed both inflation and real
equilibrium interest rate expectations, which
are tightly connected to growth prospects(Cieslak and Povala 2014). A rapid decline interm spreads is seen as a predictor of increased
recession risks.12 The dispersion of term
spread forecasts therefore captures uncertainty
surrounding growth prospects while a left
hand shift in their distribution signals a
predominance of downside risks. Current andnext-year term spread forecasts are compiled
from monthly surveys published byConsensus Economics from January 2006 to
May 2016. A global term spread is proxied by
GDP-weighted (at 2010 prices and exchange
rates) term spreads across G20 economies.

•

Average of Brent and WTI crude oil forward
prices. Abrupt changes in oil prices makegrowth prospects more uncertain. A supplydriven decline in oil prices raises global
growth prospects (Baffes et al 2015; Kilian2014). As in the case of the S&P 500, theimplied volatility at 100 percent moneyness ofBrent and WTI crude oil prices at 6- and 18months-ahead option contracts are obtained
from Bloomberg and used as a proxy for crude
oil market uncertainty. Crude oil prices
implied volatility is obtained by taking asimple average of that of Brent and WTI.

Assessing uncertainty in the global growthforecast
The degree of uncertainty surrounding theforecast points relative to historical levels of
uncertainty is measured by the mean square errorsof historical forecast. As in Kannan and Elekdag(2009) and Blix and Sellin (1998) global growthrisk is assumed to be based on an assessment of
the selected risk factors.
Broadly in line with Kannan and Elekdag (2009),
the selected global risk factors include risks to oil
prices, global stock markets (as proxied by the
S&P500 index) and a GDP-weighted average ofterm spreads in G20 countries (see more extensive
discussion in the main text of this Special
Focus).11•

Equity prices. Equity prices futures—
especially the Standard and Poor’s S&P500
index—arepositively
correlated withprospects for the U.S. and global economy.
Their implied volatility signals changes in

10For more properties of the two-piece normal distribution, seeKannan and Elekdag (2009).
11Kannan and Elekdag (2009) also include U.S. inflation as a risk
factor to proxy the risks to U.S. monetary policy. However, for mostcountries, especially emerging markets and developing countries(EMDE), the most immediate risks to monetary policy are alreadycaptured by equity prices and term spreads.

12Harvey (1989), Estrella and Hardouvelis (1991), Estrella andMishkin (1996), Haubrich and Dombrosky (1996), Dueker (1997);
Kozicki (1997), Dotsey (1998), Stock and Watson (2003), and Kao
et al. (2013).

85

86

S P E C I AL FO C U S 2Changes in risk stemming from these risk factors
signal a change in the distribution of global
growth forecast. The current measure of the hperiod ahead global growth forecast uncertainty
is assumed to be linearly related to its
historical level as:

where
is the mean square errors of thehistorical global growth forecast andis ascaling parameter for a given forecast horizon hcalculated as:

where
is the current measure of h-periodahead forecast uncertainty extracted from risk
factor j andthe corresponding historicalmeasures andis the weight (defined to bepositive) of factor j in explaining the forecast
errors variance of global growth.
is the weightof other factors not included in the analysis. By
construction, the weight parameters for a given
forecast horizon h are constrained to add up to 1:

The parameter amplifies or dampens historicaluncertainty by the uncertainty surrounding
individual risk factors. A responsive to variationsin uncertainty of the risk factors adds objectivity
to the assessment of global growth uncertainty.
Notice that subjective judgements can be allowedin the computation of the parameter to reflect
the forecaster’s view of the current state ofuncertainty (Blix and Sellin 1997). For example, if
for any reason the forecaster view is different fromthe market predictions, the parametercan bemodified to allow the forecaster to discount thesignals extracted from the market.
A starting point (baseline) of the analysis would be
the case where =1. In this case global growthforecast uncertainty is equal to its historical level.
When, current information on risk factors(market- and survey-based) signals that global
growth forecast uncertainty is larger thanG L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

historical uncertainty and vice versa when
The intuition behind the expression ofis that an increase in uncertainty of the risk
factors relative to their historical levels will
increaseand thus signal an increase inuncertainty of global growth. For example, if there
is no change in uncertainty of all risk factors
relative to their historical levels—that is—this would imply that = 1 and thatthe global growth forecast uncertainty remains
unchanged relative to historical levels.
The weight parameters
are estimated as theshares of the variance of global growth forecast
errors explained by forecast error of risk factor j.
This is calculated in the variance decomposition at
a given horizon h of global growth forecast error ina vector autoregression (VAR) with orthogonalized
error terms:

whereis the variance of global growth own h-period ahead forecast error, that is, the forecast
errors due to other factors of global growth
not included in the analysis.
Both sides of equation (4) are divided by thehistorical uncertainty of global growth
for agiven forecast horizon:

Equations (5) and (1) – (2) are equivalent with the
terms

and

as the sharesof variance of the global growth forecast errors at agiven horizon explained by risk factor j and by
global growth’s own forecast error, respectively.
Estimates of these parameters can be obtained by avariance decomposition analysis in a VAR
including global growth and the selected risk
factors. Notice that in the analysis, thecontribution of other factors to the uncertainty of
global growth forecast at a given horizon h—that
is,—is kept constant at its historical average.

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

A. VAR-based estimates•

Estimating weights for dispersion. The
weight assigned to each risk factor is estimatedas the share of the global growth forecast error
variance explained by each of the risk factors.
The variance decomposition is derived from arecursive identification based on theassumption that oil prices are mostly driven
by supply factors as in the analysis of spillovers

13To ensure that risks are not perpetually skewed in one direction,over the full horizon of historically available data, the skewness ofeach risk factor is adjusted for its mean over the full time series.

3

Percent
550 percent
80 percent
90 percent
Baseline
90 percent in JAN16
3

1

1

3

Source: World Bank Staff estimates.
Note: “90 percent in JAN16” is the 90 percent confidence interval of a fan chart based on data
available for the January 2016 Global Economic Prospects report.

(World Bank 2016a). The ordering of thevariables used in the Cholesky decompositionis as follows: global term spread, S&P500, oilprices, and global growth. The derived
dispersion of the forecast error distribution isscaled to match the mean square root of past
forecast errors since 2010.
•

Estimating weights for skewness. The weightassigned to each risk factor in the estimationof global growth skewness is estimated using
the impulse responses of global growth at theforecast horizons of interest (2, 4, 6, and 18
quarters) from the same VAR. The Choleskyordering is the same as for the estimation ofweights for dispersion.

As a result, each of these recovered statistics
characterizing the shape of the global growthforecast distribution is time-varying, reflecting
shifts in the distribution of the underlying risk
factors.
As a robustness check, the constant OLS-derived
weights proposed by Kannan and Elekdag (2009)
are estimated (Annex Figure SF2.1). The OLSbased approach produces a smaller variance of
global growth forecast than the VAR approach.
This reflects the presence of other risk factors thatare not captured in the OLS estimates of Kannan
and Elekdag (2009) but are important residual
terms in the VAR estimates.

2017

2016

2015

2017

5

1

2014

5

1

Estimating risk weights
As baseline, a vector autoregression (VAR)
approach is used. The VAR includes the global
term spread, the first difference in the log S&P500
Index, the log of crude oil prices (de-trended), andglobal growth. Two lags are selected based on one
or more information criteria. Impulse responses
and variance decompositions are evaluated at theforecast horizons of 2, 4, 6, and 8 quarters (Annex
Table SF2.1). Quarterly data from 1991Q12015Q3 are used in the estimation.

B. OLS-based estimates

Percent
50 percent
5
80 percent
90 percent
Baseline
90 percent in JAN16
3

2016

where
is the weight associated with the risk
factor j at the forecast horizon h.13 Equation (6) isan approximation of the true forecast error
skewness. The parametercan be thought ofas the elasticity of h-period ahead global growthwith respect to risk factor j. Notice that thecontribution of each risk factor to the skewness ofglobal growth depends on both its skewness andweight. The weight parameters are thus asimportant as the skewness of the risk factors in theestimation of the balance of risk of global growth.

OLS-based risk weights suggest lower risks to growth and a smaller
downside bias than VAR-based risk weights, especially in 2016. This
reflects the failure of OLS estimates to take into account the persistence ofgrowth shocks.

2015

It is assumed that the skewness of the global
growth distribution can be approximated as alinear combination of the skewness of the selectedrisk factors as in Blix and Sellin (1998). Denotebyandthe skewness of h-period ahead
forecast of global growth and risk factor jrespectively:

87

ANNEX FIGURE SF2.1 Risks to growth: January andJune 2016

2014

Assessing the balance of risk to global
growthS P E C I AL FO C U S 2

S P E C I AL FO C U S 2

88

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ANNEX FIGURE SF2.2 Probability of growth outcomes
The probability of global growth falling below the baseline forecast of 2.4
percent in 2016 and 2. 9 percent in 2017 is 54 and 52 percent, respectively
and, based on OLS estimates, 40 and 51 percent, respectively.
A. Probability of global growth below
threshold: VAR-based estimates

B. Probability of global growth below
threshold: OLS-based estimates

Percent
100

Percent
100
2016
2017

80

2016
2017

80

60

60

40

40

20

20

0

The methodology described above yields themoments of the two-piece normal distribution of
global growth: dispersion, mode (the June 2016
Global Economic Prospects forecasts), andskewness. The corresponding cumulative density
function of global growth can be derived. Based on
this, the probability of growth falling below any
threshold can be calculated (Annex Figure SF2.2).

0
0.0

1.4 1.9 2.4 2.9
Threshold (percent)

3.5

4.0

0.0

1.4 1.9 2.4 2.9
Threshold (percent)

3.5

4.0

Source: World Bank Staff estimates.

ANNEX TABLE SF2.1 Global growth dispersion weights: VAR estimates
OLS-based
weights

VAR-based weights
6-monthsahead

12- months
ahead

18-months
ahead

24-months
ahead(All horizons)

S&P500 (β1)

0.25

0.22

0.14

0.11

0.23

Term spread (β2)

0.01

0.03

0.06

0.15

0.48

Oil price (β3)

0.01

0.17

0.40

0.42

0.27

Other factors (βε)

0.73

0.58

0.40

0.30

-

Source: World Bank staff estimates.
Note: VAR-based results are variance decomposition weights derived from a VAR of oil prices, S&P500, term spread and global growth—they are calculated as the share of variance of
global growth explained by selected risk factors and other risk factors not included in the analysis. OLS-based weights are the absolute values of the coefficients obtained from an OLSregression of global growth on oil prices, S&P500 and global term spreads. Regressions use annual data for 1982-2014.

ANNEX TABLE SF2.2 Global growth skewness weights: OLS estimates
OLS-based
weights

VAR-based weights
6-monthsahead

12- months
ahead

18-months
ahead

24-months
ahead(All horizons)

S&P500 ( α1)

0.36

0.40

0.49

0.47

0.23

Term spread (α2)

0.1

0.14

0.41

0.52

0.48

Oil price (α3)

-0.06

-0.21

-0.76

-0.82

-0.27

Source: World Bank staff estimates.
Note: Impulse responses-based weights are derived from a VAR including in this order: oil prices, S&P500 Index, term spread and global growth. The responses of global growth to own
innovations are not presented here. OLS-based weights are derived from OLS-regression of global growth on oil prices, S&P500 and global term spreads. Regressions use annual data for1982-2014

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

S P E C I AL FO C U S 2

89

ANNEX TABLE SF2.3.A Literature review: Fan chart construction methodology

AuthorCountry/
Variable ofinterest

Banco Central
do Brasil,
Inflation Report,
Dec. 2015

Brazil.
Inflation, real
GDP growth

Asymmetric fan chart based on historical forecast errors.

External and domestic
developments: global demand,commodity prices, financial market,
and GDP growth. Inflation.

Bank of
Canada,Monetary Policy
Report, Jan.
2016

Canada.
Inflation,
core inflation

Fan chart based on Bank of Canada forecast errors and survey
professional forecast data.

Inflation, real GDP growth.

Canada,Parliamentary
Budget Office,Aug. 2010

Canada.
Budgetbalance

Uses the procedure proposed by Kannan and Elekdag (2009) toconstruct the forecast distribution of Canadian Parliamentbudget projection in 2010.

Real GDP, U.S. growth, U.S. term
spread, oil prices, budget deficit.

Banco Central
de Chile,
Monetary Policy
Report, Feb.
2015

Chile.
Inflation, realGDP

Fan chart based on historical forecast errors and allowing
subjective assessment of risk.

Global demand, commodity prices,financial market, GDP growth,
inflation.

Michal et al.
(2014)

Czech
Republic.
Inflation, real
GDP growth,interest rate,exchange
rate

BVAR forecast model and minimum distance method in theconstruction of a fan chart for inflation, real GDP growth, andinterest and exchange rate forecasts. Assess the Zero Lower
Bound of interest rate effect on the fan chart and propose a test
procedure that evaluates the severity of macroeconomic risk
factors included in the central bank financial stress andmacroeconomic outlook test model. Data are from 1998Q1 2012Q2.

CPI inflation, real GDP growth,
3-month interest rate, nominal CZK/EUR exchange rate.

National Bankof Czech
Republic

Czech
Republic.
Inflation, real
GDP growth,interest rate

Fan chart based on historical smoothed forecast errors.

Inflation, real GDP growth.

Alvaro andMaximiano(2003)

Euro Area.
Inflation,
GDP growth

A critique to the Bank of England linear approximation of theforecast distribution and the independence of risk factors
assumptions. Proposes an alternative density to the Two-Piece
Normal (TPN) density. Use of VAR for the baseline forecast.

Real GDP growth, inflation,commodity prices index, effective
exchange rate, real GDP growthoutside the Euro Area.

Smets and
Wouters (2004)

Euro Area.
Many macro
variables

Forecasts the baseline using BVAR DSGE model.

Many macro variables including
GDP, consumption, investment,
employment, and inflation.

Reserve Bankof India, Apr.
2016 (Banerjee
and Das 2011)

India.
Inflation, real
GDP growth

Fan charts for inflation and GDP growth are constructed basedon historical forecast error variances.

Wholesale price index inflation rate,
real GDP growth, international
investment position, real effective
exchange rate, M1 money
aggregate.

Bank of Israel,
Monetary Policy
Report, H12015

Israel.
Inflation,interest rates

Uncertainty results from shocks to endogenous variables whose
distribution is based on their past developments.

External and domestic
developments: global demand,commodity prices, financial market
index, real GDP growth, inflation.

Japan.
Inflation, real
GDP growthDistributions of forecasts are based on the Policy Board
members’ assessment of uncertainty and their judgement of thebalance of risk associated with their forecasts. The distributionsof Board members forecast are presented to illustrate the extent
of uncertainty and balance of risk associated with the
projections.

Inflation, real GDP growth.

Bank of Japan,
Outlook for
Economic
Activity andPrices, Jan.
2016

Methodology

Variables included

90

S P E C I AL FO C U S 2

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ANNEX TABLE SF2.3.A Literature review: Fan chart construction methodology (continued)
AuthorCountry/Variableof interest

Methodology

Variables included

Banco dePortugal,
Economic( 2015)

Portugal. Inflation,
real GDP growth

Fan chart on inflation and real output growth based on subjective
assessment of uncertainty and balance of risk.

Inflation, real GDP growth.

South African
Reserve Bank,MPR (2015)

South Africa.
Inflation

Fan chart for inflation and growth in the semi-annual Monetary
Policy Review to communicate the view of the MPC on the
distribution of risk around the SARB inflation forecast.

Global demand, commodity
prices, domestic supply
factors, GDP growth,
inflation.

Blix and Sellin(1998)

Sweden. Inflation,
GDP growth

Methodology to assess uncertainty in GDP growth and inflation
using uncertainty and balance of risks extracted from macro risk
factors. Allows for subjective assessment of the current risk
(relative to historical levels) by introducing judgments or expert
views on the current balance of risk in the risk factors.

Inflation rate, GDP growth,
other exogenous macro
variables.

Sveriges
Riksbank,
MPR (2016)

Sweden. Inflation,
GDP growth, repo
rate

Baseline forecasts for inflation, Riksbank repo rate, and real GDP
growth using Riksbank historical forecast errors.

Inflation, GDP growth, repo
rate, global developments,
and Forex variables.

Board ofGovernors of
the Federal
Reserve
System, Feb.
2016

United States. PCE(personal
consumption
expenditure)
inflation, real GDP
growth,unemployment

Density of individual forecast series are based on Board members’
assessment and judgement of the balance of risk. Histograms ofindividual series are presented to illustrate the distributions of theforecasts.

Global demand, commodity
prices, financial markets
index, unemployment, GDP
growth, inflation.

Britton and
Whitley (1998)

United Kingdom.
Inflation, real GDP
growthMethodology of U.K. Inflation Report fan chart construction. Fanchart is based on historical forecast errors variance of theMonetary Policy Committee inflation forecast.

Retail Price Index (RPIX)
inflation, real GDP growth.

Cogley et al.
(2003)

United Kingdom.
Inflation

BVAR forecast model and minimum entropy method in theconstruction of a fan chart for inflation forecast. The paper
assesses the effect of parameter uncertainty on inflation forecasts
and compares the BVAR fan chart with the one produced by the
Bank of England. The sample used is from 1957Q1 to 2002Q4.

Output gap, RPIX inflation,
3-month Treasury Bill rate.

Wallis (2004)

United Kingdom.
Inflation

Evaluates the Bank of England and the National Institute of
Economic Social Research density forecasts using data up to
2003Q4.

Inflation.

U.S.
Congressional
Budget Office(2007)

United States.
Budget balance

Fan chart for budget balance elements including revenue,
expense, and debt. Fan chart is based on historical forecast errors.
The revenue historical forecast error is decomposed into cyclicaland noncyclical components using OLS regressions of revenue
forecast error on a measure of business cycle (output gap). The
distribution of the revenue forecast is predicted by making
assumptions on the cyclical and non-cyclical components andusing the OLS estimation coefficients as weights.

Primary surplus/deficit, debt/
GDP, GDP growth.

Gürkaynak etal. (2013)

United States.
Inflation, real GDP
growth, interest
rate.

Assesses the performance of Dynamic Stochastic General
Equilibrium (DSGE) model forecast against different reduced-form
models (RW, AR, VAR, BVAR) out-of-sample from 1992Q1 2006Q1.

Real GDP growth, inflation,
Fed funds interest rate.

Wolters (2015)

United States.
Inflation, real GDP
growth, interest
rate.

Evaluates the accuracy of point and density forecasts from various
DSGE models using real-time dataset synchronized with Fed's
Greenbook projections. Forecast performance is compared against
BVAR-based forecast and the Greenbook projections. Data usedcovers 1960Q1 - 2000Q3.

Real GDP growth, inflation,
Fed funds interest rate.

World (IMF's World
Economic Outlook,
Oct. 2008).
Forecast of global
real GDP growth

Incorporate market-based and survey-based relevant global growthrisk factors (inflation, oil prices, financial conditions) uncertainty
information in the construction of global growth fan chart.
Forecasted global growth uncertainty is estimated as a scaled
function of the historical uncertainty in growth. The scale parameteris a function of risk factors uncertainty. Use of data from 1970 to2007 to estimate the weight as elasticities by OLS.

Baseline: WEO's forecast ofreal GDP global growth.
Survey-based risk factors:
Consensus forecast of
inflation oil prices and term
spread. Market-based: S&P
500 option prices implied
volatility.

Kannan andElekdag(2009)

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

S P E C I AL FO C U S 2

91

ANNEX TABLE SF2.3.B Literature review: Estimation of weight parameters for risk factors
AuthorCountry/Variable

Methodology

1. Linear Approximation: Forecast points as input in the construction of the forecast distributions from key risk
factors
Elekdag and
Kannan(2009)

World, IMF's Oct 2008 World
Economic Outlook (WEO)/
Forecast of global real GDP
growthOLS estimation of the elasticity of global growth with respect toeach risk factor. Dependent variable: global growth;
Independent variables: lag of global growth and standardizedrisk factors

IMF, WEO Oct 2015

World /Forecast of global real
GDP growthSame as in Elekdag and Kannan(2009)

Blix and Sellin(1998)

Sweden/Inflation, GDP growth

Elasticity of inflation or the variable of interest with respect toeach risk factor. Does not suggest any estimation method

2. VARs and DSGE Methods: Forecast distribution is inferred directly from the forecasting model
Cogley et al (2005)

United Kingdom/Inflation

The weight parameters are obtained
stochastic volatility

from BVAR with

Alvaro andMaximiano (2003)

Euro Area/ Inflation, GDP growth

The weight parameters are estimated in VAR forecasting model

Smets and Wouters(2004)

Euro Area/ Many macro variables

The weight parameters are obtained from the sticky prices
DSGE model using a Bayesian technique

Gürkaynak et al(2013)

U.S./Inflation, real GDP growth,Interest rate.

The weight parameters are obtained from an estimated DSGE
and a VAR and forecast performances of the two approaches
are compared

Wolters (2013)

U.S./Inflation, real GDP growth,Interest rate.

The weight parameters are obtained from a DSGE model and
BVAR model. The forecast performance of the two approaches
are compared

ANNEX TABLE SF2.3.C Literature review: Measurement of dispersion and skewness
AuthorCountry/Variable

Methodology

Mixon (2011)

U.S./S&P500(25delta Put - 25delta Call)/50 deltaBates (2001)

U.S./S&P500

Out of The Money (OTM) Call/OTM Put -1

Baksi et al (2003)

U.S./S&P100

The slope from regression log of Implied Volatility (IV) on log
of moneyness

Carr and Wu (2007)

Currencies: JPY/USD, GBP/USD,
GBP/JPY

Risk Reversal (RR[25])=25delta put-25delta call

Chicago Board of
Option Exchange(CBO) (2010)

U.S./SPX 500

Skewness = 100-10*(Price of Skewness )Elekdag and Kannan(2009)

U.S./SPX 500

Skewness of the risk neutral density

92

S P E C I AL FO C U S 2

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95

Regional growth slowed to 6.5 percent in 2015, and is expected to decelerate to 6.2 percent during 2016-18.
The gradual slowdown in China more than offsets a nascent pickup in activity elsewhere in the region,
supported by public investment and robust private consumption. Short-term risks are broadly balanced. On thedownside, they include a sharper-than-expected slowdown in China (although a low-probability scenario), andtighter business credit amid high corporate and household leverage in the region. Since the region is highly open
to trade, a pickup in advanced country growth, or further declines in commodity prices, are upside risks. Key
policy objectives include an orderly sectoral rebalancing and deleveraging in China, strengthened medium-term
fiscal and macro-prudential frameworks, and structural reforms to support long-term growth as the population
ages and the labor force grows more slowly.

Recent developments
Growth in the East Asia and Pacific (EAP) region
slowed from 6.8 percent in 2014 to 6.5 percent in2015, in line with previous expectations (Table
2.1.1). The deceleration reflects the gradualslowdown in China—from 7.3 in 2014 to 6.9
percent in 2015.1 Other commodity-importing
economies in the region saw an acceleration ofactivity, supported by solid domestic demand,
amid strong labor markets and low energy prices(Figure 2.1.1). The region as a whole has shown
resilience to external headwinds, including weaktrade and tightened financing conditions (WorldBank 2016a). This resilience partly reflects several
years of countercyclical policies that have helped
build policy buffers and buttress investor
confidence (Box 2.1).
China
In China, measures to address overcapacity,
including through cuts in investment, in energyintensive, highly polluting, inefficient enterprises
in older sectors (raw coal and crude steel for
Note: The author of this section is Ekaterine Vashakmadze. Research assistance was provided by Liwei Liu.
1Chinese official statistics indicate that growth has declined gradually from 10.6 percent in 2010 to 6.9 percent in 2015. Alternative
assessments by some analysts, weighing industrial activity more heavily suggest a sharper slowdown.

example), have caused a sharp drop in industrial
production (Figure 2.1.2). Weak external demandand periods of financial market volatility have also
contributed to the slowdown in activity.
Expansionary policies have moderated thedeceleration. In 2015, the People's Bank of China(PBC) implemented five cuts in the benchmark
one-year lending rate and four cuts to the reserve
requirement rate. A new round of fiscal stimulus
measures in 2016 includes tax cuts, increases inspending on social welfare (poverty reduction andsocial housing), and education. These measures are
expected to contribute to a record budget deficitof 3 percent of GDP in 2016. The PBC kept aneasing bias in 2016 by implementing additional
cut in reserve requirement rate in March.
The rapid growth of monetary aggregates,
accompanied by a rise in debt to over 250 percent
of GDP in March 2016, and of housing prices(especially in first tier cities), is raising concerns
about financial vulnerabilities. A tightening ofproperty market policy, including higher down
payment requirements for home buyers andtighter oversight on financing through the shadowbanking system, was implemented in March, andaims to moderate the surge in first tier housing
prices. There are also indications that credit
growth started to ease in April, reflecting newmeasures implemented by the PBC to temper
excessive borrowing.

100

C H A P TE R 2. 1

BOX 2.1.1 Macroeconomic policy developments
in selected EAP countries
The resilience of the region to financial market volatility
partly reflected several years of counter-cyclical policies.
Since 2013, these have helped build policy buffers, allowed
accommodative policies in 2015-16, and supported investor
confidence.

Monetary and exchange rate policy
Since the taper-tantrum of mid-2013, policy tightening inIndonesia (one of the emerging economies consideredfragile during that episode) and tighter macro-prudential
regulations in the rest of the region helped reduce
vulnerabilities. This, in combination with low inflation(helped by falling oil prices), enabled EAP central banks toease or maintain an accommodative monetary policy stancein late 2015 and early 2016 (Figure 2.1.3). For example,
Indonesia lowered policy rates in January, February, andMarch, in response to the stabilization of the rupiah and a
decline in inflation. Flexible exchange rates, occasionallysupplemented with foreign currency interventions tosmooth volatility, helped absorb shocks and prepare
economies for tighter external financing conditions.

Fiscal policy
In Indonesia and Malaysia, macroeconomic frameworks
have been improved by historic subsidy reforms, a series ofinvestment-friendly policy packages, and reduced
dependence on budget revenue related to the commodity
sector. Malaysia introduced a new Goods and Services Tax(GST) in April 2015 which, together with measures toreduce operating expenditures, helped achieve a target
deficit of 3.2 percent of GDP in 2015. Absent the
introduction of the GST, the deficit might have widened to
4.2 percent of GDP. Fiscal consolidation amid strong GDP
growth also helped to stabilize the government debt-toGDP ratio.
While Indonesia’s fiscal deficit widened in 2015, it
remained below the statutory limit of 3 percent of GDP on
the back of subsidy reform and cuts to low-priority
spending, helping to protect outlays for infrastructure andtargeted social assistance. In the Philippines, fiscal deficits
for the general government narrowed significantly, from 3.5
percent of GDP in 2010 to just under 1 percent in 2015,
helped by strong revenue collection through faster growthand improved tax administration.

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

China’s economic rebalancing continues, frominvestment to domestic consumption, and frommanufacturing to services (Lardy 2016). The
services sector, which now constitutes half of
nominal GDP, has overtaken manufacturing as
the major driver of growth and accounts for the
majority of new urban jobs. The financial sector
and other services were particularly dynamic in
2015. Inflation, which was less than 2 percent in2015 (below the PBC target rate of 3 percent),
picked up in early 2016. Producer price inflation,
which has been negative since March 2012,
showed signs of bottoming out.
Capital outflows in 2015 contributed to adepletion of about 20 percent ($0.8 trillion) of
foreign reserves compared with their August 2014
peak. About two fifths of these outflows wererelated to a repayment of short-term external debt
and diversification of assets by residents. The
remaining capital outflows may partly havereflected expectations of renminbi depreciation.
Tighter enforcement of capital controls andimproved communication of policy objectives,
including exchange rate policies, helped to clarify
policy objectives, stabilize financial markets, easepressures on the renminbi, and slow outflows.
China’s net foreign asset position remains firmly
positive (14 percent of GDP at the end of thethird quarter of 2015; BIS 2016; World Bank
2016b).
Rest of the region
Growth in the region excluding China has been
resilient. This reflects strong consumption,encouraged by low fuel prices, and public
investment. Plunging oil prices contributed to low
inflation, which allowed the region’s major central
banks to maintain accommodative policies. Strong
domestic demand underlay growth in commodity
importers (the Philippines) and an acceleration ofactivity in Vietnam and Thailand (Table 2.1.2).
Growth in net-fuel exporting Malaysia moderated
with output expanding by 5 percent in 2015,reflecting some softening in private consumption.
Growth in exporters of other commodities(Indonesia, Myanmar), showed signs of bottoming
out amid buoyant domestic demand and arecovery of public investment.

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

Growth is estimated to have slowed to 6.5 percent in 2015, and is
expected to decelerate further to 6.2 percent on average in 2016-18. This
reflects the gradual slowdown in China and a modest recovery in the restof the region. Activity in the region excluding China has been supported bypublic investment, but exports have been weak.
B. Real GDP

A. Real GDP
Percent, year-on-year2011-12
12
2016f
10

Outlook
The regional outlook remains broadly unchanged,with growth expected to ease slightly, but remain
above 6 percent through 2018. This assumes anorderly slowdown in China, where growth isprojected to slow gradually from 6.7 percent in2016 and 6.3 percent in 2018, which in turndepends on smooth progress of structural reforms,
with appropriate policy stimulus as needed. In theremainder of the region, growth will increase
gradually, from 4.8 percent in 2016 to 5.2 percent
in 2018, supported by rising investment in several

2015

Percent, quarter-on-quarter

10

2015Q1
2015Q3
2016Q1

2015Q2
2015Q4
2015

C. GDP components
Percent
17

2010-14

ThailandPhilippines

Malaysia

Indonesia

0

China

Commodity
importers (excl.
China)

Commodity
exporters

EAP (excl.
China)

China

5

D. Investment in selected economies
2015

2016f

1990-08

Percent

12

12

7

8

2

2011-122016f

2013-14
2003-082015
1990-08

Percent

2012

2013

2014

Commodity
importers(excl. China)

Commodity
exporters

F. Values of exports of goods andservices
2003-08

1.5

18

1990-08
2014-15

2010-13
2016Q1Indonesia

Percent of world
2011

China

Imports

Exports

Investment

Commodity importers(excl. China)

E. Foreign direct investment

2.00Philippines

Commodity
exporters

Consumption

Imports

Investment

Exports

Imports

Exports

Consumption

4

-3

China

8

1.0
-2

0.5
0.0

Commodity importers

Malaysia

Thailand

China

VietnamCommodity
importers(excl. China)-12

Commodity
exporters

Financial market conditions were volatile in early2016 but have stabilized since February, driven inpart by signs that monetary policy in advanced
economies will remain more accommodative thanpreviously anticipated. In recent months,
corporate and sovereign risk spreads, which rose
across the region in late 2015 and early 2016, haveeased, and regional currencies have appreciatedagainst the U.S. dollar, reflecting renewed capital
inflows and moderating outflows. Equity andbond markets have generally recovered over thesame period.

2013-141990-0886420Investment

Despite weak exports, compression of importvalues has led to increased or stable current
account surpluses in commodity importers,
especially in Thailand. In Vietnam, expansionary
fiscal policy and related strong imports
contributed to a lower current account surplus in2015 (Figure 2.1.4). In net-energy exporters such
as Malaysia, the current account surplus narrowed
but remained positive, with strong noncommodity export performance (particularlyelectrical and electronics manufactures).

FIGURE 2.1.1 EAP growth

Consumption

Export growth slowed in the region as a whole in2015, but started to show signs of bottoming out
in the first half of 2016. In contrast to the rest of
the region, exports in Cambodia and Vietnam
have remained buoyant throughout 2015—thesecountries benefit from sizeable foreign direct
investment into their highly cost-competitive
manufacturing, including production of garments
and other consumer goods. Growth in thePhilippines has been bolstered by steady inflows ofremittances and trade in services.

101

E A S T A S I A A N D P A C IF I C

Commodity exporters

Sources: World Bank World Development Indicators; International Monetary Fund, International
Financial Statistics; World Economic Outlook; Haver Analytics; United Nations Conference on Tradeand Development.
A. Commodity exporters include Fiji, Indonesia, Malaysia, Mongolia, Myanmar, Papua New Guinea,
Tonga, and Timor-Leste. Commodity importers include Cambodia, Lao PDR, Philippines, Samoa,
Solomon Islands, Thailand, Tuvalu, Vanuatu, and Vietnam.
B. The data are seasonally adjusted.
C and D. Commodity exporters include Indonesia and Malaysia. Commodity importers include Cambodia, Kiribati, Lao PDR, Philippines, Solomon Islands, Thailand, and Vietnam.
F. Exports of goods for China, Thailand, and Vietnam.

large economies (Indonesia, Malaysia, Thailand),low commodity prices (Thailand, the Philippines,
Vietnam), and strong consumption (thePhilippines).
Commodity exporters
Growth is expected to edge up in Indonesia toslightly over 5 percent in 2016 and 5.5 percent by
2018. Investment is likely to lead the recovery,

102

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FIGURE 2.1.2 China: Activity, exchange rates, andexternal accounts
Growth in China continues to slow gradually and is rebalancing. The
services sector, which now constitutes about half of GDP, has overtaken
industry as a driver of growth. Policy support has contributed to a reboundof activity in 2016. Financial markets have stabilized. Pressures on therenminbi (RMB) eased and capital outflows slowed after contributing toabout a 20 percent fall in foreign reserves from the August 2014 peak.

A. Real GDP growth

B. Purchasing Managers Index

Percent, year-on-year

Index
60

Industry and construction
Services
GDP

14
12
10

Composite

Manufacturing

Services
55

8
6

50

4
2

C. Nominal and real effective
exchange rates (REER)
Percent
Index. Jan. 2010=100
Onshore vs offshore rate spread (RHS)3
RMB per U.S.dollar
REER
CPI
based
120
2

2016Q1

2015Q3

2015Q1

2014Q3-1

2014Q190

2013Q30

2013Q1

1

100

2012Q3110

2012Q1

Apr-16Oct-15

Apr-15Oct-14Apr-14Oct-13Apr-13Oct-12

Apr-12

D. Balance of payments

130

2011Q3Oct-11

Q1
2016

Apr-11

2010 2011 2012 2013 2014 2015

Oct-10

Apr-1045

0Percent of GDP
10
8
6
4
2
0
-2
-4
-6
-8

Current accountNet capital flows
Change in reserves

Growth is expected to rebound gradually in 201718, as commodity prices stabilize and reforms are
implemented to spur investment, which has
already showed signs of bottoming out (IMF
2016e; World Bank 2015a).
Mongolia continues to adjust to the end of amining boom, with economic activity held backby weakening mineral exports and by government
efforts to contain public debt. In Myanmar,
growth is projected to accelerate to 8.4 percent on
average in 2017-18, reflecting continued strong
commodity-related investment. In Papua New
Guinea, growth should fall sharply in 2016
following strong output in 2015, the first full yearof production, and reflecting domestic adjustment
to low liquefied natural gas (LNG) prices. In
Timor-Leste, growth in the non-oil economy isexpected to rebound to 5.5 percent on average inthe medium term, with investment, especiallypublic sector construction projects, the major
driver of growth.
Commodity importers

2010

2011

2012

2013

2014

2015

Sources: World Bank; Bloomberg; Haver Analytics; International Monetary Fund, International Financial Statistics.
B. Value greater than 50 indicate expansion. Data are seasonally adjusted, rolling 3-month average.
D. Net capital flows include net errors and omissions.

helped by an acceleration of public spending.
However, with external demand still facing
headwinds, this projection depends on theimplementation of an ambitious public
investment program and the success of recent
government reforms to reduce red tape anduncertainty for private investments (IMF 2016e,
World Bank 2016c).
In Malaysia, growth should slow to around 4.4
percent in 2016, as the economy adjusts to weakcommodity prices and public spending cuts due tolower natural resource sector revenues. Tight labormarket conditions are expected to underpin solid,
albeit moderating, domestic demand growth.
Financial conditions are likely to remain benign,
but credit growth will continue to moderate,
reflecting tighter macro-prudential policies.

Among the large developing ASEAN economies,
Vietnam and the Philippines have the strongest
growth prospects. In the Philippines, growth isprojected to firm to 6.4 percent in 2016, with anaccelerated implementation of public-private
partnership projects and strong domestic demand.
The country benefits from diversified export
markets and low global commodity prices. In
Vietnam, output is expected to expand at an
average of 6.3 percent in 2016-18, with all
categories of demand buoyed by strong foreign
directinvestment,
growing
exportsofmanufactures, and solid labor markets. In
Thailand, growth is expected to strengthen
gradually as investor confidence returns, but islikely to remain below 3 percent in 2016-18,
reflecting weak global trade.
Growth in several of the smaller economies in theregion should be supported by strong FDI. They
are also likely to benefit from export growth (suchas garments in Cambodia and electricity in Lao
PDR), despite weak global demand, reflecting
competitive price advantages. Growth inCambodia will to ease only slightly and should

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

Policy challenges

2011-122013-15

Q1 2016

Percent

2011

2012

2014

2015

18
13
8

Percent

2011
2016

2012-14
2003-08

Philippines

Malaysia

Commodity exporters

Commodity importers

D. Ten-year Treasury Bond yields
2015

Percent
12

2011-122013-15

2016

ThailandC. Inflation (year-on-year)

10
8
6
4
2
0

Indonesia

ThailandPhilippines

Commodity importers

Philippines

Commodity exporters

Vietnam

Malaysia

3
-2

9
6

Commodity exporters

Vietnam

Malaysia

0Indonesia

Commodity
importers(excl. China)

Commodity
exporters

EAP (excl.
China)

3

Commodity importers

Sources: World Bank; Haver Analytics; International Monetary Fund, International Financial Statistics.
A. Policy rates are average of end-of-period data.
B. Average growth from January to August for 2015.
C. 2016 is an average of January-April.
D. 2016 data are through May.

Key policy challenges for China include managing
a gradual slowdown and rebalancing demand fromexports and investment to domestic consumption.
There is also a pressing need to reduce leverage—
particularlyinindustrial sectors where
overcapacity is most evident and in areas where
credit growth has been exceptionally high—through strengthened market discipline in thefinancial sector.2 The use of short-term countercyclical fiscal measures would help avoid a sharp

slowdown in growth, but it would need to beundertaken within a medium-term fiscal
consolidation framework. In particular, thegovernment should reduce its extensive contingent
liabilities to strengthen its government sheet(World Bank 2015b, 2016a; IMF 2015b). Reformof Chinese state-owned enterprises (SOEs)
represents a key policy challenge (Peng, Shi, andXu 2016). Sectors that are dominated by SOEs
should be opened up to competition, privileges
traditionally accorded to SOEs should be reduced
to ensure a level playing field, and inefficient
SOEs should be allowed to close in an orderly way(World Bank 2015b).

2Chen et al. (2015) suggest that larger and faster deleveraging in
the private sector (mainly driven by deleveraging in nonfinancial
corporates) is positively associated with growth afterwards. Deleveraging should focus on up-front balance sheet adjustments.

Recent turmoil in Chinese equity and currency
markets is a reminder that financial market
reforms that proceed faster than broader, market-

China

2013

Vietnam

Percent
14
12
10
8
6
4
2
0

B. Real credit growth

ThailandA. Policy rates

Indonesia

Short-term risks to the forecast are balanced. On
the downside, they include a sharper-thanexpected slowdown in China (although a lowprobability scenario), which would generate
sizable spillovers to the rest of the region. Within
China, excessive leverage in parts of the industrial
and real estate sectors is a growing vulnerability.
Estimates show that a one-off, 1-percentage-point
decline in China's growth rate would reduce
growth by around 0.4 of a percentage point inIndonesia, Malaysia, and Thailand. The
magnitude of spillovers from China would be
more pronounced if growth fluctuations areamplified via the confidence channel (World Bank
2016b). Other risks are related to weaker-thanexpected global trade and bouts of volatile andtighter global financial conditions, similar to theepisodes in August 2015 and January-February
2016. A renewed decline in commodity prices ismainly an upside risk for the region as a whole,which is a net commodity importer, but adownside risk for commodity exporters (WorldBank 2016d).

Since the taper-tantrum of mid-2013, policy tightening in Indonesia andstrengthened macro-prudential regulations in the rest of the region helped
reduce vulnerabilities—including a slower pace of real credit growth. This,in combination with low inflation, helped EAP central banks to ease or
maintain an accommodative monetary policy stance in late 2015 and early2016. Improved macroeconomic frameworks led to lower bond yields.

Mongolia

Risks

103

FIGURE 2.1.3 EAP excluding China: Selected indicators

China

remain around 6.8 percent in 2016–18. In Lao
PDR, growth is expected to remain at around 7
percent, supported by investment in the power
sector and growing regional trade integration.

E A S T A S I A A N D P A C IF I C

104

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FIGURE 2.1.4 EAP excluding China: Selected indicators(continued)
Plunging oil prices contributed to solid current account balances forenergy importers in the region, with the exception of Vietnam. Net energy
exporters fared less well. Financial market conditions were volatile in early2016 but have stabilized more recently. Regional currencies haveappreciated against the U.S. dollar since February, and equity and bondmarkets have generally recovered.

goal should be to facilitate reallocation of credit
and factors of production toward more productive
sectors, and away from declining sectors withexcess capacity. Reducing the role ofadministrative measures in the financial sector andallowing a more market-based allocation of capitalwould help.

A. Current account balances

Rest of the region

Percent of GDP
14

2011
2014

B. Current account balances, capital
flows and change in reserves

2012
2015

2013
2003-08

US$ billions
80

9

60

4

40

Current accountNet capital flows
Change in reserves

20

-1

0
-20
2012

2014

2015

2013-14

2015

2016

Vietnam

2011

Thailand-40

Philippines

VietnamPhilippines

T hailand

Indonesia

Malaysia-62013

Main commodity exporters Main commodity importers

C. Currency changes against the U.S.
dollar

D. Stock markets

Percent

Index, Jan. 2010 = 100
2011-12250

57

Sep 2011-May 2016

May 2013-Oct 2013

200

37

150

17

100

Commodity exporters

Commodity importers

50

Malaysia

0Indonesia

Solomon Islands

VietnamPhilippines

Thailand

Malaysia

Mongolia

Indonesia-3

Commodity exporters

For the rest of the region, the main policy
challenge is to achieve faster, more inclusive
growth, while preserving macro-financial stability.
A major contribution could be throughstrengthening medium-term fiscal and macroprudential frameworks (ADB 2016; World Bank
2016a). Medium-term fiscal consolidation tostabilize debt and reduce financing requirements
would be particularly important for economies
where domestic demand growth has beenaccompanied by high credit growth (Malaysia,
Thailand), or where external demand had
previously been boosted by the commodities
boom (Indonesia, Mongolia, Papua New Guinea),or where fiscal deficits remain elevated (Mongolia,
Papua New Guinea, Vietnam).3

Commodity importers

Sources: World Bank; Haver Analytics; Bloomberg; International Monetary Fund, International Financial Statistics.
B. Net capital flows include net errors and omissions.
C. Positive values indicate depreciation.
D. 2016 data are through May.

oriented and institutional reforms may exacerbate
volatility. Institutional reforms—such as better
corporate governance, enhanced auditing andaccounting standards, and stronger regulatory
frameworks—are also required. In the absence ofbroad reforms of this nature, inefficient resource
allocation, lower productivity growth, andwasteful investment may persist. This would
weaken growth, worsen the debt overhang, andheighten risks to the financial system (Prasad2016). To mitigate the negative effects of policy
uncertainty and foster confidence, clear official
communication is also essential.
Continued structural reforms will be required to
improve the longer-term outlook. Growth has
recently been supported by falling oil prices andmonetary and fiscal stimulus. To create theconditions for sustainable increases in income, theFiscal policy measures should be establishedwithin a medium-term framework to create fiscal
space and improve public expenditure efficiency.
This can be achieved through improved revenue
mobilization(Cambodia,
Indonesia,
thePhilippines, Lao PDR), reduced dependence on
fiscal revenue from energy sectors (Malaysia,
Mongolia, Papua New Guinea), and increased andmore efficient investment (Indonesia, thePhilippines, Thailand). Better fiscal institutions
would provide support for such reforms (WorldBank 2015c; IMF 2016c). For commodity
producers like Indonesia, Malaysia, Mongolia,
and Papua New Guinea, the decline in prices
underscores the need to enhance fiscal rules andimprove the operation of institutions designed to
manage commodity price volatility, such as
sovereign wealth funds. State-owned enterprisereforms, including measures to enhancetransparency and governance, could reduce drains
on fiscal resources (Thailand, Vietnam). In
3Notwithstanding some stabilization, total debt remains high in
China, Malaysia, and Thailand.

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

105

E A S T A S I A A N D P A C IF I C

FIGURE 2.1.5 Vulnerabilities
In China, a sharp increase in house prices in the first tier cities raised concerns about renewed price bubbles. Fiscal policies across theregion have generally tightened in line with medium-term fiscal objectives or remained neutral. Foreign currency reserves are generally
adequate, but in a few cases foreign indebtedness is high. Stocks of outstanding domestic debt remain elevated in China, Malaysia, andThailand.
A. Housing prices in China

B. Total debt and real GDP growth in China

C. Fiscal balances

Percent change, year-on-year

Percent of GDP

16

Percent of GDP
1

14

-1

12

-3

10

-5

50

8

-7

0

6

1st tier
1st tier (excl. Shenzhen)
2nd tier
3rd tier

40
30

Debt

300

Percent, year-on-year
Real GDP growth (RHS)

250
200

20

2009

2015

120
80
40

China

2015

2007

2015

2007

2015

2007

2015

2007

0

Malaysia Thailand Indonesia

External debt

While low inflation has allowed reductions inpolicy interest rates, central banks must be
watchful that a recovery in commodity prices does
not generate a sustained acceleration in inflation.
Banking sector reforms would be priorities for
improving efficiency and the allocation of capitalin Cambodia, Mongolia, and Vietnam.
Strengthened financial sector (macro- and microprudential) policies could help buttress financial
stability in the event of market turmoil. Relevant

VNM

CHN

IDN

Percent of total
100
External debt
Short-term debt (RHS) 80

60

60
40

30

Short-term debt

20
0

0

Sources: World Bank, Quarterly External Debt Statistics; Bank for International Settlements; Haver Analytics; International Monetary Fund, World Economic Outlook.
C. CHN = China, IDN = Indonesia, KHM = Cambodia, LAO = Lao PDR, MMR = Myanmar, MYS = Malaysia, PHL = Philippines, VNM = Vietnam.
D. For both private and public debt, 2015 data are the average of 2015 Q1, 2015Q2 and 2015Q3.
F. The data for China are for 2015Q3; for other countries, the data are for 2015Q4.

Thailand, where the closing of a large negative
output gap may require an expansionary fiscal
stance in the short-term, policies should also beframed in the overall context of a sustainablemedium-term fiscal framework.

MMR

LAO

MYS

PHL

2014

2013

2015

Percent of GDP
90

measures include risk-informed pricing, rigorous
borrower affordability assessments, supervisory
vigilance over underwriting practices and capital
adequacy, elevated reserve requirements, higher
liquidity ratios or loan-loss provisions, andappropriate loan-to-value limits (IMF 2016d).
Exchange rate flexibility should remain a key
shock absorber, especially where terms of trade
shocks are large (Mongolia, Papua New Guinea).
Reserve interventions may, however, be useful tosmooth unusually sharp exchange rate fluctuations
caused by short-term capital flows in countries
that have strong reserve positions.
Policy buffers—such as fiscal space (low publicdebt), and foreign currency reserves—are robust in

China

160

Q4 2015

Philippines

200

Deterioration

ThailandPrivate debt

Indonesia

Public debt

240

Improvement
F. External debt in EAP, 2015

Share ofreserves

Percent of GDP
Q1 2015
50
40
30
20
10
0

2012

2011

Percent of GDP

Share ofreserves

E. External debt, China

Share of GDP

D. Total debt in EAP

Share of GDP

2010

2009

2008

2007

Jul-11
Nov-11Mar-12
Jul-12
Nov-12Mar-13
Jul-13
Nov-13Mar-14Jul-14
Nov-14Mar-15
Jul-15
Nov-15
Apr-16

-10

2006

100

0

Malaysia

10

KHM

150

106

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FIGURE 2.1.6 Policy issues
Across the region there is a room to improve business environment toboost competitiveness.
A. Share of countries lower thanChina’s ranking

B. Share of countries lower than
EAP’s ranking

Share of countries
2010
100
86
80 86
64
65
60

Share of countries
2010
100
80
60
55
53
41
40 43
37

54

Latest53 52

52

Ease of Doing
Business

Economic
Freedom

Institutions

Open Budget
Index

20
0
Ease of Doing
Business

Institutions

Open Budget
Index

19

54

22
Economic
Freedom40200LatestSources: International Budget Partnership; World Economic Forum; Heritage Foundation;
Transparency International; World Bank, World Development Indicators.
Note: The Open Budget Index (OBI) is the world’s only independent, comparative measure of central
government budget transparency. The OBI assigns countries covered by the Open Budget Survey atransparency score on a 100-point scale using 109 of the 140 questions on the Survey. The latest
rank is for 2015. The Institution Rank data are from Pillar I. Institutions in Global CompetitivenessIndex. GCI is defined by the World Economic Forum. The variables are organized into twelve pillars
with the most important including: institutions, infrastructure, macroeconomic framework, health andprimary education and higher education and training. The GCI score varies between 1 and 7 scale,higher average score means higher degree of competitiveness. The latest rank is for 2015-16. Index
of Economic Freedom measures economic freedom of 186 countries based on trade freedom,business freedom, investment freedom, and property rights. Each of the ten economic freedoms
within these categories is graded on a scale of 0 to 100. A country’s overall score is derived byaveraging these ten economic freedoms, with equal weight being given to each. The latest rank is for2016. The Ease of Doing Business Index ranks countries against each other based on how theregulatory environment is conducive to business operation and stronger protections of property rights.
Economies with a high rank (1 to 20) have simpler and more friendly regulations for businesses. The
latest rank is for 2015.

China, and are generally adequate in the rest of
the region. Several countries, however, especiallythose with sizeable external financing needs,
should rebuild these buffers. High leverage is themost important vulnerability across the region.
Tighter macro-prudential policies in several of thelarger regional economies (Malaysia, Thailand, thePhilippines) have already resulted in moderating
credit growth. The stocks of outstanding domestic
debt (both corporate and household), however,remain elevated in Malaysia and Thailand (Figure
2.1.5).
Structural reforms should focus on productivity
growth, higher private investment, and greaterlabor force participation to mitigate the impact ofaging populations and slower labor force growthin China, Indonesia, Malaysia, and Thailand. In
some younger, lower-income countries, including
Cambodia, Lao PDR, Myanmar, Papua New
Guinea, the Philippines, and Timor-Leste, reforms
should aim at maximizing the potential
demographic dividend (ADB 2016; World Bank
2015d). Improvements in the business climate andreductions in the cost of doing business should
be a high priority in Cambodia, Lao PDR,
Myanmar, Papua New Guinea, Timor-Leste, andthe small Pacific Islands. These countries rank
low on the World Bank of Ease of Doing
Business Index (World Bank 2015e, 2016e).
Better performance in this regard will help
catalyze private investment and enhance
productivity growth.
Many countries in the region, especially
Cambodia, Lao PDR, Myanmar, Papua New
Guinea, Solomon Islands, also rank low on the2015 Corruption Perceptions Index reported byTransparency International, as well as on othergovernance indicators (Figure 2.1.6). Enhanced
transparency, strengthened accountability, andmore responsiveness by state institutions to theneeds of the private sector would bolster investor
confidence (World Bank 2016a). Other measures
to promote productivity include high-quality
education to further raise the skills of the labor
force. Reforms that raise the mandatory
retirement age for civil servants and increase
female participation would help increase labor
participation (ADB 2015).
Finally, deepening global and regional trade andinvestment integration through lower non-tariffbarriers would further boost productivity andcompetitiveness. New partnerships, including theTrans-Pacific Partnership agreement, signed in2015, and other regional trade agreements,
including the ASEAN economic community andtheproposed
Regional
Comprehensive
Economic Partnership, should all help anchor
structural reforms and raise potential growth in
the region.4

4Twelve countries in the Pacific Rim, including Malaysia andVietnam, recently concluded negotiations on the Trans-PacificPartnership (TPP).

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

107

E A S T A S I A A N D P A C IF I CTABLE 2.1.1 East Asia and Pacific forecast summary(Real GDP growth at market prices in percent, unless indicated otherwise)

2013
EMDE EAP, GDPa

2016f

2017f

2018f

7.1
6.8
6.5
6.3
6.2
6.1
0.1
0.0
(Average including countries with full national accounts and balance of payments data only)b

0.0

-0.1

EMDE EAP, GDPb
GDP per capita (U.S. dollars)
PPP GDPPrivate consumption

2014

2015e

(percentage point difference
from January 2016 projections)

2016f

2017f

2018f

2015e

7.1

6.8

6.5

6.3

6.1

6.1

0.1

0.0

-0.1

-0.1

6.4

6.0

5.7

5.6

5.5

5.5

0.0

0.0

0.0

-0.1

7.0

6.7

6.4

6.3

6.1

6.1

0.0

0.0

0.0

-0.1

6.8

6.9

7.0

6.9

7.0

7.0

0.1

0.0

0.0

0.0

Public consumption

7.7

4.3

6.4

6.1

5.9

5.8

0.1

0.0

0.0

0.1

Fixed investment

8.8

7.1

6.6

6.4

6.3

5.7

0.2

0.1

0.2

-0.2

Exports, GNFSc

7.2

6.5

2.5

3.4

4.3

4.8

-1.2

-0.9

-0.5

-0.4

Imports, GNFSc

Net exports, contribution to growth

8.5

5.7

2.1

4.0

4.8

5.4

-1.1

-0.7

-0.3

-0.2

-0.2

0.4

0.2

-0.1

0.0

-0.1

0.0

-0.1

0.0

-0.1

Memo items: GDP
East Asia excluding China

5.1

4.7

4.8

4.8

4.9

5.2

0.2

0.0

-0.1

0.1

China

7.7

7.3

6.9

6.7

6.5

6.3

0.0

0.0

0.0

-0.2

Indonesia

5.6

5.0

4.8

5.1

5.3

5.5

0.1

-0.2

-0.2

0.0

Thailand

2.7

0.8

2.8

2.5

2.6

3.0

0.3

0.5

0.2

0.3

Source: World Bank.
World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained inother Bank documents, even if basic assessments of countries’ prospects do not differ at any given moment in time.
a. EMDE refers to emerging market and developing economy. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. Excludes American Samoa
and Democratic People's Republic of Korea.
b. Sub-region aggregate excludes American Samoa, Democratic People's Republic of Korea, Fiji, Kiribati, Marshall Islands, Micronesia, Federated States, Myanmar, Palau, Papua New
Guinea, Samoa, Timor-Leste, Tonga, and Tuvalu, for which data limitations prevent the forecasting of GDP components.
c. Exports and imports of goods and non-factor services (GNFS).

TABLE 2.1.2 East Asia and Pacific country forecastsa(Real GDP growth at market prices in percent, unless indicated otherwise)(percentage point difference
from January 2016 projections)Cambodia

2013

2014

2015e

2016f

2017f

2018f

2015e

2016f

2017f

2018f

7.4

7.1

7.0

6.9

6.8

6.8

0.1

0.0

0.0

0.0

China

7.7

7.3

6.9

6.7

6.5

6.3

0.0

0.0

0.0

-0.2

Fiji

4.6

5.3

4.0

2.4

3.8

3.5

0.0

-1.1

0.7

0.5

Indonesia

5.6

5.0

4.8

5.1

5.3

5.5

0.1

-0.2

-0.2

0.0

Lao PDR

8.5

7.5

7.0

7.0

7.0

6.8

0.6

0.0

0.1

-0.1

Malaysia

4.7

6.0

5.0

4.4

4.5

4.7

0.3

-0.1

0.0

-0.3

Mongolia

11.6

7.9

2.3

0.7

2.7

6.2

0.0

-0.1

-0.3

-0.2

Myanmar

8.5

8.5

7.0

7.8

8.4

8.3

0.5

0.0

-0.1

-0.2

Papua New Guinea

5.5

8.5

8.6

3.0

4.1

2.9

-0.1

-0.3

0.1

-0.9

Philippines

7.1

6.1

5.8

6.4

6.2

6.2

0.0

0.0

0.0

0.0

Solomon Islands

3.0

1.5

3.3

3.0

3.3

3.0

0.0

0.0

-0.2

-0.4

Thailand

2.7

0.8

2.8

2.5

2.6

3.0

0.3

0.5

0.2

0.3

2.8

6.0

4.3

5.0

5.5

5.5

-2.5

-1.9

-1.5

-1.5

5.4

6.0

6.7

6.2

6.3

6.3

0.2

-0.4

0.0

0.3

Timor-Leste
Vietnamb

Source: World Bank.
World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained inother Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time.
a. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. Excludes American Samoa and Democratic People's Republic of Korea.
b. Non-oil GDP. Timor-Leste's total GDP, including the oil economy, is roughly four times the non-oil economy, and highly volatile, sensitive to changes in global oil prices and local
production levels.

Economic activity in emerging market Europe and Central Asia stagnated in 2015, driven by the deep recession
in the Russian Federation.1 Excluding Russia, regional growth remained at the 2014 rate of 2.5 percent. Turkey saw continued robust growth, while commodity exporters generally slowed. Despite the uptick in oil prices in
April and May, they remain at low levels and continue to exert pressure on key oil exporters, including Azerbaijan, Kazakhstan and Russia, where government policy buffers are eroding. Regional growth is expected to pickup to only 1.2 percent in 2016, as the Russian economy contracts further (albeit at a shallower pace) and political uncertainty in Turkey and Ukraine weighs on confidence. With a return to positive growth in Russia andUkraine, regional growth will accelerate to about 2.6 percent in 2017-18. Key downside risks include geopolitical flare-ups, pressures from persistently low oil prices, less favorable external financing conditions as substantial
bond repayments come due, and political polarization. Managing the adjustment to low commodity prices will
be a major policy challenge for exporters, especially in view of the limited scope for fiscal and monetary accommodation. Priorities for non-commodity exporters center on making the most of the lower fuel import bill andimplementing structural reforms to lift productivity and long-term growth.

Recent developments
Activity in emerging market and developing
economies (EMDE) of the Europe and Central
Asia (ECA) region contracted by 0.1 percent in2015, compared to the 1.8 percent expansion in2014 (Tables 2.2.1 and 2.2.2, and Figure 2.2.1).
The dip mainly reflected the ongoing recession in
Russia, which accounts for about 37 percent of
GDP in the region. Excluding Russia, regional
growth in 2015 was 2.5 percent, unchanged fromthe previous year’s pace. Recent data point toNote: The author of this section is Christian Eigen-Zucchi.
Research assistance was provided by Shituo Sun.
1The EMDE grouping for Europe and Central Asia adds Croatia,
Hungary, Poland, and the Russian Federation to the previous
developing economy grouping, and encompasses the following subgroupings and countries: The eastern part of the region comprises
Eastern Europe (Belarus, Moldova, and Ukraine), South Caucasus(Armenia, Azerbaijan and Georgia), Central Asia (Kazakhstan, Kyrgyz
Republic, Tajikistan, Turkmenistan, and Uzbekistan) and Russia; allexcept Belarus, Georgia, and Moldova are classified as commodity
exporters (commodities account for more than 30 percent of exports,
or a single commodity accounts for more than 20 percent of exports).
The western part of the region includes Central and Southeastern
Europe (Bulgaria, Hungary, Poland and Romania), the Western
Balkans (Albania, Bosnia and Herzegovina, Kosovo, the Former
Yugoslav Republic of Macedonia, Montenegro, and Serbia), Croatia,
and Turkey; all are classified as commodity importers.

continued weakness across much of the region, as
low oil prices put pressure on exporters(Azerbaijan, Kazakhstan, Russia), geopoliticaltensions dampen confidence (Russia, Turkey,
Ukraine), and external financing conditions
become more difficult with wide spreads andratings downgrades. Exchange rates have comeunder pressure, and in some countries nonperforming loans have ticked upwards or remain
at elevated levels. High inflation rates and efforts
to defend exchange rates have led to tight or procyclical tightening of monetary policy stances(Azerbaijan, Kazakhstan, Russia). The U.S. dollar
value of recorded remittances is estimated to havefallen by over 20 percent in 2015, led by a decline
in transfers from Russia (World Bank 2016f;
Figure 2.2.2).
The eastern part of the region comprises mostly
commodity-exporting countries and has seen the
biggest slowdown, especially among oil exporters(Azerbaijan, Kazakhstan, Russia), as economies
adjust to a deterioration in the terms of trade(Figure 2.2.3). With average oil prices falling by
47 percent to $51 per barrel in 2015, andtouching lows of under $30 per barrel in January
2016, export receipts and government revenues

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FIGURE 2.2.1 Key indicators
Growth came to a halt in the EMDE ECA region in 2015, as Russia went
into recession. A modest rebound is expected in 2016, but growth
projections have been revised downwards, especially among commodity
exporters, as low oil prices widen current account deficits and put
downward pressure on exchange rates.
A. EMDE ECA growth and forecast
revisions

B. Sub-region growth and forecast
revisions

Percent

Percent
6

EMDE ECAGEP Jan 2016 forecast

3

Commodity exporters
Commodity importers
GEP Jan 2016 forecasts

4

2

2
1

The western part of the region is comprised ofcommodity importers that are more closely linked
to, or are members of, the European Union (EU),and has been growing modestly. Lower fuel costs
are putting downward pressure on prices (Poland,
Turkey), and boosting consumer spending. In acontext of soft external demand from key trading
partners in the EU, growth will hinge on domestic
demand, both consumption and investment.
Policy uncertainty and geopolitical tensions
contributed to bouts of exchange rate volatility
during 2015.

0
0

-2

C. Current account balances

0

2018

2017

2016

2015

2014

2013

D. Nominal effective exchange rates

Commodity exporters
Commodity importers

Percent of GDP

-4

2012

2018

2017

2016

2015

2014

2013

2012

-1

-1

Index, 2010 = 100
120

Commodity exporters
Commodity importers

110

-2

100

-3
90

-4

-6
2012

2013

2014

2015

Jan-10Jun-10Nov-10
Apr-11
Sep-11
Feb-12
Jul-12
Dec-12
May-13Oct-13Mar-14Aug-14Jan-15Jun-15
Nov-1580-5Sources: World Bank; International Monetary Fund, World Economic Outlook (April 2016).
A. Dashed lines indicate projections.
B. GDP data are aggregations of all countries in each grouping. EMDE ECA commodity importers
include Albania, Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, Former Yugoslav Republic ofMacedonia, Georgia, Hungary, Kosovo, Moldova, Montenegro, Poland, Romania, Serbia, and Turkey.
EMDE ECA commodity exporters include Armenia, Azerbaijan, Kazakhstan, Kyrgyz Republic,
Russian Federation, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan. Dashed lines indicate
projections.
C. Data for groupings are simple averages for all countries where data are available.
D. Median nominal effective exchange rates of commodity exporters and commodity importers, wheredata are available. A decline denotes depreciation. Latest observations are December 2015.

have fallen, current account balances havegenerally weakened, and reserves and other buffers
have eroded. Commodity exporters have seen
sharp
exchangerate
devaluations
anddepreciations, which though necessary foradjustment, added strains to financial systems in acontext of vulnerabilities associated with the buildup of private nonfinancial debt (Chapter 1,
Special Focus 1). The ongoing recession in Russia
is bringing adverse spillovers through trade andremittances, which have fallen precipitously in
U.S. dollar terms. Turkmenistan and Uzbekistan
are also experiencing slowdowns in growth,
despite their strong buffers and limited economic
ties to the rest of the world.

Real GDP in Russia declined by 1.2 percent (yearon-year) in the first quarter of 2016, following the
sharp 3.7 percent contraction in 2015 (Figure
2.2.4). The Russian economy is struggling toadjust to continued low oil prices, trade embargoes
and geopolitical concerns. Though necessary tosupport the adjustment, tight fiscal and monetary
policies are also weighing on growth. The sharp
fall in oil revenues is weakening the fiscal position.
Even with across-the-board spending cuts, thecountry’s oil reserve fund is financing government
spending at a pace that may deplete its resources.
Interest rates are being maintained at 11 percent,despite the ongoing recession. With activity so far
in 2016 contracting more slowly than in 2015,
there are tentative indications that the decline insome sectors may be bottoming out. Industrial
production is recovering, despite shrinking
investment and restricted access to externalfinancing for Russian firms. After depreciating
sharply at the beginning of 2016, the ruble has
strengthened to levels last seen in mid-2015,
helping to reduce the rate of inflation from double
digits throughout 2015 to 7.3 percent in May
2016.
Growth in Turkey picked up to 4.0 percent in2015. Domestic demand was strong, despite theuncertainty associated with two rounds ofelections, and rising geopolitical risks (WorldBank 2016g). Lower fuel costs helped narrow thecurrent account deficit to 4.5 percent of GDP.
Indicators on industrial production, exports andretail sales suggest continued solid growth in thefirst half of 2016. However, tourism slowed
sharply so far this year, and geopolitical tensions(violence in the East, terrorist attacks inG L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

In Kazakhstan, growth decelerated to 1.2 percent
in 2015, from 4.1 percent in 2014, as the
economy adjusted to the decline in the price of oil(which accounted for 19 percent of GDP and 76
percent of exports in 2014), the deep recession in
Russia, and the slowdown in China. The
contraction in industrial production, exports, andretail sales persisted through the first quarter of
2016. The sharp devaluation, followed by themove to a floating exchange rate in August 2015,
boosted inflation and put pressure on domestic
borrowers, as about 30 percent of loans in thebanking system in mid-2015 were denominated inforeign currency, mostly U.S. dollars. While
policy interest rates were lowered by 200 basis
points to 15 percent in May, they remain elevatedas the authorities seek to support of the tenge,
sharply constraining domestic borrowing.
Government spending supported by a drawdownof the oil fund has provided a cushion, but buffers
are eroding.
Ukraine returned to positive growth of 0.1 percent(year-on-year) in the first quarter of 2016, and thecontraction of 9.9 percent in 2015 was not as

Remittances to the ECA region expressed in U.S. dollars fell by over 20
percent in 2015, led by a drop in flows from Russia, one of the biggest
sources for the region. Part of the fall is explained by exchange rate
movements. Lower remittances are impacting household consumption inrecipient countries.
A. Remittance inflows

B. Remittance outflows from Russia
and oil prices
US$, billions
US$ per barrel
Remittance outflows from Russia
Oil Price (RHS)
140

2015

2014

2013

2012

2011

2010

2009

2008

120
100
80
60
40
20
0

2007

Armenia

Bulgaria

Kyrgyz Rep.

Moldova,
Rep.

Tajikistan

Bosnia Herz.

Serbia

2015f

2006

2014

40
35
30
25
20
15
10
5
0

2005

2013

Romania

US$, billions
12
10
8
6
4
2
0
UkraineGrowth in Poland slowed to 3 percent year-onyear in the first quarter of 2016, easing from therobust expansion of 3.6 percent registered in2015. Private consumption and investment
growth accelerated in the first quarter oncontinued employment gains and low oil prices,
but public spending fell in part due to lower funds
from the European Union. Industrial production
grew strongly in the first four months of 2016,
and retails sales have also posted solid gains.
Consistent with weak price pressures across the
EU and falling oil prices, inflation has been
negative since mid-2014, and was -1 percent (year-on-year) in May 2016. Against the backdrop ofdeflation, the central bank has kept interest rates
at a record-low of 1.5 percent since March 2015.

FIGURE 2.2.2 Remittances

Uzbekistan

metropolitan centers, and the refugee crisis
emanating from Syria) are weighing on
confidence. In the three months to May, themanufacturing Purchasing Managers’ Index (PMI)
weakened to levels signaling contraction, andcapital inflows have been easing, pointing to somemoderation in growth ahead.

111

E U R OP E A N D CE N T R A L A S I A

Sources: World Bank 2016f; International Monetary Fund, Balance of Payments Statistics.
B. Oil price is the average crude oil price from World Bank Commodities Price Data. Remittanceoutflows for 2015 are estimates based on IMF Balance of Payments Statistics available up to 2015
Q3.

severe as previously anticipated. Other data so far
this year also suggest that the recession hasbottomed out. Following steep price increases in2014 and 2015 associated with the devaluation of
the hryvnia and price reforms, inflation slowed as
the currency stabilized, enabling a lowering ofpolicy interest rates to 18 percent in May. The
western part of Ukraine is not directly affected byconflict and is recovering. Still, exports andimports are down by more than half from their2012 levels and remain weak. The capacity of thebanking sector to lend is sharply constrained.
External financing remains costly, with average
spreads on euro and U.S. dollar-denominatedborrowings more than 400 basis points above
those of other countries in the region during thefirst quarter of 2016 (Figure 2.2.5). Additional
downgrades by ratings agencies could contributeto keeping spreads elevated. Tensions over a debt
dispute with Russia continue. The authorities areendeavoring to maintain progress on the reform
program agreed with the IMF, despite the fall of
the ruling coalition, which was replaced in midApril with an administration that has pledged tocombat corruption and promote closer ties with
the EU.
Several other countries in the region are
maintaining
robusteconomic
activity.

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FIGURE 2.2.3 Terms of trade
The sharp fall in commodity prices has led to substantial changes in theterms of trade in both commodity exporters and importers.
A. Terms of trade of selected
countries
2013

Index, 2012=100

2014

2015

Index, 2012=100130120Commodity exporters
Commodity importers

2015

2014

2013

2012

2011

2010

2009

2008

70
60

2007

TurkeyPolandRomania

SerbiaHungary

UkraineArmenia

K azakhst an

110
100
90
80

RussianFederation

120
110
100
90
80
70
60
50
40

B. Terms of trade: commodity
exporters and importers

Source: Haver Analytics.
B: Median of terms of trade data available for each sub-grouping. Latest observations are 2015Q4.

Turkmenistan and Uzbekistan grew by 6.5
percent and 8.0 percent in 2015, respectively,
helped by the deployment of strong buffers.
However, there was a deceleration relative to2014, and indications so far this year are of further
slowing. Also posting growth above 3 percent in2015 were Armenia, Kosovo, and Macedonia
FYR, all of which enjoy close economic ties with
the EU. In contrast, Belarus and Moldova, which
are closely connected to the Russian andUkrainian economies, went into recession in2015, and both encountered sharp falls inindustrial production in early 2016.

OutlookDespite some expected uptick from the soft
performance in 2015, prospects for the region
have generally slipped. Growth is subdued,
external accounts are under pressure, and exchange
rates are weakened, while policy uncertainty
continues. Geopolitical concerns, including ineastern Ukraine and the Caucasus, terror attacks
in Turkey, and the ongoing refugee crisis, areweighing on the outlook.
The continuing contraction in Russia keeps the
expected growth rate for ECA at about 1.2 percent
this year. Excluding Russia, forecast growth
accelerates to 2.9 percent. Activity in western ECA
will benefit from moderate growth in the EuroArea and strengthening domestic demand, with

subdued fuel costs boosting the purchasing powerof consumers. Growth projections for the mostly
commodity exporting eastern part of the region
have been revised downward relative to theJanuary 2016 Global Economic Prospects, amid theongoing adjustment to the terms of trade shock(affecting oil exporters especially, and to varying
degrees metals and agricultural commodities
exporters), with little scope for policy
accommodation to smooth the transition.
Across the largest countries in the region, there isconsiderable variation in prospects. Russia’s
economy is projected to decline by 1.2 percent in
2016, led by falls in private investment andconsumption, before returning to modest growthin 2017 (World Bank 2016h). Growth is expected
to come to a virtual stand-still in Kazakhstan in
2016, as falling oil revenues constrain public
spending and exchange rate pressures compel thecentral bank to maintain elevated policy interest
rates. Growth in Turkey is likely to slow in 2016,
partly due to lower net exports (falling tourism,
weak external demand, and trade restrictions with
Russia) and policy uncertainty weighing on
confidence. Economic activity in Poland will behelped by additional public spending in the formof monthly support payments for parents with two
or more children, and growth is forecast at about
3.5 percent in 2016-18. In the absence of an
escalation of conflict in the east, Ukraine’s
economy could return to modest growth in 2016,
helped by the real depreciation of the hryvnia,
efforts to boost exports to the EU market, andbanking sector reforms that will support a
resumption of lending.
The outlook for the external sector across theregion diverges between commodity importers andexporters, especially of oil. With commodity prices
projected to remain low for longer, exporters(Azerbaijan, Kazakhstan, Russia) face further
adjustment to the deterioration in the terms oftrade that is weakening current account balances,eroding reserves, and exerting pressure on
exchange rates (World Bank 2016i). Key priorities
include adjusting to lower government revenues
and mitigating financial sector risks in a context of
reduced fiscal space for potential financial sector
stabilization measures. Several neighboringG L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

countries are being adversely affected by spillovers
in the form of reduced trade and remittances(Armenia, Georgia, Kyrgyz Republic, Moldova,
Tajikistan). Trade embargos and quantitativetrade restrictions will affect Russia, Turkey, andUkraine. Commodity importers, however, willcontinue to reap windfalls in the form of low fuelprices, helping to strengthen current accountbalances and ease pressures on exchange rates.
Countries that are oriented towards, or are
members of, the European Union (Bulgaria,
Hungary, Poland, Romania, and increasingly
Ukraine) will benefit from some recovery in export
demand, supported by real exchange rate
depreciation (Bulgaria, Poland, Romania,
Ukraine). Ukraine will be helped by the accession
on January 1, 2016, to the Deep andComprehensive Free Trade Area with theEuropean Union.
External financing conditions are expected toremain challenging for several countries in theregion. Despite some easing of spreads in Marchand April, they remain elevated (Kazakhstan,
Russia, Turkey, Ukraine; Figure 2.2.5), anddowngrades in 2016 by ratings agencies (Armenia,
Azerbaijan, Croatia, Kazakhstan, Poland), andsanctions imposed on Russia have raisedborrowing costs or constrained access tointernational financial markets. With large
volumes of bonds falling due in 2016-18 (Russia,
Turkey), and current account deficits remaining
sizable in the baseline (Albania, Bosnia andHerzegovina, Georgia, Kosovo, Montenegro,
Serbia, Turkey), managing external financing willremain a priority. For Ukraine, this will also
require staying on track with the reform program
underpinning the debt restructuring agreement.
Geopolitical concerns and political uncertainty are
major factors weighing on baseline prospects in
ECA. The refugee crisis that is directly affecting
host countries (Turkey) and transit countries(Western Balkans) is posing enormous
humanitarian and political challenges. The
baseline forecast of strengthening growth in theregion is predicated on an easing of conflict in thesoutheast of Turkey and eastern Ukraine, and a
subsiding of terrorist attacks in urban centers in
Turkey.

E U R OP E A N D CE N T R A L A S I A

113

FIGURE 2.2.4 Recent developments at the country level
Growth performance continues to diverge between commodity exporters,
where activity contracted or slowed, and commodity importers, which haveseen a pickup. The steep fall in activity in Ukraine has bottomed out.

A. Russian Federation

B. Turkey

Percent, year-on-year
Percent of GDP
Current account (RHS)
6
6
Industrial productionGDP
4
4Percent, year-on-year
Current account (RHS)
8 Industrial production
6 GDP

2

2

Percent of GDP
12
9

4

6

2

3

0

0

0

0

-2

-2

-2

-3

-4

-4

-4

-6

-6

-6

-6

2012

2013

2014

2015

C. Poland

2013

Percent of GDP
12
8

2

4

0

0

-2

-4

-4

-8
2013

2014

2015

Percent, year-on-year
Current account (RHS)
Industrial production
8 GDP
6

2015

2016

2

0

0

-2

-2

-4

-4

-6

-6
2012

2013

Percent, year-on-year
Percent of GDP
Current account (RHS)
Industrial production
5
4
GDP
0
0

10

5

-4
-8

-15

-12

-20

-16

-25

-20
2013

2014

2015

2016

6
4

F. Azerbaijan

-5

8

2

2016

-10

Percent of GDP

4

E. Ukraine

2012

2014

D. Kazakhstan

Percent, year-on-year
Current account (RHS)
6 Industrial production
GDP
4

2012

-9
2012

2016

2014

2015

2016

Percent, year-on-year
Percent of GDP
Current account (RHS)
28
Industrial production
GDP
21
14
7
0

0
-7

-5

-14
2012

2013

2014

2015

2016

Sources: Haver Analytics; International Monetary Fund, International Financial Statistics.
A.- F. Latest observations for GDP are 2016Q1 for Russia, Poland and Ukraine, and 2015Q4 for
Turkey, Kazakhstan and Azerbaijan. Latest observations for industrial production are 2016Q1. Latest
observations for current account (seasonally adjusted) are 2015Q4.

Risks
ECA countries face a wide range of risks, primarily
to the downside—particularly for the commodity
exporters of the eastern part of the region. The
impacts of geopolitical tensions (especially ineastern Ukraine and the South Caucasus), terror
attacks and conflict in Turkey, and the refugee
crisis emanating from Syria could intensify,
dampening
confidence,
capitalinflows,
investment, tourism and growth. Knock-on effects
could include sharply increased contingent

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FIGURE 2.2.5 External financing
Despite some easing in the first quarter of 2016, spreads remain elevatedamong major borrowers in the region. Elevated bond repayments fall due
in 2016-18.

2000

200

1000

May-16

Jan-16

Mar-16

Nov-15

Jul-15

Sep-15Jun-15

Apr-15

Feb-15Oct-140

Dec-1402018

Kazakhstan

3000

400

2017

Ukraine

600

2016

40
35
30
25
20
15
10
5
0

Poland800

US$, billions

TurkeyRussiaBasis points
TurkeyPoland5000
Kazakhstan
Ukraine (RHS)
4000

Basis points

B. Bond repayments

RussiaA. Emerging market sovereign bondspreads

Sources: J.P. Morgan Chase; Dealogic.
A. Emerging Market Bond Index Global produced by JP Morgan Chase. Latest observations are May
2016.
B. Debt redemptions are indicated at face value.

liabilities (stemming from state owned enterprises
and financial sector disruptions) that undermine
fiscal positions. There is also a risk that policy
responses will be inadequate to address challenges.
External financing conditions may become moredifficult and volatile, despite low bond yields andgenerally loose monetary conditions in advanced
market economies, as greater risk aversion isreflected in elevated spreads.
The main risks confronting the eastern, mostly
commodity exporting part of the region center on
oil prices remaining lower for longer than
expected. This would increase pressure on oil
exporters (Azerbaijan, Kazakhstan, Russia) andcould precipitate disorderly adjustments, including
further fiscal deterioration, sharp exchange rate
depreciations, and financial system instability.
Financial strains and fiscal deterioration could leadto further pro-cyclical policy tightening topreserve fiscal and reserve buffers, including public
spending cuts and policy interest rate increases. A
deeper than expected recession in Russia could
generate intensified spillovers for neighboring
countries (Armenia, Belarus, Georgia, Kyrgyz
Republic, Moldova, Tajikistan, Uzbekistan)through reduced remittance flows and lower
demand for imports.
The western part of the ECA region faces risks
associated with policy uncertainty. Further
political polarization (Hungary, Poland, Turkey,

Ukraine) would jeopardize the independence of
key economic institutions and set back efforts tostrengthen the overall policy framework.
Geopolitical concerns in Turkey may lead to a
sharp reduction in tourist arrivals, especially fromthe Euro Area and Russia. Since the region
remains heavily dependent on trade, financial andlabor market ties with the Euro Area (World Bank
2016b), growth would disappoint in the event ofslower-than-anticipated Euro Area growth. On thepositive side, if as expected oil prices do not risesignificantly, inflation would remain subdued,
interest rates could be reduced, current accounts
and exchange rates would strengthen, and output
would rise.

Policy challenges
Policy makers in ECA countries are confronting a
range of challenges. Eastern commodity exporters
are grappling with adjustment to the terms oftrade shock from the drop in oil prices, while
trying to sustain domestic demand, ensure
financialsectorstability,
andmitigate
vulnerabilities. The western part of the region isseeing a windfall from lower fuel import costs, but
faceschallenges
inpublicexpenditure
management and structural issues. A decline in theworking age share of the population underscores
the need to boost productivity.
The scope for countercyclical monetary policy islimited in several commodity exporters, as they are
constrained by concerns about the exchange rate
and persistent or above-target inflation, leading topro-cyclical monetary tightening or maintenanceof elevated policy interest rates (Azerbaijan,
Kazakhstan, Russia; Figure 2.2.6). For example,
the largest deviations of Russian inflation above
target were associated with substantial ruble
depreciations, as in 2009 and 2015 (Korhonen
and Nuutilainen 2016). While exchange rate
depreciation serves as an important adjustment
mechanism, it may also raise concerns about
financial stability. Even oil exporters that entered
the oil price decline with strong sovereign wealthfunds and reserves (Azerbaijan, Kazakhstan) arescaling back their exchange market intervention in
support of depreciating currencies, which had led
to significant reserve losses.

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

Oil importing countries are benefiting fromreduced fuel import costs. Those with very
subdued inflation or deflation (Croatia, Poland,
Romania) have more room for maneuver, helpedby the accommodative monetary policy stance of
the European Central Bank. In Turkey, inflationpressures resulting
from exchange
rate
depreciation in 2015 are abating, but core
inflation remains above target. In a context of
weaker currencies and substantial foreign currency
denominated liabilities (Azerbaijan, Kazakhstan,
Russia), policy makers will need to ensure soundmacro-prudential frameworks. Measures might
include introducing higher risk weights or capping
exposure to corporate lending, constraining
lending in foreign currency to unhedged
borrowers, intensifying supervision, and increasingtransparency (IMF 2015c, 2015d). Together withefforts to address existing non-performing loans
and limit deterioration of financial sector balance
sheets, private sector credit is weakening in the
short-term (IMF 2016f).
Space for countercyclical fiscal policy is also
limited across the region, by the size ofgovernment debt in the case of commodity
importers. Oil-exporting countries have suffered a
substantial fall in revenues from oil. While they
have revised their budgets to reflect lower oil
prices, in many instances fiscal break-even oil
prices remain above the $41 per barrel currently
projected for 2016 (Azerbaijan, Kazakhstan,
Russia). Buffers, such as reserve funds or low
overall public debt levels that were built up during
the period of high oil prices, are eroding. Even
countries where public finances were in surplus formany years and reserve funds are very large, suchas Azerbaijan, face challenges balancing pressures
for fiscal consolidation and stimulus, and mayneed to pursue pro-cyclical tightening to stem
fiscal deterioration over the medium-term.
Oil importers are realizing fiscal savings, especiallythose that are taking advantage of low energy
prices to implement subsidy reforms (Romania,
Ukraine). Still, many countries entered the periodof low commodity prices carrying substantial
structural fiscal deficits and elevated public debt
levels. Given limited fiscal space, they will need toconsolidate spending (Armenia, Georgia). Efforts

E U R OP E A N D CE N T R A L A S I A

115

FIGURE 2.2.6 Monetary and fiscal policy
Over 40 percent of eastern commodity exporters have implemented procyclical tightening, amidst exchange rate pressures and above-target
inflation. Government debt in the eastern part of the region is generally
lower than the western part, but is on an upward trajectory.
A. Number of countries implementing
pro-cyclical monetary tightening

B. General government debt

Number of countries

Percent of GDP
50
2014

5

2014

2015

2016

4

40

3

30

2

20

1

10

2015

2016

0

0
EMDE ECAEMDE ECA
commodity importers commodity exporters

EMDE ECA
commodity importers

EMDE ECA
commodity exporters

Sources: Central Bank Rates; International Monetary Fund, World Economic Outlook (April 2016).
A. Number of countries in each sub-grouping that adopted pro-cyclical increases of policy interest
rates (as of May 23, 2016).
B. Median gross general government debt of the countries in each sub-grouping.

to boost revenues have also had a significant
impact on strengthened fiscal balances (Western
Balkans, World Bank 2016i). Governments need
to be prepared for spikes in risk aversion, which inpast episodes have sharply raised financing costs,
or cut off access to capital. In order to support
these efforts, several countries (Kazakhstan,
Ukraine) have embarked on ambitious public
expenditure management and civil service reforms
aimed at boosting the efficiency of public
spending, enhancing the effectiveness of public
service provision, and improving the targeting ofsocial support.
Structural reforms will be central to responding
effectively to the economic headwinds faced by theregion. Mounting evidence shows that structuralreforms play an important role in improving
resource allocation, boosting productivity andraising long-term growth (Dabla-Noris, Ho andKyobe, 2016). Gains in EMDEs are largest fromenhancing the efficiency of the banking system,
facilitating capital market development, andimproving the business environment. For
example, firm-level data from 10 ECA EMDEs
suggest that reforms improving access to financefor smaller, younger firms may increase
manufacturing productivity by 17 percent (Larrain
and Stumpner 2013). More generally, structuralreforms provide a boost to investor confidence,

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and over time have substantial benefits throughimproved allocation of resources and productivity.
The pull of the European Union is also helping toincentivize reform efforts, especially in the westernparts of the region.
Structural reforms are needed if firms in the
tradeable goods sector are to benefit from therelative price advantages associated with weakercurrencies. Such reforms should aim to increase
competition, improve factor allocation, and reduce
policy uncertainty, especially in commodity

exporting countries. Several Central Asian
countries are poorly integrated into global trade
networks, with the state playing an outsized rolein the economy. Key initiatives that would raise
productivity and growth in these countries include
privatization, trade liberalization, and thepromotion of foreign direct investment, especiallyby multinationals that can facilitate integration
into supply chains, transfer technology, andenable the transition towards higher value-addedexports (Mitra et al. 2016).

TABLE 2.2.1 Europe and Central Asia forecast summary(percentage point difference
from January 2016 projections)(Real GDP growth at market prices in percent, unless indicated otherwise)

EMDE ECA, GDPa

EMDE ECA, GDP excl. Russia

2013

2014

2015e

2016f

2017f

2018f

2015e

2016f

2017f

2018f

2.3

1.8

-0.1

1.2

2.5

2.8

0.0

-0.4

-0.1

0.0

3.1

2.5

2.5

2.9

3.2

3.4

0.1

-0.2

-0.3

-0.1

(Average including countries with full national accounts and balance of payments data only)b

EMDE ECA, GDPb

2.3

1.8

-0.2

1.2

2.4

2.8

0.0

-0.4

-0.2

0.1

GDP per capita (U.S. dollars)

1.8

1.3

-0.5

0.9

2.2

2.6

0.0

-0.4

-0.2

0.1

PPP GDP

2.3

1.7

-0.3

1.1

2.4

2.8

0.2

-0.4

-0.2

0.1

Private consumption

3.8

1.3

-3.0

1.9

2.5

3.0

-3.2

0.5

-0.3

0.1

Public consumption

2.7

1.1

1.6

1.2

1.2

1.5

2.0

0.3

-1.6

-1.3

Fixed investment

1.3

4.8

-1.7

-1.0

4.4

5.7

3.2

-1.7

1.8

2.6

Exports, GNFSc

3.3

2.2

2.8

3.1

3.6

3.6

2.2

-0.8

-1.5

-1.6

Imports, GNFSc

3.4

-1.3

-7.0

3.3

4.7

6.3

-3.4

-0.5

-0.6

1.0

Net exports, contribution to growth

0.0

1.2

3.2

0.1

-0.2

-0.7

1.8

0.0

-0.3

-0.8

Central Europed

1.6

2.9

3.4

3.4

3.3

3.2

0.2

0.1

-0.2

-0.4

Western Balkanse

2.4

0.5

2.3

2.7

3.1

3.7

0.4

0.1

0.1

0.2

Eastern Europef

0.6

-3.9

-7.8

-0.3

1.2

2.3

1.3

-0.8

-0.5

0.6

South Caucasusg

5.1

3.2

1.6

-0.5

1.7

2.2

-0.5

-1.8

-0.3

-0.9

Central Asiah

6.7

5.4

3.0

2.1

3.4

4.6

0.2

-1.1

-1.4

-0.3

Russian Federation

1.3

0.7

-3.7

-1.2

1.4

1.8

0.1

-0.5

0.1

0.3

Turkey

4.2

3.0

4.0

3.5

3.5

3.6

-0.2

0.0

0.0

0.2

Poland

1.3

3.3

3.6

3.7

3.5

3.5

0.1

0.0

-0.4

-0.4

Memo items: GDP

Source: World Bank.
World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained inother Bank documents, even if basic assessments of countries’ prospects do not differ at any given moment in time.
a. EMDE refers to emerging market and developing economy. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars.
b. Sub-region aggregate excludes Bosnia and Herzegovina, Kosovo, Montenegro, Serbia, Tajikistan, and Turkmenistan, for which data limitations prevent the forecasting of GDP
components.
c. Exports and imports of goods and non-factor services (GNFS).
d. Includes Bulgaria, Croatia, Hungary, Poland, and Romania.
e. Includes Albania, Bosnia and Herzegovina, Kosovo, FYR Macedonia, Montenegro, and Serbia.
f. Includes Belarus, Moldova, and Ukraine.
g. Includes Armenia, Azerbaijan, and Georgia.
h. Includes Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan.

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117

E U R OP E A N D CE N T R A L A S I ATABLE 2.2.2 Europe and Central Asia country forecastsa(percentage point difference(Real GDP growth at market prices in percent, unless indicated otherwise)from January 2016 projections)

2013

2014

2015e

2016f

2017f

2018f

2015e

2016f

2017f

2018f

Albania

1.1

2.0

2.6

3.2

3.5

3.8

-0.1

-0.2

0.0

0.3

Armenia

3.3

3.5

3.0

1.9

2.8

2.9

0.5

-0.3

0.0

-0.1

Azerbaijan

5.8

2.8

1.1

-1.9

0.7

1.3

-0.9

-2.7

-0.5

-1.4

Belarus

1.1

1.6

-3.9

-3.0

-1.0

0.3

-0.4

-2.5

-2.0

-0.7

Bosnia and Herzegovina

2.3

1.1

3.2

2.6

3.1

3.5

1.3

0.3

0.0

0.0

Bulgaria

1.3

1.6

3.0

2.2

2.7

3.0

0.1

0.0

0.0

0.3

Croatia

-1.1

-0.4

1.6

1.9

2.0

2.4

0.6

0.5

0.3

0.4

Georgia

3.4

4.6

2.8

3.0

4.5

5.0

0.3

0.0

0.0

0.0

Hungary

1.9

3.7

2.9

2.6

2.4

2.3

0.1

0.1

-0.3

-0.7

Kazakhstan

5.8

4.1

1.2

0.1

1.9

3.7

0.3

-1.0

-1.4

0.3

Kosovo

3.4

1.2

3.6

3.6

4.0

4.1

0.6

0.1

0.3

0.1

Kyrgyz Republic

10.9

4.0

3.5

3.4

3.1

4.1

1.5

-0.8

-0.3

-0.2

Macedonia, FYR

2.9

3.5

3.7

3.7

4.0

4.0

0.5

0.3

0.3

0.3

Moldova

9.4

4.6

-0.5

0.5

4.0

4.5

1.5

0.0

0.0

0.5

Montenegro

3.5

1.8

3.4

3.7

3.1

3.0

0.0

0.8

0.1

0.1

Poland

1.3

3.3

3.6

3.7

3.5

3.5

0.1

0.0

-0.4

-0.4

Romania

3.4

2.8

3.7

4.0

3.7

3.4

0.1

0.1

-0.4

-0.6

Russian Federation

1.3

0.7

-3.7

-1.2

1.4

1.8

0.1

-0.5

0.1

0.3

Serbia

2.6

-1.8

0.8

1.8

2.3

3.5

0.0

0.0

0.1

0.0

Tajikistan

7.4

6.7

4.2

4.0

4.8

5.3

0.0

-0.8

-0.7

-0.2

Turkey

4.2

3.0

4.0

3.5

3.5

3.6

-0.2

0.0

0.0

0.2

Turkmenistan

10.2

10.3

6.5

5.0

5.0

5.0

-2.0

-3.9

-3.9

-3.9

Ukraine

0.0

-6.6

-9.9

1.0

2.0

3.0

2.1

0.0

0.0

1.0

Uzbekistan

8.0

8.1

8.0

7.3

7.2

7.2

1.0

-0.2

-0.5

-0.5

Source: World Bank.
World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained inother Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time.
a. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars.

Latin America and the Caribbean is expected to face another year of weak economic performance due todomestic challenges among the region’s largest economies, depressed commodity prices, and tighter regionalmonetary conditions. Output is expected to shrink another 1.3 percent this year, after declining 0.7 percent in2015, marking a second consecutive year of recession for the first time in more than 30 years. Brazil and the
República Bolivariana de Venezuela are in deep recessions, while Argentina is expected to see a modest
contraction as it embarks on a period of macroeconomic policy adjustments toward more sustainable growth. In
contrast, Mexico, Central America, and the Caribbean are expected to expand at moderate rates in 2016,
boosted by robust growth in exports and tourism. The region as a whole is projected to return to growth in 2017-18, as domestic constraints gradually loosen and net exports continue picking up. Significant downside risks
persist, as the South American economy has yet to bottom out and commodity prices could resume their declines.
Regaining fiscal space, amid the economic slowdown and low commodity revenues, and enhancing productivity
growth are major policy challenges for the region.

Recent developments
The Latin America and Caribbean (LAC) region is
expected to suffer a second consecutive year ofrecession in 2016, the first double-year
contraction in more than 30 years (Figure 2.3.1,
Table 2.3.1).1 Regional economic activity is
projected to decline 1.3 percent this year, deeper
than last year’s contraction of 0.7 percent. There
are, however, substantial differences among thethree sub-regions (see Box 2.3.1). South America,
the largest sub-region, is expected to remain inrecession this year with output contracting 2.8
percent, significantly steeper than last year’s 1.9
percent drop. In contrast, Mexico and Central

Note: The author of this section is Derek H. C. Chen, withresearch assistance from Mai Anh Bui and contributions from Lei Ye,
Eung Ju Kim, and Yirou Li.
1The discussion in this section includes both developing and highincome economies in the Latin America and the Caribbean region.
The South American sub-region includes Argentina, Bolivia, Brazil,
Chile, Colombia, Ecuador, Paraguay, Peru, Uruguay, and the
República Bolivariana de Venezuela. The Mexico and Central
America sub-region includes Costa Rica, El Salvador, Guatemala,Honduras, Mexico, Nicaragua, and Panama. The Caribbean subregion includes Antigua and Barbuda, The Bahamas, Barbados,
Belize, Dominica, Dominican Republic, Grenada, Guyana, Haiti,
Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and the
Grenadines, Suriname and Trinidad and Tobago.

America will see output continue to expand in2016 at 2.7 percent, while the Caribbean willgrow by about 2.6 percent, slower than the
exceptional year in 2015.
Domestic challenges in Brazil and the República
Bolivariana de Venezuela, as well as the ongoingmacroeconomic adjustment in Argentina, haveweighed on regional growth. This year’s
disappointing regional economic performance also
reflects the protracted decline in commodity
prices. Slumping oil prices will weigh most heavily
on the major oil exporters (Colombia, Ecuador,
República Bolivariana de Venezuela). Yet, withmetal and agricultural prices also declining, mosteconomies in the region will be held back by thedeterioration in the terms-of-trade, reduced export
and fiscal revenues, and weaker investment
especially in the commodities sector (Bolivia,
Chile, Peru). The significance of commodities
prices for LAC growth has been documented in
the literature (Gruss 2014). Moreover, financial
conditions have tightened, with reduced bondissuance and monetary policy rate increases,
particularly in South America. Moderating theslowdown, the real depreciation of regional
currencies has improved the competiveness ofexports.

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FIGURE 2.3.1 GDP growth: Latin America and the
Caribbean

Amid market concerns about global prospects andpossible further increases in U.S. interest rates,
investor risk aversion has increased. Within theregion, this aversion has been compounded bydomestic political uncertainty, weak regional
economic activity, and the renewed decline incommodity prices earlier in the year. The region,
particularly South America, saw substantial
depreciations at the beginning of 2016, but has
since recovered, coming out almost flat for theyear. However, given that South American
currencies depreciated on average 27 percent
against the U.S. dollar in 2015, these currencies
are still relatively weakened, both in real andnominal terms (Figure 2.3.2). At the same time,international bond issuance from LAC slumped
61 percent (year-on-year) in 2015Q4, amounting

The LAC region is expected to see another year of economic contraction in2016, its first multi-year recession since the Latin American debt crisis in
1981-1983. Domestic challenges and the slump in commodity prices haveweighed on growth, especially among South American economies.
A. Regional real GDP growth, 19802016e
Percent
Multi-year recession
8

ActualB. Sub-regional real GDP growth, 2014-2016eEstimated

7

6

Percent
5

2014

2015

2016e

3

4

1

2

-1

0
-2

-3
LAC

South
America

2013
2016

2010

2007

2001
2004

1998

1995

1989
1992

1986

1983

0

1980

-4

Mexico & Caribbean
CentralAmerica

Source: World Bank.
Note: e = estimated. GDP weighted average.

FIGURE 2.3.2 Exchange rates and sovereign bond spreads
Investor risk aversion spiked in early 2016, amid a renewed decline in commodity prices, leading to sharp increases in sovereign bondspreads and depreciated regional currencies, especially for oil exporters. However since then, nominal exchange rates and bonds spreads
have largely recovered to their late 2015 levels.
A. Exchange rates against U.S. dollar

B. Selected countries: Exchange rates against
U.S. dollar

C. Real effective exchange rates

Percent change

Percent change
20

Percent change
10

2014

10

2015

YTD 2016

2014

2015

YTD 2016

2014

2015

YTD 2016

0

0

0

-20
-10

-40

BrazilChile

Colombia

Peru

Dominican Rep.

Honduras

Mexico & Central
America, andCaribbean

GuatemalaSouth America

Mexico-30

UruguayArgentina

-10

-20

-20
South America

D. Selected countries: Sovereign bond spreads

E. Selected countries: Sovereign bond spreads

F. LAC bond issuance

Basis points

Basis points

US$, billions
120

800

BrazilColombia
MexicoDominican Rep.
Peru

5000

Belize Ecuador Venezuela, RB

4000

600

90

3000
400

Mexico & Central
America, andCaribbean

60

2000
30

2016Q1

2015Q4

2015Q3

2015Q2

2015Q1

2015

2014

2013

May-16

Jan-16

Mar-16

Nov-15

Sep-15

Jul-15May-15Mar-150

Jan-15May-16

Mar-16

Jan-16

Nov-15

Sep-15

Jul-150
May-150

Mar-15

1000
Jan-15200

Sources: Haver Analytics; International Monetary Fund, International Financial Statistics; JP Morgan; Dealogic.
A. GDP weighted average. South America includes Argentina, Brazil, Chile, Colombia, Paraguay, Peru, and Uruguay. Mexico & Central America, and Caribbean includes Dominican
Republic, Guatemala, Honduras, and Mexico. Last observation is April 2016.
B. Last observation is April 2016.
C. GDP weighted average. South America includes Bolivia, Brazil, Chile, Colombia, Ecuador, Paraguay, Peru, and Uruguay. Mexico & Central America, and Caribbean includes Mexico,and Panama. Last observation for Bolivia and Paraguay is February 2016. Last observation for the other countries is April 2016.
D. E. Latest observation is May 2016.

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L A T I N AM E RI C A A N D T H E C A R I B B E A N

BOX 2.3.1 Sub-regional divergence in Latin America and the Caribbean
new Macri administration has employed a series ofpolicy measures to reduce economic distortions andset growth on a more sustainable path. The
administration has thus far significantly reduced
export taxes and import restrictions, lifted currency
controls on the Argentine peso and adopted a floatingexchange rate, and cut energy and transport subsidies.
While these policy adjustments should serve tostrengthen the Argentine economy in the medium
and long-term, economic activity will be subdued in
the short-term, with a modest contraction in 2016.

In 2015, Latin America and the Caribbean saw its firstcontraction since the financial crisis. This recession is
expected to deepen in 2016. Regional GDP is expected to
decline 1.3 percent in 2016, after shrinking 0.7 percent in2015. However, there is substantial heterogeneity among
the three sub-regions.
In South America, a region of major hydrocarbon andmetal exporters, domestic policy uncertainty, increasing
global risk aversion, and higher policy interest rates
contributed to a contraction in activity in 2015.
•

In Brazil, LAC’s and South America’s largest
economy, GDP shrank around 3.8 percent in 2015 in
its worst recession in decades. Investor confidence has
slumped partly due to the uncertainties surrounding
the Lava Jato investigations and impeachment processagainst the president. The substantial depreciation
against the U.S. dollar of over 30 percent in 2015 andthe removal of energy subsidies have lifted inflation toaround 10 percent. To re-anchor inflation
expectations, the central bank has maintained its tightmonetary policy stance, despite contracting output,
and the one-year ahead inflation expectations arecoming back into the target range. High inflation andrising unemployment have eroded real incomes andweighed on private consumption, while fixed
investment has been on a steep decline since 2014.

•

The República Bolivariana de Venezuela is also in a
deep recession, contracting 5.7 percent in 2015,
according to official data. Annual inflation reached
180 percent in 2015 and is expected to increase multifold in 2016. Public finances have deteriorated
sharply with the collapse of oil prices and reduced oil
production, despite some measures to containspending pressures, including a 6000 percent increasein domestic gasoline pump prices, which is still
heavily subsidized. Even with the introduction of a
two-tier exchange rate system, foreign reserves havefallen to US$12.6 billion in April 2016, the lowest
since 1998, prompting CDS spreads to surge.2•

In Argentina, GDP expanded moderately in 2015,
weighed down by double-digit inflation rates, awidening fiscal deficit, severe import controls andrestricted access to international capital markets. The

2The second tier DICOM exchange rate is still heavily managed, being
valued at about one-third of the parallel exchange rate in May 2016.

•

Other countries in South America (virtually allcommodity exporters) continue to struggle to adjust
to sharply lower commodity prices. Falling resource
revenues were met with expenditure cuts to preserve
fiscal buffers (Colombia). Central banks responded toabove-target inflation and depreciation pressures with
policy rate hikes despite sharply lower growth (Chile,
Colombia, Peru). As a result of the terms of trade
shock and procyclical policy tightening, growthamong the smaller South American countries
continued to be below trend and slowed to 2.6
percent in 2015 from 3.3 percent in 2014.

In contrast to South America, growth picked up to amoderate rate in the Mexico and Central America subregion, largely owing to its close economic ties with asteadily growing United States, competitiveness gains fromreal depreciation, and consumption supported by rising
real incomes amid falling unemployment rates andinflation. In Mexico, excess capacity and lower oil prices
have led to lower inflation rates, aided by some
improvements brought by the telecom reform. The subregion has been weighed down by commodity prices andworsening terms-of-trade, although to a lesser extent thanSouth America. Despite being an oil exporter, Mexico’sexports are largely diversified away from primarycommodities. However, lower oil prices have translated
into significant revenue losses, compelling the Mexican
government to repeatedly cut fiscal spending, especially on
government investments. Supported by low oil prices, lowinflation and strong U.S. demand, other countries inCentral America also continued to witness moderate
growth rates in 2015 (El Salvador, Guatemala, Honduras,
Nicaragua). Costa Rica saw a modest slowdown led by a
sharp decline in exports, due to the effects of El Niño
related drought and the residual effects of Intel’s
withdrawal of its microprocessor plant in 2014.
Meanwhile, Panama, Central America’s and the LAC

121

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BOX 2.3.1 Sub-regional divergence in Latin America and the Caribbean (continued)
region’s fastest growing economy, saw growth broadly
unchanged in 2015, with robust consumption and gains
from net trade offsetting weaker investment, as many of
the capital-infrastructure projects reached completion.

expenditures also increased 4.2 percent (EIU 2016a). This
has resulted in robust growth of more than 3 percent in2015 at the sub-regional level. However, there was somedegree of heterogeneity among Caribbean economies.
Poor weather conditions in Belize and Haiti have taken atoll on agricultural production, contributing to asignificant slowdown in overall growth in 2015. In
contrast, a post-drought rebound in agricultural
production supported growth in Jamaica, along with anincrease in tourism growth and a recovery in the
manufacturing sector.

The Caribbean also enjoys close ties to the United Statesin terms of trade, investment and tourism. With theUnited States steadily growing in 2015, Caribbean tourism
growth was robust, with international visits increasing 7
percent (7.5 percent in the Dominican Republic, theCaribbean’s largest tourist destination). Tourism

FIGURE 2.3.3 Export growth and current accountbalances
Exports expanded in a number of countries in 2015, supported by weakexchange rates. Weighed down by low commodity prices and reduced
export revenues, current account deficits widened in South America andCentral America.
A. Regional exports: Growth of totalexport volumes

B. Selected countries: Growth of totalexport volumes

Percent, year-on-year
10

Percent, year-on-year
10

2014

2015

2014

2015

5

8

0

6

-5

4

South
America

Mexico &CentralAmerica

Costa Rica

Chile

Argentina

Colombia

Dominican Rep.

Peru

Caribbean

Guatemala

LAC Region

2015

Dominican Rep.

-5

2014

Costa Rica

Colombia-4

Percent of GDP
2
0
-2
-4
-6
-8

Mexico2015

El Salvador

2014

Percent of GDP-2

D. Selected countries: Current
account balances

EcuadorC. Regional current account balances

Honduras

Caribbean

Argentina

Mexico &CentralAmerica

BrazilSouth
AmericaPeru

LAC Region

BrazilMexico0-2Guatemala-102

Sources: International Monetary Fund, World Economic Outlook; Haver Analytics.
A. C. GDP weighted average.

to only $8.4 billion, the lowest level since mid2009, at the height of the global financial crisis(EIU 2016b). This large reduction is in part
because Brazil has been absent from internationalbond markets until March 2016, reducing theoverall volume of issuance at the regional level lastyear. Argentina, in its recent return to the global
bond market, bucked this trend by selling $16.5
billion worth of bonds on April 19, the largest one-day issue from an emerging economy. Reflecting
higher risk aversion, sovereign bond spreads acrossthe region increased significantly in early 2016,
but subsequently fell back to their late 2015 levels
in most countries.
Partly due to improved competitiveness provided
by weaker exchange rates, total regional export
volumes surged to 3.5 percent in 2015, with theregion’s share of global merchandise exports
expanding from 5.3 percent in 2014 to 7.4
percent in 2015.3 Export volumes expanded in a
number of countries in 2015 (Brazil, Dominican
Republic, Guatemala, Honduras, Mexico, Peru,
see Figure 2.3.3). Most notably, Brazil’s and
Mexico’s total export volumes jumped 6-9 percent
in 2015. Costa Rica proved to be the strong
exception, with exports dropping more than 8
percent in 2015, largely due to the loss in exports
associated with weaker agricultural production andthe closing of the Intel chip manufacturing plantin mid-2014. At the same time, weaker exchange
rates and slower investment and GDP growth
have constrained imports. Nevertheless, current
account deficits as share of GDP on average
widened 0.7 percentage point across the region,
more so in South America due to the slump in
3Based on U.N. Comtrade data with 70 countries (including 12
LAC countries) reporting export data for 2015. 149 countries(including 25 LAC countries) reported export data for 2014.

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L A T I N AM E RI C A A N D T H E C A R I B B E A N

FIGURE 2.3.4 Inflation rates and policy rates
Consumer price inflation rates have increased across the region, particularly in some South American countries, where they have exceeded
target bands, prompting central banks to increase policy interest rates. In contrast, central banks in Central America and the Caribbean,
except Mexico, have either held steady or loosened rates, as inflation has remained within target bands.
A. Regional headline inflation

Percent, year-on-year

2014

20

2015

B. Selected countries: Headline inflation

C. Selected countries: Core inflation

Percent, year-on-year Headline 2015
Headline YTD 2016
12

Percent, year-on-year
1016Core 2015

Upper & lower inflation targets

8Core YTD 2016

64

Costa Rica

MexicoDominican Rep.

Nicaragua

Guatemala

Peru

Chile

-2

Paraguay

Costa Rica

Peru

Chile

Dominican Rep.

Caribbean

MexicoMexico &CentralAmerica

JamaicaSouth
America

Guatemala

LAC Region

Paraguay

Brazil0

Colombia-4

4

Brazil208Colombia

12

D. Regional policy rates

E. Central bank policy rates in South America

F. Central bank policy rates in Mexico, Central
America and the Caribbean

Percent

Percent
10

Percent
10

12South America
Mexico, Central America & Caribbean

10
8

Chile
Paraguay
Brazil (RHS)

Colombia
Peru

Percent
16

8

12

6

8

4

4

2

0

MexicoDominican Rep.
Honduras

Costa Rica
Guatemala8642

Sources: International Monetary Fund, World Economic Outlook; World Bank, International Financial Statistics; Bloomberg; Haver Analytics.
A. D. GDP weighted average.
B. C. D. Last observation is April 2016.
E. F. Last observation is May 2016 for Chile, Colombia, Mexico, Paraguay, and Peru; and April 2016 for others.

commodity
prices (Argentina,
Colombia,
Ecuador, Peru). Ecuador’s current account deficit
reached 2.2 percent of GDP in 2015, the largest
since 2010, largely owing to a record trade deficit
caused by the slump in oil prices. Since mostcountries are oil-importers and predominantly
linked to a growing U.S. economy, current
account balances widened less in Central America.
In the Caribbean, with its concentration ofcommodity importers and hence lower importcosts, current account balances narrowed in 2015.
Headline consumer price inflation has increased
across the region, in line with weakened exchange
rates and higher import prices (Figure 2.3.4).
Partly due to the larger depreciations, inflation
rates are higher in South American economies,
with rates exceeding inflation target bands in a

number of countries, prompting central banks tohike interest rates. Inflation rates have also been
increasing in the Mexico and Central America sub-region and in the Caribbean earlier this year, after
registering declines in 2015. However, most of
the rates still fall below or within inflation target
bands, allowing monetary policy to remain
accommodative. Mexico has proven to be theexception, with the central bank hiking interest
rates as recently as February to support the peso.
With excess capacity and lower oil prices, Costa
Rica, and to a lesser extent El Salvador, saw
periods of deflation in 2015, which carried over
into 2016.
As a result of revenue losses from lower
commodity prices and weak economic activity,
fiscal balances across the region have deteriorated

May-16

Jan-16

Sep-15May-15Jan-15

Sep-140

May-14May-16

Jan-16

Sep-15May-15Jan-15

Sep-14May-14Feb-16

Sep-15

Apr-15

Nov-14Jun-14Jan-142

Jan-144

Jan-146

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FIGURE 2.3.5 Fiscal indicators

Outlook

Fiscal balances are on diverging paths among sub-regions, with lower
commodity revenues and slower output growth weighing on fiscal
revenues across the region but especially in South America. Wider fiscal
deficits have translated to higher public debt ratios in 2015.

Percent of GDP
0

Percent of GDP
2

2014

2015

2013

2014

2015

MexicoB. Selected countries: Central
government fiscal balances

GuatemalaA. Regional general government fiscal
balances

0

-2

-2

-4

-4

-6

-6

C. Regional gross public debt

D. Selected countries: Gross public
debt
2015

Percent of GDP

2013

2014

2015

Ecuador2014

Percent of GDP
65

Uruguay

Caribbean

EcuadorMexico &CentralAmerica

Colombia

South
AmericaChile

LAC Region

Colombia

-10

-8.7

Chile

-8

Brazil

-8

50
40

60

30
55

20
10

50

Mexico &CentralAmerica

Caribbean

El Salvador

South
America

Mexico

LAC Region

Brazil045

Sources: International Monetary Fund, World Economic Outlook; Haver Analytics.
A.C. GDP weighted average.

(Figure 2.3.5). At the regional level, general
government fiscal deficits as a share of GDP
widened on average from 5.4 percent in 2014 to
7.8 percent in 2015.
However, there weredistinct differences among the sub-regions. SouthAmerica, with its concentration of oil and metal
exporters, saw deficits increase on average 3
percentage points in 2015, with most countries
seeing sharp reductions in government revenues,
but also some countries loosening fiscal policy tosupport growth (Bolivia, Peru). In contrast, fiscal
deficits in the Mexico and Central America subregion, and the Caribbean, narrowed by 0.5 to 1
percentage point in 2015. Across the region,
government gross debt levels increased on average
to 58.2 percent of GDP in 2015, from 51.3
percent in 2014, with South America seeing debt
ratios rise around 8 percentage points in 2015,
and Mexico and Central America seeing a rise of
4 percentage points. In response to thedeteriorating fiscal position, the Mexican
authorities implemented budget cuts for 2016,
amounting to 2 percent of GDP.

Output is set to shrink another 1.3 percent in
2016, after declining 0.7 percent in 2015. Activity
is only projected to begin expanding again in
2017, gradually gaining momentum to around 2
percent in 2018 (Figure 2.3.6). The outlook is
predicated on commodity prices stabilizing anddomestic political uncertainty moderating. Also,
the baseline assumes that the use of expansionary
fiscal policies will be limited, reflecting lower
commodity prices, lower fiscal revenues, andwidening fiscal deficits. Fiscal consolidation acrossthe region will weigh on growth. However, there
are contrasting paths among the three sub-regions.
Underpinning the regional outlook, SouthAmerica, after two years of recession, is projected
to have a mild recovery in 2017 followed by agradual strengthening of output growth to 1.7
percent in 2018. In contrast, output growth in the
Mexico and Central America sub-region and the
Caribbean, are expected to be moderate in 2016,
and strengthen to around 3 percent in 2017 and2018.
Brazil’s outlook continues to be challenging. The
continuing contraction in 2016 expected to carryover into 2017, amid attempts at policy
tightening, rising unemployment, and shrinking
real incomes (Table 2.3.2). If politicaluncertainties persist, the implementation of
pertinent fiscal initiatives may be delayed,
weighing on investment. While inflation has
begun to ease, tight monetary conditions are
assumed to continue in the short-term as inflation
remains above target. Partially mitigating theadverse effects, the substantially depreciated real islikely to continue boosting net exports in the short-term.
As a result of ongoing macroeconomic
adjustments and structural reforms, activity inArgentina is projected to be in a modest recession
in 2016, before picking up on a firmer basis in
2017-18. Capital inflows are expected tostrengthen from 2016-17, following a formal exitfrom technical debt default and regained access tointernational debt markets, and a return ofinvestor confidence. Net exports will be helped bya significantly weaker Argentine peso. The recent

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L A T I N AM E RI C A A N D T H E C A R I B B E A N

elimination of electricity subsidies will improve
the fiscal position and bolster investor sentiment.
External factors such as the prolonged recession in
Brazil and low commodity prices continue toweigh on the outlook.

FIGURE 2.3.6 Regional outlook

The economic downturn in the República
Bolivariana de Venezuela has yet to bottom out,
with continuing macroeconomic imbalances andelevated policy uncertainty. Oil prices are expected
to stabilize around current levels and oil
production is projected to decline further, partly
due to inadequate maintenance. Fiscal revenues
will therefore continue to be under pressure.
Foreign reserves have fallen to the lowest level
since 1998, and with a substantial amount ofsovereign bonds maturing this year and even morein 2017; credit default swap spreads have surged
to multi-year highs. The recent 6000 percent
jump in petroleum pump prices and further
monetizing of the public sector deficit are likely tocontinue contributing to inflationary pressures,
weighing on output.4

A. GDP growth

Elsewhere in South America, once commodity
prices stabilize, generally sound economic
fundamentals will continue to underpin growth inChile, Colombia, and Peru. However, the outlook
for these three countries will be weighed down byrelatively tight domestic monetary conditions
amid elevated inflation rates, and reduced fiscal
revenues. Low commodity prices and reduced
demand growth from slowing major trading
partners, will continue to be major headwinds thatwill be met to varying degrees by production andinvestment adjustments. Oil output in Colombia
is expected to dip in the medium term, owing to alack of major discoveries and a drop in investment
and seismic exploration. However, growth should
be supported by strong investment in public
works, with confidence being buttressed byenhanced security due to the expected internal
peace agreement.

4A new amendment to the law governing the Central Bank passedby the National Assembly in 2009 allows the Central Bank topurchase bonds issued by PDVSA, thus bridging PDVSA’s deficit indomestic currency. The continuous financing of PDVSA has been
one of the main causes of the expansion in the monetary base inrecent years and has led to a considerable increase in the amount ofmoney in circulation (liquidity) in the economy (Vera 2015).

125

The region as a whole is expected to rebound in 2017, with growthstrengthening to 2.1 percent in 2018, as domestic policy uncertainty
moderates, commodity prices stabilize and weakened exchange rates
support exports.

Percent
4

2015

B. Prices of key commodity exports
2016e

2017f

2018f

Percent change, year-on-year
30
2015
2016e
2017f

2018f

15

2

0
-15

0

-30
-2

-45

Source: World Bank.
Note: e=estimated; f=forecast.

Chile, the world’s largest producer of copper, haseither suspended or reduced production in a
number of copper mines, slowing economic
growth, at least in the near term. In contrast, due
to high ore grades and low costs for energy andwater, copper production has been surging in Peru
with the recent opening of the Las Bambas mineand expansion of existing mines, despite low
copper prices. Capacity will be expanding in themedium term with investment in new mines andfurther development of current mines, lifting
Peru’s near-term outlook. Ecuador is projected toexperience a sharp contraction in the near term,reflecting low oil prices, loss of export
competitiveness due to the strong U.S. dollar, andscarce external financing compelling substantial
fiscal consolidation. The devastating earthquake
on April 16 will compound current economic
strains. The government estimates the rebuilding
costs may reach 3 percent of GDP.
In contrast to South America, the Mexico andCentral America sub-region is more closely linked
to the U.S. economy for trade, investment, andremittance flows. With the protracted decline in
agricultural commodity prices, growth is expected
to remain broadly unchanged in 2016 largely due
to fiscal consolidation across the sub-region. A
modest increase should follow in 2017-18, as thereal depreciation of local currencies spurs net
exports and the U.S. economy continues toexpand. Household consumption is expected tocontinue picking up, as real incomes are supported

Gold

CopperIron ore

Mexico & Caribbean
CentralAmerica

Wheat

South
America

Soybeans

LAC

Crude oil

-60
-4

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FIGURE 2.3.7 External debt
External debt as a share of GDP has increased in most countries,
especially long-term foreign currency denominated debt. The volume ofdebt maturing swells in 2017, exerting additional financing pressures.

A. Total external debt

Percent of GDP
80
60

Long-term domestic currency
Short-term domestic currency
Long-term foreign currency
Short-term foreign currency

40

B. LAC-issued bond redemption
US$, billions
Argentina
100
Chile
MexicoVenezuela, RB
75

BrazilColombia
Peru
Others

50

20
25

2024

2023

2022

2021

2020

2019

2018

2017

2016

ARG CHL BRA COL CRI MEX PER URY

0

2015

2014
2015
2014
2015
2014
2015
2014
2015
2014
2015
2014
2015
2014
2015
2014
2015

0

Sources: World Bank, Quarterly External Debt Statistics; Dealogic; Haver Analytics.
Note: ARG = Argentina, CHL = Chile, BRA = Brazil, COL = Colombia, CRI = Costa Rica, MEX =Mexico, PER = Peru, URY = Uruguay.

by low inflation and falling unemployment,
particularly in Mexico. In a number of Central
American economies, domestic monetary policy is
expected to remain largely accommodative in the
short and medium term, with low inflation rates
encouraging investment (Costa Rica, Honduras).
Stronger investment growth is also expected in
Mexico, as benefits from recent structural reforms
materialize.5
Despite strong tourism growth, the Caribbean
region will slow down in 2016 in a normalizationfrom a bumper year in 2015. Major tourismassociated construction is winding down, and anumber of Caribbean economies are pursuingfiscal consolidation to strengthen public financesand lower heavy public-debt burdens. While there
is a substantial downside risk posed by the Zika
virus outbreak, tourism is expected to continue toexpand and support growth.6 Fiscal consolidationin several countries (Dominican Republic, most
OECS economies) will weigh on growth in themedium-term.
In particular, the opening of Cuba presents
tourists from the U.S. with an additional
5For example, the end of 2015 saw further progress in energy
reform with the successful completion of the first of three publictenders for oil exploration, paving the way for more investments inthe energy sector in the coming years.
6As of March 2016, no Caribbean country has reported any
downturn in tourist arrivals, despite the widespread media attention
to the effects of the virus (World Bank 2016l).

destination within the Caribbean. Total tourist
arrivals in Cuba have already been surging, with
January 2016 arrivals jumping 12.7 percent (yearon-year) Tourist arrivals from the United States
jumped 77 percent in 2015, albeit from a low
base, a figure that excludes the hundreds ofthousands of Cuban Americans who visited
relatives last year. At the sub-regional level,
liberalized Cuba–U.S. bilateral tourism could
increase overall arrivals, with total Caribbean
arrivals increasing 4 percent per year (Romeu2014), leading to increased employment creationand growth (Garsous, Novoa, and Velasco 2015;
Castillo et al. 2015).

Risks
The balance of risks to the regional outlook ismarkedly tilted to the downside for a number ofreasons. First, the baseline outlook for the region
assumes that commodity prices will stabilize
around current prices in the medium term. Shouldcommodity prices drop further, the terms-of-tradeof regional economies will continue to worsen,
and falling fiscal and export revenues will trigger
additional policy tightening, weighing on growth.
Second, total external debt across the region has
been increasing, especially in recent years (Figure
2.3.7). The majority of the region’s debt is foreign
currency denominated, typically in U.S. dollars.
With the recent appreciation of the U.S. dollar
relative to domestic currencies, debt servicing costs
have increased and debt-to-GDP ratios have risen
substantially; the debt burden becomes more
onerous if government revenues are mainly
denominated in local currencies. Increases in debt
ratios could contribute to sovereign credit
downgrades, as in Brazil. Moreover, the volume ofexternal debt maturing in 2017 is 60 percent
higher than in 2016, adding to government
financing pressures.
Third, the recessions in Brazil and the República
Bolivariana de Venezuela have yet to bottom
out and could last longer than expected due
to political uncertainties and continued
macroeconomic imbalances. There is additionalrisk that they may spill over to other countries in
the region. In particular, negative growth shocks

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

from Brazil can lead to statistically significant
declines in growth for Argentina, Chile,
Colombia, Ecuador, Paraguay, and Peru (WorldBank 2016b).
Fourth, the Zika virus has spread rapidly acrossLatin America in recent months, with more than
25 countries affected. The virus has been
associated with a growing number of birth defects
in the region, and there are also some indications
that the virus is linked to paralysis. The immediate
economic impact of the virus will be to reduce
tourism, as well as to raise health care costs. The
long-term impact of the virus will be the lost or
delayed cohort of babies and the consequences on
future fertility patterns and the size of the future
working-age
populations.
Thenear-term
economic costs associated with the virus could beconsiderable this year, especially if the mosquitoborne illness is not quickly contained (WorldBank 2016j). However, the estimated economic
impact across the region is modest, but could belarger for some countries—especially in the
Caribbean, where economies are relatively more
dependent on tourism (World Bank 2016k,
2016l).

Policy challenges
Slumping commodity prices, weaker trade flows,
and slower global growth have weighed on growthacross the region. Moreover, in a number of LAC
countries, low fiscal buffers limit the use ofcounter-cyclical fiscal policy. In addition, some
economies, especially those in South America, arealso facing above-target inflation, limiting thecapacity for counter-cyclical monetary policy.
More importantly, given that commodity prices
are projected to stabilize at current low prices, andglobal growth is expected to remain tepid in themedium term, regional economies need to rely on
productivity improvements as a driver of sustained
long-term growth.
During the financial crisis, regional economies
implemented
expansionary,countercyclicalpolicies to support growth, leading to a build-up
of debt and a narrowing of fiscal space. For many
countries, these policies were not fully unwoundin the post-crisis years (World Bank 2015c). Amid

L A T I N AM E RI C A A N D T H E C A R I B B E A N

the extended decline in commodity prices and theslowdown in economic activity, fiscal balances
have therefore further worsened in a number ofcountries.7 A credible medium-term plan to raise
revenues and reduce expenditures would help
rebuild fiscal buffers and bolster investor
confidence (Celasun et al. 2015). Novelapproaches to broaden the tax base, levy additional
taxes, or strengthen tax administration could be
more widely explored.8 A number of regional
governments have already cut and will continue totrim expenditures in order to prevent further
deterioration in their fiscal accounts (Colombia,
Ecuador, Mexico). Although such cuts will
dampen growth in the short run, it will enhance
economic resilience in the medium term.
Structuring fiscal consolidation in ways tominimize adverse effects on growth, poverty, andincome distribution will be important. Options
include consolidating social assistance programs
and improving targeting, enhancing access of lowincome families to education and health services,
expanding coverage of the Personal Income Tax,and pension reform by increasing the retirementage (IMF 2014).
Given that commodity prices are expected tostabilize around the current low levels in themedium term (World Bank 2016k), the ability of
the region to boost economic growth in themedium and long-term will increasingly hinge on
diversifying the economy and improving thecompetitiveness of other sectors throughproductivity improvements, so as to achieve a
broader export base.
In support of the economic diversification agenda,
governments could focus on the reduction of labormarket rigidities and the retraining of workers.
This would facilitate the transition of labor awayfrom sunset industries towards blooming ones (dela Torre et al. 2015).
Productivity growth in LAC has been muted forthe past few decades, and the productivity gap
7More generally, studies have shown that a number of countries in
the region have procyclical monetary and/or fiscal policies (Carneiroand Hnatkovska 2016).
8In Costa Rica, increased tax withholding from business sales has
been found to reduce tax evasion and increase tax revenues(Brockmeyer and Hernandez 2016).

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FIGURE 2.3.8 Total factor productivity growth andinfrastructure quality
Total factor productivity growth has been low and weakening in the LAC
region for a number of years. In particular, low levels of investment,
especially infrastructure investment, has created bottlenecks to higher
levels of TFP and economic growth. One measure of an adequate andaccessible infrastructure is the ease of obtaining electricity, where anumber of LAC economies rank poorly.
A. Total factor productivity growth

B. Ease of obtaining electricity

Percent
4

Ranking
160

LAC

EAP

120
80

2

40

-2
2003-08

2010-122013-14

GuatemalaBrazil
Costa Rica
Uruguay
Chile
Peru
Colombia
MexicoLAC Average
Jamaica
Argentina
Nicaragua
Ecuador
Bolivia
El Salvador
Haiti
Honduras
Dominican Rep.
Venezuela, RB

00

Source: World Bank.
A. LAC is the Latin America the Caribbean region; EAP is the East Asia and Pacific region.

between Latin America economies and the UnitedStates widened from 1980 to 2011 (OECD, UN
and CAF 2014). Slowing productivity growth wasa major contributor to the growth slowdown in
LAC economies after 2014 (Didier et al. 2015, De
Gregorio 2015; see Figure 2.3.8).
A series of structural reforms would help improve
total factor productivity growth. Apart fromgrooming a sufficiently-skilled and appropriatelytrained labor force, and investing in a modern andaccessible information and communications, andenergy and transport infrastructure, governments
could encourage firms to invest in R&D and otherproductivity enhancing investments. Recent
investment projects in LAC have already resulted
in productivity improvements in a wide range ofsectors.9 In the current environment of tight fiscal
revenues, fiscal reform will be required to generate
the necessary financial resources. Innovative public-private partnership arrangements could be also
pursued to fund such medium-term investment
projects.

9In Brazil, spillover effects from enhancements in agricultural
productivity have boosted credit supply and employment in service
and industrial sectors through banking linkages (Bustos, Garber, andPonticelli 2016). In Uruguay, ICT investments have boosted
productivity in the service and manufacturing sectors (Aboal andTacsir 2015).

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L A T I N AM E RI C A A N D T H E C A R I B B E A N

TABLE 2.3.1 Latin America and the Caribbean forecast summary(Real GDP growth at market prices in percent, unless indicated otherwise)

EMDE LAC, GDPa

(percentage point difference
from January 2016 projections)

2013

2014

2015e

2016f

2017f

2018f

2015e

2016f

2017f

2018f

2.9

1.0

-0.7

-1.3

1.2

2.1

0.2

-1.3

-0.9

-0.3

b

(Average including countries with full national accounts and balance of payments data only)
EMDE LAC, GDPb
GDP per capita (U.S. dollars)
PPP GDP

2.9

1.0

-0.7

-1.3

1.2

2.1

0.2

-1.3

-0.9

-0.3

1.7

-0.1

-1.8

-2.4

0.1

1.0

0.2

-1.3

-0.9

-0.4

3.0

1.3

-0.1

-0.8

1.5

2.2

0.3

-1.2

-0.7

-0.4

Private consumption

3.6

0.1

-0.8

-1.3

0.6

1.8

0.1

-1.2

-1.2

-0.2

Public consumption

2.6

4.2

0.7

-3.3

-1.1

0.4

0.6

-2.5

-0.6

-0.5

Fixed investment

2.9

-0.9

-5.5

-4.6

1.0

2.8

2.3

-1.7

-1.2

-0.2

Exports, GNFSc

1.4

1.6

3.5

3.9

4.4

4.8

0.9

-0.1

-0.1

0.1

Imports, GNFS

c

2.8

-0.2

-3.0

-0.9

1.2

3.8

0.2

-1.5

-1.0

0.4

-0.3

0.4

1.3

1.0

0.7

0.3

0.1

0.3

0.2

-0.1

South Americad

3.3

0.4

-1.9

-2.8

0.5

1.7

0.2

-1.7

-1.2

-0.3

Mexico and Central Americae

1.7

2.5

2.7

2.7

3.0

3.1

0.0

-0.3

-0.2

-0.3

Net exports, contribution to growthMemo items: GDP

Caribbean

f

3.1

3.8

3.4

2.6

3.2

3.2

0.1

-0.6

0.3

0.1

Brazil

3.0

0.1

-3.8

-4.0

-0.2

0.8

-0.1

-1.5

-1.6

-0.7

Mexico

1.4

2.3

2.5

2.5

2.8

3.0

0.0

-0.3

-0.2

-0.2

Argentina

2.9

0.5

2.1

-0.5

3.1

3.0

0.4

-1.2

1.2

0.0

Source: World Bank.
World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained inother Bank documents, even if basic assessments of countries’ prospects do not differ at any given moment in time.
a. EMDE refers to emerging market and developing economy. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. Excludes Cuba.
b. Sub-region aggregate excludes Cuba, Dominica, Grenada, Guyana, St. Lucia, St. Vincent and the Grenadines, and Suriname, for which data limitations prevent the forecasting of GDP
components.
c. Exports and imports of goods and non-factor services (GNFS).
d. Includes Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Paraguay, Peru, República Bolivariana de Venezuela, and Uruguay.
e. Includes Costa Rica, Guatemala, Honduras, Mexico, Nicaragua, Panama, and El Salvador.
f. Includes Antigua and Barbuda, The Bahamas, Barbados, Belize, Dominica, Dominican Republic, Grenada, Guyana, Haiti, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and the
Grenadines, Suriname, and Trinidad and Tobago.

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TABLE 2.3.2 Latin America and the Caribbean country forecastsa(percentage point difference
from January 2016 projections)(Real GDP growth at market prices in percent, unless indicated otherwise)
2013

2014

2015e

2016f

2017f

2018f

2015e

2016f

2017f

2018f

Argentina

2.9

0.5

2.1

-0.5

3.1

3.0

0.4

-1.2

1.2

0.0

Belize

1.3

4.1

0.9

0.8

1.8

2.2

-2.1

-1.7

-0.8

-0.6

Bolivia

6.8

5.5

4.8

3.7

3.4

3.4

0.8

0.2

0.0

0.0

Brazil

3.0

0.1

-3.8

-4.0

-0.2

0.8

-0.1

-1.5

-1.6

-0.7

Chile

4.3

1.8

2.1

1.9

2.1

2.3

0.0

-0.5

-0.8

-0.8

Colombia

4.9

4.4

3.1

2.5

3.0

3.5

0.0

-0.5

-0.3

0.0

Costa Rica

3.4

3.5

2.8

3.3

3.6

4.0

0.0

-0.7

-0.6

-0.4

Dominica

1.7

3.4

-4.0

2.5

2.0

2.0

-1.0

-1.5

0.0

0.0

Dominican Republic

4.8

7.4

6.9

5.0

4.3

4.0

1.3

0.4

0.5

0.1

Ecuador

4.6

3.7

0.3

-4.0

-4.0

0.0

0.9

-2.0

-4.0

-0.5

El Salvador

1.8

2.0

2.5

2.2

2.3

2.3

0.1

-0.3

-0.3

-0.5

Guatemala

3.7

4.2

4.1

3.5

3.5

3.6

0.4

-0.1

0.0

0.0

Guyana

5.2

3.8

3.0

4.0

3.9

3.8

-0.5

0.2

-0.1

-0.2

Haitib

4.2

2.8

1.2

0.9

1.9

2.2

-0.5

-1.6

-0.9

-0.8

Honduras

2.8

3.1

3.6

3.4

3.5

3.5

0.2

0.0

0.0

-0.1

Jamaica

0.5

0.7

0.9

1.5

2.2

2.6

-0.4

-0.6

-0.2

0.0

Mexico

1.4

2.3

2.5

2.5

2.8

3.0

0.0

-0.3

-0.2

-0.2

Nicaragua

4.5

4.7

4.9

4.4

4.2

4.1

1.0

0.2

0.1

0.1

Panama

8.4

6.2

5.8

6.0

6.1

6.2

-0.1

-0.2

-0.3

-0.4

Paraguay

14.0

4.7

3.0

3.0

3.2

3.4

0.2

-0.6

-0.8

-0.8

Peru

5.9

2.4

3.3

3.5

3.5

3.2

0.6

0.2

-1.0

-1.4

St. Lucia

-1.9

-0.7

1.6

1.5

2.0

2.0

-0.1

-0.1

0.1

-0.1

St. Vincent and the Grenadines

2.3

-0.2

1.8

2.4

3.1

3.1

-0.3

-0.3

0.1

-0.3

Trinidad and Tobago

2.3

-1.0

-2.0

-2.0

2.0

2.5

-2.0

-2.5

0.8

1.0

Uruguay

4.6

3.2

1.0

0.7

1.6

2.5

-0.5

-1.2

-1.2

-0.5

Venezuela, RB

1.3

-3.9

-5.7

-10.1

-3.4

1.6

2.5

-5.3

-2.3

1.6

Source: World Bank.
World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained inother Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time.
a. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars.
b. GDP is based on fiscal year, which runs from October to September of next year

Growth in the Middle East and North Africa was an estimated 2.6 percent in 2015, slightly weaker than in
2014. The sharp drop in oil prices over the past two years and the continuation of several serious conflicts aremajor factors holding back activity in the region. Growth is expected to be little changed in 2016, at 2.9
percent. The marginal improvement is largely due to the expected strong recovery in the Islamic Republic of Iranfollowing the lifting of sanctions in January 2016. Growth in most other oil-exporting countries, including mostGulf Cooperation Council (GCC) countries, will weaken in 2016, while performance in oil-importing
countries will be mixed because of varied macroeconomic and geopolitical challenges. Risks to the outlook aretilted to the downside and include further declines in oil prices, the escalation of conflict in some countries, andfragile security conditions in others. Key policy challenges are to improve government finances; reduce economic
dependence on oil; and address longstanding business environment, labor market, and financial sector
shortcomings.

Recent developments
Growth in the Middle East and North Africa wasan estimated 2.6 percent in 2015, slightly weaker
than the already subdued rate of 2.9 percent in2014 (Tables 2.4.1 and 2.4.2, and Figure 2.4.1).1
Performance diverged in oil-exporting and oilimporting country groups, with 2015 activity
slowing in exporters and strengthening inimporters from the previous year. Low oil prices
and ongoing conflict in the region are holdingback growth.
In oil-importing countries, growth reached 3.3
percent in 2015. Strong public investment andresilient private consumption supported an uptick
in growth in the Arab Republic of Egypt from 2.2
percent in FY2013/14 to 4.2 percent in
FY2014/15, while bumper agricultural output
Note: The author of this section is Dana Vorisek. Research assistance was provided by Qian Li.
1The EMDE grouping for the Middle East and North Africa(MENA) adds Gulf Cooperation Council (GCC) countries—
Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United ArabEmirates—to the developing MENA grouping. All GCC countries
are oil exporters. Other oil exporters are Algeria, the Islamic Republicof Iran, Iraq, and Libya. Oil importers in the region are Djibouti,
Egypt, Jordan, Lebanon, Morocco, Tunisia, and West Bank andGaza. The Syrian Arab Republic and the Republic of Yemen are
excluded from regional growth aggregates due to data limitations.

buoyed growth in Morocco. Jordan and Lebanon
face continued trade and investment challenges
stemming from the conflict in Syria and, in
Lebanon’s case, the economic slowdown in GCC
countries. Together with domestic political andsecurity challenges, continued spillovers fromexternal conflicts slowed growth in these twocountries in 2015. In Tunisia, several high-profile
terrorist attacks and the resulting adverse impact
on tourism, together with continued social unrest,
slowed growth to only 0.8 percent, although
historically high olive oil production boosted
agricultural output.
While strong domestic demand supported activity
in Egypt last year, net exports were weak, in part
caps on U.S. dollar deposits in banks. The
restrictions, intended to reduce the gap between
the official and black market exchange rates,
resulted in a shortage of foreign currency to pay
for raw materials and equipment. This contributed
to a sharp slowdown in manufacturing sector value
added and a contraction of goods exports by 17
percent in FY2015 that worsened by the end of
the calendar year. To support the economy, andwith reserves hovering around just three months ofimports, the central bank devalued the currency by
14 percent in March 2016 and announced that it
would adopt a more flexible exchange rate policy

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FIGURE 2.4.1 Growth and oil production
Growth in the Middle East and North Africa has slowed relative to its recent
historical level, largely reflecting weaker activity in oil-exporting countries.
The upswing in oil production in the Islamic Republic of Iran since thelifting of most sanctions in January is benefiting the domestic economy but
is occurring in an environment of already high supply, including in otherproducers in the region.

A. Oil production in five largest producers in MENA

B. GDP growthMillion barrels per day
Million barrels per day
Iraq
5.0 Iran, Islamic Rep.
10.5
KuwaitUAE
4.5 Saudi Arabia (RHS)
10.0

Percent
5

8.0

1

2.0

7.5
Jan-162

2.5
Jan-158.5

Jan-149.0

3.0

Jan-13

3.5

Jan-12

9.5

Jan-11

2015

2000-134

4.0

Jan-10

2014

3

0
MENA

Oil
importers

Oilexporters

Sources: International Energy Agency, Haver Analytics, national sources, World Bank.

(Figure 2.4.2). The devaluation was quickly
followed by a hike in the policy interest rate tolimit the impact of higher import prices on
inflation, which had moderated in the previous
months but was still elevated, at 9 percent (yearon-year) in February 2016.
In Jordan and Lebanon—two other oil-importing
countries with currencies pegged to the U.S.
dollar—deflation underway since early 2015
continues. In Morocco, decelerating inflation andgrowth expectations for 2016 led the central bankto lower interest rates in March. In some oilimporting countries (Lebanon, Morocco), low
global energy prices reduced the cost of imports in2015, narrowing current account deficits,
although Lebanon’s deficit remains very large, atan estimated 23 percent of GDP. Remittances to
non-GCC countries in the Middle East and North
Africa are estimated to have contracted by 0.9
percent in 2015 in U.S. dollar terms, largely
driven by a downward revision in estimated flows
to Egypt and, to a lesser extent, a depreciation of
the euro, the currency in which much of theremittances to other North African countries aredenominated (World Bank 2016f).
Though the extended period of low oil prices has
not been followed by a significant boost to growthin oil-importing countries in the region, it has

allowed several countries to adjust policy tocontain deteriorating public finances. This has
included lower spending on subsidies and wages(Egypt, Morocco) and cash transfers to households(Jordan), partly to offset a decline in aid from
GCC countries (Morocco). The authorities in
Morocco have shown notable commitment tofiscal adjustment, reducing the general
government deficit for three consecutive years.
However, deficits remain above 3 percent of GDP
in all oil-importing countries in the region, andare financed by a combination of domestic andinternational borrowing, including concessionalloans from international financial institutions(Jordan, Morocco, Tunisia). Budget shortfalls arecontributing to high and growing government
debt as a share of GDP, most prominently in
Egypt, Jordan, and Lebanon. In Egypt, interest on
this debt absorbs nearly one-third of government
revenues, and in Lebanon nearly half.
Unemployment, particularly among youth,
remains high in oil-importing countries. The
unemployment rate in Jordan averaged 13.7
percent in the second half of 2015, close to two
percentage points above the 2014 average, androse to 15.4 percent in Tunisia in the fourth
quarter, continuing an upward trend underway
since mid-2014. Unemployment in the WestBank and Gaza is also persistently high, at 26
percent. In Egypt, however, unemployment fellslightly in 2015, to 12.8 percent at year end.
Oil-exporting economies as a group grew by 2.5
percent in 2015, down from 3.0 percent in 2014.
In Iraq, a 20 percent increase in oil production
was the main force pulling the economy out ofrecession in 2015, despite low oil prices. In mostother oil-exporting countries, the steep decline inoil prices translated into 2015 growth rates thatwere below the 2000–13 average. In the Islamic
Republic of Iran, the combination of low oil prices
and uncertainty surrounding the timeline for thelifting of sanctions slowed growth significantly.
With fiscal and export revenues in most oilexporting countries in the region highly
dependent on the oil sector, the oil price collapse
since mid-2014 led to market prices that were well
below fiscal break-even prices (the price that

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

In contrast to high and rising inflation in mostemerging and developing oil-exporting economies
in other regions, domestic price growth is subdued
among oil exporters in the Middle East and North
Africa (other than Algeria and the Islamic
Republic of Iran), as currency pegs in most ofthese countries have kept nominal exchange rates
stable. However, low oil prices, together with anappreciated U.S. dollar, have raised concerns
about the sustainability of exchange rate regimes,
while recent subsidy reform in GCC countries is
now putting upward pressure on inflation.2
Foreign reserves are being depleted (particularly in
2Among oil-exporting countries in the region, Kuwait pegs its
dinar to an undisclosed basket of currencies, while other GCC countries and Iraq maintain conventional pegs against the U.S. dollar.

Low levels of foreign exchange reserves contributed to the Egyptian
central bank’s decision to devalue the currency in March. High inflation
remains a challenge in Egypt, while low commodity prices have led topersistent deflation in Jordan and Lebanon. Fiscal and current accountdeficits are significant, and in some countries worsening, despite theextended period of low-priced oil imports. Budget shortfalls arecontributing to already very high public debt in Egypt, Jordan, and,especially, Lebanon.
A. Exchange rate and foreign reservesin Egypt
Egyptian pounds per US$
Months of imports
5
10
Exchange rate
Reserves (RHS)
6
8

B. Inflation

Percent, year-on-year
Egypt
JordanMoroccoTunisia

Lebanon

15
10

7

6

8

4

9

2

0

10

0

-5

5

Jan-13Apr-13
Jul-13Oct-13Jan-14Apr-14Jul-14Oct-14Jan-15
Apr-15
Jul-15Oct-15Jan-16
Apr-16

Jan-10Jul-10Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13Jan-14Jul-14Jan-15
Jul-15Jan-16

C. Fiscal and current accountbalances

D. Government debt

-20
-25

30

10

-30

-30

0

0

Egypt

2015

2014

2015

2014

2015

2014

2015

2014

Jordan Lebanon Morocco Tunisia

Egypt

2016

20

-20
-25

2014

60

2016

30

-15

2014

-10

-15

2016

-10

2014

40

90

2016

120

2014

0
-5

-5

Percent of GDP

2016

Percent
Debt (LHS)Interest on debt/revenue
50

Percent of GDP

2014

150

Percent of GDP
Fiscal balance (LHS)
Current account balance0

2015

Budget adjustment in oil exporters is underway,
predominantly through cuts in infrastructure
spending, fuel and utility subsidies, andgovernment wage bills. While public debt ratios
were low in most of these countries prior to the oil
price plunge and remain at manageable levels in all
countries except Bahrain, Iraq, and Libya, otherindications of fiscal vulnerability have risen. In
early 2016, sovereign credit ratings of Bahrain,
Oman, and Saudi Arabia were downgraded(Bahrain to below investment grade), and credit
default swap spreads spiked. Spreads have sincereceded, but in Saudi Arabia and Bahrain theyremain elevated compared to levels of the past 12
months.

FIGURE 2.4.2 Macroeconomic conditions in
oil-importing countries

2014

balances the government budget) in 2015,
particularly in Libya, Bahrain, and Saudi Arabia.
As a result, fiscal positions have worsened, withlarge surpluses in several GCC countries in 2014
swinging into deficit in 2015 and existing deficits
in other oil-exporting countries worsening (Figure
2.4.3). A similar pattern can be observed incurrent account balances. Algeria, Iraq, andOman, and even more so Libya, face especiallylarge twin deficits. In GCC countries and inAlgeria, public assets (foreign reserves andsovereign wealth funds) have been drawn down tofinance fiscal deficits. Iraq’s government is issuing
domestic bonds, borrowing from commercial
banks, and plans to finance about 10 percent of
the budget shortfall with international bondissuance in 2016.

133

M I D D LE E AS T A N D N O R T H A F R I C A

Jordan LebanonMorocco Tunisia

Sources: Haver Analytics; International Monetary Fund, World Economic Outlook database; Moody’s;
World Bank.

Algeria, Iraq, and Saudi Arabia) to defend pegs or
to support budget overruns. With limitedmonetary autonomy, central banks in Bahrain,
Kuwait, Saudi Arabia, and the United ArabEmirates followed the U.S. Federal Reserve’s
December 2015 interest rate hike, despite theirsoft growth outlook and contained inflation.
Several recent geopolitical developments—namely,
the start of the post-sanctions era in the Islamic
Republic of Iran in mid-January, a January
political agreement in Libya, and a ceasefire
agreement in Syria at the end of February—are
expected to benefit the regional growth outlook.
Positive impacts for the Iranian economy,
particularly in the form of higher oil production,
are already apparent.

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FIGURE 2.4.3 Macroeconomic conditions in
oil-exporting countries
Fiscal and current account deficits deteriorated sharply in oil-exporting
countries in 2015 as oil-related government and export revenues
plummeted. This trend has been accompanied in some countries byreceding public foreign assets and other indicators of rising fiscal
vulnerability. In contrast to oil exporters in other regions, inflation remains
contained in the Middle East, reflecting stable currency pegs.
A. Fiscal and current accountbalances, GCC countries

B. Fiscal and current accountbalances, other oil-exporting
countries

5
0

-15

-20

-20

Algeria

BahrainKuwait Oman Qatar Saudi UAE
ArabiaIran,Islamic Rep.

2015

-10

-15

2014

-5

2015

-5
-10

2015

2014

2015

2014

2015

2014

2015

-20
-30

2014

-20
-30

2015

-10

2014

-10

2015

10
0

2014

10
0

Percent of GDP

0

2014

20

Percent of GDP
Fiscal balance (LHS)
Current account balance
5

2015

30
20

2014

Percent of GDP
40
Fiscal balance (LHS)
Current account balance
30

Percent of GDP
40

Iraq

C. Inflation

D. Foreign reserves

Percent, year-on-year
GCC
9
Iraq
Algeria
Other EMDE energy exporters
7

US$, billions
US$, billions
100
700
2015H1average-16%
2015H2 average +11%600
80
Latest month
500
60
400
40

100
Saudi
Arabia
(RHS)

0
UAE

0
KuwaitJul-15Oct-15Jan-16
Apr-16

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

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

-1

200

-6%

20

1

The main reason for the slight improvement inregional growth in 2016 is stronger activity in theIslamic Republic of Iran, the region’s secondlargest economy, which is forecast to grow 4.4
percent in 2016, up from an estimated 1.6 percent
in 2015, following the removal of sanctions(Figure 2.4.4).3 In Iraq, as well, there is expected
to be a strong increase in activity in 2016 (7.2
percent), reflecting rapidly rising oil production
and continued success by the government inregaining territory from ISIS, notwithstanding
supply disruptions early in the year.

300

-11%

+39%

Qatar

3

Oman

5

recognized parliament in the east of the country
and that the new government established under
the agreement will take office. In addition, growthin the Euro Area, a major trading partner ofseveral countries in the region, is expected toremain steady but modest in 2016–18. Given thatoil exporting economies account for four-fifths of
the region’s GDP, the expected recovery in oil
prices in 2017 is projected to lift regional growth
to an average of 3.6 percent in 2017–18.

Sources: International Monetary Fund (IMF), World Economic Outlook database; Haver Analytics;
Bloomberg; Kuwait Central Statistical Bureau; IMF International Financial Statistics database; WorldBank.
A. B. Libya is not shown because its balances are well outside of the ranges shown.
C. For the GCC and “other EMDE energy exporter” aggregates, line reflects median of inflation in the
country groups. The Islamic Republic of Iran is not shown because its inflation is outside the range
shown: an average of 18 percent in 2014, 14 percent in 2015, and 9 percent in the first three monthsof 2016.
D. Percentages above bars indicate the difference between the level of foreign reserves in the latest
available month and the average level in the first half of 2015. Last observation is April 2016 forKuwait and Oman and March 2016 for Qatar, Saudi Arabia, and United Arab Emirates.

OutlookThe baseline forecast envisages that growth in the
Middle East and North Africa will rise slightly in
2016, to 2.9 percent, 1.1 percentage points below
the January estimate, largely due to a lower pathfor oil prices. The outlook assumes an average oil
price of $41 per barrel for 2016, down from $51
per barrel assumed in January, and that the pricewill rise to $50 in 2017 and $53 in 2018. Other
assumptions are that there is no further worseningof negative spillovers from the conflict in Syria;
that the security situation in Iraq will continue toimprove slowly in 2016; and that Libya’s politicalagreement will be endorsed by the internationally-

Excluding the Islamic Republic of Iran, growth inoil-exporting countries in the region will besomewhat lower than in 2015, at 2.5 percent. For
GCC countries, continued low oil prices, together
with tightening fiscal and (to a lesser extent)
monetary policy, will be a drag on activity in2016. Growth in these countries is forecast to fallfrom 2.9 percent in 2015 to 2.0 percent this year,
the slowest pace since 2009. In Algeria, thecoming online of a gas project, together with solid
activity in the nonhydrocarbon sector, is expected
to result in growth of 3.4 percent this year, a fasterpace than in 2015.
For oil-importing countries, a lower aggregate
forecast for 2016 is due to slowing growth in thelargest economy, Egypt, where expected growth of
3.3 percent in FY2015/16 is well below theauthorities’ target of 5 percent. The weakness isdue to a sharp downturn in tourism since October
2015, softening business sentiment, and theforeign currency shortage that plagued theeconomy for most of the fiscal year. The currency
3U.S. primary sanctions remain in place, however, meaning that
direct engagement by U.S. businesses with the Islamic Republic of
Iran continues to be prohibited.

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M I D D LE E AS T A N D N O R T H A F R I C A

135

FIGURE 2.4.4 Growth outlook
The expected modest recovery in regional growth in 2016 will come mainly from a sharp acceleration of activity in the Islamic Republic of
Iran after the lifting of most sanctions. Growth in other oil-exporting countries will be restrained by fiscal consolidation and continued low oil
prices, while slowing activity in Egypt and Morocco will moderate aggregate growth in oil-importing countries. Business sentiment is falling
or already weak across the region. An envisaged turnaround in oil prices will support a modest regional growth recovery in 2017, but growthis expected to remain below the 2000-13 pace for the duration of the forecast period.

Composite PMI, >50 = expansion
65

55

US$ per barrel
Average annual price
Forecasted price
120
Average monthly price, 2000M1-2014M6
100

50

80

60

Sources: World Bank; national sources; Haver Analytics; International Monetary Fund, World Economic Outlook database.
B. Composite PMI considers manufacturing and services sectors.
C. Average annual price is the average of monthly data for each given year.

devaluation in March may boost the pricecompetitiveness of Egypt’s exports, however. In
Morocco, a significant contraction in agricultural
output in the early part of the year due to adrought will push growth down to 1.7 percent
from 4.4 percent in 2015, a strong harvest year. In
other countries, growth is expected to firm
somewhat in 2016, benefitting from increased
phosphate production (Jordan, Tunisia) andsubsiding negative trade and investment spillovers
from the war in Syria (Jordan, Lebanon). For
Morocco and Tunisia, which have deep trade ties
with Europe, a somewhat worse growth outlook in
the Euro Area than envisaged in January 2016
stands to restrain exports. An expected reductionin outward remittances from GCC countries in2017 and 2018 will impact some oil-importing
countries in the region (World Bank 2016f).
Procyclical fiscal consolidation is underway inmost oil-exporting countries. Public expenditure
cuts of 14 percent in Saudi Arabia, 11 percent inOman, 9 percent in Algeria, 8 percent in Iraq, andsmaller amounts in Kuwait, Qatar, and the United
Arab Emirates have been outlined in 2016budgets.
Energysubsidy
reforms
wereimplemented in all GCC countries in 2015 or
early 2016, and have begun to be put into effect inAlgeria. Modest efforts to expand revenue havealso been implemented, including raising

corporate and consumption taxes, but in the shortterm will not make up for large revenue losses in2015 from plummeting oil prices (Figure 2.4.5). A
GCC-wide agreement to enact a value-added tax
at an expected rate of 5 percent at the beginningof 2018 was announced in March. Increasingly,
governments will rely on domestic andinternational debt issuance to finance deficits, andin some cases will continue using public assets.
The downward pressure on growth from fiscal
consolidation will be reinforced in the GCC
countries by tightening monetary policy intandem with any rate increase in the UnitedStates. Central banks in the GCC and Iraq remaincommitted to their longstanding currency pegs,
despite pressure on forward exchange rates insome countries.
For the Islamic Republic of Iran, the easing of
sanctions has opened the country to international
trade and investment. In April 2016, crude oil
production was 3.6 million barrels per day (mbd),
25 percent higher than average monthly
production in 2015, and already at the upper endof the 0.5–0.7 mbd increase estimated last
October for the post-sanctions period (Devarajan
and Mottaghi 2015). The post-sanctions era also
holds strong promise for the Iranian financial
services, mineral and metals, and manufacturingindustries (Ianchovichina, Devarajan, and Lakatos

2018

2016

2014

20
2012

Jul-15Jan-16

Jul-14Jan-15

Jul-13

Iran,
Islamic
Rep.

40
Jan-14

Oil
Oil
importers exporters
excl. IranJul-12

MENA

35

Jan-13

0

60

Egypt
LebanonSaudi Arabia
United Arab Emirates
Jul-11

40

Jan-12

45

1

Jul-102

Jan-11

3

Jan-104

2010

2000-13

2008

2018

2006

2017

2004

2015 2016

C. Oil price outlook

2002

Percent
5

B. Purchasing managers indexes

2000

A. GDP growth136

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FIGURE 2.4.5 Policy outlook in oil-exporting countries

Risks

Public expenditure cuts are being implemented in response to theprolonged period of low oil prices, but will not be enough to offset large
declines in public revenues in the near term. Budget sustainability willremain a challenge in the forecast period. Central banks intend to maintainexchange rate pegs but pressure in foreign exchange markets remains
elevated in some countries, albeit below highs reached in early 2016.
B. Gap between 12-month forward andspot exchange rates in GCC countries

US$, billions
160

Forward points
1700
Bahrain
Kuwait
Oman
1100
Qatar
Saudi Arabia
United Arab Emirates
500

-160

Expenditure-250(RHS) -350
DZA IRQ KWT OMN QAT ARE SAU-100
4/2/2016-120

1/2/2016

-150

-80

7/2/2015-50-40

10/2/201550

0

4/2/2015150

40

1/2/2015250

7/2/2014

Revenue

10/2/2014

80

US$, billions350

4/2/2014

120

2014
2015
2016e

A. Fiscal adjustment in oil-exporting
countries

Sources: International Monetary Fund, World Economic Outlook database; Bloomberg; World Bank.
A. 2016e = 2016 expected. DZA = Algeria, IRQ = Iraq, KWT = Kuwait, OMN = Oman, QAT = Qatar,
SAU = Saudi Arabia, ARE = United Arab Emirates.
B. All exchange rates are against the U.S. dollar.

2016). There is also potential to exploit large,
untapped natural gas reserves, although this iscontingent upon significant investment in the
sector and improvement in the domestic businessand regulatory environment.
To the extent that higher Iranian oil production
marginally reduces global oil prices, the impact of
the country’s reintegration into the global
economy is likely to be negative for other oilproducing countries, including those in the
Middle East. Moreover, higher Iranian oil output
will occur as other developments, including anannouncement by Saudi Arabia in May to increase
production in 2016 and the mid-April collapse ofa draft agreement among major oil exporters tofreeze production at January 2016 levels, may put
downward pressure on prices. The impacts of theIslamic Republic of Iran’s reintegration into theglobal economy through trade channels are morechallenging to assess, but exports from theEuropean Union to the Islamic Republic of Iran,for instance, stand to approximately double if theyrebound to the levels seen prior to the tighteningof sanctions in 2012.4 Countries neighboring Iranmay benefit from increased trade links and travel.
4A positive effect for the European Union (EU) is consistent withthe findings of Ianchovichina, Devarajan, and Lakatos (2016), whichfinds that the EU’s economic output would increase following theremoval of sanctions on the Islamic Republic of Iran.

Risks to the growth outlook for the Middle Eastand North Africa are mainly to the downside.
Three risks stand out: a further slide in oil prices,
escalation of conflict, and further negative effects
of security challenges and social unrest in
countries not entrenched in war.
Should average annual oil prices not reach atrough in 2016, it would likely trigger additional
downgrading of the forecast for oil exporters in
the region. Weaker growth would be accompanied
by intensification of fiscal vulnerabilities; furtherpressure on exchange rate pegs; and, in Bahrain,
Iraq, and Libya, set the stage for a rise ingovernment debt beyond already high levels.5 In
addition, low oil prices have the potential togenerate negative feedback effects through thefinancial sector. In Saudi Arabia, low growth of oil
prices and nonoil private sector GDP are found tobe associated with nonperforming loan ratios andlower credit and deposit growth in the banking
sector (Miyajima 2016).
Even with some positive recent developments
regarding conflicts in the region, the potential for
conflict-related spillovers remains high. In
addition, due to a large number of casualties, theseconflicts have resulted in significant loss of humanand physical capital in domestic, and neighboring,
economies (Devarajan and Mottaghi 2016). Someestimates indicate that direct and indirect losses of
the war in Syria and the advance of ISIS had beena cumulative $35 billion in Egypt, Iraq, Jordan,
Lebanon, Syria, and Turkey (in 2007 dollars) as of
mid-2014, and to have, on average, reduced
Syria’s output growth by about 10 percentage
points per year below what it would have been
between 2011 and 2014 (Ianchovichina andIvanos 2016). In Yemen, infrastructure and public
service delivery damage from conflict in four cities
between March and October 2015 is estimated tohave been $4.1 to 5 billion (World Bank 2016m),
approximately 13 percent of Yemen’s GDP as of

5In Bahrain, government debt in 2015 was already above the 60
percent threshold stipulated by the future GCC monetary union, andis expected to rise to approximately more than 80 percent in 2016
and significantly higher in the medium term.

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

Policy challenges
Policy challenges in Middle East and North
African countries are centered on ensuring
macroeconomic stability in an environment ofsustained low oil prices, ongoing conflict, andlongstanding challenges related to competitiveness.
Both oil-exporting and oil-importing countries
face substantial fiscal challenges. While
expenditure cuts in oil exporters implemented in2015 and underway in 2016 are a step in the right
direction, additional cuts are needed to achievefiscal sustainability, together with a boosting of
non-oil-sector revenues—through tax increases,
policy changes encouraging private sector
participation and investment, or other changes.
Moreover, these further adjustments will need tobe carried out against the backdrop of alreadysubdued growth and shrinking foreign assets.
With increasing reliance on sovereign debt
issuance to finance government deficits, oilexporting countries should ensure that they havesolid debt management frameworks in place. Oil
exporters would also benefit from implementing
fiscal frameworks that better manage oil price
6The assessment covers the health, education, energy, water andsanitation, transport, and residential housing sectors in Sana’a, Aden,
Taiz, and Zinjibar.

B. Conflict risk

Deviation from 3-year average, thousands

Score, scale 0–12, 0=highest risk
EAP ECA LAC MENA
6500

Egypt: October 2015 Sinai plane crash
Tunisia: June 2015 Sousse attack

300

SAR

SSA

Apr-15

A. Tourist arrivals around major
terrorist events

Apr-14

Major terrorist attacks in the region over the past year have been followedby sharp contractions in tourist arrivals and value added in the hotels andrestaurants sector. Internal conflict risk in the Middle East and North Africa
has risen much more over the past five years than in other emerging anddeveloping regions.

7

100

8

-100
9
-300

Apr-16

Apr-13Apr-12

Apr-11

Apr-10

Apr-09Apr-08MonthsApr-0710-500

Apr-06In several countries not grappling with widespreaddomestic conflict (including Egypt, Jordan,
Lebanon, Tunisia), a worsening of fragile domestic
security or political stability could sap domestic
sentiment and investor confidence and undermine
economic activity. A series of high-profile terrorist
attacks in Egypt and Tunisia in 2015 highlighted
the destructive effect of these incidents for the
tourism industry (Figure 2.4.6). Conflict risk in
the Middle East and North Africa has risen much
faster than in other emerging and developing
regions over the past decade. Poor security
conditions reflect both spillovers from conflicts
and the absence of material improvement in living
and business environment conditions in the five
years since the Arab Spring.

FIGURE 2.4.6 Risks

t-6
t-5
t-4
t-3
t-2
t-1
t
t+1
t+2
t+3
t+4
t+5
t+6

2013, the year of the most recently compiled
national accounts.6

137

M I D D LE E AS T A N D N O R T H A F R I C A

Sources: Haver Analytics, PRS Group, World Bank.
A. t = month of attack.
B. Figure shows median internal conflict risk among all emerging and developing economies in eachregion ranked in the PRS Group’s International Country Risk Guide. The internal conflict risk scoreassesses political violence and its actual or potential impact on governance and is based on threesubcomponents, each scored on a scale of 0–4. The subcomponents are civil war/coup threat,terrorism/political violence, and civil disorder. Sample includes 104 countries, categorized into regions
according to the World Bank definitions. EAP = East Asia and Pacific, ECA = Europe and Central
Asia, LAC = Latin America and the Caribbean, MENA = Middle East and North Africa, SAR = SouthAsia, and SSA = Sub-Saharan Africa.

volatility. Among oil importers, government debtto-GDP ratios need to be reduced to moremanageable levels in Egypt, Jordan, and especially
Lebanon, where debt levels are among the highestof all emerging and developing economies. The
complex situation posed by the continued
presence of a large number of Syrian refugees willcomplicate debt reduction in Jordan and Lebanon,
however.
Monetary policy challenges in the region are lesspronounced than fiscal policy challenges but arenotable in some countries. As the Islamic Republicof Iran reintegrates into the global economy, thecountry’s monetary authorities will need to keep
inflation in line with the stated targets and unify
the exchange rate regime (the latter of which isintended to be complete by the end of
September), and to ensure banking sector stability(IMF 2015e). In Egypt, the central bank will needto continue efforts to rein in inflation against the
backdrop of stabilizing oil prices and the passthrough of subsidy reductions in 2015 and thedevaluation in the first quarter of 2016.
GCC policymakers are putting greater priority on
structural reforms to reduce pressure on public

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FIGURE 2.4.7 Policy challenges
Export and government revenue losses imposed by low oil prices
underscore the pressing need to diversify away from oil in Algeria, Iraq,
and most of the GCC countries. Across much of the region, there is a needto address uncompetitive business environments, labor market inefficiency,
and insufficiently developed financial markets—measures by whichcountries in the Middle East and North Africa have largely stagnated or
backtracked in recent years relative to other emerging and developing
economies.
A. Oil dependence, 2014

80

Percentile
100

2016

2011

2006

Yemen

Government revenues
Goods exports

Percent
100

Iraq

B. Ease of doing business

80

60

60

40

40

20

Syria

Algeria

Egypt

LebanonWest Bank

JordanIran,Islamic Rep.

Libya

Tunisia

2010-11

Iran,
Islamic Rep.
Algeria

2013-14

Egypt

EMDE
average2015-16

Lebanon

0

Egypt
Iran,
Islamic Rep.

20

0
Algeria40

20
Tunisia60

40

Morocco60

Lebanon80

Jordan80

GCC
average
EMDE
average

Tunisia

Percentile
100

Jordan2013-14

Morocco2015-16

D. Financial market development

GCC
average

Percentile
100

MoroccoAlgeria

Iran,
Islamic Rep.

United ArabEmirates

KuwaitBahrain

Qatar

Oman

Saudi Arabia

Iraq

C. Labor market efficiency

0

GCC
average

20

0Sources: International Monetary Fund; World Bank, Doing Business indicators; World Economic
Forum; World Bank.
B. Figure shows the percentile rankings of indicated countries among the set of emerging anddeveloping economies included in the World Bank’s Doing Business “ease of doing business”
indicator: 152 countries in 2016, 148 in 2011, and 122 in 2006. A decrease in the percentile ranking
over time indicates a deteriorating business environment.
C. D. Figures show the percentile scores of indicated countries among the set of emerging anddeveloping economies included in the World Economic Forum’s Global Competitiveness Survey forlabor market efficiency (103 countries in 2015–16, 110 in 2013–14) and financial market development
efficiency (103 countries in 2015–16, 110 in 2013–14, and 101 in 2010–11). Labor market efficiency
rankings for 2010–11 are excluded because the methodology differs from that used in the more
recent surveys. A decrease in the percentile score over time indicates deteriorating labor market or
financial market conditions.

finances, including easing restrictions to private
sector participation in key economic sectors andprivatizing state-owned companies. The details ofreforms, such as those outlined in Saudi Arabia’s
Vision 2030 plan released in April, are still being
developed. In the medium term, the export andgovernment revenue losses imposed by low oil
prices highlight the need to reduce highdependence on oil in Algeria, Iraq, and most of the
GCC countries (Figure 2.4.7). Yet in anenvironment of continued low oil prices, which
are expected be well below 2010–14 levels in themedium term, diversification is likely to bechallenging. Large emerging markets in otherregions that have successfully diversified theireconomies away from oil (Indonesia, Malaysia,
and Mexico) have made relevant policy
adjustments during periods of strong oil revenues(Callen et al. 2014; Cherif and Hasanov 2016).
For GCC countries, where business climates arefor the most part already quite competitive among
emerging and developing economies, theexperience of other countries suggests that a
combination of horizontal (creating linkages
between existing industries) and vertical(development of sectors, particularly tradable
sectors, outside their traditional comparativeadvantage) dimensions is key to successful
diversification (Cherif and Hasanov 2016).
In countries other than those in the GCC,
longstanding structural challenges include
uncompetitive business environments, labormarket inefficiency, insufficiently developed
financial markets, and insufficient and poorquality infrastructure (in particular, electricity;
Mitra et al. 2016). Recent assessments of countries
in the Middle East and North Africa indicate thatsome countries are now faring worse incomparison to other emerging and developing
economies than they were during the past decade(World Economic Forum 2015; Doing BusinessIndicators 2016).

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139

M I D D LE E AS T A N D N O R T H A F R I C A

TABLE 2.4.1 Middle East and North Africa forecast summary(Real GDP growth at market prices in percent, unless indicated otherwise)

EMDE MENA, GDPa

(percentage point difference
from January 2016 projections)

2013

2014

2015e

2016f

2017f

2018f

2015e

2016f

2017f

2018f

2.0

2.9

2.6

2.9

3.5

3.6

-0.2

-1.1

-1.0

-0.5

(Average including countries with full national accounts and balance of payments data only)b
EMDE MENA, GDPb

2.0

3.4

2.7

2.7

3.1

3.3

0.0

-0.8

-0.9

-0.6

GDP per capita (U.S. dollars)

0.0

1.4

0.8

1.0

1.5

1.8

-0.1

-0.8

-0.9

-0.7

PPP GDP

1.8

3.5

2.7

2.9

3.3

3.5

-0.1

-0.8

-0.9

-0.6

Private consumption

3.1

3.8

2.6

2.8

3.0

3.3

-0.6

-0.4

-0.4

-0.2

Public consumption

6.6

6.8

2.3

0.2

0.7

2.2

-1.5

0.3

-3.7

-2.5

Fixed investment

2.6

3.2

-2.6

-2.4

1.8

2.3

2.2

-7.5

-5.5

-2.8

Exports, GNFSc

1.4

3.3

3.5

4.9

4.6

4.4

-2.3

0.3

0.1

-0.5

Imports, GNFSc

3.2

5.4

0.9

-0.5

3.3

4.0

-0.6

-4.9

-1.4

-0.7

Net exports, contribution to growth

-0.6

-0.6

1.4

2.6

1.0

0.7

-0.7

2.1

0.6

0.2

1.8

3.0

2.5

2.9

3.5

3.5

-0.1

-1.2

-1.0

-0.5

Memo items: GDP
Oil exporters
GCC countries

d

3.3

3.4

2.9

2.0

2.3

2.7

-0.1

-1.0

-0.9

-0.5

Saudi Arabia

2.7

3.6

3.4

1.9

2.0

2.3

0.6

-0.5

-0.9

-0.6

Iran, Islamic Rep.

-1.9

4.3

1.6

4.4

4.9

4.7

-0.3

-1.4

-1.8

-1.3

2.9

2.7

3.3

2.9

3.7

4.0

-0.2

-0.6

-0.4

-0.4

1.4
2.1

4.0
2.2

3.6
4.2

3.8
3.3

4.4
4.2

4.6
4.6

-0.4
0.0

-0.3
-0.5

-0.2
-0.2

-0.2
-0.2

Oil importers
Egypt, Arab Rep.
Fiscal year basis

Source: World Bank.
World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained inother Bank documents, even if basic assessments of countries’ prospects do not differ at any given moment in time.
a. EMDE refers to emerging market and developing economy. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. Excludes Syrian Arab
Republic and Republic of Yemen due to data limitations.
b. Sub-region aggregate excludes Djibouti, Iraq, Libya, and West Bank and Gaza, for which data limitations prevent the forecasting of GDP components.
c. Exports and imports of goods and non-factor services (GNFS).
d. Gulf Cooperation Council (GCC) countries include Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates.

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TABLE 2.4.2 Middle East and North Africa country forecastsa(Real GDP growth at market prices in percent, unless indicated otherwise)(percentage point difference
from January 2016 projections)

2013

2014

2015e

2016f

2017f

2018f

2015e

2016f

2017f

2018f

Algeria

2.8

4.1

2.9

3.4

3.1

2.7

0.1

-0.5

-0.9

-1.1

Bahrain

5.4

4.5

2.9

2.2

2.0

1.9

0.4

-0.5

-0.7

-0.9

Djibouti

5.0

6.0

6.5

6.5

7.0

7.0

0.0

-0.5

-0.1

0.0

Egypt, Arab Rep.

1.4

4.0

3.6

3.8

4.4

4.6

-0.4

-0.3

-0.2

-0.2

Fiscal year basis

2.1

2.2

4.2

3.3

4.2

4.6

0.0

-0.5

-0.2

-0.2

Iran, Islamic Rep.

-1.9

4.3

1.6

4.4

4.9

4.7

-0.3

-1.4

-1.8

-1.3

Iraq

6.6

-2.1

2.4

7.2

4.7

5.2

1.9

4.1

-2.4

-1.3

Jordan

2.8

3.1

2.4

3.0

3.3

3.6

-0.1

-0.5

-0.5

-0.4

Kuwait

1.2

-1.6

-1.3

1.3

1.6

2.4

-2.5

-1.1

-1.1

-0.3

Lebanon

3.0

1.8

1.5

1.8

2.3

2.5

-0.5

-0.7

-0.2

-0.5

Libya

-13.6

-24.0

-10.2

14.0

40.0

20.0

-5.0

-21.7

12.4

11.6

Morocco

4.7

2.4

4.4

1.7

3.4

3.6

-0.3

-1.0

-0.6

-0.4

Oman

3.9

2.9

3.3

1.6

1.9

2.6

-0.4

-1.6

-1.1

0.1

Qatarb

4.6

4.1

3.9

3.3

3.5

4.0

-2.7

-3.5

-2.4

-1.0

Saudi Arabia

2.7

3.6

3.4

1.9

2.0

2.3

0.6

-0.5

-0.9

-0.6

Tunisia

2.4

2.3

0.8

1.8

2.5

3.0

0.3

-0.7

-0.8

-1.5

United Arab Emirates

4.3

4.6

3.4

2.0

2.4

3.0

0.4

-1.1

-0.9

-0.5

West Bank and Gaza

2.2

-0.2

3.5

3.3

3.5

3.6

0.6

-0.6

-0.2

-0.1

Source: World Bank.
World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained inother Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time.
a. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. Excludes Syrian Arab Republic and Republic of Yemen due to data limitations.
b. A recent rebasing of Qatar’s GDP from 2004 to 2013 prices has resulted in significant revisions to historical and forecast growth rates compared to January 2016.

Growth in South Asia is expected to reach 7.1 percent in 2016, and to strengthen to 7.3 percent by 2018,
underpinned by robust domestic demand. In the near term, consumption spending continues to benefit from low
oil prices and modest inflation rates, although these effects will wane in the medium term. An accommodative
monetary stance, public investments in infrastructure, and progress on the structural reform agenda should
support growth. Risks to the forecast are weighted to the downside. On the external front, volatility in financial
markets could lead to large capital outflows from the most vulnerable emerging market economies in the region.
Lower remittance inflows could dampen consumption spending and the growth outlook in the region’s smaller
economies. Domestic risks include slower-than-expected progress in structural reform, vulnerabilities in bankand corporate balance sheets, and fiscal challenges. Reforms to strengthen macroeconomic stability, address
business environment deficiencies (including energy shortages), and resolve non-performing loans problems will
improve the region’s prospects for growth and for further poverty reduction.

Recent developments
Economic activity in South Asia has remained
resilient despite headwinds from the global
economy. GDP growth reached 7 percent in 2015
(Table 2.5.1), making it the fastest-growing
developing region. Robust domestic demand
momentum (Figure 2.5.1), the main growth
driver, continued through the first half of 2016.
India is the region’s largest and fastest-growing
economy, but Pakistan, Bangladesh, and Bhutan
also show strengthening activity. Most South
Asian economies have benefitted from the decline
in oil prices and the resulting benign inflationary
environment and steady remittance flows.
Monetary policies have been accommodative.
Some economies have benefitted from a pick-up
in the pace of reform or from improvements in the
security situation. Nonetheless, to varying degrees,
weak external demand, a challenging businessenvironment (e.g., energy and infrastructure
constraints), fiscal pressures, and poor weather
have encumbered activity in some of the region’s
economies.

Note: The author of this section is Allen Dennis. Research
assistance was provided by Yiruo Li.

Growth in India picked up to 7.6 percent in
FY2015/16, a 0.4 percentage point increase over
FY2014/15 (Table 2.5.2), driven largely bydomestic demand. Partly thanks to the ongoingliberalization of India’s foreign direct investment(FDI) regime, FDI to India surged 37 percent
from the launch of the “Make in India” campaign
in October 2014 to February 2016, with thecomputer software and automotive sectors
attracting the bulk of this investment.
Manufacturing activity, though dampened byweak external demand, accelerated 9.3 percent in
the final quarter of FY15/16. Relative to otherlarge emerging economies, purchasing manager
indices for India reflect more buoyant sentiment(Figure 2.5.2). Business start-ups are on the rise,
particularly in the e-commerce and financial
services sector.1 The ensuing job creation fromstrengthening economic activity and boost to real
income from low inflation and increase in wages2
are lifting urban consumption. Furthermore,increased public investment in power generation,
roads, railways and urban infrastructure is
1In January 2016, there were 19,400 technology-enabled startups,of which 5000 were started in 2015.
2According to firm-level survey data from the Reserve Bank ofIndia, staff costs rose by an average of 15.4% in FY2014/15 andFY2015/16.

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FIGURE 2.5.1 Domestic growth
Domestic demand is the main driver of the region’s growth.
A. GDP growth by country

Percent
82014

B. Contribution to regional growth bydomestic demand and net exports

2015e

2016f

Net exports
Domestic demand
GDP growth

Percent
8

6

7

4

6
5

Nepal

Maldives

Afghanistan

Pakistan

Sri Lanka

Bangladesh

3
2

Bhutan

4

0

India

2

1
0

2013

-1

2014

2015e

2016f

Source: World Bank.
A. GDP data for 2015 is estimated and GDP data for 2016 is a forecast. For Bangladesh, Bhutan,
India, Nepal, and Pakistan (factor cost), fiscal year real GDP growth figures are used.
B. GDP data for 2015 is estimated and GDP data for 2016 is a forecast.

FIGURE 2.5.2 Foreign direct investment and PMIs
The opening up of more sectors for foreign participation, along with otherreforms, has supported the rise in FDI to India. Relative to most other large
emerging market economies, India’s PMIs have been higher in recent
months.
A. Growth in foreign direct investment
to India

B. Manufacturing PMI

Percent

Index
India Brazil China Russia South Africa

35
54

20

52
50

5

48

-10

46
44

-25

Apr-16

Jan-16Oct-15

Jul-15

Apr-152009 2010 2011 2012 2013 2014 2015

Jan-1542-40

Source: Haver Analytics.
B. Index numbers greater than 50 represent an expansion and vice versa.

contributing
toanimprovedbusiness
environment and reduced supply-side constraints.
Nonetheless, India faces notable headwinds. Rural
consumption has been hard-hit by two years ofpoor monsoons (rainfall in 2015/16 was 14
percent below the historical average). Despite fiveinterest rate cuts since 2015, credit growth to thecorporate sector remains sluggish because ofstressed asset quality in the banking sector(especially for claims on the aviation,
infrastructure, iron, and steel sectors) Weak
exports also weigh on growth – February marked
the 15th consecutive month of decline.
In Pakistan, GDP growth picked up to 4.2
percent (at factor cost) in FY 2015/16 –its highest

pace in seven years. This pickup was supported byseveral positive factors: an improving security
situation, lower oil prices, higher remittances, anacceleration in credit growth, and rising public
investment. The country’s Extended Fund Facility
arrangement with the IMF remains on track. The
fiscal deficit was reduced to 5.3 percent of GDP in
2015, from 8.4 percent in 2013, as revenues
improved and recurrent expenditures werecurtailed. Ongoing security concerns (even if
improving) and chronic energy deficiencies have
weakened FDI, but a pick up is expected with thecommencement of the China Pakistan Economic
Corridor program. Nonetheless, domestic
investment remains weak.
In Bangladesh, growth is estimated to havereached 6.5 percent in FY2015/16, supported byincreased public investment, public sector wage
increases, and steady remittance flows. Despite thecontraction in global trade, Bangladeshi exports
expanded by 15.5 percent in FY2015/16, with
rapid growth in garment exports, where it holds asignificant labor cost advantage. However, private
investment continues to be held back by a poor
business environment, inadequate infrastructure,energy bottlenecks, weak bank balance sheets, andoccasional civil unrest. Economic activity in Sri
Lanka steadied at 4.8 percent in 2015 supported
by robust consumption, and strong growth in theservices and agricultural sectors. However, earlier
loose monetary policy and rising fiscal deficits
have led to a deterioration in the current accountbalance and gross external reserves position. Sri
Lanka is discussing a program with the IMF – in
April 2016 it reached a staff level agreement for a$1.5 billion Extended Fund Facility.
Inflation. Low global oil and food prices,
tightening fiscal policy (India, Pakistan), easing
electricity bottlenecks (India, Pakistan), reductionof administered food and energy prices (SriLanka), and in some countries benign weather
conditions for food production (Bangladesh) have,to various degrees, reduced inflationary pressuresacross the region.3 Headline and core inflation

3The impact of lower oil prices on GDP growth ranges from 0.5
to 3.6 percentage points in South Asia (World Bank 2015f; Afshin
and Zahran 2015).

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FIGURE 2.5.3 Inflation
Inflation is generally below targets, in part because of the drop in energy
prices. Core inflation is also low. Interest rates have been cut or sustainedat moderate levels for most economies in the region.
A. Inflation

Percent

CPI

7
6
5
4
3
2
1
0

Inflation target

Core inflation
11

Bangladesh

Sri Lanka

India

Pakistan

9

Sri Lanka

Apr-16

Jan-16

Jul-15Oct-15

Apr-15Jan-15

Jul-14Oct-14Apr-14

5

Jan-14

Pakistan

India

Bangladesh

7

Sources: World Bank, Central Bank News, Haver Analytics, Central Bank of Sri Lanka.
A. CPI data are year-on-year headline inflation for the average of the latest three months. The
inflation target for Sri Lanka is indicative. The inflation targets of Bangladesh and Pakistan are for
FY2016 . In Bangladesh the upper limit of the target is shown. The inflation target of India was 6
percent by January 2016 and is 4 percent by FY2016/17. Core inflation is on a year-on-year basis forthe latest 3 months.

FIGURE 2.5.4 Fiscal indicators
Except in India, fiscal deficits widened in 2015. The revenue base remains
relatively low in comparison to other emerging markets and developing(EMDE) regions.
A. Fiscal balances
Percent of GDP

B. Debt
2013
2015e

2014
2016f

Percent of GDP
80

-3
60
40

-6

20

C. Tax revenue to GDP

D. Tax revenue to GDP

Tax revenues, percent of GDP

Percent of GDP

50

20

40

15

30

10

RegionSouth Asia

Nepal

Bangladesh

EMDE

India

Pakistan

Sri Lanka

Sri Lanka

Bangladesh

0

India

-9

SAR average

5

20

NPL

12

India

Afghanistan

11

Bangladesh

7
8
9
10
Real GDP per capita

Sri Lanka

6

Pakistan

5

EAP

0

SSA

0

PAKIND LKA

AFG

World

10

ECA

In Bangladesh, above-inflation public sector wage
increases and below-target revenue collection (dueto weakness in tax administration) widened the
deficit. The under-execution of budgeted public
investment projects eased fiscal pressures in
Bangladesh and Nepal, but may set back long-run
growth. In Sri Lanka, an expansionary fiscal policy
has contributed to the increased deficit and debt
levels. Efforts are underway to address thedeterioration in public finances, including theincrease in the VAT rate from 11 to 15 percent.
Government debt levels in South Asia are higher

Percent

Pakistan

Fiscal Policy. The fiscal situation remains diverse
across the region. India and Pakistan are on a pathof fiscal consolidation, whereas fiscal deficits areon the rise in Bangladesh and Sri Lanka (Figure
2.5.4). Fiscal consolidation in India has been
supported by an increase in excise duties,
simplification of the tax regime, including theremoval of tax exemptions, better expenditurecontrol, and rationalization of some subsidies (inIndia, fuel subsidies fell to 0.1 percent of GDP in2015 from 0.75 percent; see IMF 2016g).
Notwithstanding delays to the Goods and Services
Tax (GST) reform, other measures underway inIndia include: further fiscal decentralization as thestates are to receive greater share of revenues fromthe central government; better targeting oftransfers through the use of direct benefit
transfers; higher rates of indirect taxes; andimprovements in tax administration (including
expanding the use of electronic platforms to assess
and file taxes and measures to reduce uncertainty
and litigation in the paying of taxes). The packageof measures should support the objective in the
FY2016 Union Budget to reduce the fiscal deficit
by 0.4 percentage point. In Pakistan, fiscal
consolidation has been supported by the rollingback of tax exemptions and increases to petroleum
and excise taxes (IMF 2016h). If the planned
divestment
fromstate-owned
enterprisematerializes in both India and Pakistan, it willcontribute to further fiscal consolidation.

B. Central bank policy rates

EMDE

remains below target levels for most of the region’s
economies (Figure 2.5.3). In contrast, inflation in
Nepal was elevated on account of supply
disruptions after the earthquake in 2015, tradedisruptions with India, and poor monsoon rains.

143

S O U TH A S I A

Source: World Bank.
A. Data for 2015 is estimated and data for 2016 is forecasted.
B. Debt refers to the general government gross debt in percent of GDP. EMDE is the unweighted
average for emerging markets and developing economies.
C. The data used is for 2012, except for Canada, Mali, Nepal, Pakistan, Rwanda, United ArabEmirates and the United States where 2013 data are used. AFG = Afghanistan, IND = India, LKA =Sri Lanka, NPL= Nepal, and PAK = Pakistan. Logarithm of real GDP per capita in U.S dollars.
D. EAP = East Asia and Pacific, ECA = Europe and Central Asia, EMDE = emerging markets anddeveloping economies, SSA = Sub-Saharan Africa, and SAR = South Asia. The SAR and EMDE
average is the unweighted average of the latest available tax-to-GDP ratio data.

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FIGURE 2.5.5 Current account balances and remittances
The decline in oil prices and resilient remittance flows have supported theimprovement in current account balances, notwithstanding weak export
demand.
A. Current account balances
Percent of GDP

2013
2015e

B. Reserves
2014
2016f

Percent, year-on-year
Bangladesh India
90
Sri Lanka
Pakistan

1
-0.5

60

-2

30
0

Bangladesh

C. Remittance inflows

68

15

5

0

Nepal

60

Sri Lanka

10

Bangladesh

10

PakistanApr-16Oct-15

Jul-1520

64

India (LHS)

Apr-15

30

India

20

Percent of GDP

Pakistan

US$, billions

Bangladesh

2015e

Sri Lanka

2014

D. Remittance inflows

Nepal

US$, billions
72

Jan-16-30

Jan-15

Pakistan

India

Sri Lanka-3.5

Sources: World Bank, Migration and Remittances database; International Monetary Fund; Haver
Analytics; Central Bank of Sri Lanka.
A. Data for 2015 is an estimate and data for 2016 is forecasted.
C. Data for 2015 is an estimate. 2016 forecast numbers are not available by individual country. However, for the region as a whole, remittances are expected to increase by 4.6 percent.
D. Data are taken from Migration and Remittances database, April 2016.

than in other developing regions. In Bhutan,
Maldives and Sri Lanka, government debt levels
are above 70 percent of GDP. In Afghanistan,where the debt-to-GDP ratio is low, fiscalpressures are mounting as aid inflows decline andthe deteriorating security situation puts pressureon military expenses.
Current Account. Notwithstanding weak tradingpartner growth, current account balances have
improved for most of the region’s economies, inlarge part due to the decline in oil prices (Figure
2.5.5). Remittance flows have been broadly steadyin Bangladesh and Sri Lanka, and increased inPakistan, as a result of rising migrant populations
and a gradual improvement in some destination
economies (e.g., in Europe). In contrast, Bhutan’scurrent account deficit widened to 30 percent in
FY2015/16 as a result of capital imports for largehydropower projects. These projects are being

funded by India; upon their completion, they are
expected to increase Bhutan’s electricity exports tothat country.
Gross International Reserves. Reserve buffers remain
comfortable or improved in most countries in theregion, compared to a year ago. In Pakistan,increased disbursements from the IMF and othermultilateral and bilateral sources have contributed
to the build-up of its gross international reserves.
Reserves are also higher in Bangladesh, India, andMaldives. In contrast, along with its fiscal
situation, import cover ratios in Sri Lanka
deteriorated to an estimated 3.5 months.
Reflecting
improved
macroeconomic
fundamentals, capital outflows from India werelimited during the global financial market turmoil
earlier this year. However, Sri Lanka, along withother emerging and frontier market economies,
experienced significant capital outflows. Gross
official reserves in Sri Lanka fell to $6.3 billion in
March 2016 from $7.3 billion in December 2015.

Outlook
Growth in South Asia is expected to remain robust
at 7.1 percent in 2016, picking up to 7.3 percent
in 2018 (Table 2.5.1). This represents, adownward revision from the January forecast,mainly due to external factors. Weaker-thanexpected growth in advanced economies will
dampen export growth. Fiscal consolidation in
GCC countries will slow remittance flows, mainly
affecting the outlook for the smaller economies
that rely heavily on remittances (Bangladesh,
Nepal and Sri Lanka). Gradually tightening
financing conditions will increase externalborrowing costs for economies with access tointernational capital markets (notably corporate
borrowing in India and public sector borrowing in
Sri Lanka). Poor monsoons in India continue tohave a negative impact on rural incomes, and on
output in agriculture-intensive sectors. In somecountries, these factors will be mitigated, at leastin the short run, by various developments. Public
investment is on the rise in Bhutan, India, Sri
Lanka; public sector wages are increasing in
Bangladesh and India; and market-friendly
reforms are in progress in India and Pakistan. A
normalization of weather conditions (as El Niño

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

subsides) will lift agricultural
Bangladesh and India.

outputS O U TH A S I A

inIndia will continue to grow faster than its large
emerging market peers, with growth rates of 7.67.7 percent from FY2016/17 to FY2018/19.4
Rural incomes and spending should improve withthe return to normal monsoons, as the benefits ofdirect transfers through the rolling out of themobile banking initiative (Jan Dhan Aadhaar
Mobile) are realized and improvements inagricultural productivity improve. New sectors
will continue to attract FDI. As of December
2015 some $45.7 billion (2.2 percent of GDP)
had been pledged under the “Make in India”
campaign. Private domestic investment is expected
to benefit from an accommodative monetary
policy. In addition, the government’s planned
investment in infrastructure, and the streamliningof business procedures and of the tax regime, areexpected to alleviate some constraints, and crowdin private investment (Bahal, Raissi, and Tulin2015). Nonetheless, private investment will still beheld back by infrastructure bottlenecks, achallenging regulatory environment, and by tightcredit amidst the ongoing resolution of stressed
assets in the banking sector. If implemented asplanned, continued fiscal consolidation from 2016
onwards should support investor confidence inIndia through future bouts of turmoil in global
financial markets.
Pakistan will benefit from expected improvements
in power supply and to its security situation.
Investments under the China Pakistan Economic
Corridor project will provide a boost to demandin the short run, and over time alleviate
transportation bottlenecks and energy shortages.
Ongoing monetary accommodation will support
an expansion of credit for domestic borrowers.
Pakistan is expected to continue on its path of
fiscal consolidation. Sri Lanka’s growth is expected
to pick-up to 5.3 percent over the forecast period,
despite monetary and fiscal tightening. Growth
will be supported by infrastructure spending
financed by sizable FDI flows as part of the

4FY2016/17 Consensus forecasts for India range from 7.0 to 7.9
percent with a median of 7.6 percent, and for FY 2017/18 it ranges
from 6.7 to 8.2 percent with a median forecast of 7.8 percent.

government’s Port City and Western Province
Megapolis initiatives. Also, recent policy measures
to curb imports will contribute to growth. In
Bangladesh, growth is expected to ease to 6.3
percent in FY2016/17, as a result of poor harvests
and slowing credit, before rising to 6.8 percent in
FY2017/18 on the back of rising public sector
wages and improving harvests. Growth inAfghanistan will be subdued. Security problems
hinder private investment, especially FDI into theminerals sector, and a decline in aid inflows
exacerbates the fiscal situation. In Bhutan,
construction of large hydropower projects andtheir subsequent exports will boost incomes. An
expected pick-up in tourism, and supportive fiscal
stance, will also contribute to a strengthening of
economic activity.

Risks
Risks to the forecast are weighted to the downsideand predominantly domestic.
Domestic risks to growth and fiscal positions
include setbacks in reform implementation. These
include reforms affecting the allocation of labor,
land and capital, including the removal of
impediments to productivity (Shah and Chadha2016). Reforms delays may be related toentrenched political obstacles to privatization(Pakistan), and land and tax reforms (India).
Delays would compromise future productivity anddampen growth prospects and, in some instances,increase fiscal pressures (in both India andPakistan, the budget projections take into accountproceeds from strategic disinvestments).
Although the region’s systemic banks do not rely
heavily on wholesale funding, vulnerabilities inbank balance sheets may lead to financial stressand weigh on lending. Several banks must raise
their capital adequacy ratios to meet Basel III
requirements. Some
corporate borrowers,
particularly state-owned enterprises, are facing
sizable losses, which could eventually turn into
nonperforming bank loans and contingent
government liabilities (e.g., India, Pakistan).
However, in India stress tests suggest that the
government is adequately resourced to recapitalize
public sector banks were they to face a severe

145

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C H A P TE R 2. 5

deterioration in asset quality (Lindner and Jung2014).
External risks include weaker-than-expected global
trade and an unexpected tightening of global
financing conditions. South Asian economies will
not be immune to such developments, eventhough the region is less integrated with global
markets than other developing regions.
Heightened volatility in financial markets could
lead to a reversal of capital flows and debt rollover
difficulties. Countries in the region with weakerbuffers and exposure to international capital
markets are likely to be the most adversely
affected. If the ongoing fiscal consolidation in
GCC countries is sharper than expected,
remittance flows to the region could slow sharply,in particular to Bangladesh, Nepal, and Sri Lanka(World Bank 2016f; Wickramasekara 2016,
Kelegama 2011). Furthermore, while the baseline
forecast assumes that oil prices will recover only
gradually over the forecast horizon, supply shocks(for instance, due to a geopolitical event) could
lead to a spike in prices. Since the region is a net
oil importer, this would weaken incomes andoutput growth.
As an upside risk, weather patterns could be better
than expected. India has been through two poor
monsoons in a row, due to the El Niño
phenomenon. Historically, El Niño years are often
followed by La Niña, which is associated withbumper harvests (NOAA 2016). Hence thepossibility of La Niña could yield an upswing toagricultural output, rural income and spending,and lower food inflation. Average GDP growth inIndia for La Niña years has been 8.4 percent(India Ministry of Finance 2016), well above thecurrent projection through 2018.

Policy challenges
Growth in South Asia has been remarkably strong,
and with it, a steep decline in poverty rates overthe past two decades.5 However, some of the
tailwinds that have supported South Asia’s recent
5South Asia’s poverty rate fell from about 51 percent in 1990 (574
million poor) to 19 percent in 2012 (309 million poor; World Bank
2015d).

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

strong performance (e.g., significantly lower oil
prices) are likely to fade over the medium term
(World Bank 2016n). South Asian economies
need to pursue macroeconomic policies that
address areas of vulnerability and implement
reforms to raise efficiency and productivity (Rajan
2016).
Against the backdrop of a fragile global economy,
the priority for fiscal policy is to build fiscal
buffers and reduce debt. This will give policy
makers some flexibility to respond to future
shocks with fiscal stimulus. Measures to raise
direct tax revenues, which are low even by
emerging market and developing country
standards (India Ministry of Finance 2016), will
free fiscal space for much-needed public
investment. Such measures include theintroduction and implementation of a GST tax(India), broadening the tax base (India and Sri
Lanka), reducing exemptions (Sri Lanka)
strengthened fiscal responsibility legislation(Pakistan), and improved tax administration(Bangladesh, India, Pakistan, Sri Lanka).
Efforts to raise revenue would benefit if they arecomplemented with better quality of spending. To
this end, appropriate measures include
strengthened public financial management(Bangladesh, Sri Lanka), and a shift fromrecurrent spending to spending on physical capital(roads, ports, energy infrastructure) and humancapital (health and education). Such investments
lay a long-term foundation for growth (Mallick
2016; Leduc and Wilson 2012; Pereira andPereira 2015). To contain fiscal spending andinflationary pressures, subsidies could be further
reduced (Bangladesh, India) and proposed public
sector wage increases (Bangladesh, India) could
receive additional scrutiny.
Easing inflation pressures have allowed some
central banks (Bangladesh, India) to cut policy
rates and others (Pakistan) to maintain theiraccommodative policy stances. Since the drop inenergy prices is responsible for only part of thedecline in inflation, as evidenced by the low rateof core inflation, policy easing has been warranted.
In contrast, in Sri Lanka, rising core inflation andhigh credit growth have compelled the central

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

FIGURE 2.5.6 Banking sector vulnerabilities
Non-performing loans remain high, and are rising in some countries.
A. Non-performing loans

B. Non performing assets in India

Percent of total loans

Percent of grossadvances
616Sound insolvency legislation and procedures
encourage bank lending and support thereallocation of resources to the most productive
uses. Bankruptcy processes in South Asia areamong the most challenging, with insolvency
processes that take an average of two and halfyears, and recovery rates of only about 32 cents on
the dollar (Doing Business Indicators 2016). Suchbarriers to legal resolution of debts delay the exitof unviable firms, and hinder productivity gains
from reallocation of resources to more productive
firms (Bloom et al. 2011). Slow exit and factor
reallocation may partly account for low total factor
productivity in the Indian manufacturing sector,
which estimates place at 40-60 percent below
potential (Hsieh and Klenow 2009). In thisregard, the recent passing of India’s newbankruptcy law, which introduces time limits to
the recovery of debts, should help improve thebusiness regulatory environment and a more
efficient allocation of resources.

12

Private and foreign banks
Public banks
All

4

8

2

4

FY2015-16Q1

FY2014-15Q4

FY2014-15Q3

FY2014-15Q2

FY2014-15Q1

FY2013-14Q4

FY2013-14Q3

FY2013-14Q2

India

Sri Lanka

Bangladesh

BhutanPakistan

Afghanistan

FY2013-14Q1

0

0

Maldives

Stressed assets in the banking sector implies some
impairment of bank capital, hence the need for aswift recapitalization of systemically importantbanks to restore buffers against futurecontingences (Rajan 2016). In India, the share ofstressed assets (non-performing loans plus
restructured loans) has risen by over 1.5
percentage points since 2013. Public sector banks(which represent about 76 percent of totalbanking system assets) account for most of the
problem. A resolution of the issue would facilitate
easier access to loans by credit-worthy borrowers,
and thereby boost investment. In Afghanistan,
Bangladesh, Bhutan and Pakistan non-performing
loans amount to between 9 and 13 percent of thetotal loan portfolio (Figure 2.5.6).

FY2012-13Q4

bank to tighten policy. Once oil prices stabilize or
eventually begin to rise, monetary policy rate
tightening may also be required elsewhere in theregion if inflation rises above targets or more
sharply than consistent with macroeconomic
stability.

147

S O U TH A S I A

Sources: Reserve Bank of India, World Bank.
A. The chart shows the latest observation of each country. For Afghanistan, Bhutan, India, Maldives,
Pakistan, and Sri Lanka the latest year is 2015. For Bangladesh, the latest year is 2014.
B. Public sector banks account for 76 percent of total bank assets, and private and foreign banks
account for 24 percent.

Addressing energy bottlenecks in South Asia
remains critical for sustaining the region’s longterm growth (Wijayatunga and Fernando 2013).
In Pakistan, which has an annual energy deficit ofabout 5000MW, power shortages may haveshaved off about 4 percentage points of GDP
growth per year (Kugelman 2015). Similar
shortages are reported in Bangladesh. These can beaddressed with a combination of institutional
reforms,
additional
generation
capacity,
privatization of state-owned generation anddistribution companies, rationalization of utility
tariffs, improved tariff collection, and measures toconserve energy (Sethi 2015). Some success isevident in India, where the peak electricity deficit
in India declined to its lowest level on record (2.4
percent) in 2015, thanks to ongoing government
investment and reforms that have increased
generation capacity. Further, unrestricted crossborder electricity trading within the sub-region
holds great potential, saving up to some $9 billion
per annum of electricity costs (Singh et al. 2015;
Timilsina et al. 2015)

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TABLE 2.5.1 South Asia forecast summary(percentage point difference(Real GDP growth at market prices in percent, unless indicated otherwise)from January 2016 projections)

EMDE South Asia, GDPa, b

2013

2014

2015e

2016f

2017f

2018f

2015e

2016f

2017f

2018f

6.1

6.8

7.0

7.1

7.2

7.3

0.0

-0.2

-0.3

-0.2

c

(Average including countries with full national accounts and balance of payments data only)
EMDE South Asia, GDPc

6.1

6.8

7.1

7.2

7.3

7.3

0.1

-0.1

-0.2

-0.3

GDP per capita (U.S. dollars)

4.7

5.4

5.7

5.8

5.9

6.0

0.1

-0.2

-0.3

-0.2

PPP GDP

6.1

6.8

7.1

7.1

7.2

7.3

0.1

-0.2

-0.3

-0.2

5.7

6.0

6.0

6.7

6.8

6.5

-0.5

0.1

0.5

0.3

Private consumption
Public consumption

1.6

9.7

9.6

6.6

6.5

6.6

1.5

-0.9

-0.1

0.2

Fixed investment

3.9

4.7

7.2

7.1

8.1

8.8

2.5

-2.0

-3.3

-2.7

Exports, GNFSd

6.8

2.6

-2.9

2.7

5.9

7.5

-5.2

-1.3

0.9

1.8

d

-2.4

0.7

-1.8

1.6

5.0

6.3

-3.4

-3.0

-0.8

-0.2

2.6

0.4

-0.2

0.1

-0.1

0.0

-0.3

0.4

0.3

0.5

13/14

14/15

15/16e16/17f

17/18f

18/19f

15/16e16/17f

17/18f

18/19f

4.9

5.4

5.3

5.3

5.5

5.4

-0.4

-0.5

-0.5

-0.6
-0.2

Imports, GNFS

Net exports, contribution to growthMemo items: GDPb
South Asia excluding India
India

6.6

7.2

7.6

7.6

7.7

7.7

0.3

-0.2

-0.2

Pakistan (factor cost)

3.7

4.0

4.2

4.5

4.8

5.1

0.0

0.0

0.0

0.3

Bangladesh

6.0

6.1

6.5

6.3

6.8

6.0

0.0

-0.4

0.0

-0.8

Source: World Bank.
World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained inother Bank documents, even if basic assessments of countries’ prospects do not differ at any given moment in time.
a. EMDE refers to emerging market and developing economy. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars.
b. National income and product account data refer to fiscal years (FY) for the South Asian countries, while aggregates are presented in calendar year (CY) terms. The fiscal year runs from
July 1 through June 30 in Bangladesh, Bhutan, and Pakistan, from July 16 through July 15 in Nepal, and April 1 through March 31 in India. 2014 data for Bangladesh, India, and Pakistan
cover FY2014/15.
c. Sub-region aggregate excludes Afghanistan, Bhutan, and Maldives, for which data limitations prevent the forecasting of GDP components.
d. Exports and imports of goods and non-factor services (GNFS).

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

S O U TH A S I A

149

TABLE 2.5.2 South Asia country forecasts(Real GDP growth at market prices in percent, unless indicated otherwise)(percentage point difference
from January 2016 projections)

2013

2014

2015e

2016f

2017f

2018f

2015e

2016f

2017f

2018f

Afghanistan

2.0

1.3

1.5

1.9

2.9

3.6

-0.4

-1.2

-1.0

-1.4

Bangladesh

6.1

6.3

6.4

6.6

6.4

6.0

-0.2

-0.2

-0.4

-0.8

India

6.4

7.1

7.5

7.5

7.6

7.7

0.2

-0.2

-0.3

-0.2

Maldives

4.7

6.5

1.9

3.5

3.9

4.6

-2.5

0.4

-0.3

0.1

Nepal

4.9

4.4

1.7

2.7

4.5

4.4

-0.9

-1.0

-0.6

-0.1

Sri Lanka

3.4

4.9

4.8

5.3

5.3

5.3

-0.5

-0.3

-0.7

-0.7

13/14

14/15

15/16e16/17f

17/18f

18/19f

15/16e16/17f

17/18f

18/19fBangladesh

6.0

6.1

6.5

6.3

6.8

6.0

0.0

-0.4

0.0

-0.8

Bhutan

3.9

5.8

6.7

6.8

8.0

8.0

-0.1

-0.4

2.4

2.0

India

6.6

7.2

7.6

7.6

7.7

7.7

0.3

-0.2

-0.2

-0.2

Nepal

3.8

6.0

2.7

0.6

4.7

4.4

-0.7

-1.1

-1.1

-0.1

Pakistan (factor cost)

3.7

4.0

4.2

4.5

4.8

5.1

0.0

0.0

0.0

0.3

Calendar year basisaFiscal year basis a

Source: World Bank.
World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained inother Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time.
a. Historical data are reported on a market price basis. National income and product account data refer to fiscal years (FY) for the South Asian countries with the exception of Afghanistan,
Maldives and Sri Lanka, which report in calendar year (CY). The fiscal year runs from July 1 through June 30 in Bangladesh, Bhutan, and Pakistan, from July 16 through July 15 in Nepal,
and April 1 through March 31 in India. 2014 fiscal year data, as reported in the table for India, Pakistan, Bangladesh, Nepal, cover FY2014/15. GDP figures presented in calendar years (CY)
terms for Bangladesh, Nepal, and Pakistan are calculated taking the average growth over the two fiscal year periods to provide an approximation of CY activity. Historical GDP data in CY
terms for India are the sum of GDP in the four calendar quarters.

Growth in Sub-Saharan Africa is projected to slow again in 2016, to 2.5 percent, down from an estimated 3.0
percent in 2015. The forecast is 1.7 percentage points lower than the January 2016 projections. Low
commodity prices, tightening global financial conditions, and drought in parts of the region will continue toweigh on growth this year. The recovery is expected to strengthen to an average of 4.1 percent in 2017-18,
driven by a gradual improvement in the region’s largest economies and as commodity prices stabilize.
Nonetheless, risks to the outlook remain tilted to the downside, including a sharper-than-expected slowdown inmajor trading partners, further decline in commodity prices, delays in adjusting to the negative terms-of-trade
shocks, worsening drought conditions, and political and security uncertainties. Key policy challenges include
adjusting to an era of low commodity prices, addressing economic vulnerabilities, and developing new sources ofgrowth.

Recent developments
GDP growth in Sub-Saharan Africa (SSA) slowedmarkedly in 2015 to an estimated 3.0 percent,down from 4.5 percent in 2014 (Figure 2.6.1).
Low commodity prices, rising borrowing costs,
and adverse domestic developments in several
countries significantly impacted activity in theregion. Per capita GDP growth weakened to 0.3
percent, compounding the challenge ofaccelerating poverty reduction. The slowdown wasparticularly pronounced among oil exporters(Nigeria, Republic of Congo), but activity also
weakened substantially in non-energy mineralexporters (Botswana, South Africa, Zambia).
Domestic impediments were an important
contributory factor in countries affected byelectricity shortages (Nigeria, South Africa,
Zambia), the Ebola epidemic (Guinea, Liberia,
Sierra Leone), conflict (Burundi, South Sudan)and political and security uncertainties (Burkina
Faso, Chad, Mali, Niger, Nigeria). However,many other oil-importing countries continued toregister robust growth, reflecting their morediverse export base. This was the case in Coted’Ivoire and more broadly the West African
Economic and Monetary Union (WAEMU),
Note: The author if this section is Gerard Kambou. Research
assistance was provided by Xinghao Gong.

where growth exceeded 6 percent in 2015.
Rwanda and several countries in the East African
Community (Ethiopia, Tanzania) grew at about 7
percent or more, supported by infrastructure
investment, construction, and expanding services.
The fall in commodity prices represented asignificant shock for a region for which
commodities make up a large share of exports(Box 2.6.1). Oil exporters, in particular,
experienced a sharp deterioration in their termsof trade, which strained their fiscal and current
account balances. Most commodity prices
rebounded in February-March on improved
market sentiment and weakening U.S. dollar.
Nevertheless, average prices are generally low,compared to their level in the fourth quarterof 2015, and are expected to remain subdued in
the medium-term (World Bank 2016o).
Meanwhile, production has continued to fall in a
number of commodity exporters. In Nigeria,
militant attacks in the oil-producing region
contributed to a sharp decline in oil output. In
South Africa, mining output fell by an annualized
and seasonally-adjusted 18.1 percent (q/q) in
2016Q1, led by contractions in copper, platinum,and iron ore.
The plunge in commodity prices has been further
exacerbated by reduced capital inflows, with cross-

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FIGURE 2.6.1 Economic activity

agricultural production and exerting pressures on
their fiscal and external positions.

Growth in Sub-Saharan Africa slowed significantly in 2015 to 3.0 percent,down from 4.5 percent in 2014, due in part to low commodity prices. The
impact of the decline in commodity prices has been most severe on oil
exporters. In several instances, adverse domestic developments
exacerbated the direct impact of declining commodity prices. In Nigeria,
electricity and fuel shortages and policy uncertainty adversely affected
activity in the non-oil sector. In South Africa, a severe drought reduced
agricultural production and hydroelectricity generation.
A. GDP growth in Sub-Saharan Africa

B. Commodity prices

Percent
6

Cumulative percent change of nominal index,
2010=1000Percent
8

2013

2012

2011

2016

2015

2014

2013

-4

2012

0

2011

-2

2010

0

2

2010

2

4

2009

4

6

2008

6

8

2007

10

Electricity, gas and water
Total GDP

2006

Real GDP
Non-oil GDP

Gold

Percent
12

2016

D. South Africa: GDP growth

2005

C. Nigeria: GDP growth

2015

Sub-Saharan Sub-Saharan Sub-SaharanAfrica oil
Africa oil
Africaexporters
importers

Tea

0

Cocoa

-80

June-Dec. 2014
Dec. 2014-Apr. 2016

2014

-60

1

Coffee-40

2Copper

-20

3

Oil

4

Iron ore

5

Platinum

2014
2016f

Natural gas

2013
2015e

Sources: Haver Analytics, World Bank, International Monetary Fund Article IV staff reports, Statistics
South Africa.
Note: Gray area denotes forecast.

border bank lending and Eurobond issuancedeclining. At the start of 2016, marked concerns
about growth in large emerging markets and about
plunging oil prices led to a further tightening of
external financial conditions for developing
economies. These developments have prompted
many countries in the region to delay plans to tap
the international bond market. In mid-April,South Africa issued 10-year government bonds atfavorable coupon rates. However, sovereign bondspreads have remained elevated among oil
exporters (Figure 2.6.2), reflecting markets’assessment of deteriorating economic conditions,and suggesting that Eurobond issuance is likely toremain expensive for these countries. In addition,
a number of countries, especially in Southern
Africa, are facing severe El Niño-related drought
conditions that are adversely impacting

The current account balances of oil exporters
have deteriorated sharply. A decline in export
volumes has compounded the fall in oil prices insome countries (Nigeria, South Sudan).
Non-oil commodity exporters also saw theircurrent account deficits widened, in part because
the improvement in oil prices was offset by the
decline in the price of their commodity exports.
The deterioration of current account balances has
exposed many commodity exporters to a reversalof capital flows. In Nigeria, capital flows were 74
percent (y/y) lower in the first quarter of 2016,
with portfolio inflows slowing significantly. The
persistently low commodity prices exerted
downward pressures on the currencies ofcommodity exporters, raising the value of their
public debt denominated in foreign currency. As aresult, a number of countries (Angola,
Mozambique, Zambia) that have tapped theinternational bond market face significant
refinancing and exchange rate risks, which arecompounded by rising sovereign spreads. Most of
the region’s currencies stabilized at the end of thefirst quarter, reflecting the rebound in commodity
prices and a decline in global risk aversion. The
Angolan kwanza and Mozambican metical,
however, continued to depreciate against the U.S.
dollar, as investor sentiment weakened.
The pass-through of nominal exchange rate
depreciation, compounded by the impact ofdrought on food supply and the removal of fuelsubsidies, contributed to a rise in inflation incommodity exporters (Figure 2.6.3). Headline
inflation has increased sharply in Angola,
Mozambique, Nigeria, and Zambia, exceeding thecentral banks’ targets. Core inflation also edged
upward. To contain inflation, authorities in a
number of countries responded to the pressures on
exchange rates by tightening monetary policy(Angola, Mozambique, Nigeria, South Africa). In
some countries (Angola, Burundi, Nigeria),
monetary authorities introduced administrative
measures in a bid to support their currency. The
foreign exchange controls introduced by theCentral Bank of Nigeria have helped stabilize theofficial exchange rate. However, the parallelG L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

exchange rate has depreciated sharply against the
U.S. dollar. This has driven inflation higher,
stifled private sector demand, and contributed tothe slowdown in non-oil GDP growth and decline
in reserves. In March, against the backdrop of a
sharp increase in core inflation, the Central Bankof Nigeria raised its key policy rate, but left theforeign exchange restrictions in place. Nigeria’s
real GDP contracted by 0.4 percent (y/y) in
Q12016. In contrast, in a number of oilimporting countries (Kenya, Tanzania, Uganda),
inflation has eased in recent months, reflecting a
steady exchange rate and disinflationary pressuresfrom lower food and oil prices. This prompted
the Bank of Uganda to cut interest rates in April,followed by the Central Bank of Kenya in May.

S U B- S A H A R A N A F R IC A

FIGURE 2.6.2 External sector developments
External positions weakened across the region as a result of the decline incommodity prices. The current account deficit widened in oil exporters,
and remained elevated among oil importers due to strong import growth
driven by large public investment projects. The commodity price shock
was exacerbated by reduced capital inflows in the region. Cross-borderbank lending fell and bond issuance softened from their record 2014
levels. Sovereign spreads rose in the region and have remained elevatedamong oil exporters. The deterioration of the current account balancesacross countries increased the region’s external debt.
A. Current account balance

B. Capital flows

Oil exporters
Oil exporters ex. Nigeria
Oil importers

Percent of GDP
10

US$, billions
50

Outlook
The external environment confronting SubSaharan Africa is expected to remain less favorable
in the near term. Commodity prices will remainlow (Figure 2.6.5) amid only a gradual pickup in
global activity, and external financing conditions
will tighten further. Against this backdrop, average
growth in SSA is projected to slow further in
2016, to 2.5 percent, reflecting low growth among
oil exporters, before rising to 4.1 percent in 201718. The projected pickup in growth is contingent
on commodity prices stabilizing and on
improvement in conditions in the region’s largest
economies – Angola, Nigeria, and South Africa.

Equity issue
Bond issue
Bank loans

40

5

30

0

20

-5

10

-10

0

-15

2013

2010 2011 2012 2013 2014 2015 2016f

2014

C. Sovereign bond spreads

D. Total external debt

Basis points
1500
1300

40

1100
900

Percent of GDP

Africa region
Emerging markets
Gabon
Ghana
NigeriaSouth Africa

2015

2016
Jan-AprOil exporters
Oil exporters ex. Nigeria
Oil importers

35
30
25

700
500

20

300
100

10

Jan-16Aug-15Oct-14Mar-15May-14Jul-13

Dec-13

Feb-13Apr-12

Sep-12

Jun-11

15

Nov-11

Fiscal positions have weakened across the region(Figure 2.6.4). The median fiscal deficit increased
from 3 ¾ percent of GDP in 2014 to 4 ½ percent
in 2015, the highest in more than five years. The
deterioration in the overall fiscal balance was due
to a number of factors, including low commodity
prices, decelerating capital inflows, and weakgrowth, which depressed revenues. The mediangovernment debt ratio reached 48 ½ percent of
GDP in 2015, up from 36 ½ in 2014, driven byrising fiscal deficits in some countries (Angola,
Mozambique, Zambia) and currency depreciationsin others (Tanzania, Zimbabwe). In this context,
sovereign debt ratings have been recently
downgraded in a number of countries, including
Angola, Mozambique, Republic of Congo, andZambia.

153

502010 2011 2012 2013 2014 2015 2016f

Sources: Bloomberg; Haver Analytics; World Bank; International Monetary Fund, Regional Economic
Outlook.

Average per capita GDP growth is expected toremain weak in 2016, at -0.1percent, before rising
to 1.4 percent in 2017-18.
Underlying the regional outlook is the continued
divergence between oil exporters and importers.
The prospects for a significant pickup in private
consumption growth in oil exporters remain weakin the near term, due in part to rising inflation.
The removal of subsidies to alleviate pressure on
budgets has resulted in higher fuel costs
in Angola which, coupled with currency
depreciation, are expected to weigh on consumers’purchasing power. By contrast, lower inflation in
oil importers (Kenya, Tanzania), owing in part tolower fuel prices, should support real incomes andconsumer spending. However, food price inflation
due to drought in a number of countries (Zambia,

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BOX 2.6.1 Macroeconomic effects of low commodity prices in Sub-Saharan Africa
Commodity prices. The sharp declines in commodity
prices have been a major factor behind the marked
slowdown in the region over the past year. The commodity
price shock was compounded by the increase in the shareof commodities in the region’s exports. Fuels, ore, andmetals account for more than 60 percent of the region’sexports, compared with 16 percent for manufactured and10 percent for agriculture goods (World Bank 2015g). Oilprices have declined markedly, falling by 67 percent since
mid-2014. Despite a recent rebound, oil prices haveremained low due to strong supply conditions. Among
non-energy commodities, metal prices sustained a steep
drop, with large declines in the prices of iron-ore,
platinum, and copper, owing to weak global demand.
Agricultural prices fell at a slower pace, amid higher stocks
and increased production for some commodities despite astrong El Niño episode. Looking to 2017, a modest
recovery is projected for most commodities as demandstrengthens. Crude oil is projected to rise to $50/bbl from$41/bbl in 2016 (World Bank 2016l).
Economic activity. Reflecting the sharp decline in oil
prices, average growth in oil-exporting countries is
estimated to have slowed from 5.3 percent in 2014 to 2.5
percent in 2015. In Nigeria, the region’s largest oil
exporter and economy, growth more than halved from 6.3
percent in 2014 to 2.7 percent in 2015. In several
instances, adverse domestic developments exacerbated the
direct impact of declining oil prices. In Nigeria, electricity
and fuel shortages, policy uncertainty, and security threats
depressed activity in the non-oil sector. In other oil
exporters, conflict (South Sudan), and Boko Haraminsurgencies (Cameroon, Chad) diverted resources fromdevelopment goals.
Economic activity weakened substantially in non-energy,
mineral-exporting countries (Botswana, Guinea, Liberia,
Sierra Leone, South Africa, Zambia). Sharp declines in theprice of metals, their main commodity exports, played amajor role. The adverse impact of low metal prices wascompounded by domestic challenges. In Southern Africa(Botswana, South Africa, and Zambia), a severe drought
reduced agricultural output and hydroelectricity
generation. In South Africa, the marked decline inelectricity production also reflected inadequate investmentin the power sector. Insufficient electricity supply
constrained activity in the manufacturing sector, slowing
the overall pace of GDP growth. In addition, politicaltensions kept business confidence low and put pressures on
the currency. In Guinea, Liberia, and Sierra Leone, theeconomy had already been hit by the Ebola crisis, whichbegan to recede at the end of 2015.
In comparison, the slowdown has been less pronounced inother non-oil exporting countries. In Mozambique,planned investment projects for the liquefied natural gas
sector were delayed due to low commodity prices, whichweighed on growth.
In Uganda, a large currency
depreciation spurred a tightening of monetary conditions
that dampened domestic demand. Nevertheless, comparedto the regional average, growth has remained robust inthese countries, reflecting their more diversified exportbase. Among oil importers, Ethiopia, Rwanda, andTanzania recorded solid growth. Growth remained
buoyant in Kenya, amid improving investor sentiment.
Despite terrorist attacks in some member countries (Mali,
Niger), the West African Economic and Monetary Union
continued to experience robust growth in 2015, helped inpart by increased agricultural production. However, asevere political crisis contributed to a contraction of output
in Burundi.
External positions. External positions weakened across theregion in 2015. The current account deficit widened
significantly in Angola and the Republic of Congo; inNigeria, the current account surplus swung into deficit in2015. The current account deficit deteriorated in several
non-energy commodity exporters (Ethiopia, Mozambique,
Namibia, Niger), in part because exports continued to fallbut also due to strong import growth on the back of large
public infrastructure investments. Ghana’s current accountdeficit narrowed, helped by an increase in service exports
and private transfers, including remittances. Overall,
capital inflows to the region fell from their record level in
2014, led by a decline in cross-border bank lending.
European banks have increasingly deleveraged andoriented their lending activities toward developing Asia.
Eurobond issuance also softened; in addition, reflecting inpart expectations about U.S. Federal Reserve interest rate
hike that materialized toward the end of 2015, borrowing
became more expensive. Yields reached 10.75 percent for
Ghana in October, compared with 6.6 percent obtained by
Côte d’Ivoire in February 2015.
External debt. The deterioration of current accountbalances and currency depreciations increased external
debt, triggered a decline in reserves, and put pressures on
exchange rates. The median external debt in the region isestimated at 28 percent of GDP in 2015, up from 23
percent of GDP in 2014. On aggregate, external debt

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S U B- S A H A R A N A F R IC A

155

BOX 2.6.1 Macroeconomic effects of low commodity prices in Sub-Saharan Africa (continued)
levels increased moderately in oil-exporting countries, due
in part to Nigeria’s low level of external debt. However,Angola, the Republic of Congo, and Gabon saw a large
increase in their external debt ratio. Other countries where
external debt levels increased noticeably in 2015 include
Ghana, Kenya, Mozambique, Tanzania, and Zambia.
Several of them (Ghana, Kenya, Zambia) have tapped
multiple times the international bond market, which ismore expensive than concessional loans and carries
significant refinancing and exchange rate risks. Across theregion, international reserves have declined, with themedian estimated at 3.6 months of imports, down from
4.2 months of imports in 2014. Reserve levels fell mostmarkedly among oil exporters (Angola, Nigeria) and incountries defending fixed exchange rates or managed pegs
(Burundi, Rwanda); in some cases, the resulting policy
inconsistency caused a widening of parallel market premia(Burundi, Nigeria).
Inflation. Low food and fuel prices have helped keep
inflation low in a number of oil-importing countries(Kenya, Tanzania, and Uganda). Inflation has also
remained low in the CFA franc zone countries, on accountof the stable peg to the euro and terms of trade
improvements. However, sizeable currency depreciations,compounded by the effects of El Niño-related drought onfood supply and the removal of fuel subsidies, contributed
to a rise in inflation in a number of commodity exporters.
In March, headline inflation rose to high double digits in
Angola (23 ½ percent y/y), Mozambique (13 ½ percent y/y), Nigeria (12 ¾ percent y/y), and Zambia (22 percent y/y). Concerns about inflation led central banks in several
countries to hike interest rates (Angola, Mozambique,
Nigeria, South Africa).
Fiscal positions. Oil exporters (Angola, Chad, Republic ofCongo, Gabon, Nigeria) experienced a substantial decrease
in revenues that put pressures on the overall fiscal balance.
The fiscal policy response to the revenue shortfalls hasvaried, suggesting that finding an appropriate fiscal
response to economic shocks remains an important

challenge for many countries. A number of oil exporters
cut expenditures, with the expenditure cuts matching the
reduction in revenues in few of them (Angola, Chad). In
some countries (Cameroon, Republic of Congo), thegovernment continued with its ambitious infrastructure
investment program, financed in some cases throughadvances from the domestic banking system (Republic ofCongo). Some large mineral exporters (Mauritania,
Zambia) also saw a sharp decline in commodity revenues
that was not met with a commensurate reduction in
expenditure, resulting in a widening of the fiscal deficit.
However, Ghana’s fiscal adjustment has remained on
track, with the overall deficit improving. In other countries(Ethiopia, Kenya, Madagascar), expenditure overruns
caused the fiscal deficit to increase.
Government debt. As a result of the limited fiscal
adjustment, public debt burdens have risen. The mediangovernment debt is estimated at 48 ½ percent of GDP in
2015, up from 36½ percent of GDP in 2014, withsignificant country-level variations. Public debt rose
marginally in Nigeria in relation to GDP. However, anumber of other oil exporters (Angola, Republic of Congo)
saw a large increase in their public debt/GDP ratio,
exceeding 15 percentage points in the case of Angola. The
increase in debt burdens was more moderate in non-energy
mineral exporting countries, with the exceptions of Niger,
Sierra Leone, and Zimbabwe where the public debt/GDP
ratio rose by more than 10 percentage points. Kenya,
Mozambique, and Tanzania saw their debt levels increasedby 5 percentage points on average. In several countries(Kenya, Niger), the increase in government debt reflectedrising infrastructure spending that should support
potential growth over the medium term. In others,exchange rate depreciations (Tanzania, Zimbabwe) also
contributed to the rising debt levels. Overall debt ratios in2015 were well above levels in 2011-13, with both externaland domestic debt contributing to the increase in public
debt. Debt sustainability assessments deteriorated in a
number of countries (World Bank 2016m).

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FIGURE 2.6.3 Exchange rates and inflation
developments
Most of the region’s currencies depreciated against the U.S. dollar,
although they stabilized toward the end of the first quarter of 2016. The
pass-through of nominal exchange rate depreciation contributed to a rise ininflation in a number of countries. Authorities responded by tightening
monetary policy. However, easing inflation and a stable exchange rate
prompted the Bank of Uganda to cut interest rates in April.
A. Exchange rates

B. Inflation

LCU/US$, percent change since January 1, 201410

Year-on-year, in percent
30

0

25

-10

20
15
10
5

Jul-15Jan-16

Jan-16

Jul-14Jan-15

Jul-13Jan-14Jul-12

Jan-13

Jul-11

Jan-12

Jul-10Jan-11

Jul-15

C. Inflation: actual vs. target

D. Policy interest rates

Inflation target
Latest, year-on-year

Percent
28

Jan-10

Apr-16

Jan-16

Jul-15Oct-15

Apr-150
Jan-15Jan-14-50

Jul-14-40

AngolaGhana
Kenya
Mozambique
Nigeria
UgandaSouth Africa

Oct-14-30

Apr-14-20

Sub-Saharan Africa
AngolaKenya
Mozambique
NigeriaSouth Africa
ZambiaGhana
Kenya
NigeriaSouth Africa
UgandaZambiaPercent
30

24
20
16

20

12
8

10

4

Jul-14Jan-15Jan-14Jul-13Jan-13

Jul-120

Jan-12

ZambiaUgandaSouth Africa

Nigeria

Kenya

Ghana

Angola0

Sources: Haver Analytics, World Bank.
Note: Last observations are May 25, 2016 for A, April 2016 for B and C, and May 2016 for D.

Zimbabwe), high unemployment (South Africa),
and the price level impact of currency
depreciation, combined with interest rateincreases, could moderate these effects.
Investment growth is expected to slow across theregion in 2016, particularly among oil andmineral exporters. China’s rebalancing, lower
commodity prices, and deteriorating growthprospects in many commodity exporters, areexpected to result in further declines in FDI flows.
Foreign direct investment declined by 48 ½
percent (y/y) in the first quarter of 2016 in
Nigeria. Domestic policies are also weighing on
private investment. In Nigeria, the central bank’s
foreign exchange controls have tightened credit
conditions and curtailed private investment. In
South Africa, economic sentiment is showing signsof stabilization. However, political uncertainty,
coupled with deficient electricity supply, could
hold back private investment. By contrast, in a

number of low-income, non-oil commodity
exporters, governments are expected to continue
with their public infrastructure program, drawing
in part on public-private partnerships (Rwanda),
donor aid (Tanzania, Rwanda) and financing from
Chinese entities (Ethiopia, Kenya, Tanzania).
Nevertheless, the pace of investment growth in
low-income countries is expected to slow
somewhat in 2016. Some countries, such as
Mozambique, Tanzania, and Uganda, areexperiencing delays in inward investment in theirresource sectors due to the decline in commodity
prices.
Moreover, the tightening of global
financing conditions has prompted other countries
to delay tapping the international bond market.
The fiscal policy stance in commodity exporters is
expected to remain tight in 2016. The
governments of Angola and Nigeria, the region’slargest oil exporters, are seeking assistance frominternational development institutions and other
donors to alleviate public investment cuts, but
further fiscal adjustment may be necessary unlessoil prices pickup swiftly. With fiscal deficits
widening across the region, other countries,
including the low-income, non-oil commodity
exporters that have experienced a surge ininfrastructure investment spending, also face theneed for fiscal consolidation to build buffers.
Net exports are expected to make a negative
contribution to growth in 2016 (Table 2.6.1).
Low commodity prices will depress export
receipts, especially among oil exporters, even asexport volumes rise in some countries. Demand
from advanced economies is expected to staymodest, given their moderate prospects for
medium-term growth. Among oil importers,
current account balances are expected todeteriorate in many countries on account ofcontinued solid import growth, driven by capital
goods imports for infrastructure projects.
Against this backdrop, the following trends are
anticipated:•

Activity is expected to remain weak in theregion’s three largest economies in 2016. In
Nigeria, foreign exchange restrictions, fuelshortages, and oil output disruptions will

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

weigh on economic activity, exacerbating theeffects of low oil prices. In South Africa, lowbusiness confidence will slow investment
growth, while high unemployment and tightmonetary
policywill
limit
privateconsumption. In Angola, low oil prices, aweak investment climate, and rising inflation
will weigh on growth. Reforms of labor andproduct markets to spur private investment
should help enhance growth prospects in thesecountries.
••

Among the region’s frontier markets, growthis expected to pick up moderately in Ghana,helped by improving investor sentiment, newoilfields, and the waning of electricity
shortages. Growth is expected to remain
subdued in Zambia owing to low copper
prices and power shortages. In addition,higher interest rates and food prices stemmingfrom the drought and a weak currency will
weigh on domestic demand.
However,growth is expected to remain robust in Coted’Ivoire, Kenya, and Senegal, supported byongoing infrastructure investment, private
consumption, and agriculture.
The outlook for the region’s LICs is expected
to include a modest pickup in growth in oiland mineral exporters, as they continue toadjust to low commodity prices. In
Mozambique, delayed investment into theliquefied natural gas sector, rising inflation,and low investor confidence will adversely
impact growth. Activity is also expected toslow in the Democratic Republic of Congo as
the copper sector continues to struggle andpolitical uncertainty weighs on investor
sentiment. Infrastructure investment and anincrease in iron ore exports should help boost
activity in Liberia, Guinea, and Sierra-Leoneas they emerge from the Ebola crisis.
However, political and security uncertainties
are expected to exert a drag on economic
growth in Burundi, Burkina Faso, Mali, andNiger, and drought could significantly impact
activity in Ethiopia. For most other LICs,
including Rwanda, Tanzania, and Uganda,
growth is projected to remain robust,
supported by domestic demand.

S U B- S A H A R A N A F R IC A

157

FIGURE 2.6.4 Fiscal developments
Oil exporters experienced a substantial decrease in revenues that put
pressures on the overall fiscal balance. Responses to the revenue
shortfalls have varied. Some countries cut expenditures in the face of
declining revenues; others continued with their infrastructure investment
program, financing it in some cases through advances from the domesticbanking system. Meanwhile, in a number of oil importers, expenditure
overruns coupled with a decline in grants caused the fiscal deficit towiden. As a result of the limited fiscal adjustment, public debt burdens
increased in the region.
A. Fiscal balance
Oil exporters
Percent of GDP
Oil exporters ex. Nigeria
8
Oil importers
6
4
2
0
-2
-4
-6
-8
-10
2010 2011 2012 2013 2014 2015 2016f

B. Government debt
Percent of GDP
60

Oil exporters
Oil exporters ex. Nigeria
Oil importers

50
40
30
20
10
0
2010 2011 2012 2013 2014 2015 2016f

Sources: Haver Analytics; Bloomberg; World Bank; International Monetary Fund, Regional Economic
Outlook, International Monetary Fund, World Economic Outlook.

Risks
The balance of risks to the outlook remains tilted
to the downside.
•

On the external front, a sharper-than-expected
slowdown in major trading partners could
further weaken activity in commodity
exporters, and lead to a reduction orcancelation of planned investment projects intheir resource sectors. Weaker-than-expected
growth in the Euro Area, an important
trading partner for many countries in theregion, could further lower exports, andreduce investment flows as well as official aid.
A renewed decline in the price of oil would
further strain the fiscal and current accountbalances of oil producers, which could force
more cuts in public expenditure thanenvisaged. Tighter global financing conditions
would result in higher borrowing costs that
could affect the region through higher risk
premia and reduced sovereign bond access for
emerging and frontier countries.

•

On the domestic front, delayed adjustment tothe commodity price shock in the mostaffected countries would create policy
uncertainties that could weigh on investor

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FIGURE 2.6.5 Outlook•

For most countries, adjusting to low
commodity prices will need to include
stronger efforts to strengthen domestic
resource mobilization. In particular, resourcerich countries would benefit from improving
their non-resource tax systems. While tax
revenues in SSA, as a share of GDP, haveincreased since the 1980s, much of the
improvement was driven by the growth incommodity revenues. Excluding resourcebased revenues, there has been limited
improvement in the domestic mobilization oftax revenues in the region. Increasing
domestic revenue will require stronger efforts
to broaden the tax base and strengthen tax
administration. This could be achieved byremoving tax preferences, managing bettertransfer pricing by multinational companies,
taxing extractive industries fairly andtransparently, and improving the quality of
information available to tax officials (AfDB/OECD 2010).

•

Exchange rate flexibility, where feasible, could
help cushion the impact of the decline incommodity prices. Policymakers may need totighten monetary policy where inflationinduced by currency depreciation is persisting,
and where drought-related increases in foodprices may have a second round inflationary
effect. However, tighter monetary policy
could adversely impact private sector activity
through higher borrowing costs.

•

The
increased
externalandfiscalvulnerabilities point to the need for greater
efforts to rebuild policy buffers. For mostcountries, this would require measures torationalize current expenditure, particularly
the wage bill, and improve public financial
management and the quality of spending. In
oil-exporting countries, measures are needed
to reform energy subsidies and increase public
investment efficiency (Dabla-Norris et al.
2011). In many countries that have taken
advantage of favorable financing conditions toincrease infrastructure investment spending,fiscal and current account deficits haveremained elevated. These countries should
adjust their policies to build buffers and

The external environment confronting Sub-Saharan Africa is expected toremain difficult in the near term. Commodity prices are expected to stay
low in 2016, amid a gradual pick up in global activity, and external
conditions are expected to tighten. Against this backdrop, average growth
in SSA is projected to slow to 2.5 percent in 2016, rising to 4.1 percent in2017-18, driven by a gradual improvement in the region’s largest
economies as commodity prices stabilize and policies become more
supportive of growth.

2018

2017

2016

1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
2022
2025

10

2015

30

2014

50

2013

70

2012

Percent
Sub-Saharan Africa excluding South Africa
8
EMDE Sub-Saharan Africa
EMDE excluding China
7
6
5
4
3
2
1
0
-1
2011

Index, 2010=100130
Agriculture
110
EnergyMetals90

2010

B. Growth forecasts

2009

A. Commodity price forecasts

Source: World Bank.
A. B. Gray area denotes forecast.
A. Index of nominal prices in U.S. dollars.
B. EMDE Sub-Saharan Africa excludes Somalia, Central Africa Republic and São Tomé and Príncipe.

sentiment. A worsening of drought conditions
would dampen growth in agriculture, reducehydroelectricity production, and accentuate
inflationary pressures through higher foodprices. Militant insurgencies and terrorist
attacks remain a concern in West Africa and
Kenya, with potential spillovers toneighboring countries. Risk of political
upheavals in Burundi and South Sudan could
further hurt growth in these countries, with
implications for trading partners in their subregion.

Policy challenges
Commodity exporters across the region need toadjust to a protracted period of lower commodity
prices. With commodity markets likely to be lesssupportive than in the past, the region will alsoneed to focus on developing new sources ofgrowth. Meanwhile, widening fiscal and current
account deficits have increased economic
vulnerabilities that are reflected in depreciating
currencies, falling reserves, and rising inflation anddebt levels. This has prompted central banks insome countries to raise interest rates, even as
economies are slowing, increasing the drag on
growth. Responses to these challenges will vary,depending on country-specific conditions.

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

address vulnerabilities that could emerge if theexternal environment suddenly deteriorates.
Countries needing a deeper and faster fiscal
adjustment as a result of the commodity priceshock may face a difficult trade-off between
boosting development spending and building
buffers. In these countries, fiscal adjustment
should be designed to minimize the impact on
growth and on vulnerable populations.
•159

S U B- S A H A R A N A F R IC A

(Kenya, Senegal, Uganda), eased access tocredit information (Kenya, Uganda), andfacilitatedcross-border
trade(Benin,Mauritania). Accelerating structural reforms
aimed at boosting competitiveness anddiversification will be critical for raising
growth prospects and reducing extreme
poverty. For most countries, this will require
greater efficiency of infrastructure investment,
further energy sector reforms to expand
supply and reduce the cost of electricity, tradereforms to reduce trade logistics cost andregulatory barriers to services trade,enhancing the quality of education, and amore inclusive financial sector (World Bank
2016p).

Notable progress has been made acrossthe region in recent years to improve
the quality of regulations that enhancebusiness activity (Doing Business 2016).
During 2014/15, reforms were implemented
that have increased access to electricity

TABLE 2.6.1 Sub-Saharan Africa forecast summary(percentage point difference(Real GDP growth at market prices in percent, unless indicated otherwise)

EMDE SSA, GDPafrom January 2016 projections)

2013

2014

2015e

2016f

2017f

2018f

2015e

2016f

2017f

2018f

4.8

4.5

3.0

2.5

3.9

4.4

-0.3

-1.7

-0.7

-0.3

b

(Average including countries with full national accounts and balance of payments data only)
4.7
4.5
3.0
2.5
3.9
4.3
-0.4
-1.7

EMDE SSA, GDPb

-0.7

-0.4

GDP per capita (U.S. dollars)

2.0

1.8

0.3

-0.1

1.2

1.7

-0.4

-1.6

-0.7

-0.3

PPP GDP

5.0

4.8

3.2

2.8

4.2

4.6

-0.4

-1.6

-0.7

-0.4

Private consumption c

9.9

3.4

2.8

2.5

3.6

3.9

-0.3

-1.2

-0.4

-0.2

Public consumption

2.0

4.3

3.6

3.0

3.2

3.6

0.3

-0.6

-0.5

-0.2

Fixed investment

9.0

7.7

5.9

5.1

6.8

6.9

0.0

-1.5

-0.2

-0.2

Exports, GNFSd

-2.5

4.7

1.5

1.8

2.3

2.8

-0.4

-0.7

-0.4

0.0

d

6.6

2.9

3.3

3.3

3.4

3.5

0.5

0.4

0.3

0.4

-2.8

0.5

-0.6

-0.5

-0.4

-0.3

-0.3

-0.3

-0.2

-0.1

SSA excluding South Africa

5.7

5.6

3.5

3.2

4.8

5.1

-0.5

-1.9

-0.8

-0.6

Oil exporterse

5.4

5.3

2.5

1.7

3.8

4.2

-0.6

-2.7

-1.3

-1.0
-0.2

Imports, GNFS

Net exports, contribution to growthMemo items: GDP

CFA countries

f

4.6

5.6

4.0

5.3

5.3

5.7

-0.4

-0.4

-0.7

South Africa

2.2

1.5

1.3

0.6

1.1

2.0

0.0

-0.8

-0.5

0.4

Nigeria

5.4

6.3

2.7

0.8

3.5

4.0

-0.6

-3.8

-1.8

-1.3

Angola

6.8

3.9

2.8

0.9

3.1

3.4

-0.2

-2.4

-0.7

-0.4

Source: World Bank.
World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained inother Bank documents, even if basic assessments of countries’ prospects do not differ at any given moment in time.
a. EMDE refers to emerging market and developing economy. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. Excludes Somalia, Central
African Republic, and São Tomé and Príncipe.
b. Sub-region aggregate excludes Liberia, Somalia, Central African Republic, São Tomé and Príncipe,and South Sudan, for which data limitations prevent the forecasting of GDP
components.
c. The sudden surge in private consumption in the region in 2013 is driven by the revised and rebased NIA data of Nigeria in 2014.
d. Exports and imports of goods and non-factor services (GNFS).
e. Includes Angola, Cameroon, Chad, Cote d Ivoire, Democratic Republic of Congo, Gabon, Nigeria, Republic of Congo, and Sudan.
f. Includes Benin, Burkina Faso, Central African Republic, Chad, Cote d Ivoire, Cameroon, Equatorial Guinea, Gabon, Mali, Niger, Republic of Congo, Senegal, and Togo.

160

C H A P TE R 2. 6

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

TABLE 2.6.2 Sub-Saharan Africa country forecastsa(percentage point difference(Real GDP growth at market prices in percent, unless indicated otherwise)from January 2016 projections)

2013

2014

2015e

2016f

2017f

2018f

2015e

2016f

2017f

2018f

Angola
Benin

6.8
5.6

3.9
5.4

2.8
5.2

0.9
5.5

3.1
5.8

3.4
6.1

-0.2
-0.5

-2.4
0.2

-0.7
0.7

-0.4
1.0

Botswanab
Burkina Faso

9.3
6.7

4.4
4.0

-0.3
4.0

3.7
5.2

4.3
5.5

4.4
6.0

-3.3
-0.4

-0.3
-0.8

0.1
-1.5

0.2
-1.0

BurundiCabo Verde
Cameroon

4.6
1.0
5.6

4.7
1.8
5.9

-2.5
1.0
6.2

3.0
1.5
6.0

3.5
1.9
6.1

4.0
2.2
6.2

-0.2
-1.9
-0.1

-0.5
-2.0
-0.5

-1.3
-2.2
-0.4

-0.8
-1.9
-0.2

Chad

5.7

6.9

1.8

-0.4

1.6

5.2

-2.3

-5.3

-4.5

-1.3

Comoros
Congo, Dem. Rep.

3.5
8.5

3.0
9.0

2.3
7.7

2.4
6.3

3.0
7.7

3.1
8.5

0.0
-0.3

-0.1
-2.3

-0.1
-1.3

0.0
-0.5

Congo, Rep.
Côte d'Ivoire

3.4
9.2

6.5
9.0

2.6
8.4

3.8
8.5

3.2
8.0

3.0
8.1

1.3
0.0

0.3
0.2

-2.4
0.0

-2.6
0.1

Equatorial Guinea
Eritrea

-4.8
1.3

-3.1
1.7

-15.5
3.0

1.5
4.0

-1.0
4.3

-1.6
4.3

-6.2
2.1

-0.8
2.0

-0.6
2.1

-1.4
2.1

Ethiopiab
Gabon
Gambia, The

10.5
4.3
4.8

9.9
4.3
0.9

9.6
4.0
-2.5

7.1
3.9
-4.0

9.4
4.4
4.5

8.6
4.6
5.5

-0.6
-0.1
-6.5

-3.1
-1.2
-8.5

0.4
-0.9
-0.8

-0.4
-0.7
0.2

Ghana

7.3

4.0

3.4

5.2

8.2

7.5

0.0

-0.7

0.0

-0.7

GuineaGuinea-Bissau
Kenya

2.3
0.8
5.7

-0.3
2.9
5.3

0.1
5.1
5.6

4.0
5.7
5.9

5.0
6.0
6.1

6.0
6.0
6.2

-0.3
0.7
0.2

0.5
0.8
0.2

1.0
0.7
0.0

1.8
0.7
0.1

Lesotho

4.6

2.0

2.7

2.6

3.7

4.0

0.1

-0.2

-0.8

-0.5

Liberia
Madagascar
Malawi
Mali

8.7
2.4
5.2
1.7

0.7
3.0
5.7
7.2

0.3
3.0
2.8
5.5

3.8
3.7
3.0
5.3

5.3
3.7
4.1
5.1

5.6
3.7
5.4
5.0

-2.7
-0.2
0.0
0.5

-1.9
0.3
-2.0
0.3

-1.5
0.1
-1.7
0.1

-1.2
0.1
-0.4
0.0

Mauritaniac

5.5

6.9

3.0

4.2

4.5

3.3

-0.2

0.2

0.5

-0.7

Mauritius
Mozambique
Namibia
Niger
Nigeria
RwandaSenegal
Seychelles

3.2
7.3
5.7
4.6
5.4
4.7
3.6
6.6

3.6
7.4
6.4
6.9
6.3
7.0
4.3
2.8

3.6
6.3
4.5
4.2
2.7
7.1
6.5
4.3

3.8
5.8
4.2
5.4
0.8
6.8
6.6
3.7

4.0
7.7
5.4
6.3
3.5
7.2
6.8
3.6

4.0
8.3
5.5
7.0
4.0
7.1
7.0
3.6

0.1
0.0
-0.5
-0.2
-0.6
-0.3
1.5
0.8

0.1
-0.7
-1.3
0.1
-3.8
-0.8
1.3
0.0

0.3
0.5
-0.5
-3.0
-1.8
-0.4
1.5
0.0

0.3
1.1
-0.4
1.3
-1.3
-0.5
1.7
0.0

Sierra Leone
South Africa
South Sudan

20.1
2.2
13.1

7.0
1.5
3.4

-21.5
1.3
-6.3

6.5
0.6
3.5

5.3
1.1
6.9

5.4
2.0
7.4

-1.5
0.0
-1.0

-0.1
-0.8
0.0

0.0
-0.5
-0.1

0.1
0.4
0.4

Sudan

3.3

3.1

3.2

3.3

3.8

4.0

-0.3

-0.1

-0.1

0.1

Swaziland
Tanzania

2.8
7.3

2.5
6.8

1.7
7.0

1.3
7.2

1.4
7.1

1.6
7.1

0.4
-0.2

0.5
0.0

0.6
0.0

0.8
0.0

Togo
UgandabZambiaZimbabwe

5.1
4.4
6.7
4.5

5.7
4.7
4.9
3.8

5.5
5.0
3.6
1.1

5.6
5.0
3.4
1.4

5.0
5.9
4.2
5.6

5.5
6.8
5.0
3.5

0.4
0.0
0.1
0.1

0.7
0.0
-0.4
-1.4

0.3
0.1
-1.2
2.6

0.8
1.0
-1.0
0.5

Source: World Bank.
World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained inother Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time.
a. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars. Excludes Somalia, Central African Republic, and São Tomé and Príncipe.
b. Fiscal-year based numbers.
c. Data for Mauritania for 2013 and 2014 is provisional.

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

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165

STATISTICAL
APPENDIXS T A TI S T I C A L A P P E N D IX

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169

TABLE 1 Real GDP Growth
Annual estimates and forecastsa

Quarterly growthb

2013

2014

2015e

2016f

2017f 2018f

14Q4

15Q1

15Q2

15Q3

15Q4 16Q1e

World

2.4

2.6

2.4

2.4

2.8

3.0

2.7

2.0

2.5

2.7

1.9

2.3

Advanced Economies

1.1

1.7

1.8

1.7

1.9

1.9

2.1

1.9

1.9

1.9

1.2

1.6

United States

1.5

2.4

2.4

1.9

2.2

2.1

2.1

0.6

3.9

2.0

1.4

0.8

Euro Area

-0.3

0.9

1.6

1.6

1.6

1.5

1.4

2.3

1.6

1.2

1.3

2.1

Japan

1.4

-0.1

0.6

0.5

0.5

0.7

2.1

5.4

-1.7

1.6

-1.7

1.7

2.2

2.9

2.2

2.0

2.1

2.1

2.7

1.8

2.4

1.8

2.4

1.4

4.7

4.2

3.4

3.5

4.4

4.7

4.0

2.2

3.8

4.2

3.2

3.8

United Kingdom
Emerging Market and Developing
Economies
East Asia and the Pacific

7.1

6.8

6.5

6.3

6.2

6.1

6.8

5.6

6.8

6.5

6.5

5.5

Cambodia

7.4

7.1

7.0

6.9

6.8

6.8

..

..

..

..

..

..

China

7.7

7.3

6.9

6.7

6.5

6.3

..

..

..

..

..

..

Fiji

4.6

5.3

4.0

2.4

3.8

3.5

..

..

..

..

..

..

Indonesia

5.6

5.0

4.8

5.1

5.3

5.5

..

..

..

..

..

..

Lao PDR

8.5

7.5

7.0

7.0

7.0

6.8

..

..

..

..

..

..

Malaysia

4.7

6.0

5.0

4.4

4.5

4.7

6.1

5.7

3.8

3.5

5.0

4.2

Mongolia

11.6

7.9

2.3

0.7

2.7

6.2

..

..

..

..

..

..

Myanmar

8.5

8.5

7.0

7.8

8.4

8.3

..

..

..

..

..

..

Papua New Guinea

5.5

8.5

8.6

3.0

4.1

2.9

..

..

..

..

..

..

Philippines

7.1

6.1

5.8

6.4

6.2

6.2

7.4

2.9

8.9

5.7

8.8

4.5

Solomon Islands

3.0

1.5

3.3

3.0

3.3

3.0

..

..

..

..

..

..

Thailand

2.7

0.8

2.8

2.5

2.6

3.0

3.8

1.9

1.7

4.0

3.4

3.8

Timor-Leste

2.8

6.0

4.3

5.0

5.5

5.5

..

..

..

..

..

..

Vietnam

5.4

6.0

6.7

6.2

6.3

6.3

..

..

..

..

..

..

2.3

1.8

-0.1

1.2

2.5

2.8

1.1

-4.1

-0.2

3.4

1.7

-0.3

Albania

1.1

2.0

2.6

3.2

3.5

3.8

..

..

..

..

..

..

Armenia

3.3

3.5

3.0

1.9

2.8

2.9

..

..

..

..

..

..

Azerbaijan

5.8

2.8

1.1

-1.9

0.7

1.3

..

..

..

..

..

..
..

Europe and Central Asia

Belarus

1.1

1.6

-3.9

-3.0

-1.0

0.3

..

..

..

..

..

Bosnia and Herzegovina

2.3

1.1

3.2

2.6

3.1

3.5

..

..

..

..

..

..

Bulgaria

1.3

1.6

3.0

2.2

2.7

3.0

2.6

3.5

2.6

2.9

2.9

..

Croatia

-1.1

-0.4

1.6

1.9

2.0

2.4

..

..

..

..

..

..

Georgia

3.4

4.6

2.8

3.0

4.5

5.0

..

..

..

..

..

..

Hungary

1.9

3.7

2.9

2.6

2.4

2.3

1.6

5.7

1.6

1.2

2.4

-3.2

Kazakhstan

5.8

4.1

1.2

0.1

1.9

3.7

..

..

..

..

..

..

Kosovo

3.4

1.2

3.6

3.6

4.0

4.1

..

..

..

..

..

..

Kyrgyz Republic

10.9

4.0

3.5

3.4

3.1

4.1

..

..

..

..

..

..

Macedonia, FYR

2.9

3.5

3.7

3.7

4.0

4.0

..

..

..

..

..

..

Moldova

9.4

4.6

-0.5

0.5

4.0

4.5

..

..

..

..

..

..

Montenegro

3.5

1.8

3.4

3.7

3.1

3.0

..

..

..

..

..

..

Poland

1.3

3.3

3.6

3.7

3.5

3.5

2.8

5.3

2.0

3.2

5.3

-0.4

Romania

3.4

2.8

3.7

4.0

3.7

3.4

3.6

4.9

0.0

6.1

4.5

6.6

Russian Federation

1.3

0.7

-3.7

-1.2

1.4

1.8

..

..

..

..

..

..

Serbia

2.6

-1.8

0.8

1.8

2.3

3.5

..

..

..

..

..

..

Tajikistan

7.4

6.7

4.2

4.0

4.8

5.3

..

..

..

..

..

..

Turkey

4.2

3.0

4.0

3.5

3.5

3.6

5.6

4.5

5.3

4.8

3.0

..

Turkmenistan

10.2

10.3

6.5

5.0

5.0

5.0

..

..

..

..

..

..

Ukraine

0.0

-6.6

-9.9

1.0

2.0

3.0

..

..

..

..

..

..

Uzbekistan

8.0

8.1

8.0

7.3

7.2

7.2

..

..

..

..

..

..

170

S T A TI S T I C A L A P P E N D IX

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

TABLE 1 Real GDP Growth (continued)
Annual estimates and forecastsa
Latin America and the
Caribbean
Argentina

Quarterly growthb

2013

2014

2015e

2016f

2017f 2018f

14Q4

15Q1

15Q2

15Q3

15Q4 16Q1e

2.9

1.0

-0.7

-1.3

1.2

2.1

1.8

-1.1

-3.0

-1.5

-1.3

0.9

2.9

0.5

2.1

-0.5

3.1

3.0

1.5

..

..

..

..

..

Belize

1.3

4.1

0.9

0.8

1.8

2.2

..

..

..

..

..

..

Bolivia

6.8

5.5

4.8

3.7

3.4

3.4

..

..

..

..

..

..

Brazil

3.0

0.1

-3.8

-4.0

-0.2

0.8

0.9

-4.5

-7.7

-6.2

-5.2

-1.1

Chile

4.3

1.8

2.1

1.9

2.1

2.3

4.6

3.9

0.0

1.3

0.4

5.3

Colombia

4.9

4.4

3.1

2.5

3.0

3.5

2.4

3.1

3.2

4.3

2.4

..

Costa Rica

3.4

3.5

2.8

3.3

3.6

4.0

..

..

..

..

..

..

Dominica

1.7

3.4

-4.0

2.5

2.0

2.0

..

..

..

..

..

..

Dominican Republic

4.8

7.4

6.9

5.0

4.3

4.0

..

..

..

..

..

..

Ecuador

4.6

3.7

0.3

-4.0

-4.0

0.0

1.3

-0.5

-4.1

-0.6

0.2

..

El Salvador

1.8

2.0

2.5

2.2

2.3

2.3

..

..

..

..

..

..

Guatemala

3.7

4.2

4.1

3.5

3.5

3.6

..

..

..

..

..

..

Guyana

5.2

3.8

3.0

4.0

3.9

3.8

..

..

..

..

..

..

Haitic

4.2

2.8

1.2

0.9

1.9

2.2

..

..

..

..

..

..

Honduras

2.8

3.1

3.6

3.4

3.5

3.5

3.9

3.8

1.9

5.7

5.1

..

Jamaica

0.5

0.7

0.9

1.5

2.2

2.6

..

..

..

..

..

..

Mexico

1.4

2.3

2.5

2.5

2.8

3.0

2.9

1.8

2.5

3.2

2.2

3.3

Nicaragua

4.5

4.7

4.9

4.4

4.2

4.1

..

..

..

..

..

..

Panama

8.4

6.2

5.8

6.0

6.1

6.2

..

..

..

..

..

..

Paraguay

14.0

4.7

3.0

3.0

3.2

3.4

..

..

..

..

..

..

Peru

5.9

2.4

3.3

3.5

3.5

3.2

..

..

..

..

..

..

St. Lucia

-1.9

-0.7

1.6

1.5

2.0

2.0

..

..

..

..

..

..

St. Vincent and the Grenadines

2.3

-0.2

1.8

2.4

3.1

3.1

..

..

..

..

..

..

Trinidad and Tobago

2.3

-1.0

-2.0

-2.0

2.0

2.5

..

..

..

..

..

..

Uruguay

4.6

3.2

1.0

0.7

1.6

2.5

..

..

..

..

..

..

Venezuela, RB

1.3

-3.9

-5.7

-10.1

-3.4

1.6

..

..

..

..

..

..

2.0

2.9

2.6

2.9

3.5

3.6

3.7

3.0

6.8

0.5

0.3

..

Algeria

2.8

4.1

2.9

3.4

3.1

2.7

..

..

..

..

..

..

Bahrain

5.4

4.5

2.9

2.2

2.0

1.9

..

..

..

..

..

..

Middle East and North Africa

Djibouti

5.0

6.0

6.5

6.5

7.0

7.0

..

..

..

..

..

..

Egypt, Arab Rep.c

2.1

2.2

4.2

3.3

4.2

4.6

..

..

..

..

..

..

Iran, Islamic Rep.

-1.9

4.3

1.6

4.4

4.9

4.7

..

..

..

..

..

..

Iraq

6.6

-2.1

2.4

7.2

4.7

5.2

..

..

..

..

..

..

Jordan

2.8

3.1

2.4

3.0

3.3

3.6

..

..

..

..

..

..

Kuwait

1.2

-1.6

-1.3

1.3

1.6

2.4

..

..

..

..

..

..

Lebanon

3.0

1.8

1.5

1.8

2.3

2.5

..

..

..

..

..

..

Libya

-13.6

-24.0

-10.2

14.0

40.0

20.0

..

..

..

..

..

..

Morocco

4.7

2.4

4.4

1.7

3.4

3.6

5.4

-3.5

10.8

6.3

8.0

-15.9

Oman

3.9

2.9

3.3

1.6

1.9

2.6

..

..

..

..

..

..

Qatar

4.6

4.1

3.9

3.3

3.5

4.0

..

..

..

..

..

..

Saudi Arabia

2.7

3.6

3.4

1.9

2.0

2.3

..

..

..

..

..

..

Tunisia

2.4

2.3

0.8

1.8

2.5

3.0

..

..

..

..

..

..

United Arab Emirates

4.3

4.6

3.4

2.0

2.4

3.0

..

..

..

..

..

..

West Bank and Gaza

2.2

-0.2

3.5

3.3

3.5

3.6

..

..

..

..

..

..

S T A TI S T I C A L A P P E N D IX

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

171

TABLE 1 Real GDP Growth (continued)
Annual estimates and forecastsa

Quarterly growthb

2013

2014

2015e

2016f

2017f 2018f

14Q4

15Q1

15Q2

15Q3

15Q4

16Q1e

6.1

6.8

7.0

7.1

7.2

7.3

2.2

5.9

11.9

9.4

2.0

9.2

Afghanistan

2.0

1.3

1.5

1.9

2.9

3.6

..

..

..

..

..

..

c

Bangladesh

6.0

6.1

6.5

6.3

6.8

6.0

..

..

..

..

..

..

Bhutanc

3.9

5.8

6.7

6.8

8.0

8.0

..

..

..

..

..

..

Indiac

6.6

7.2

7.6

7.6

7.7

7.7

..

..

..

..

..

..

Maldives

4.7

6.5

1.9

3.5

3.9

4.6

..

..

..

..

..

..

3.8
3.7

6.0
4.0

2.7
4.2

0.6
4.5

4.7
4.8

4.4
5.1

..
..

..
..

..
..

..
..

..
..

..
..

South Asia

c

Nepal
Pakistanc d
Sri Lanka
Sub-Saharan Africa
Angola

3.4

4.9

4.8

5.3

5.3

5.3

..

..

..

..

..

..

4.8

4.5

3.0

2.5

3.9

4.4

4.6

0.6

0.0

3.3

1.3

..

6.8

3.9

2.8

0.9

3.1

3.4

..

..

..

..

..

..

Benin

5.6

5.4

5.2

5.5

5.8

6.1

..

..

..

..

..

..

Botswanac

9.3

4.4

-0.3

3.7

4.3

4.4

..

..

..

..

..

..

Burkina Faso

6.7

4.0

4.0

5.2

5.5

6.0

..

..

..

..

..

..

Burundi

4.6

4.7

-2.5

3.0

3.5

4.0

..

..

..

..

..

..

Cabo Verde

1.0

1.8

1.0

1.5

1.9

2.2

..

..

..

..

..

..

Cameroon

5.6

5.9

6.2

6.0

6.1

6.2

..

..

..

..

..

..

Chad

5.7

6.9

1.8

-0.4

1.6

5.2

..

..

..

..

..

..

Comoros

3.5

3.0

2.3

2.4

3.0

3.1

..

..

..

..

..

..

Congo, Dem. Rep.

8.5

9.0

7.7

6.3

7.7

8.5

..

..

..

..

..

..

Congo, Rep.

3.4

6.5

2.6

3.8

3.2

3.0

..

..

..

..

..

..

Côte d'Ivoire

9.2

9.0

8.4

8.5

8.0

8.1

..

..

..

..

..

..

Equatorial Guinea

-4.8

-3.1

-15.5

1.5

-1.0

-1.6

..

..

..

..

..

..

Eritrea

1.3

1.7

3.0

4.0

4.3

4.3

..

..

..

..

..

..

Ethiopiac

10.5

9.9

9.6

7.1

9.4

8.6

..

..

..

..

..

..

Gabon

4.3

4.3

4.0

3.9

4.4

4.6

..

..

..

..

..

..

Gambia, The

4.8

0.9

-2.5

-4.0

4.5

5.5

..

..

..

..

..

..

Ghana

7.3

4.0

3.4

5.2

8.2

7.5

..

..

..

..

..

..

Guinea

2.3

-0.3

0.1

4.0

5.0

6.0

..

..

..

..

..

..

Guinea-Bissau

0.8

2.9

5.1

5.7

6.0

6.0

..

..

..

..

..

..

Kenya

5.7

5.3

5.6

5.9

6.1

6.2

7.5

2.1

9.3

5.9

13.4

..

Lesotho

4.6

2.0

2.7

2.6

3.7

4.0

..

..

..

..

..

..

Liberia

8.7

0.7

0.3

3.8

5.3

5.6

..

..

..

..

..

..

Madagascar

2.4

3.0

3.0

3.7

3.7

3.7

..

..

..

..

..

..

Malawi

5.2

5.7

2.8

3.0

4.1

5.4

..

..

..

..

..

..

Mali

1.7

7.2

5.5

5.3

5.1

5.0

..

..

..

..

..

..

Mauritania

e

5.5

6.9

3.0

4.2

4.5

3.3

..

..

..

..

..

..

Mauritius

3.2

3.6

3.6

3.8

4.0

4.0

..

..

..

..

..

..

Mozambique

7.3

7.4

6.3

5.8

7.7

8.3

..

..

..

..

..

..

Namibia

5.7

6.4

4.5

4.2

5.4

5.5

..

..

..

..

..

..

Niger

4.6

6.9

4.2

5.4

6.3

7.0

..

..

..

..

..

..

Nigeria

5.4

6.3

2.7

0.8

3.5

4.0

..

..

..

..

..

..

Rwanda

4.7

7.0

7.1

6.8

7.2

7.1

..

..

..

..

..

..

172

S T A TI S T I C A L A P P E N D IX

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

TABLE 1 Real GDP Growth (continued)
Annual estimates and forecastsa
2013

Quarterly growthb

2014

2015e

2016f

2017f

2018f

14Q4

15Q1

15Q2

15Q3

15Q4 16Q1e

Sub-Saharan Africa (continued)
Senegal

3.6

4.3

6.5

6.6

6.8

7.0

..

..

..

..

..

..

Seychelles

6.6

2.8

4.3

3.7

3.6

3.6

..

..

..

..

..

..

Sierra Leone

20.1

7.0

-21.5

6.5

5.3

5.4

..

..

..

..

..

..

South Africa

2.2

1.5

1.3

0.6

1.1

2.0

4.1

1.9

-2.0

0.3

0.4

..

South Sudan

13.1

3.4

-6.3

3.5

6.9

7.4

..

..

..

..

..

..

Sudan

3.3

3.1

3.2

3.3

3.8

4.0

..

..

..

..

..

..

Swaziland

2.8

2.5

1.7

1.3

1.4

1.6

..

..

..

..

..

..

Tanzania

7.3

6.8

7.0

7.2

7.1

7.1

..

..

..

..

..

..

Togo

5.1

5.7

5.5

5.6

5.0

5.5

..

..

..

..

..

..

Ugandac

4.4

4.7

5.0

5.0

5.9

6.8

..

..

..

..

..

..

Zambia

6.7

4.9

3.6

3.4

4.2

5.0

..

..

..

..

..

..

Zimbabwe

4.5

3.8

1.1

1.4

5.6

3.5

..

..

..

..

..

..

Source: World Bank and Haver Analytics.
a. Aggregate growth rates calculated using constant 2010 U.S. dollars GDP weights.
b. Quarter-over-quarter growth, seasonally adjusted and annualized. Regional averages are calculated based on data from following countries.
East Asia and the Pacific: China, Indonesia, Malaysia, Mongolia, Philippines, Thailand, and Vietnam.
Europe and Central Asia: Albania, Azerbaijan, Belarus, Bulgaria, Croatia, Georgia, Hungary, Kazakhstan, Macedonia, FYR, Poland, Romania, Russian Federation, Serbia, Turkey, andUkraine.
Latin America and the Caribbean: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Paraguay, Peru, andUruguay.
Middle East and North Africa: Bahrain, Egypt, Arab Rep., Iran, Islamic Rep., Jordan, Morocco, Qatar, Saudi Arabia, and Tunisia.
South Asia: India and Sri Lanka.
Sub -Saharan Africa: Botswana, Kenya, Nigeria, and South Africa.
c. Annual GDP is on fiscal year basis, as per reporting practice in the country.
d. GDP data for Pakistan are based on factor cost.
e. Data for Mauritania for 2013 and 2014 is provisional.

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

S E L E CTE D TO P I C S

173

Global Economic Prospects: Selected Topics, 2015-16
Growth and Business Cycles
Low-income countries: Graduation, recent developments, and prospects

January 2015, Chapter 1

What does weak growth mean for poverty in the future?

January 2015, Box 1.1

What does a slowdown in China mean for Latin America and the Caribbean?

January 2015, Box 2.2

How resilient Is Sub-Saharan Africa?

January 2015, Box 2.4

Recent developments in emerging and developing country labor markets.

June 2015, Box 1.3

Who catches a cold when emerging markets sneeze?

January 2016, Chapter 3

Sources of the growth slowdown in BRICS

January 2016, Box 3.1

Understanding cross-border growth spillovers

January 2016, Box 3.2

Regional integration and spillovers: East Asia and PacificJanuary 2016, Box 2.1.1

Regional integration and spillovers: Europe and Central Asia

January 2016, Box 2.2.1

Regional integration and spillovers: Latin America and the Caribbean

January 2016, Box 2.3.1

Regional integration and spillovers: Middle East and North Africa

January 2016, Box 2.4.1

Regional integration and spillovers: South Asia

January 2016, Box 2.5.1

Regional integration and spillovers: Sub-Saharan Africa

January 2016, Box 2.6.1

Within-region spillovers

January 2016, Box 3.3

Understanding cross-border growth spillovers

January 2016, Box 3.2

Recent developments and outlook for low-income countries

June, 2016, Box 1.1

Recent developments and outlook across emerging market and developing country regions

June, 2016, Box 1.2

Quantifying uncertainties in global growth forecasts

June 2016, SF 2

What does a slowdown in China mean for Latin America and the Caribbean?

January 2015, Box 2.2

Commodity Markets
Understanding the plunge in oil prices: Sources and implications

January 2015, Chapter 4

What do we know about the impact of oil prices on output and inflation? A brief survey

January 2015, Box 4.1

After the commodities boom: What next for low-income countries?

June 2015, Chapter 1, SF

Low oil prices in perspective

June 2015, Box 1.2

From Commodity Discovery to Production: Vulnerabilities and Policies in LICs

January 2016, Chapter 1

Globalization of Trade and Financial Flows
What lies behind the global trade slowdown?

January 2015, Chapter 4

China’s integration in global supply chains: Review and implications

January 2015, Box 2.1

Potential macroeconomic implications of the Trans-Pacific Partnership Agreement

January 2016, Chapter 4

Regulatory convergence in mega-regional trade agreements

January 2016, Box 4.1.1

Can Remittances Help Promote Consumption Stability?

January 2016, Chapter 4

174

S E L E CTE D TO P I C S

G L O B A L E CO N O MI C P R OS P E C TS | J U NE 2 0 16

Global Economic Prospects: Selected Topics, 2015-16
Monetary and Exchange Rate Policies
Countercyclical monetary policy in emerging markets: Review and evidence

January 2015, Box 1.2

Econometric analysis of U.S. yields and spillovers

June 2015, SF1.1

Negative interest rates in Europe: A glance at their causes and implications

June 2015, Box 1.1

Hoping for the best, preparing for the worst: risks around U.S. rate liftoff and policy options

June 2015, Chapter 1, SF

Peg and control? The links between exchange rate regimes and capital account policies

January 2016, Chapter 4

Private borrowing surge in light of history

June 2016, SF1

Fiscal Policy
Having fiscal space and using it: Fiscal challenges in developing economies

January 2015, Chapter 3

Revenue mobilization in South Asia: Policy challenges and recommendations

January 2015, Box 2.3

Fiscal policy in low-income countries

January 2015, Box 3.1

What affects the size of fiscal multipliers?

January 2015, Box 3.2

Chile’s fiscal rule—An example of success

January 2015, Box 3.3

Narrow fiscal space and the risk of a debt crisis

January 2015, Box 3.4

G

lobal growth prospects have deteriorated in 2016.

Emerging market and developing economies are facing
increased external headwinds, including softer growth inadvanced economies. Commodity exporters are struggling withparticularly challenging conditions, while commodity importers
are thus far showing greater resilience. Global growth isexpected to gradually accelerate in 2017-18, but downside
risks to the outlook are increasingly pronounced.
In addition to discussing global and regional economic
developments and prospects, this edition of Global

Economic Prospects includes two Special Focus essays ofcritical importance for emerging and developing economies: ananalysis of the buildup of private debt in emerging and frontiermarkets and a quantitative study of uncertainties surrounding
global growth.
This year marks the 25th anniversary of the Global Economic

Prospects. The Global Economic Prospects is a World Bank
Group Flagship Report that has, since its inception in 1991,
examined international economic developments and prospects,
with a special focus on emerging market and developing
economies. It has also included analytical essays on a wide
range of topical macroeconomic, financial, and structural
policy challenges faced by these economies. It is published ona semiannual basis (in January and June). The January edition
includes in-depth analyses of topical policy challenges, while
the June edition contains shorter analytical essays.