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Global Economic Prospects 2016

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The 2016 Global Economic Prospects Report subtitled 'Divergences and Risks' argues growth prospects have weakened throughout the world economy. The report discusses the upcoming challenges to be faced by emerging market and developing economies, which include weaker growth among advanced economies and low commodity prices. It focuses on each region and highlight two main issues: the recent credit surge in historical context, and the quantifying uncertainties in global growth forecasts.





JUNE 2016




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ISBN (paper): 978-1-4648-0777-0


ISBN (electronic): 978-1-4648-0778-7


DOI: 10.1596/978-1-4648-0777-0


ISSN: 1014-8096


Cover design: Bill Pragluski (Critical Stages).


The cutoff date for the data used in this report was May 31, 2016.





Global Economic Prospects at 25


This year marks the 25th anniversary of the Global Economic Prospects, a World Bank Group flagship


report 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 as


a 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 to


them for sustained development.”


Global Economic Prospects, May 1991








v


Table of contents


Chapter 1




Foreword.................................................................................................................................. xi


Acknowledgments .................................................................................................................. xiii


Abbreviations .......................................................................................................................... xv


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 ......................................................................................................... 92





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




Chapter 2







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




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


vii





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


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








viii






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




Tables




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





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




x




Although the global financial crisis is now seven
years behind us, the world’s economy is still
struggling to regain momentum. Growth
continues to falter in advanced economies and,
while there is considerable divergence of
performance across emerging market and
developing 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 nature
of trade. Exporters of oil and other key
commodities have been particularly hard hit, while
their importers have been more resistant to
economic 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, this
report analyses two topical policy challenges for
policymakers to navigate.


The first charts an important vulnerability that
risks 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, where
previously it had been considerably higher than in
commodity exporters.


The second has to do with tools for assessing the
risks surrounding prospects for the world economy
and concludes that forecast uncertainty has
increased since January 2016, while the balance of
risks for global growth has further tilted to the
downside.


Foreword
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 will
continue 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 diminished
confidence in the effectiveness of policies to spur
growth. These risks are compounded by the fact
that 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 other
human skills and wellbeing, as well as initiatives to
promote economic diversification and liberalize
trade, will boost growth prospects and improve
standards of living. The international community
has an important role to play in the pursuit of
these goals.






Kaushik Basu


Chief Economist and Senior Vice President


The World Bank






xi








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 BaMes, Vandana Chandra,
Christian Eigen-Zucchi, Eung Ju Kim, Boaz Nandwa,


Ekaterine Vashakmadze, and Dana Vorisek.


Oe Prst Special Focus, on the Recent Credit Surge in
Historical Context, was prepared by Shu Yu and Lei
Sandy Ye. Oe second Special Focus, on Quantifying
Uncertainties in Global Growth Forecasts, was
prepared by Franziska Ohnsorge, Yirbehogre Modeste
Some, and Marc Stocker with research assistance from
Peter 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. Oe authors
were Ekaterine Vashakmadze (East Asia and PaciPc),
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-Saharan


Africa).


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, and


Peter Williams.


Oe online publication was produced by a team
including Graeme Littler, Praveen Penmetsa, Mikael
Reventar, and Katherine Rollins, with technical support
from Marjorie Patricia Bennington. Phillip Hay and
Mark Felsenthal managed media relations and the
dissemination. Oe print publication was produced by
Maria Hazel Macadangdang, Adriana Maximiliano, and


Quinn Sutton.


Many reviewers oMered extensive advice and comments.
Oese 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 ChauMour, Ajai
Chopra, Karl Kendrick Tiu Chua, Punam Chuhan-
Pole, Kevin Clinton, Brett Coleman, Andrea Coppola,
Tito Cordella, Damir Cosic, Barbara Cunha, Kevin
Oomas 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
SchiMbauer, 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, Mark
Oomas, 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 oWces of the regional chief


economists.


Acknowledgments


2is World Bank Group Flagship Report is a product of the Prospects Group in the Development


Economics Vice Presidency. 2e project was managed by Ayhan Kose and Franziska Ohnsorge,


under the general guidance of Kaushik Basu.






xiii












AE


ASEAN


bbl


BRICS


BVAR


CDS


CY


DSGE


EAP


ECA


ECB


EM


EMBI


EMDE


EU


FDI


FOMC


FY


GCC


GDP


GEP


GST


ICT


IMF


LAC


LIC


MNA


NPLs


OECD


OLS


OPEC


PMI


PPP


RHS


SAR


SOE


SSA


Abbreviations
advanced economies


Association of Southeast Asian Nations


barrel


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


Bayesian vector autoregression


credit default swap


calendar year


dynamic stochastic general equilibrium


East Asia and Pacific


Europe and Central Asia


European Central Bank


emerging market economies


Emerging Markets Bond Index


emerging markets and developing economies


European Union


foreign direct investment


Federal Reserve Open Market Committee


fiscal year


Gulf Cooperation Council


gross domestic product


Global Economic Prospects


goods and services tax


information and communications technology


International Monetary Fund


Latin America and Caribbean


low-income country


Middle East and North Africa


nonperforming loans


Organisation for Economic Co-operation and Development


ordinary least squares


Organization of the Petroleum Exporting Countries


purchasing manager’s index


purchasing power parity


right-hand side (in figures)


South Asia Region


state-owned enterprise


Sub-Saharan Africa


xv





TFP


TPP


VAR


WEO


WTI


WTO


total factor productivity


Trans-Pacific Partnership


Vector Autoregression


World Economic Outlook


West Texas Intermediate


World Trade Organization






xvi




Divergences and Risks


GLOBAL OUTLOOK


CHAPTER 1






CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 3








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 and
developing economies (EMDEs), the divergence
in economic conditions between commodity
exporters and importers has widened. Some of the
downside risks identified in January have
materialized, including softer-than-expected
growth in advanced economies and further
declines in commodity prices that have only
partially reversed in recent months. These
developments have been accompanied by
heightened political uncertainties, concerns about
the effectiveness of monetary policy stimulus in
some advanced economies, the pace of monetary
policy normalization in the United States, and
policy 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 not
translated into the large boost to growth initially
expected, as other headwinds and uncertainties
have held back activity.


Global growth this year is likely to remain
unchanged relative to the disappointing pace of


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 part
due to a significant downgrade to the growth
forecasts for commodity exporters, amid
heightened domestic uncertainties and a more
challenging external environment.


Advanced economies are expected to expand by
1.7 percent in 2016, 0.5 percentage point below
January projections. Investment continues to be
soft amid weaker growth prospects and elevated
policy uncertainty, while export growth has slowed
reflecting subdued external demand. Despite an
expected boost from lower energy prices, and the
ongoing improvement in labor markets, growth is
projected to level off in 2016 rather than
accelerate.


EMDEs started 2016 with weaker manufacturing
activity. Investment growth has also slowed
substantially, especially in commodity exporters,
partly reflecting tightened domestic policies and
weak capital inflows. In China, a gradual domestic
rebalancing is under way, with robust growth in
services and policy support measures mitigating
the slowdown in industrial activity. Brazil and the
Russian 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


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 growth
among 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 from
low 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 have
become more pronounced. These include deteriorating conditions among key commodity exporters, softer-than-
expected activity in advanced economies, rising private sector debt in some large emerging markets, and
heightened 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.


Note: 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.




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 4








TABLE 1.1 Real GDP1


(percent change from previous year)






Percentage point differences from
January 2016 projections


2013 2014 2015e 2016f 2017f 2018f 2015e 2016f 2017f 2018f
World 2.4 2.6 2.4 2.4 2.8 3.0 0.0 -0.5 -0.3 -0.1


Advanced economies 1.1 1.7 1.8 1.7 1.9 1.9 -0.1 -0.5 -0.2 -0.1
United States 1.5 2.4 2.4 1.9 2.2 2.1 -0.1 -0.8 -0.2 -0.1
Euro Area -0.3 0.9 1.6 1.6 1.6 1.5 0.1 -0.1 -0.1 -0.1
Japan 1.4 -0.1 0.6 0.5 0.5 0.7 -0.2 -0.8 -0.4 -0.6


Emerging and developing
economies (EMDEs) 4.7 4.2 3.4 3.5 4.4 4.7 0.0 -0.6 -0.3 -0.2


Commodity exporting EMDEs 3.2 2.1 0.2 0.4 2.4 3.0 0.1 -1.2 -0.8 -0.3
Other EMDEs 5.9 5.9 5.9 5.8 5.7 5.8 0.0 -0.1 -0.1 -0.1


Other EMDEs excluding
China 3.9 4.3 4.7 4.7 4.9 5.0 0.0 -0.2 -0.2 -0.2


East Asia and Pacific 7.1 6.8 6.5 6.3 6.2 6.1 0.1 0.0 0.0 -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


Europe and Central Asia 2.3 1.8 -0.1 1.2 2.5 2.8 0.0 -0.4 -0.1 0.0
Russia 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


Latin America and the Caribbean 2.9 1.0 -0.7 -1.3 1.2 2.1 0.2 -1.3 -0.9 -0.3
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


Middle East and North Africa 2.0 2.9 2.6 2.9 3.5 3.6 -0.2 -1.1 -1.0 -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
Egypt, Arab Rep2 2.1 2.2 4.2 3.3 4.2 4.6 0.0 -0.5 -0.2 -0.2


South Asia 6.1 6.8 7.0 7.1 7.2 7.3 0.0 -0.2 -0.3 -0.2
India2 6.6 7.2 7.6 7.6 7.7 7.7 0.3 -0.2 -0.2 -0.2
Pakistan2 3.7 4.0 4.2 4.5 4.8 5.1 0.0 0.0 0.0 0.3
Bangladesh2 6.0 6.1 6.5 6.3 6.8 6.0 0.0 -0.4 0.0 -0.8


Sub-Saharan Africa 4.8 4.5 3.0 2.5 3.9 4.4 -0.3 -1.7 -0.7 -0.3
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


Memorandum items:
Real GDP1


High-income countries 1.2 1.7 1.6 1.5 1.9 1.9 0.0 -0.6 -0.2 -0.2
Developing countries 5.3 4.9 4.3 4.3 4.9 5.1 0.0 -0.5 -0.4 -0.2


Low-income countries 6.5 6.1 4.5 5.3 6.3 6.6 -0.6 -0.9 -0.3 0.0
BRICS 5.7 5.1 3.8 4.2 5.1 5.3 -0.1 -0.4 -0.2 -0.1
World (2010 PPP weights) 3.2 3.4 3.1 3.1 3.6 3.7 0.0 -0.5 -0.2 -0.2


World trade volume3 3.3 3.8 3.1 3.1 3.9 4.1 -0.5 -0.7 -0.4 -0.4
Commodity prices


Oil price4 -0.9 -7.5 -47.3 -25.7 32.5 6.5 -0.8 -17.2 25.3 -0.7
Non-energy commodity price
index -7.2 -4.6 -15.0 -12.2 10.5 2.3 -0.2 -10.4 8.6 0.4


Capital inflows to EMDEs
(percent of GDP)5 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 of


Emerging 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).




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 5








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 to
remain steady at 5.8 percent throughout the
forecast 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.


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 and
political challenges have trimmed 0.9 percentage
point from the previous forecast. While the
difficult external environment confronting LICs
will likely continue, projected growth is supported
by resilience of domestic investment and the
expected implementation of reforms.


Downside risks to the outlook have become more
pronounced. Rising policy related and political
uncertainties, geopolitical risks and eroding
confidence in policy effectiveness could set back
global growth and trigger financial market
turbulence. A synchronous slowdown in major
advanced 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 with
elevated private sector debt. Prolonged stagnation
in advanced economies and weaker growth
potential in EMDEs could exacerbate protectionist
sentiments. The materialization of some of these
risks could slow the catch-up of EMDE income
per capita relative to advanced economy levels and
set back poverty alleviation.


FIGURE 1.1 Global prospects


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 of
global 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.


B. Commodity price forecasts A. Global growth


30


50


70


90


110


20
11


20
12


20
13


20
14


20
15


20
16


20
17


20
18


Agriculture
Energy
Metals


US$ nominal, index =100 in 2011


D. Import volume growth C. Contributions to global growth


revisions


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 contri-
butions from individual country growth revisions can differ from global growth revisions reported in
Table 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.


F. LICs with growth below long-term


average


E. Growth by country group


0
10
20
30
40
50
60
70
80


20
00


20
02


20
04


20
06


20
08


20
10


20
12


20
14


20
16


Commodity importers
Energy exporters
Metal exporters
Agricutlure exporters


Share of countries


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


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


-4
-2
0
2
4
6
8


10


20
07


20
08


20
09


20
10


20
11


20
12


20
13


20
14


20
15


20
16


20
17


20
18


World
Advanced economies
Emerging and developing economies


Percent


-0.6


-0.5


-0.4


-0.3
-0.2


-0.1


0.0


2016 2017


EMDE commodity exporters
EMDE commodity importers
Advanced economies


Percentage points


-2
0
2
4
6
8


10
12
14


20
11


20
12


20
13


20
14


20
15


20
16


20
11


20
12


20
13


20
14


20
15


20
16


World EMDEs


1990-2008 average
2003-2008 average


Percent


0
2


4
6


8
10


20
11


20
12


20
13


20
14


20
15


20
16


20
11


20
12


20
13


20
14


20
15


20
16


20
11


20
12


20
13


20
14


20
15


20
16


20
11


20
12


20
13


20
14


20
15


20
16


EMDEs EMDE
commodity
importers


EMDE
commodity
exporters


Advanced
economies


1990-2008 average
2003-2008 average


Percent




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 6








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 because
of 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 unconventional
monetary 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, these
tools may over time have diminishing returns and
raise financial stability risks. Expansionary fiscal
policy could provide support to activity in a
number of advanced economies in the event of
adverse 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 to
investors that authorities are committed to
reinforcing long-term prospects. If well targeted,
they could also support short-term aggregate
demand. Greater investment—in infrastructure,
productivity enhancing technology, and human
capital—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 to
implement expansionary fiscal policy if large
downside risks materialize, channel pooled global
resources into infrastructure, and strengthen
international safety nets for the most fragile
countries. In a context mediocre global demand
and limited fiscal space across EMDEs, and amid
extremely low global interest rates, multilateral
organizations have an important role to play in the
financing of infrastructure and human capital
investment.


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 those


countries, particularly where the private sector is highly leveraged. Such
shocks could slow the catch-up of EMDEs’ income per capita toward
advanced economy levels. Amid weak growth, monetary and fiscal buffers
are eroding, particularly among commodity exporting EMDEs, while space
for further monetary policy accommodation in advanced economies has


narrowed.


B. Leverage and growth around


previous financial stress episodes


A. Impact of 1ppt decline in G7 and


BRICS growth on other emerging


markets


D. Median EMDE inflation C. Years to catch-up to 2015 U.S. GDP


per capita


0


20


40


60


80


100


120


Emerging
markets


Frontier
markets


1993-2008
2003-08
2013-15


Number of years


LICs (RHS)
0


100


200


300


400
Number of years


1.0


2.0


3.0


4.0


5.0


6.0


7.0


2010 2011 2012 2013 2014 2015 2016


Oil exporters Oil importers
Percent


Sources: World Bank, Conference Board, Haver Analytics, International Monetary Fund, Bank for
International 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 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 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 for
each 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.


F. Policy interest rate expectations E. Fiscal balances among oil


producers


0
10
20
30
40
50
60


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


An
go


la
M


ex
ic


o


Br
a


zil
Ira


n


Ni
ge


ria
Ru


ss
ia


Ka
za


kh
st


a
n


Al
ge


ria
Ba


hr
ai


n


Q
a


ta
r


O
m


a
n


Ira
q


Ku
w


ait


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


Percentage points change
percent of GDP


US$/bbl


-1.6


-1.2


-0.8


-0.4


0.0


On impact 1 year 2 years


G7 BRICS


Percentage points


90


95


100


105


110


0 1 2 3 4 5


Rising leverage Stable leverage
GDP per capita, Index = 100 in 0


Year


-1.0


-0.5


0.0


0.5


1.0


1.5


2.0


2016 2017


Dashed line: December 2015
Solid line: current United States


Euro Area


Japan


Percent




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 7








Major economies: Recent


developments and outlook


Prospects for major advanced economies have
deteriorated, amid weak global trade and
manufacturing 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, and
inflation persistently below target, the European
Central Bank (ECB) and Bank of Japan are
pursuing further policy accommodation, while the
U.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 is
calibrated by policy easing.


Major advanced economies are at different stages
of their post-crisis recovery but are expected to
stabilize around a weak growth trajectory (Figure
1.3). Rising or high public debt and monetary
policy rates at or near the zero lower bound could
reduce the effectiveness of counter-cyclical
policies, leaving these economies more vulnerable
to domestic and external shocks. At the same
time, 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 of
2016 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 expenditure
in 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 and
falling energy prices, continue to support private
consumption as the main engine of growth. Labor
market slack is diminishing, but a cyclical recovery


in labor participation and a still elevated number
of discouraged and involuntary part-time workers
suggests a persistent and sizable pool of
underutilized labor. Wage growth is expected to
gradually 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 capital-
intensive manufacturing and energy-producing
industries (Van Zandweghe 2016), but around an
already weak post-crisis trend. This trend is
unlikely to reverse in the short-term, as corporate
investment remains low, employment growth has
mainly concentrated in services, and the benefits
of 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) have
revised down their projections for the federal


FIGURE 1.3 Activity and policy space in major advanced


economies


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 effectiveness
of fiscal expansion.


B. Public debt and nominal policy


rates in G3 countries


A. GDP level


80
90
100
110
120
130
140


0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5


20
06


20
07


20
08


20
09


20
10


20
11


20
12


20
13


20
14


20
15


20
16


Policy interest rate Public debt (RHS)
Percent Percent of GDP


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.


90


95


100


105


110


115


120


20
07


20
08


20
09


20
10


20
11


20
12


20
13


20
14


20
15


20
16


20
17


20
18


United States Euro Area Japan
Index = 100 in 2007




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 8








funds rate expected at the end-2016 by an average
of more than 180 basis points. Revisions to
FOMC projections for core inflation and
unemployment are estimated to account for about
a 50-basis point reduction in the appropriate level
of 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 the
delayed 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 are
intensifying, and a significant turnaround in
productivity growth is unlikely in the short-term
(Gordon 2016; Byrne, Fernald, and Reinsdorf
2016).


Euro Area: Modest momentum


The recovery in the Euro Area is proceeding at a
moderate pace, supported by an exceptional level
of 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, and
persistently low oil prices and improved labor
market conditions should help consolidate gains in
2016 (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 five-
year period has been estimated to raise private
debt by around 6 percentage points of GDP
(Draghi 2016). The ECB announced additional


FIGURE 1.4 United States


Declining oil prices have led to a collapse of capital expenditure in the
energy sector, but supported resilient consumer spending, which will
remain 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.


B. Private consumption and


household income growth


A. Mining and exploration investment


0
20
40
60
80
100
120
140


0


2


4


6


8


10


19
99


20
00


20
01


20
02


20
03


20
04


20
05


20
06


20
07


20
08


20
09


20
10


20
11


20
12


20
13


20
14


20
15


20
16


Mining and exploration
investment
Oil price (RHS)


Percent of non-financial
corporations’ investment


US$/ Barrel


2.0


2.5


3.0


3.5


GDP Private
consumption


Disposable
income


Since June 2014 Since 1990
Percent


D. Unemployment C. GDP growth and components


0
1
2
3
4
5
6


G
DP


Co
n


su
m


pt
io


n


In
ve


st
m


en
t


Ex
po


rts


Im
po


rts


2016 2015Percent


0


2


4


6


8


10


12


2005 2007 2009 2011 2013 2015


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


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 is
defined 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 this


case), 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."


F. Contribution to FOMC’s Federal


Funds rate forecast revisions since


June 2014


E. Core inflation and wage growth


0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0


20
07


20
07


20
08


20
09


20
09


20
10


20
10


20
11


20
11


20
12


20
13


20
13


20
14


20
14


20
15


20
16


0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0


CPI less food and energy
Average hourly earnings (RHS)


Percent, year-over-year


-2.0
-1.5
-1.0
-0.5
0.0
0.5


In
fla


tio
n


U
ne


m
pl


oy
m


en
t


O
th


er


Fa
ct


or
s


To
ta


l


Percentage points




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 9








monetary 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.


Notwithstanding some progress since 2015, the
ongoing recovery in the Euro Area is subdued in
comparison with the recoveries following systemic
banking crises in other advanced economies, such
as the United States, the United Kingdom, and
Sweden in 2008-09 (Ruscher and Vašíček 2015).
Problems associated with structural rigidities and
persistent imbalances, although being gradually
addressed, are still significant. After a long period
of 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 to
2016 GDP growth. Rising flows of migrants to
the European Union are creating notable
challenges. E.U. countries have agreed to a
relocation plan to help countries most affected by
the influx, but implementation has been very slow
(Merler 2016).


Japan: Continued stagnation


Japan continues to fluctuate between periods of
modest growth and contraction. Private
consumption remains weak, falling short of the
gains in real income, which have themselves been
modest (Figure 1.6). Exports are also subdued,
dampened by weak external demand and limited
benefits of past yen depreciation. Despite weak
growth, labor market conditions continue to show
signs of tightening against the backdrop of an
aging population. The unemployment rate
remains slightly above 3 percent, the active job
openings-to-applicants ratio has risen steadily, and
the 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


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


FIGURE 1.5 Euro Area


The recovery in the Euro Area is proceeding at a moderate but uneven
pace, with persistent differences in output growth and unemployment rates
across countries. Export growth is expected to moderate this year, but


domestic 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, despite


extraordinary monetary policy accommodation.


B. Unemployment rate A. GDP change since 2008Q2


-2
0
2
4
6
8


10
12
14


Ire
la


nd


Fr
a


nc
e


G
er


m
a


ny


Ne
th


er
la


nd
s


Sp
ain


Eu
ro



Ar


ea Ita
ly


Po
rtu


ga
l


Percentage points


2


7


12


17


22


27


32


20
08


20
09


20
10


20
11


20
12


20
13


20
14


20
15


20
16


Germany France
Italy Spain
Portugal Euro Area


Percent


D. Unemployment and consumer


confidence


C. GDP growth and components


0
1
2
3
4
5
6


G
DP


Co
ns


u
m


pt
ion


In
ve


st
m


e
nt


Ex
po


rts


Im
po


rts


2016 2015Percent


-1.0


-0.5


0.0


0.5


1.0


1.5-35
-30
-25
-20
-15
-10
-5
0
5


20
00


20
02


20
04


20
06


20
08


20
10


20
12


20
14


20
16


Change in unemployment (inverted RHS)
Consumer confidence


Percent balance Percent change


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.


F. Inflation and Consensus inflation


forecasts


E. Non-performing loans and average


borrowing costs


AUT


CYP


DEU


ESP
FIN


FRA IRLITA


MLT


NLD


PRT


0
5


10
15
20
25
30
35
40
45


1.5 2.5 3.5 4.5


N
on


-
pe


rfo
rm


in
g


loa
ns


Borrowing cost, percent


Percent of total loans


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


20
10


20
11


20
12


20
13


20
14


20
15


20
16


20
17


20
18


20
19


20
20


20
21


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


Percent, year-over-year




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 10








Because of growth disappointments and
persistently low consumer price and wage
inflation, the Bank of Japan continued to ease in
2016, introducing a negative interest rate policy in
January. Market yields dropped, but measures of
inflation expectations remained low, and the
Japanese yen appreciated. This has raised concerns


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


China: Ongoing rebalancing


Growth in China decelerated further, to 6.9
percent in 2015, and to 6.7 percent in the first
quarter of 2016, reflecting weak exports and
slowing 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 to
offset layoffs in shrinking industrial sectors and
kept urban labor markets tight (Lardy 2016). In
addition, consumption growth continued to be
robust, contributing 4.6 percentage points to
GDP growth in 2015, compared to a contribution
of 2.5 percentage points from investment.


As a response to the pronounced slowdown in the
industrial sectors and in real estate, a range of
expansionary policy measures were implemented
in the second half of 2015. These included cuts in
reserve requirements and interest rates, increased
public spending on infrastructure projects, and tax
cuts for small businesses. Further policy easing in
2016 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


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 and
aging labor force has been an important factor weighing on aggregate


investment and savings. Growth in GDP per capita has been closer to
advanced 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.


B. Job creation since 2007 by sector A. Consumption and income growth


-5
-4
-3
-2
-1
0
1
2
3
4


Mar-13 Mar-14 Mar-15


Income


Consumption


Percent, year-over-year


-300


-200


-100


0


100


200


300


20
07


20
08


20
09


20
10


20
11


20
12


20
13


20
14


20
15


20
16


Industry
Services
Total


Thousands


D. Average GDP per capita and popu-


lation growth since 2007


C. Demographics, savings and


investment


80


85


90


95


100


105


18
20
22
24
26
28
30
32


19
96


19
98


20
00


20
02


20
04


20
06


20
08


20
10


20
12


20
14


Gross national savings
Total investment
Active age population (RHS)


Percent of GDP Index = 100 in 1995


-1
0
1
2
3
4
5
6
7
8


United States Japan Euro Area


GDP per capita growth
Population growth


Percent


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. Last


observation 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 observation


is May 2016.


F. Nominal and real effective


exchange rates


E. GDP growth and components


-2
-1
0
1
2
3
4


GD
P


C
on


su
m


pt
io


n


In
ve


st
m


e
nt


Ex
po


rts


Im
po


rts


2016 2015Percent


60


80


100


120


140


20
00


20
02


20
04


20
06


20
08


20
10


20
12


20
14


20
16


Nominal Real
Index, 100 = 2010




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 11








deterioration in global growth prospects, a shift in
policy focus away from the bilateral exchange rate
with the U.S. dollar towards a basket of currencies
in December 2015, the expected expiration of
temporary market stabilization measures taken in
summer 2015, and the introduction of circuit
breakers, contributed to renewed stock market
turbulence in January 2016. Improved
communications on exchange rate policy (World
Bank 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 2016-
20), 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.


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


Baseline projections envisage that growth in China
will continue to slow moderately, to 6.7 percent in
2016 and to an average of 6.4 percent in 2017-18,
assuming reforms proceed as expected and their
impact 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 price
deflation, underway since 2012, showed signs of
bottoming 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 ease
business regulations.


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


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 of
GDP, at the end of the third quarter of 2015
(Prasad 2016). International reserves ($3.2 trillion,


FIGURE 1.7 China


A slowdown in industrial activity has thus far been mitigated by steady
growth in the services sector. Fueled by policy support, house price
inflation increased in some market segments. The renminbi has remained


broadly stable against the dollar and in real trade-weighted terms since the
start of 2016. Consumer price inflation picked-up at the start of 2016, while
producer price deflation showed signs of bottoming out. Reflecting gradual
rebalancing, consumption has become a major driver of growth. Capital
outflows in 2015 contributed to a depletion of about 20 percent of foreign


reserves, but these have stabilized in 2016.


B. House prices A. Growth


0


2


4


6


8


10


12


14


2010 2011 2012 2013 2014 2015


Industry Services


Percent


-10


0


10


20


30


40


Ap
r-


11
Au


g-
11


D
ec


-
11


Ap
r-


12
Au


g-
12


D
ec


-
12


Ap
r-


13
Au


g-
13


D
ec


-
13


Ap
r-


14
Au


g-
14


D
ec


-
14


Ap
r-


15
Au


g-
15


D
ec


-
15


Ap
r-


16


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


Percent, year-on-year


D. Inflation C. Exchange rates


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


10


Ap
r-


10
O


ct
-


10
Ap


r-
11


O
ct


-
11


Ap
r-


12
O


ct
-


12
Ap


r-
13


O
ct


-
13


Ap
r-


14
O


ct
-


14
Ap


r-
15


O
ct


-
15


Ap
r-


16


Consumer price index
Production price index


Percent, year-on-year


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. Last
observation 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.


F. Balance of payments E. GDP growth and components


-800
-600
-400
-200


0
200
400
600


2011 2012 2013 2014 2015


Current account
Net capital flows
Change in reserves


US$ billions


-1


0


1


2


3


90


100


110


120


130


Q3
11


Q1
12


Q3
12


Q1
13


Q3
13


Q1
14


Q3
14


Q1
15


Q3
15


Q1
16


Onshore vs offshore rate spread (RHS)
Nominal vs $US
Real effective


Index. Jan. 2010=100 Percent


0


2


4


6


8


G
DP


Co
ns


u
m


pt
io


n


In
ve


st
m


en
t


Ex
po


rts


Im
po


rts


2016 2015Percent




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 12








or 30 percent of GDP) are still ample to meet a
spike in demand for foreign currency in case of
renewed financial market volatility. Capital
controls on portfolio investment and bank
lending, as well as a largely state-owned financial
system, limit the risk of financial instability arising
from 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


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


Bouts of volatility amid tightening financing
conditions


Financial markets had a turbulent start of the year,
reflecting concerns for the global economic
outlook, amplified by a sudden re-repricing of
credit risks (Figure 1.8). The market sell-off was
short-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 in
credit 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 the
most 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 since
2010, and the share of bond issuance by energy
companies worldwide jumped from 16 percent to
32 percent over the same period. As plunging oil
prices have led to sharply lower revenues and
reduced collateral values, weakened balance sheets
could lead to a rise in default rates in the sector
(Caruana 2016). Creditor losses would be most
pronounced in bond markets where EMDE oil
and gas companies raised most of their external
funding. Exposures of banks’ balance sheets to the
energy sector remain on the whole limited. In the
United States, for example, the claims on the
energy industry account for up to 6 percent of
assets among the largest banks.


Banks. Beyond their exposure to credit risks in the
energy sector, concerns about bank balance sheets
at the start of the year mainly reflected fear of
slowing growth in advanced economies and
prospects of persistently low or negative interest
rates hurting profitability. For now, many


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 and
banks, led to a sudden re-repricing of credit risks, and a sharp stock


market selloff at the start of 2016. Subordinated bank debt came under
pressure in the Euro Area, where the stock of legacy assets and non-
performing loans is still elevated.


B. Global equity indexes A. Bonds and CDS spreads


0
4
8


12
16
20
24


EM
DE



oil


co
m


pa
n


y
C


DS


G
lo


ba
l h


ig
h


yie
ld


U.
S.



hig


h
yie


ld


Em
e


rg
in


g
hi


gh


yi
eld


U.
S.


en
e


rg
y


hi
gh



yie


ld


Range since 2010
Jan-Feb
Current


Percent


60
70


80


90
100


110
120


Ja
n-


14


Ap
r-


14


Ju
l-1


4


O
ct


-
14


Ja
n-


15


Ap
r-


15


Ju
l-1


5


O
ct


-
15


Ja
n-


16


Ap
r-


16


All Oil and gas Banks
Index = 100 in Jan 2014


D. Nonperforming loans in the United


States and Euro Area


C. Change in bank CDS spreads in


2016


0


50


100


150


200


Eu
ro


pe


U.
S.


Eu
ro


pe


U.
S.


Subordinated Senior


Peak year-to-date change


Year-to-date change


Basis point


0


2


4


6


8


10


2000 2003 2006 2009 2012 2015


Percent of total loans


Euro Area United States


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 and
sovereign 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.




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 13








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 into
bank profits, particularly in the Euro Area and
Japan. 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 subordinated
debt 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 post-
crisis balance sheet restructuring. Among EMDEs,
bank profitability may be affected by the impact of
low growth and tighter financing conditions.


Emerging market assets and capital flows.
Following a period of intense volatility at the start
of 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 have
been particularly elevated since the start of 2015
(Figure 1.9). A recovery of the former and
weakening of the latter have coincided with a
rebound in EMDE equity, bond, and currency
markets. Additional monetary policy
accommodation in Europe and Japan has also
helped reduce pressures from the anticipated
normalization of U.S. monetary policy, and
provided additional funding opportunities
through euro-denominated credit markets.
Improved market conditions, which also reflected
a stabilization in China’s activity indicators, led to
a resurgence of international bond issuance by
both sovereign and corporate borrowers in
EMDEs, clearing a backlog accumulated in
previous months.


However, a sustained recovery in portfolio and
bank capital flows might prove elusive in the
absence of improving economic fundamentals.
Rating agencies are continuing to reassess credit
risks of EMDE borrowers, particularly of
commodity exporters, several of which have been


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


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.


B. Emerging markets financial assets A. Correlation of EMDE assets with oil


prices and US$


-1


-0.5


0


0.5


1


Currencies Shares Shares
With oil prices With US$


Since Jan. 2015
2010-2014


Correlation


D. EMDE bond and energy company


CDS spreads


C. Bond issuance by EM borrowers


0


20


40


60


80


100


120


2010 2011 2012 2013 2014 2015 2016


Non-financial corporations
Financial corporations
General government


i l i
i i


l


US$, billions


F. Net capital flows to EMDEs E. Fund flows in EMDE commodity


importers and exporters


-50
-40
-30
-20
-10


0
10
20
30
40
50


2008 2010 2012 2014 2016


Commodity importers ex. China
Commodity exporters
China


US$, billions, 12-month cumulative sum


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.


80
85
90
95


100
105
110
115


Ja
n-


15


M
ar


-
15


M
ay


-
15


Ju
l-1


5


Se
p-


15


No
v


-
15


Ja
n-


16


M
ar


-
16


M
ay


-
16


Currency vs US$
Equities
USD bonds
Local currency bonds


Index, Jan.2 2015 =100


-1000


-500


0


500


1000


1500


2000
20


01
20


02
20


03
20


04
20


05
20


06
20


07
20


08
20


09
20


10
20


11
20


12
20


13
20


14
20


15


FDI inflows Porfolio inflows
Other inflows FDI outflows
Porfolio outflows Other outflows
Net inflow


US$, billions, 4-quarter cumulative sum


0


2


4


6


8


10


12


2008 2010 2012 2014 2016


High yield sovereigns
Investment grade sovereigns
Oil companies' CDS


Percent




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 14








investment (FDI) flows to EMDEs are generally
more stable and relatively less affected by short
term 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 inter-
company loans are expected to account for more
than half of FDI inflows in 2016, with a
particularly significant contribution in China.


Low commodity prices


The weakness of commodity prices, especially for
energy, persisted into 2016 (Figure 1.10), pushing
some prices to new lows at the start of the year.
Abundant supplies and stocks across most
commodity sectors, softening global growth


prospects, and a strong U.S. dollar have all
contributed 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 less
than $30 per barrel in mid-January to $46 per
barrel in May, reflecting rising investor sentiment,
a weaker U.S. dollar, strong crude import demand
in China, and supply disruptions in a number of
oil 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 the
policy front, in mid-April, OPEC and several non-
OPEC oil producers failed to agree to freeze crude
production at January 2016 levels. The oil market
remains well-supplied, with OECD stocks at
record levels, but is expected to rebalance
materially 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 and
drilling, 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 bulk
of the decline in the United States. With the
notable exception of Canada and Russia, most
other oil producers are expected to record
moderate declines in 2016. As a result, global
production is expected to fall to a level more in
line with global consumption. Downside risks to
the price forecast include more resilient non-
OPEC supply and weaker global demand growth,
while the main upside risk for oil prices is a
coordinated supply restraint by major producers.


FIGURE 1.10 Commodity markets


Commodity prices recovered from January lows but remain low on the
back 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 recover
slowly as supply is gradually cut back and demand strengthens later in the
year. Average oil production costs have been declining in recent years and


are currently below $40 per barrel across most producing countries.


B. U.S. oil production A. Industrial commodity prices


0
20
40
60
80


100
120
140
160


Ja
n-


11
M


ay
-


11
Se


p-
11


Ja
n-


12
M


ay
-


12
Se


p-
12


Ja
n-


13
M


ay
-


13
Se


p-
13


Ja
n-


14
M


ay
-


14
Se


p-
14


Ja
n-


15
M


ay
-


15
Se


p-
15


Ja
n-


16
20


16


Agriculture
Energy
Metals


US$ nominal, Index =100 in 2010


-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0


20
07


20
08


20
09


20
10


20
11


20
12


20
13


20
14


20
15


20
16


20
17


Lower 48 Gulf of Mexico Alaska
Million barrels, year-on-year change


D. Cost of oil production C. OECD crude oil stocks


0 20 40 60
Kuwait


Saudi Arabia
Iraq


UAE
Iran, Islamic Rep.


Russia
Algeria


Venezuela, RB
Libya


Mexico
China


Nigeria
United States


Brazil


Operating
Capital


US$/bbl


Sources: 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.


900


1,000


1,100


1,200


1,300


2007 2009 2011 2013 2015


Million barrels




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 15








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


Metals markets. Metal prices have also rallied
from January lows on expectations of stronger
demand, and ongoing supply rebalancing from
production 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) and
aluminum (China). The closure of large zinc
mines in 2015 (Australia and Ireland) is expected
to support zinc prices. Metal prices are projected
to decline 15 percent in 2016 and to rise
moderately in the medium term as the expansion
of capacity slows, but the timing will vary by
individual metals.


Agricultural commodity markets. Agricultural
prices continued their downward trend during the
first quarter of 2016, the seventh consecutive
quarterly decline. Ample supplies during the
current 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 energy-
intensive 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


2 percent decline in agricultural commodity
prices. Input costs for agricultural commodities
have also eased because policy-driven demand for
biofuels, crops that compete with agricultural
commodities for land, has leveled off. Prices of
agricultural commodities are expected to decline
marginally in 2016, with favorable weather
conditions in the Southern Hemisphere for most
grains 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


FIGURE 1.11 Commodity markets (cont.)


Ample production during the current and past two seasons have kept most
grain and oilseed markets well-supplied. Since agriculture is an energy-
intensive sector, weakness in agricultural prices also reflect the pass-
through from lower energy prices.


B. Global grain production and


consumption


A. Commodity price indices change


-40
-35
-30
-25
-20
-15
-10
-5
0


Oils and
meals


GrainsBeverages Other
food


Raw
materials


2011Q1-2015Q1 2015Q1-2016Q1Percent


1.3


1.5


1.7


1.9


2.1


2.3


20
00


20
02


20
04


20
06


20
08


20
10


20
12


20
14


20
16


Production
Consumption


Billion metric tons


D. Elasticity of food prices to oil


prices


C. Energy intensity


0 10 20


Sub-Saharan Africa
Turkey


India
World


United States
EU-12
Brazil
China


Canada


Manufacture
Agriculture


Percent


0.00
0.05
0.10
0.15
0.20
0.25
0.30


R
ice


W
he


at


M
a


ize


Pa
lm



oi


l


So
yb


e
an


s


Al
l f


oo
d


Elasticity


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 the
cost of agriculture and manufacturing industries and accounts for both direct and indirect use of
energy. 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 of


income), 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).


2La Niña is characterized by unusually cold ocean temperatures in
the Equatorial Pacific, compared to El Niño, which is characterized
by unusually warm ocean temperatures in the same region. La Niña


often follows El Niño.




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 16








Weak global trade


Following years of weak performance, global
merchandise trade growth reached a post-crisis low
in 2015, largely reflecting a marked deceleration
in import demand from commodity exporters and
slowing 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 of
the observed deceleration in global trade last year
(Constantinescu, Mattoo, and Ruta 2016). Many
of 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 to
have been mutually reinforcing drivers for weaker
merchandise 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 of
other EMDEs’ exports, this has had an adverse
impact on other emerging economies. The gradual
shift from investment to consumption and slowing
industrial activity in China lowered its import
demand for industrial commodities and
intermediate goods. This was compounded by
subdued industrial activity and capital expenditure
in the manufacturing sector in the United States
and the Euro Area. Feeble global investment—
reflecting mediocre growth, deleveraging pressures
in advanced economies, and a maturing credit
cycle in EMDEs—could continue to cap the
growth of goods trade throughout 2016.


More resilient services trade. Global services trade
appears 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 one-
fifth of global trade volumes and half of global
trade value-added (Hollweg et al. 2015). While
barriers to service sector trade have fallen globally,
they have remained stable across smaller
economies (Anderson et al. 2015). Over time, the
share 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 a
pattern of repeated and significant downward
revisions, global trade forecasts for 2016-17 have
been downgraded again, consistent with evidence
of a persistent deterioration in the relationship
between global trade and activity. After growing


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 and
services 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 trade


liberalization.


B. Goods import value from major


commodity importers


A. Import volume growth


60
70


80
90


100
110
120
130


2012 2013 2014 2015


Consumer goods
Raw materials
Manufactured goods


Nominal $US value, Index = 100 in Jan 2012


D. Global trade growth forecasts C. Services and merchandise export


value growth


-15


-10


-5


0


5


10


15


Merchandise Services Merchandise Services
Commodity importers Commodity exporters


Range
Average


Percent growth, 2013-15, nominal $US


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 defined


as 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 and


Transport Equipment, Miscellaneous Manufacturing Articles, Commodities and Transactions. Last
observation 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.


-2
0
2
4
6
8


10
12
14


20
11


20
12


20
13


20
14


20
15


20
16


20
11


20
12


20
13


20
14


20
15


20
16


20
11


20
12


20
13


20
14


20
15


20
16


World EMDEs Advanced


1990-2008 average
2003-2008 average


Percent


2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5


2013 2014 2015 2016 2017 2018


June 14 June 15 June 16Percent


Avg. 2010-15


Avg. 1990-08




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 17








roughly in line with GDP in 2015, global trade is
expected to marginally outperform global growth
over the forecast period. In the medium-term,
maturing supply chains, a slower pace of trade
liberalization, 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 of
technologies 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).


Emerging market and


developing economies:


Recent developments


and outlook


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, and
persistent domestic challenges. In contrast, growth
projections for commodity importing EMDEs are
little changed, at 5.8 percent for 2016, and are
expected to be broadly stable at that level through
2018. In low-income countries, growth in 2016 is
projected at 5.3 percent. Policy buffers continue to
erode in commodity exporting EMDEs, especially in
oil exporting countries, reducing their ability to
withstand further downside shocks.


Recent developments


Growth in EMDEs decelerated to 3.4 percent in
2015—about half of the pre-crisis average growth
rate, and in line with the rate expected in January


(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 in
2010-14. About 90 percent of the countries that
have experienced this protracted slowdown were
commodity 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 of
negative 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 group
that accounts for about a third of EMDE
output—actually picked up in 2015 to 4.7 percent


FIGURE 1.13 Activity in EMDEs


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 in
deep 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.


B. Countries with three consecutive


years of declining growth


A. GDP growth


0


4


8


12


16


20


1990 1995 2000 2005 2010 2015


Commodity exporters
Commodity importers


Share of countries


D. Contribution to EMDEs growth C. GDP growth components, 2015


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.


-4
-2
0
2
4
6
8


20
11


20
12


20
13


20
14


20
15


20
11


20
12


20
13


20
14


20
15


20
11


20
12


20
13


20
14


20
15


20
11


20
12


20
13


20
14


20
15


Commodity
importers


Commodity
importers ex.


China


Commodity
exporters ex.


Brazil and
Russia


Brazil and
Russia


1990-2008 average
2003-2008 average


Percent


-1
1
3
5
7
9


Co
ns


um
pt


ion


In
v


es
tm


e
n


t


Ex
po


rts


Im
po


rts


Co
ns


um
pt


ion


In
v


es
tm


e
n


t


Ex
po


rts


Im
po


rts


Co
ns


um
pt


ion


In
v


es
tm


e
n


t


Ex
po


rts


Im
po


rts


Metal exporters Oil exporters
ex.Russia


Commodity
importers ex.


China


1995-2008 averagePercent


-1
0
1
2
3
4
5
6
7
8
9


10


2003-08 2010-14 2015 2016


Brazil
China
Commodity importers
Commodity exporters
Russia


Percentage points




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 18








from 4.3 percent the previous year, above its long-
term average of 4.1 percent, reflecting generally
robust domestic demand. The difference between
the sharp slowdown in commodity exporters and
the 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 start
of the year continued to be challenging, with
subdued global trade and rising borrowing costs.
Manufacturing activity diverged, with commodity
importing EMDEs performing better than
commodity exporters. Brazil and Russia, which
together account for about two-fifths of
commodity exporting EMDE output, are expected
to contract again in 2016. External headwinds
these two economies face, particularly low
commodity prices, have combined with persistent
domestic 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 have
come 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 in
2016 amid tighter financing conditions. Many oil
exporters (Angola, Azerbaijan, Colombia,
Ecuador, Kazakhstan, Nigeria, República
Bolivariana de Venezuela) struggle with sharply
deteriorating current accounts, exchange rate
pressures, and falling fiscal revenues. Persistent
high inflation prompted several central banks in
oil exporting countries to continue hiking rates or
tightening foreign exchange restrictions (Angola,
Azerbaijan, Nigeria) in the first months of 2016.


Non-energy commodity exporters, whose terms of
trade have deteriorated more gradually since mid-
2011, are showing some signs of stabilization.
Growth remains broadly stable in this group as
adjustment to lower non-energy commodity prices


seems to be well advanced, including for some
metal exporters (Indonesia, Peru) and agriculture
exporters (Tanzania, Senegal, Uganda). However,
performance varied considerably among the
countries reflecting country-specific vulnerabilities
and policy responses. Headwinds included sharply
falling remittances (Armenia, Moldova,
Tajikistan), conflict (Burundi), unwinding
financial vulnerabilities (Mongolia), drought
damage to agricultural production (Botswana,
South Africa, Zambia), electricity shortages (South
Africa, Zambia), and natural disasters (Pacific
Islands).


Among commodity importing EMDEs, low
energy prices and modest but ongoing growth in
advanced economies are supporting activity,
particularly in parts of Europe and Central Asia
(Poland, Romania, Turkey), East Asia (the
Philippines, 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 by
other headwinds, reducing some of the expected
windfall gains. These headwinds included political
instability 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, policy-
supported, post-crisis growth and the end of the
latest 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 of
underinvestment (European Bank for
Reconstruction and Development 2016; World
Bank 2015b). Moreover, sharply lower oil prices
have contributed to a notable reduction in
investment in the oil and gas industry. More
generally, declining corporate profitability and




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 19








return on equity has weakened investor sentiment
and capital inflows.


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 the
lowest 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, the
adverse impact of low commodity prices was
exacerbated by a severe drought, which curtailed
agricultural production (Haiti, Zimbabwe). In a
number of LICs, political tensions or electoral
uncertainties (Burundi, Haiti, Nepal), security
challenges (Afghanistan, Chad, Niger) and
terrorist attacks (Burkina Faso, Mali) have
weighed on activity. However, growth has
remained robust in some commodity exporters
with a diverse export base (Democratic Republic
of 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.


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 growth
prospects and rising vulnerabilities have been
reflected in numerous recent sovereign rating
downgrades, as well as depreciations earlier in the
year despite foreign reserve interventions and use
of sovereign wealth fund assets.3


In contrast, in several large commodity importing
EMDEs, fiscal and current account deficits
narrowed in 2015 (Turkey, India, Pakistan).


Foreign exchange reserves are broadly stable or
increasing, and inflation below target levels, in
most 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 is
above the median of that period.


In many commodity exporting and importing
countries alike, high and rising credit to the
private sector has become an increasingly
important vulnerability (see Special Focus 1).
Fueled by low post-crisis borrowing costs and
rising financing needs, credit to the nonfinancial
private sector increased by 14 percentage points of
GDP, to 85 percent of GDP in the five years to


FIGURE 1.14 External and fiscal buffers in EMDEs


Weak growth in commodity exporting countries contributed to a
deterioration of external and fiscal buffers in 2015. Current account and
fiscal deficits widened and government debt and debt service costs rose in
many 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


A. External sustainability: commodity


exporters


0


15


30


45


60


Cu
rr


en
t a


cc
ou


nt
ba


la
n


ce
/G


D
P


<


-
5%


G
ro


ss


e
xt


e
rn


al
de


bt
/G


DP
>



60


%


NE
ER


de
pr


ec
ia


tio
n


>


10
%


D
ec


lin
e


in


fo
re


ign
re


se
rv


e
s


>


10
%


2014 2015Share of countries


0


15


30


45


60


Cu
rr


e
nt



ac


co
un


t
ba


lan
ce


/G
DP


<


-
5%


G
ro


ss


e
xt


e
rn


al
de


bt
/G


DP
>



60


%


NE
ER


de
pr


e
cia


tio
n


>


10
%


De
cl


ine


in
fo


re
ig


n
re


se
rv


es
>



10


%


2014 2015Share of countries


D. Fiscal sustainability: commodity


importers


C. Fiscal sustainability: commodity


exporters


0
10
20
30
40
50


Pr
im


ar
y


ba
la


nc
e/


G
D


P
<



-


3%


Go
ve


rn
m


e
nt


de
bt


/G
DP


>


70
%


In
te


re
st



on


de
bt


/re
v


en
u


e
>



10


%


So
v


er
ei


gn
cr


ed
it


do
w


ng
ra


de


2014 2015 2016eShare of countries


0
10
20
30
40
50


Pr
im


ar
y


ba
la


nc
e/


G
D


P
<



-


3%


Go
ve


rn
m


e
nt


de
bt


/G
DP


>


70
%


In
te


re
st



on


de
bt


/re
v


en
u


e
>



10


%


So
v


er
ei


gn
cr


ed
it


do
w


ng
ra


de


2014 2015 2016eShare of countries


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 that


experienced changes of more than the indicated percentages during the course of the year. Based on
data 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.


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.




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 20












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, a
severe 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.


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, a
severe 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.


The slowdown has been pronounced in oil and metals
exporters (Figure 1.1.1). Growth in 2015 more than
halved in Chad, while GDP is estimated to have
contracted by more than 5 percent in South Sudan, as low
oil prices reduced government revenues. Several metal-
exporting 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, which


began to recede in late 2015.


In a number of LICs, political and security related
uncertainties held back activity. Afghanistan’s economy
continued to face headwinds from the gradual pullout of
NATO troops and decline in foreign aid. Sustained
insurgent attacks complicated the implementation of
reforms and undermined the government’s efforts to
develop the mining sector, a potential source of growth,
and improve regional trade linkages. In Nepal, despite the
passing 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 the
second-round presidential election. Political tensions and
security threats intensified in several Sub-Saharan Africa
LICs, on account of electoral disputes (Burundi,
Democratic Republic of Congo), Boko Haram
insurgencies (Chad, Niger) and terrorist attacks (Burkina
Faso, Mali), with the resulting increase in uncertainty


adversely impacting activity.


This box was prepared by Gerard Kambou.


0
1
2


3
4


5
6
7
8


20
13


20
14


20
15


20
16


20
17


20
13


20
14


20
15


20
16


20
17


20
13


20
14


20
15


20
16


20
17


Commodity-
exporting LIC


Other
LICLIC


Percent


-30


-20


-10


0


Oil-exporting LIC Metals-exporting
LIC


Other LIC


October 2014
April 2016


Percent of GDP


FIGURE 1.1.1 Recent developments and


outlook in LICs


Growth has slowed sharply in low-income countries
(LICs), to 4.5 percent in 2015 down from 6.1 percent in


2014. Persistently low commodity prices, a severe
drought in parts of Sub-Saharan Africa, and security and
political challenges took a toll on activity in low-income
countries. Current account positions weakened among
oil exporters, and deficits remain large among some


metal exporters.


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.


A. Growth forecast, 2016


B. Current account balance, 2015




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 21












In contrast, the slowdown has been less pronounced in
commodity 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 these
countries, 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 by
garments 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 price
declines 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 and
currency depreciations in many countries (Figure 1.1.2).
Reserve drawdowns were most pronounced among some
mineral exporters (Niger, Sierra Leone) and in countries
facing sharp currency depreciations (Burundi, The
Gambia, Rwanda). Monetary authorities in countries with
a flexible exchange rate regime responded to external
pressures 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 in
inflation 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 in
many countries. Oil exporters and other resource-rich


-16


-14


-12


-10


-8


-6


-4


-2


0


Metals-exporting LIC Other LIC


Dec-15
Latest


Percent, year-on-year


-8


-6


-4


-2


0


2


4


Oil-exporting LIC Metals-exporting
LIC


Other LIC


October 2014
April 2016


Percent of GDP


BOX 1.1 Low-income countries: Recent developments and outlook (continued)


FIGURE 1.1.2 Recent developments and


outlook in LICs (cont.)


Currencies have depreciated and fiscal positions have
weakened in many countries. Oil exporters and other


resource-rich countries faced a substantial decrease in
commodity revenues. In a number of countries, spending
increased, causing fiscal deficits to widen.


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.


A. Exchange rate depreciation


B. Fiscal balance, 2015




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 22












countries faced a substantial decrease in commodity
revenues. Some countries (Chad, Mozambique, and
Rwanda) 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 was
increased 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 have
increased sharply. As a result, public debt burdens have
risen, most significantly in Malawi, Mozambique, Togo,
and Zimbabwe. In some countries (Mozambique, Niger),
the increase in government debt reflected rising
infrastructure 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 the
near-term. Commodity prices are expected to remain low
despite a gradual pickup in global activity. Against this
backdrop, 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. The implications for individual LICs will vary:


• Oil and other commodity exporters are expected to
see a modest pickup in growth in 2016 as they
continue to adjust to low commodity prices. Growth
is expected to remain low in Chad as oil production
falls. In Mozambique, delayed investment into the
LNG sector and rising inflation will weigh on growth
in 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 and
some 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 post-
earthquake reconstruction needs. Activity is expected


to weaken further in Nepal as disruptions of cross-
border traffic restrict access to critical inputs, the
tourism industry struggles to recover from the
earthquakes, 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 2016
is expected to be marginally higher than that of 2015,
as attacks by insurgents continue to delay the
implementation of government’s reforms and
undermine private sector confidence. Political
uncertainty and threats of terrorist attacks will hold
back activity in Burundi, Burkina Faso, Mali, and
Niger. Drought is expected to weigh on growth in


Ethiopia.


• For most other countries, growth is projected to
remain 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, with


both external and domestic risks.


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


well 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 food
insecurity, and accentuate inflationary pressures.
Militant insurgencies and terrorist attacks remain a
concern in West Africa, while political risks are high
in Afghanistan, Burundi, Democratic Republic of


Congo, Haiti, and Nepal.


BOX 1.1 Low-income countries: Recent developments and outlook (continued)




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 23












TABLE 1.1.1 Low-income countries: Real GDPa


(Annual percent change unless indicated otherwise)




Percentage point differences from
January 2016 projections


2013 2014 2015e 2016f 2017f 2018f 2015e 2016f 2017f 2018f
Low Income Country, GDPb 6.5 6.1 4.5 5.3 6.3 6.6 -0.6 -0.9 -0.3 0.0
Afghanistan 2.0 1.3 1.5 1.9 2.9 3.6 -0.4 -1.2 -1.0 -1.4
Benin 5.6 5.4 5.2 5.5 5.8 6.1 -0.5 0.2 0.7 1.0
Burkina Faso 6.7 4.0 4.0 5.2 5.5 6.0 -0.4 -0.8 -1.5 -1.0
Burundi 4.6 4.7 -2.5 3.0 3.5 4.0 -0.2 -0.5 -1.3 -0.8
Cambodia 7.4 7.1 7.0 6.9 6.8 6.8 0.1 0.0 0.0 0.0
Chad 5.7 6.9 1.8 -0.4 1.6 5.2 -2.3 -5.3 -4.5 -1.3
Comoros 3.5 3.0 2.3 2.4 3.0 3.1 0.0 -0.1 -0.1 0.0
Congo, Dem. Rep. 8.5 9.0 7.7 6.3 7.7 8.5 -0.3 -2.3 -1.3 -0.5
Eritrea 1.3 1.7 3.0 4.0 4.3 4.3 2.1 2.0 2.1 2.1
Ethiopiac 10.5 9.9 9.6 7.1 9.4 8.6 -0.6 -3.1 0.4 -0.4
Gambia, The 4.8 0.9 -2.5 -4.0 4.5 5.5 -6.5 -8.5 -0.8 0.2
Guinea 2.3 -0.3 0.1 4.0 5.0 6.0 -0.3 0.5 1.0 1.8
Guinea-Bissau 0.8 2.9 5.1 5.7 6.0 6.0 0.7 0.8 0.7 0.7
Haitic 4.2 2.8 1.2 0.9 1.9 2.2 -0.5 -1.6 -0.9 -0.8
Liberia 8.7 0.7 0.3 3.8 5.3 5.6 -2.7 -1.9 -1.5 -1.2
Madagascar 2.4 3.0 3.0 3.7 3.7 3.7 -0.2 0.3 0.1 0.1
Malawi 5.2 5.7 2.8 3.0 4.1 5.4 0.0 -2.0 -1.7 -0.4
Mali 1.7 7.2 5.5 5.3 5.1 5.0 0.5 0.3 0.1 0.0
Mozambique 7.3 7.4 6.3 5.8 7.7 8.3 0.0 -0.7 0.5 1.1
Nepalc 3.8 6.0 2.7 0.6 4.7 4.4 -0.7 -1.1 -1.1 -0.1
Niger 4.6 6.9 4.2 5.4 6.3 7.0 -0.2 0.1 -3.0 1.3
Rwanda 4.7 7.0 7.1 6.8 7.2 7.1 -0.3 -0.8 -0.4 -0.5
Sierra Leone 20.1 7.0 -21.5 6.5 5.3 5.4 -1.5 -0.1 0.0 0.1
South Sudan 13.1 3.4 -6.3 3.5 6.9 7.4 -1.0 0.0 -0.1 0.4
Tanzania 7.3 6.8 7.0 7.2 7.1 7.1 -0.2 0.0 0.0 0.0
Togo 5.1 5.7 5.5 5.6 5.0 5.5 0.4 0.7 0.3 0.8
Ugandac 4.4 4.7 5.0 5.0 5.9 6.8 0.0 0.0 0.1 1.0
Zimbabwe 4.5 3.8 1.1 1.4 5.6 3.5 0.1 -1.4 2.6 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 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.


BOX 1.1 Low-income countries: Recent developments and outlook (continued)




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 24








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 rising
risk spreads have increased debt service costs in a
number of countries (Hofmann et al. 2016). In


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


In the past, credit booms over a sustained period
were sometimes followed by slowing growth and,
in the presence of financial stress, increased the
severity of the subsequent recession (Claessens,
Kose, and Terrones 2012; Jordà, Schularick, and
Taylor 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 and
Terrones 2015).


Current debt rollover risks appear limited in the
short term, given the modest stock of debt
maturing in 2016, but could increase in 2017 as
refinancing pressures intensify. In sectors where
state ownership is pervasive (e.g. energy),
deteriorating creditworthiness or financial stress
could weaken sovereign balance sheets and
propagate 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 their
monetary 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).


FIGURE 1.15 Private indebtedness in EMDEs


Rising private sector indebtedness has become a major source of
vulnerability in some EMDEs. Historically, countries with rapidly rising
leverage in the years leading up to a period of financial stress have
experienced 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.


B. Private sector credit in selected


EMDEs


A. Private sector credit in EMDEs


0


40


80


120


160


200


19
95


19
97


19
99


20
01


20
03


20
05


20
07


20
09


20
11


20
13


20
15


Range Average
Percent of GDP


0
50
100
150
200
250


-20
0


20
40
60
80


Ch
in


a


Tu
rk


e
y


Th
ai


la
nd


Br
a


zil
M


al
ay


sia
Po


la
nd


Ru
ss


ia
In


do
n


es
ia


Sa
u


di
In


di
a


H
un


ga
ry


So
u


th


Af
ric


a


Change since 2007Q4
Latest (RHS)


Percentage points of GDP Percent of GDP


D. GDP per capita around the 1997-98


Asian crisis


C. debt service burden of private non-


financial sector


0
5


10
15
20
25


Br
az


il
Ch


ina
M


a
la


ys
ia


Tu
rk


ey
Ru


ss
ia


Hu
n


ga
ry


Th
a


ila
nd


In
dia


So
ut


h
Af


ric
a


Po
la


nd
In


do
ne


sia
M


ex
ico


Current Pre-crisis


Percent of income


90


95


100


105


110


115


1997 1998 1999 2000 2001 2002


Rising leverage Stable leverage
Index, 100=1997


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, divi-
dends) 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 non-
financial 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 ad-


vanced economies. Unweighted average across countries.


F. Stock of EMDE bonds maturing E. GDP per capita around the global


financial crisis


95


100


105


110


2008 2009 2010 2011 2012 2013


Rising leverage Stable leverage
Index, 100=2008


0
10
20
30
40
50
60
70
80


2015 2016 2017 2018


Sovereign
Corporate


Percent of gross bond issuance in 2015




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 25








FIGURE 1.16 Growth outlook for EMDEs


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 for
importers. 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.


B. Growth forecasts, commodity


importers


A. Growth forecasts, commodity


exporters


0
1
2


3
4


5
6
7


20
12


20
13


20
14


20
15


20
16


20
17


20
18


Jun-15 Jan-16 Jun-16
Percent


0
1
2


3
4
5
6
7


20
12


20
13


20
14


20
15


20
16


20
17


20
18


Jun-15 Jan-16 Jun-16
Percent


D. Growth around oil price declines,


commodity importers


C. Growth around oil price declines,


commodity exporters


2


4


6


8


10


12


14


16


18


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


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


Range of previous episodes
Average of previous episodes
2014Q2


Percent


0


3


6


9


12


15


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


Range of previous episodes
Average of previous episodes
2014Q2


Percent


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.


F. Growth forecasts, commodity


importers


E. Growth forecasts, commodity


exporters


-6


-2


2


6
10


In
do


n
es


ia


Ar
ge


n
tin


a


Sa
u


di


Ar
a


bia


Ru
ss


ia


Br
a


zil


Et
hi


o
pi


a


Ta
nz


a
ni


a


Co
n


go
,


D.
R.


M
o


za
m


biq
ue


Ug
an


da


EMDE commodity
exporters


LIC commodity
exporters


2015 2016 2017-18Percent


0


2


4


6
8


In
dia


Ch
ina


Po
la


nd


Tu
rk


e
y


M
ex


ico


Ca
m


bo
dia


Er
itr


ea


Ne
pa


l


Af
gh


an
ist


an


Ha
iti


EMDE commodity
importers


LIC commodity
importers


2015 2016 2017-18Percent


Outlook


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 from
January. Going forward, growth is projected to
firm to 4.4 percent in 2017 and 4.7 percent in
2018, reflecting an expected recovery in
commodity exporting countries, predicated on a
modest upturn in oil prices and the end of
recessions in Russia in 2017 and Brazil in 2018.


Among commodity exporting EMDEs, the
outlook has once again been downgraded (Figure
1.16). This reflects the sharp decline in oil and
other commodity prices, as well as weak
investment, soft global manufacturing trade, and
tightening financing conditions. At 0.4 percent,
growth in these countries will be well below the
1.6 percent projected in January. The expectation
of a further decline in the average price of oil, to
$41 per barrel for this year (versus $51 projected
in the January GEP) will weigh on growth in
2016. 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 for
commodity 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 1990-
2008 average of 6.1 percent. The divergence in the
prospects for commodity exporters and importers
is also reflected in notable differences across
regional outlooks (see Box 1.2). While 2016
projections for EMDE regions with a large
number of importers (East Asia and Pacific, South
Asia) are broadly unchanged from January, those
for regions with a sizable number of exporters
(Latin America and the Caribbean, the Middle
East and North Africa, Sub-Saharan Africa) were
significantly revised down.


The external environment confronting low-
income countries is expected to remain
challenging in the near term, with lower
commodity prices and a more subdued recovery in
global activity than previously projected, but it
will be somewhat offset by sustained investment
growth and falling oil prices that benefit the


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




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 26












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 major
commodity exporting economies—Europe and Central Asia, Latin America and the Caribbean, the Middle East and
North Africa, and Sub-Saharan Africa—have been downgraded since January .


East Asia and Pacific. Growth is estimated to have
slowed to 6.5 percent in 2015 from 6.8 percent in
2014, broadly in line with January projections. This
reflects the gradual slowdown in China. This offset a
very modest pickup in the rest of the region, which
showed signs of bottoming out in 2015. The
moderation of growth in commodity exporters was
offset 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 to
continue to gradually slow down, growth in the rest
of 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 corporate
and household leverage in the region. Key policy
challenges include strengthening medium-term fiscal
and macroprudential frameworks and structural
reforms to support long-term growth (World Bank
2016b).


Europe and Central Asia. Activity in EMDEs in the
region contracted by 0.1 percent in 2015 (as
estimated in January) from a 1.8 percent expansion in
2014, driven by the deep recession in the Russian
Federation. Excluding Russia, regional growth in
2015 was 2.5 percent, broadly unchanged from the
rate of expansion in 2014, as continued economic
dynamism in Turkey and several large oil importers
in 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 Euro


Area and continued weakness of external demand
pose further headwinds. While low commodity prices
are helping importers in the western part of the
region, the benefits have yet to translate fully into
robust consumption and investment. Growth is
expected 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 average
of 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 in
2014. GDP was dragged down by depressed
commodity prices, tighter regional monetary
conditions, and domestic challenges among the
region’s largest economies. Brazil and, particularly,
República Bolivariana de Venezuela are both mired
in deep recessions, while Argentina has embarked on
macroeconomic policy reforms aimed at more
sustainable 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 another
year 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 to
bottom out and commodity prices could continue to
decline. This box was prepared by Derek Chen, Allen Dennis, Christian Eigen


-Zucchi, Gerard Kambou, Ekaterine Vashakmadze, and Dana Vorisek.




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 27












Middle East and North Africa. Growth in the region
was an estimated 2.6 percent in 2015, slightly down
from 2.9 percent in 2014 and broadly in line with
January estimates. The sharp slide in oil prices over
the past two years has contributed to a deterioration
of buffers and a growth slowdown in most oil
exporting countries. The impacts of low oil prices are
necessitating 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 the
region have resulted in significant output losses in
domestic and neighboring economies (Devarajan and
Mottaghi 2016). Regional growth is projected to rise
slightly 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 the
removal of sanctions in January, rapidly rising oil
sector activity in Iraq, and a recovery of oil prices in
2017. Risks to the outlook are mainly to the
downside and include a further slide in oil prices and
additional negative impacts of poor security
conditions.


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—has
remained robust, supported mainly by domestic
demand. Inflation remains benign, even if picking up
in some countries. Net exports continue to exert a
drag 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 in
India, should support a pickup in private investment.
Risks to the forecast are weighted to the downside.


FIGURE 1.2.1 Regional Growth


Differences in recent developments and prospects
across EMDE regions reflect in part the divergences
between commodity exporters and importers.


Source: World Bank
A. Since largest economies of each region account for almost 50 percent of


regional 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.


A. Regional growth (weighted average)


B. Regional growth (unweighted average)


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


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


-2


0


2


4


6


8


10


20
14


20
15


20
16


20
17


20
14


20
15


20
16


20
17


20
14


20
15


20
16


20
17


20
14


20
15


20
16


20
17


20
14


20
15


20
16


20
17


20
14


20
15


20
16


20
17


East Asia
and


Pacific


Europe
and


Central
Asia


Latin
America
and the


Caribbean


Middle
East and


North
Africa


South
Asia


Sub-
Saharan


Africa


1990-08 average 2003-08 averagePercent


0


2


4


6


8


10


20
14


20
15


20
16


20
17


20
14


20
15


20
16


20
17


20
14


20
15


20
16


20
17


20
14


20
15


20
16


20
17


20
14


20
15


20
16


20
17


20
14


20
15


20
16


20
17


East Asia
and


Pacific


Europe
and


Central
Asia


Latin
America
and the


Caribbean


Middle
East and


North
Africa


South
Asia


Sub-
Saharan


Africa


1990-08 average 2003-08 averagePercent




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 28










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 than


January estimates. The slowdown was most severe in
oil exporters (Angola, Nigeria), where low oil prices
sharply slowed activity (World Bank 2016f). The
decline in metal prices led to a substantial fall in
revenues and exports in non-energy mineral


exporting 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 in


other oil importing countries, supported by ongoing
infrastructure investments, private consumption, and
increased agricultural production. Regional growth is
expected 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 gradual
improvement in the region’s largest economies—
Angola, Nigeria, and South Africa. Domestic
downside risks include delays in implementing the
necessary adjustment to deteriorating terms of trade


or in the realization of reforms, and worsening
drought conditions. Political and security-related
risks remain high in several countries. On the
external side, a further decline in commodity prices,
weaker-than-expected growth in advanced
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.


Risks to the outlook


In a weak growth environment, the global economy is
facing increasingly pronounced downside risks. These
are associated with deteriorating conditions among
key commodity exporters, disappointing activity in
advanced economies, rising private sector debt in
large emerging markets, and heightened policy and
geopolitical 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 the
faster-than-expected slowdown in major emerging
markets and weaker-than-expected recovery of
advanced economies (Figure 1.17). Since the start
of 2016, some of the previously identified risks
have materialized, including additional headwinds
among commodity exporters and deteriorating
prospects among major advanced economies. The
terms of trade shock from low energy prices
among net exporters has been amplified by
domestic uncertainties and tightened policy.
Furthermore, incomplete deleveraging and weak
productivity growth continue to hamper aggregate
demand prospects in both exporters and
importers. With growth moderating in China,
stabilizing around a weak trajectory in advanced
economies, and stagnating in major commodity
exporters amid lingering vulnerabilities, the
expected 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 and
amid rising vulnerabilities, even an incremental
deterioration in economic conditions could lead to
sudden 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


BOX 1.2 Regional perspectives: Recent


developments and outlook (continued)


2017–18, assuming global activity strengthens and
scheduled domestic reforms are successfully
implemented. Growth in countries emerging from
the 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.




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 29








(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.


The realization of downside risks could set back
growth in EMDEs for a prolonged period, slowing
the pace of catch-up in GDP per capita to
advanced economies. About 85 percent of the
world’s population live in EMDEs, of which a
number are at risk of stalling progress or even
reversing in the case of some commodity exporters
(Eichengreen, Park, and Shin 2013; Gill and
Kharas 2015; Didier et al. 2015). Already since
2013, there has been a notable decline in the share
of EMDEs where GDP per capita continued to
catch up to U.S. levels—i.e. countries where the
gap 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 growth
of recent years has extended this catch-up period
by several decades.


Further slowdown in major emerging
markets


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 pro-
cyclical policy tightening is amplified in some
cases by rising political uncertainty, which tends
to diminish confidence and increase financial
market volatility (Julio and Yook 2013). High
leverage 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 stress
in 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


percentage point decline in growth in Brazil or
Russia could reduce growth in neighboring
countries by up to ½ percentage point on average
over 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 and
advanced economy prospects. China’s corporate
debt increased to new highs in early 2016,
reaching levels that surpassed those of most
advanced economies. Corporate indebtedness is
highly concentrated among state-owned
enterprises, particularly those in industries that
have significant overcapacity and deteriorating
profitability (IMF 2015a). Financial distress
among highly-leveraged entities could cause rising
corporate defaults, and a sharper-than-expected


FIGURE 1.17 Risks to global growth prospects


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


B. Global manufacturing activity and


financial market volatility since 2005


A. Evolution of global growth


forecasts


0
10
20
30
40
50
60
70


30 40 50 60


VIX, Index


Global Manufacturing PMI, Index


D. Probability of global growth being 1


percentage point below baseline


forecasts


C. Risks to global growth prospects


1


3


5


1


3


5


20
14


20
15


20
16


20
17


90 percent
80 percent
50 percent
Baseline
90 percent JAN16


Percent


0


5


10


15


20


Current year (2016) Next year (2017)


Average 2006-16


Percent


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 fan


chart based on information available at the cut-off date of the January 2016 Global Economic
Prospects report.


2.0


2.5


3.0


3.5


4.0


4.5


20
10


20
11


20
12


20
13


20
14


20
15


20
16


20
17


20
18


Jun-16 Jan-16 Jun-15
Jan-15 Jun-14


Percent




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 30








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 capital
outflows 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 a
whole, combined with a 100 basis points increase
in 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 frontier
markets would be particularly pronounced,
reducing growth by 1.3-1.5 percentage points over
the same period.


Potential spillovers associated with weakening
prospects in major EMDEs could be larger than
previously estimated (World Bank 2016b).


Emerging markets where prospects have
deteriorated 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 the
United States, and more than the Euro Area.


Rising policy uncertainty


Sustained policy related and political uncertainties
could significantly weigh on activity and
investment decisions in both advanced economies
and EMDEs (Figure 1.20). The debate
surrounding the U.K. referendum on European
Union membership has been accompanied by
softening activity in the United Kingdom, lower
confidence and pressure on the pound sterling.
The economic losses associated with leaving the
European 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 percent
of 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 the
European 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, and
concerns about the effectiveness of Abenomics in
Japan, could also weigh on sentiment.


In large emerging markets, attention to policy-
related economic uncertainty increased or remains
elevated (Baker, Bloom, and Davis 2016). Across
EMDEs, domestic policy uncertainty increased in
2015 as a result of elections or political unrest,


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 to
2015 U.S. levels has already declined and the number of years needed to
close the gap lengthened.


B. Years to catch-up with 2015 U.S.


GDP per capita levels


A. Share of EMDEs catching-up with


U.S. GDP-per-capita levels


20


40


60


80


100


19
93


19
95


19
97


19
99


20
01


20
03


20
05


20
07


20
09


20
11


20
13


20
15


Percent


0


20


40


60


80


100


120


Emerging
markets


Frontier
markets


1993-2008
2003-08
2013-15


Number of years


LICs (RHS)
0


100


200


300


400
Number of years


Source: World Bank.
A. Real GDP per capita. Figure shows the share of EMDEs with the gap in GDP per capita with the


United 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 for
each group. Excludes Qatar and Serbia due to data availability. LICs include 25 economies.




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 31








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-cyclical
fiscal and monetary policies may be harder to
implement when investors focus on rising
uncertainty and the potential for political tensions
to block structural reforms.


Persistent geopolitical risks


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 major
advanced economies suggests that isolated events
are unlikely to have lasting economic
consequences (World Bank 2016b). Repeated
threats, however, could undermine confidence in
an already-weak recovery and generate larger
growth setbacks.


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 a
source of political tension in host countries
(Adhikari 2013; Davenport, Moore, and Poe


2003; Melander and Ӧberg 2006).


Financial market fragility


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


FIGURE 1.19 Risks: commodity exporters and China


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 to


erode reserve buffers in China, while a retrenchment of outward FDI could
affect many EMDEs.


B. Commodity prices around BRICS


slowdowns


A. Sovereign ratings and commodity


prices


0


500


100011


11.5


12


12.5


13


20
01


20
03


20
05


20
07


20
09


20
11


20
13


20
15


Commodity exporters
Commodity price index (RHS)


BB+


BB


BB-


Average sovereign rating Index


-10


-5


0


5


10


-2 -1 0 1 2


Percent
Energy
Metals
Agricultural


Quarter


D. Private sector credit C. Average impact of 1 percentage


point growth decline on neighboring


economies


-0.6


-0.5


-0.4


-0.3


-0.2


-0.1


0


Russia Brazil


Percentage points


50


100


150


200


250


19
70


19
75


19
80


19
85


19
90


19
95


20
00


20
05


20
10


20
15


United States Japan
Germany Spain
China


Percent of GDP


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 seven


slowdowns over the period 1997 to 2015.
C. Based on estimates of a structural VAR. Average cumulative impulse response after two years of
neighboring 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.


F. FDI flows to and from China E. Capital outflows from China


0
500
1000
1500
2000
2500
3000
3500
4000
4500


-800
-600
-400
-200


0
200
400
600
800


1000


20
00


20
02


20
04


20
06


20
08


20
10


20
12


20
14


20
16


FX reserves-12 month change
FX reserves (RHS)


US$, billions US$, billions


0


2


4


6


8


10


FDI inflows FDI outflows


2003-08 2010-14
Percent of global FDI stock




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 32








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


earnings have been heightened by the expectation
that negative rates may prevail for longer,
squeezing interest margins if banks are not able to
pass 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 (World
Bank 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, and
require increased inflation risk premia over the
medium-term (World Bank 2016b, Abrahams et
al. 2015). This could trigger a sudden increase in
long-term interest rates and financial market
volatility, affecting in particular riskier assets,
including emerging market debt and currencies
(Arteta et al. 2015).


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 for
borrowing 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 have
contributed 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 of
market stress.


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 is
particularly elevated in Europe, reflecting challenges associated with large
flows of refugees, security concerns after the recent terrorist attacks, and
the 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 and
political unrest continue to affect confidence.


B. Policy uncertainty in the United


States and Europe


A. Impact of policy uncertainty


-2.0


-1.5


-1.0


-0.5


0.0


0.5


Industrial production Unemployment


Confidence interval
Impact


Percentage point deviation after 1 year


20


60


100


140


180


20
05


20
06


20
07


20
08


20
09


20
10


20
11


20
12


20
13


20
14


20
15


20
16


USA Europe
Index


D. Policy uncertainty in large EMDEs C. U.K “Brexit” and Pound Sterling


0


50


100


150


200


20
05


20
06


20
07


20
08


20
09


20
10


20
11


20
12


20
13


20
14


20
15


20
16


India China RussiaIndex


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 assassi-


nation. Google Trends search for “Terrorism” and “Terrorist Attacks.” Last observation is April 2016.
F. Sample includes 24 emerging market economies.


F. Share of EM with presidential and


parliamentary elections


E. Terrorist attacks


0
10
20
30
40
50
60


0
20
40
60
80


100
120
140
160


Ja
n-


15


Ap
r-


15


Ju
l-1


5


O
ct


-
15


Ja
n-


16


Ap
r-


16


Number of attacks


"Terrorism" + "Terrorist Attack" -
Google trends


Search intensity indexNumber of attacks


0


10


20


30


40


50


20
15


20
16


20
17


20
18


Percent of countries


0


20


40


60


80


100


0.62


0.64


0.66


0.68


0.7


0.72


0.74


Jan-15 Jul-15 Jan-16


GBP vs US$
"Brexit" - Google trends


Exchange rate Search intensity index




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 33








Stagnation in advanced economies


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


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 most
advanced economies (Figure 1.22). But the
deleveraging pressures could eventually subside,
implying a return to higher growth than that
extrapolated from recent performance (Lo and
Rogoff 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 presence
of hysteresis in output and employment, a
shortfall in aggregate demand could potentially
inflict permanent damage to activity, reinforcing
the need for aggressive monetary and fiscal policy
in a downturn (Summers 2015).


An alternative view suggests that low growth
mainly reflects deteriorating supply-side
conditions, which might have become more
apparent in the post-crisis period. The
anticipation of lower future growth may lead to a
decrease in current consumption and investment,
hence depressing aggregate demand (Blanchard,
L’Huillier, and Lorenzoni 2013). Adverse supply-
side factors include increased demographic
headwinds, which weigh on labor supply
and could also contribute to a lower rate of return
on capital and thus reduce productivity growth
(Baker, Delong, and Krugman 2005; Rachel and
Smith 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


FIGURE 1.21 Financial market fragilities


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 participants
and Fed policy makers could cause a sudden increase in bond yields and
a retrenchment of capital flows from EMDEs. Fragile liquidity conditions


could amplify volatility in periods of market stress.


B. Interest margins of Euro Area


banks


A. Bank equity prices around epi-


sodes of financial stress


40
50
60
70
80
90


100
110


0 10 20 30 40 50 60 70 80


Previous episodes
Current episode
Fall 2008


Index, 100=beginning of decline


Day


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


Ja
n-


14


Ap
r-


14


Ju
l-1


4


O
ct


-
14


Ja
n-


15


Ap
r-


15


Ju
l-1


5


O
ct


-
15


Ja
n-


16


Ap
r-


16


4-week moving average, basis points


D. U.S. Federal Funds rates during


tightening cycles


C. Gap between market and FOMC


expectations for policy rates at end


2017


0
50


100
150
200
250
300
350


-18 -12 -6 0 6 12 18


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


Basis points


Month


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 and
Poor’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 the


earning assets and the borrowed funds may be different instruments and differ in volume. Last obser-
vation 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 the
cost 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.


F. Liquidity conditions in EMDE


sovereign bond markets


E. Currency pressures and credit


default spreads in EMDEs


CHN


HUN


IND


MEX


BRA


MYS


POL


RUS


THA


TUR
ZAR


-60


-50


-40


-30


-20


-10


0


-600 -400 -200 0 200 400


Depreciation against US$ since 2012, percent


Change in 5-year CDS spread
since 2012


0
1
2
3
4
5
6
7
8
9


20
05


20
06


20
07


20
08


20
09


20
10


20
11


20
12


20
13


20
14


20
15


20
16


Average Median
Mon thly r ollin g bid-Monthly rolling big-ask spread, basis points


0
20
40
60
80


100
120
140
160


M
ar


-
15


Ju
n


-
15


Se
p-


15


D
ec


-
15


M
ar


-
16


M
ay


-
16


Basis point spread




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 34








-par growth in advanced economies puts greater
emphasis on structural reforms and their l
ikely 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 a
substantial source of global financial spillovers.
Continued disappointments in those economies
could lead to significantly weaker outcomes for
EMDEs, further setting back global trade and
investment prospects.


Increased protectionism and
slower globalization


Persistently low growth could intensify
protectionist tendencies that would further
weaken growth prospects. Although there is no
clear 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 tariff
barriers have not been erected on a large scale, but
more subtle micro-restrictions such as local
content requirements, public procurement
discrimination against foreign firms, export taxes
and quotas, and trade distorting subsidies have
proliferated (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 import
protection measures (Bown 2014). The foregone
benefits of trade liberalization appear to be
significant, particularly for emerging and
developing countries. During the 1990s, GDP per
capita grew more than three times faster in
developing 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 to
historic lows, but it increased significantly during
the crisis, and has thereafter remained near mid-
1990s levels. This has mainly reflected a
retrenchment of inter-bank lending across
different jurisdictions (Forbes 2014). Shrinking
cross-border bank flows may limit the propagation
of global financial stress. But it may also reduce
avenues for consumption smoothing during
country-specific stress, and may weaken the
efficiency of capital allocation and economic
specialization (World Bank 2016b; Islamaj and
Kose forthcoming).


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. Demographic
pressures and weak productivity growth will increasingly weigh on
prospects over the medium term. A further decline in growth across


advanced economies would have pronounced negative effects for EMDE
growth.


B. Private non-financial sector credit A. Real U.S. policy interest rates


-2


-1


0


1


2


3


1990s 2000-08 2009-13 Latest FOMC
forecast
by end
2017


Percent


0
20
40
60
80


100
120


Ho
us


eh
ol


ds



No


n-
fin


an
cia


l
co


rp
or


at
io


ns


Ho
us


eh
ol


ds



No


n-
fin


an
cia


l
co


rp
or


at
io


ns


Ho
us


eh
ol


ds



No


n-
fin


an
cia


l
co


rp
or


at
io


ns
United States Euro Area Japan


Latest value 2002-07 average
Percent of GDP


D. Impact of 1 percentage point de-


cline in G7 and BRICS growth on


other emerging market economies


C. Active age population growth


-0.10


-0.05


0.00


0.05


0.10


0.15


19
90


19
95


20
00


20
05


20
10


20
15


20
20


20
25


20
30


World
United States
Euro Area
Japan


Percent


-1.6


-1.2


-0.8


-0.4


0.0


On impact 1 year 2 years


G7 BRICS


Percentage points


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).




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 35








Upside risk: Unrealized gains from low oil
prices


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


There are two main reasons why the benefits of
lower 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 stress
associated with sharply declining prices might
diminish if some stability in oil prices is restored.
Second, consumers across major oil importers have
reacted to the positive terms of trade shock with
caution, increasing both spending and
precautionary savings. As uncertainties about
growth prospects are resolved, a delayed boost to
private consumption remains a possibility.


Policy challenges


Challenges in major economies


In advanced economies, monetary policy
accommodation will be needed until economic slack
has been absorbed and inflation moves back in line
with 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 accommodation
means 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 high
leverage and other financial vulnerabilities and
promoting the reforms needed for sustainable and
balanced medium-term growth.


Monetary and financial policy in advanced
economies


Monetary policies in major advanced economies
should remain accommodative. In the United
States, inflation and employment continue to
converge 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 to
a very gradual tightening cycle ahead (Figure
1.25). This could leave limited space for policy
accommodation during the next downturn. In
Europe and Japan, negative interest rates and
expanding asset purchase programs have been
implemented, contributing to a record-high share


FIGURE 1.23 Slower globalization and risk of


protectionism


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 be
significant, 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.


B. Trade measures from 2009 to 2015 A. Trade volumes


50
60
70
80
90


100
110
120
130
140
150


20
00


20
01


20
02


20
03


20
04


20
05


20
06


20
07


20
08


20
09


20
10


20
11


20
12


20
13


20
14


20
15


20
16


Pre-crisis trend


Index = 100 in 2008


0


100


200


300


400


500


600


Discriminatory Liberalizing


Number of measures


D. Cross-border bank flows C. Impact of 50 percent reduction in


tariffs and trade barriers


0


2


4


6


8


10


12


EMDEs Advanced economies


Percentage point, change in real income


0
5


10
15
20
25
30
35
40
45
50


20
00


20
02


20
04


20
06


20
08


20
10


20
12


20
14


US$, trillions
Pre-crisis trend


Sources: World Trade Organization, Bank for International Settlements, United Nations High
Commissioner 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.




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 36








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, the
benefit 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 their
profitability is generally low and they remain
vulnerable to market pressures—particularly in the
Euro Area, where an elevated stock of
nonperforming loans warrants close supervision.
Increased loss-absorbing capacities, reinforced
counter-cyclical buffers, and improved macro-
prudential supervision could enhance resilience,
and help a better transmission of monetary policy
accommodation to credit conditions and to the
real 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 remain


broadly 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 to
confront slowing growth would remain
appropriate for a number of advanced economies,
in view of the environment of persistently low
interest rates and increasingly constrained
monetary policy. Some countries (Canada,
Germany, United States) retain fiscal room to
maneuver (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 counter-
cyclical policy, a more growth-enhancing mix of
spending and tax reforms is possible in virtually all
countries. Public investment has been on a secular
downward trend and suffered disproportionately
from fiscal consolidation plans after 2010. The
combination of low interest rates; positive returns
on public investment; and possible crowding in of
private 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 structural
reforms are mutually reinforcing and should be
implemented in tandem to maximize their
respective effects on growth (Bordon, Ebeke, and
Shirono 2016). However, following an initial post
-crisis uptick, structural reform efforts in advanced
economies have stalled recently, including in
countries facing important crisis legacies and
where unemployment is high (Figure 1.27). In the
current fragile environment, reforms that can
bolster long-term growth while supporting
aggregate demand in the short term should be


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, has
plummeted. 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.


B. Household saving rates in oil-


importing countries


A. Revisions to 2016 forecasts since


June 2014


-7
-6
-5
-4
-3
-2
-1
0


World Advanced
economies


EMDE oil
exporters


EMDE oil
importers


GDP Consumption
Investment Exports


Percentage points


4
5
6
7
8
9


10
11
12
13


19
95


19
97


19
99


20
01


20
03


20
05


20
07


20
09


20
11


20
13


GDP weighted
Oil consumption weighted


Percent of disposable income


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, and
export growth in 2016.


4Fiscal room is lacking particularly among economies where
demand support is most needed. In the context of the Euro Area, this
emphasizes the need for effective policy coordination and appropriate


use of European financial instruments to support countries with more
binding fiscal constraints (European Commission 2016; IMF 2016a).




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 37








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 and
barriers to business entry.


Challenges in China


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


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 the
unwinding of financial vulnerabilities (Figure
1.28). A focus on strengthening the financial
sector via prudential measures would help buttress
financial stability. Recent turmoil in domestic
equity and currency markets suggests that
accelerated financial market reforms could be
accompanied by volatility. Clear communication
of policy objectives and actions by the authorities
will help reduce policy uncertainty and foster
confidence.


Fiscal policy. Short-term fiscal stimulus measures
to avoid a sharp slowdown in growth remain
adequate, provided they are undertaken within the
overall medium-term fiscal framework (World
Bank 2016a). Going forward, the planned three-
pronged 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 the
government is planning to revise tax-sharing


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


FIGURE 1.25 Monetary policy in advanced economies


The trajectory of future policy rates continued to be revised down by the
Federal Reserve, reflecting a number of factors including a reassessment
of the level of interest rates expected to prevail over the long run. In Europe
and Japan, negative interest rates and expanding asset purchase
programs 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.


B. Share of government debt trading


at negative yields


A. Real neutral policy rate in the U.S.


implied by FOMC forecasts


-1


0


1


2


20
14


20
15


20
16


20
17


20
18


Lo
n


g-
ru


n


Jun-14
Dec-15
Mar-16


Percent


0
10
20
30
40
50
60
70


N
ov


-
15


D
ec


-
15


Ja
n


-
16


Fe
b-


16


M
ar


-
16


Ap
r-


16


Cu
rr


e
nt


Europe JapanPercent


D. Long-term inflation expectations C. Share of government debt held by


central banks


0


5


10


15


20


25


30


35


2010 2011 2012 2013 2014 2015 2016


Bank of Japan
U.S. Federal Reserve
European Central Bank


Percent of debt outstanding


-0.5
0.0
0.5
1.0
1.5
2.0
2.5


Ja
n-


15
Fe


b-
15


M
ar


-
15


Ap
r-


15
M


ay
-


15
Ju


n-
15


Ju
l-1


5
Au


g-
15


Se
p-


15
O


ct
-


15
No


v
-


15
De


c-
15


Ja
n-


16
Fe


b-
16


M
ar


-
16


Ap
r-


16
M


ay
-


16


United States
Euro Area
Japan


Percent, year-on-year


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 rate
of 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 the
European Central Bank.


D. Inflation expectations are the market implied five-year forward five-year level of inflation
compensation, derived from the inflation swaps market in the respective countries. Last observation is
May 25, 2016.




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 38








Structural policy. In 2013, the government
announced a comprehensive structural reform
agenda to support a sustainable long-term growth
path. Subsequent policy statements, including the
13th Five-Year plan adopted in 2016, have
reaffirmed the commitment to the main tenets of
the agenda—increased market mechanisms and
greater transparency to encourage reallocation of
credit, land and labor toward more productive
sectors.5 Cautious progress continues to be made
in implementing the planned reforms. For
instance, the government envisages opening
sectors dominated by state-owned enterprises
(SOEs) to competition, leveling the playing field
for SOEs, and encouraging the exit of inefficient


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 the
mixed-ownership reform of SOEs (The State
Council of PRC 2016b). Barriers to production
have also been lowered to stimulate private sector
activity, particularly through tax reforms.7 A series
of reforms have been implemented to cut red tape
and make operation easier for private companies.
This resulted in a boom in the registration of
private firms: in 2015, 3.6 million firms were
created, almost double the number in 2013.
Going forward, better corporate governance,
enhanced auditing and accounting standards, and
stronger regulatory frameworks will encourage a
more efficient reallocation of resources. Delays in
implementing the planned reform agenda could
set back growth, worsen the debt overhang, and
heighten risks to the financial system (Prasad
2016, Ross 2016).


Challenges in emerging and developing
economies


Many EMDEs face reduced monetary policy space to
support growth, with substantial variation between
commodity importers and commodity exporters.
Commodity exporters are generally struggling to
maintain an accommodative monetary policy stance
amid weakening currencies and inflationary
pressures. In contrast, declining inflation is providing
central banks in some commodity importers scope to
ease. Similarly, fiscal policy challenges vary across
commodity importers and exporters; however, in most
countries 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 human
capital would boost long-term growth, although


FIGURE 1.26 Fiscal policy in advanced economies


Weak growth and low inflation have adversely affected debt dynamics in
advanced 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.


B. Change in structural fiscal balance A. Public debt


0


50


100


150


200


250


300


20
00


20
05


20
10


20
15


20
20


Japan United States Euro Area
Percent of GDP


0.0


0.4


0.8


1.2


1.6


2.0


United States Euro Area Japan


2010-15 2016-18
Percent of GDP


D. Infrastructural Quality Index C. Share of dependent population


0


20


40


60


80


World United
States


Euro
Area


China Japan


2015 2030Percent


3


3.5


4


4.5


United States Japan Euro Area


2007 2014
Index


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 a


scale from 1 (lowest quality) to 5 (highest quality). The markets are chosen based on the most
important export and import markets of the respondent's country, random selection, and, for
landlocked countries, neighboring countries that connect them with international markets.


6For example, the People’s Bank of China issued new rules to
make 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 well
as 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).


5The 13th Five-Year Plan for 2016-2020 envisages supply-side
reforms to encourage growth, restructure state-owned enterprises, to
reduce overcapacity in key sectors such as steel and coal, to create new


urban jobs, and to liberalize interest rates.




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 39








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


Monetary and financial policy


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 (Figure
1.29), as well as relieving pressure on the balance
of 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 that
disinflation might be transient, once the pass-
through from lower commodity prices has
dissipated.


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, and
weak capital inflows, despite the recent rebound.
Several central banks (Angola, Azerbaijan,
Colombia, Nigeria, South Africa) responded by
raising interest rates in early 2016. Nevertheless,
inflation remains well above target in many
commodity exporters, while policy rates seem to
be below levels that would stabilize inflation.
While high interest rates might relieve some of the
inflation and depreciation pressures, they further
weigh on activity. Thus, policymakers in these
countries face difficult trade-offs between
monetary accommodation to support growth on
the one hand, and tightening to maintain stable
inflation, ease currency and capital account
pressures, and boost investor confidence on the
other. Going forward, the adoption of monetary
policy frameworks that enhance policy credibility
could help anchor inflation expectations (Svensson
2010; Carneiro et al. 2008).


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


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 and
bankruptcy 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 for
accommodative fiscal policy (IMF 2016c). The
lack of fiscal space—high debt, wide deficits, and


FIGURE 1.27 Structural reforms in advanced economies


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


B. Reform progress and


unemployment rate


A. Reform progress


0
10
20
30
40
50
60
70


Advanced
economies


Euro Area
deficit


countries


Euro Area
surplus


countries


Other
advanced
economies


2011-12
2013-14
2015


Percent of recommended reforms


R² = 0.3534


0.0


0.2


0.4


0.6


0.8


1.0


0 5 10 15 20
Unemployment rate in 2010


Reform progress, average 2011-15


D. Ease of Doing Business and


productivity levels


C. Share of workers with skill


mismatch


0


10


20


30


40


U
nit


ed
St


a
te


s


Fr
an


ce


Ja
pa


n


Ge
rm


an
y


Sp
ai


n


Ita
ly


Percent


France


GermanyItaly Japan


Spain


United
Kingdom


United
States


20


25


30


35


40


45


70 75 80 85


Doing Business score, 2016


Hourly labor productivity level, 2015


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 the


previous 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 the
indicators across all economies in the Doing Business survey.




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 40








unsustainable fiscal paths—undermines the scope
for fiscal policy to stimulate the economy (World
Bank 2015c). In particular, the erosion of fiscal
space in commodity exporters has resulted in
much smaller fiscal multipliers relative to
commodity exporters (Figure 1.30).


For commodity importing EMDEs, smaller
outlays on fuel subsidies have reduced fiscal
pressures, though consistent implementation
remains a challenge (Kojima 2016). However,
given that many were starting from a position of
higher government debt and wider deficits, the
scope for expansionary fiscal policy is constrained.
Unless severe downside risks materialize, the
priority in many countries is therefore likely to be
the rebuilding of policy buffers and the
implementation of fiscal reforms. Efforts could
include actions to broaden tax bases and improve
the 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 as


commodity prices fail to rebound. Policymakers
are recognizing the need for substantial
adjustment, especially in oil exporters that are
facing ratings downgrades or negative outlooks
(Hanusch and Vaaler 2015). Some countries have
room to borrow or draw down the fiscal savings
previously accumulated, while others might need
to frontload fiscal adjustments amid depleted
buffers and rising sovereign risk premia. The need
to reduce spending is also reflected in widespread
reforms of fuel subsidies among major oil
producers (Mottaghi 2016). Resource-rich
countries 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, World
Bank 2015c). Many commodity exporting
countries operate sovereign wealth funds which
have helped reduce pro-cyclicality of fiscal policy
(Bleaney and Halland 2016, World Bank 2016d).
However, their current fiscal pressures suggest that
the 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 considerations
in its practices related to copper mining (World
Bank 2015c). Stronger fiscal rules, to set and
govern procedures on revenues and spending over
a multi-year horizon would help establish fiscal
sustainability in commodity exporting EMDEs.


Structural policy


While expansionary macroeconomic policies are
useful in narrowing negative output gaps, they do
not ensure higher potential growth. Structural
policies and reforms are needed to lift medium-
and long-term growth, reduce vulnerabilities, and
signal to investors that the authorities are
committed to strengthening long-term growth
prospects. If adequately targeted and
implemented, 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


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 the


unwinding 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, and
stronger regulatory frameworks will encourage a more efficient reallocation
of resources.


B. General government’s revenue,


expenditure, and structural balance


A. Contributions to loan growth


-4


-3
-2


-1


0
1


0


10


20


30


40


20
03


-
08


20
09


20
10


20
11


20
12


20
13


20
14


20
15


20
16


Fiscal balance (RHS)
Revenue
Expenditure


Percent of GDP Percent of GDP


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.


0
2
4
6
8


10
12
14


2012 2013 2014 2015 2016Q1


Overseas
Domestic to non-fin enterprises
Domestic to households


Percentage points




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 41








pursue greater diversification and foster trade, can
lay 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 to
reduce the cost of doing business and attract
foreign investment.


Infrastructure investment. The ongoing weakness
in investment across EMDEs highlights the need
to 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 of
diminishing fiscal space, the financing of
infrastructure investment is an increasing
challenge, and attempts to close infrastructure
gaps have occasionally led to widening deficits and
increasing debt levels, particularly in low-income
countries. A thorough expenditure review may
reveal current expenditures that can be more
productively 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 investable
infrastructure projects (toll roads, power
generation and supply, water) could help ease
budgetary 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).


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 is
well below that in advanced economies, and
international testing outcomes are weak. Even
within existing resource envelopes, better quality
education and closer alignment with employers’


FIGURE 1.29 Monetary policy in EMDEs


The fall in commodity prices has helped lower inflationary pressures in
commodity 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 with
pro-cyclical monetary tightening in some cases. Macroprudential policies


could help manage vulnerabilities associated with elevated private sector
debt.


B. Gap between inflation and inflation


target


A. Inflation in commodity importers


0


2


4


6


8


10


12


-2


0


2


4


6


8


10


20
10


20
11


20
12


20
13


20
14


20
15


20
16


25th-75th percentile Median
Percent, year-on-year


D. Policy interest rates C. Nominal effective exchange rate


90
92
94
96
98


100
102
104


20
10


20
11


20
12


20
13


20
14


20
15


20
16


Commodity exporters
Commodity importers


Index, 100 = 2010


4


5


6


7


8


9


10


20
10


20
11


20
12


20
13


20
14


20
15


20
16


Commodity exporters
Commodity importers


Percent


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 obser-
vation 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.


F. Private non-financial sector debt E. Changes in monetary policy rate


0
5


10
15
20
25
30


2014 2015 2016 2014 2015 2016
Commodity
exporters


Commodity
importers


Hikes Cuts
Number of countries


0


50


100


150


200


250


2010 Latest 2010 Latest
Commodity exporters Commodity importers


Range
Median


Percent of GDP


-10


-5


0


5


10


15


Commodity
exporters


Commodity
importers


Range Mean Median
Percentage points




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 42








needs can remove skill mismatches that contribute
to underemployment (Sondergaard and Murthi
2012). Despite some narrowing, gender gaps in
school enrollment persist in many EMDEs. Efforts
targeted at removing these gaps could
simultaneously make growth more equitable and
make 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 depressed
commodity prices, diminishing the over-
dependence on the production and export of
particular commodities is a major challenge in
resource-based economies. Diversification would
also help alleviate the over-reliance on volatile


commodity-based revenues. Encouraging high-
value added activities, promoting exports from
non-resource intensive sectors, and bolstering
education and worker training to boost private-
sector employment are important steps toward
economic diversification (Gill et al. 2014).
Other policy actions include improvements of
the business climate, infrastructure, and trade
logistics to facilitate the entry of young, efficient
domestic and foreign firms in the non-resource-
based sector; and encouraging labor flows from
traditional, mostly nontradable, to modern parts
of the economy (Jaud and Freund 2015;
Hausmann, Hwang, and Rodrik 2007; McMillan,
Rodrik, and Verduzco-Gallo 2014; IMF 2016d)
The successful diversification experience of some
oil exporters (Malaysia, Mexico) points to the
importance of technological upgrading for
increased 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 trade
barriers. This is particularly important given the
potential for increasing trade among EMDEs. The
empirical literature suggests that trade
liberalization generally has positive effects on
growth and poverty alleviation (Kis-Katos and
Sparrow 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, the
resilience of services trade and the available room
for further liberalization imply significant growth
opportunities for EMDEs (Mattoo, Rathindran,
and Subramanian 2006). Additional gains from
service trade liberalization for emerging and
developing economies include rising FDI and
transfers of technology and skills (Hodge 2002).
More generally, the pursuit of comprehensive


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, have
experienced rising fiscal deficits. Measures to improve fiscal buffers
include establishing fiscal rules that encourage surpluses during boom
years.


B. Implied fiscal multiplier in 2015 A. Fiscal balance in 2015


-6


-5


-4


-3


-2


-1


0


Commodity exporters Commodity importers


Oct. 2014 forecast
April 2016 estimate


Percent of GDP


C. Share of countries with fiscal rules


Sources: World Bank, International Monetary Fund.
A. Oct. 2014 forecast from the October 2014 World Economic Outlook. April 2016 estimate from the


April 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 oil


exporters and 85 oil importers.
D. Fiscal breakeven prices are oil prices associated with balanced budget.


D. MENA oil producers fiscal


breakeven oil prices


0
50


100
150
200
250
300
350


Ye
m


en


Li
by


a


Ba
hr


ai
n


O
m


an


S.


Ar
ab


ia
Al


ge
ria Ira


q
Ira


n
,



IR


UA
E


Qa
ta


r


Ku
w


a
it


2014
2015
2016
Oil price forecast, 2016


US$ per barrel


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.


0.0


0.2


0.4


0.6


0.8


1.0


1.2


Commodity exporters Commodity importers


Oct. 2014 forecast
April 2016 estimate


Fiscal multiplier


0
10


20
30
40


50
60
70


Oil exporters Oil importers


2000 2014Percent




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 43








regional trade agreements, such as the Trans-
Pacific Partnership, is a concrete policy step that
could potentially imply substantial economic
benefits for EMDEs, and foster other domestic
reforms (World Bank 2016b, Hoekman and
Javorcik 2006, Baccini and Urpelainen 2014a,b).9


Given the expected net gains from these trade
agreements, efforts should be made to identify and
support individuals who can be adversely affected
(Hornok and Koren 2016, Petri and Plummer
2016).


Poverty alleviation. These policy challenges come
in a context where the indirect impact of the sharp
growth slowdown in energy- and metal-exporting
EMDEs may outweigh the direct benefits from
lower consumer prices due to depressed
commodity prices. The commodity price slide
since 2010 has affected a wide range of EMDEs:
62 percent of EMDEs and 73 percent of LICs are
commodity exporters. Commodity exporting
economies are especially prevalent in Sub-Saharan
Africa and Latin America and the Caribbean
(Figure 1.32) whereas in South Asia, for example,
only two countries (Bhutan and Sri Lanka) are
commodity exporters. Although commodity
exporting EMDEs account for less than a third of
the global population, they are home to more than
half of the global poor. Growth remains the most
important 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 critical
role of growth-enhancing policies and structural
reforms—and of appropriate pro-poor safety nets.


International policy coordination


In an environment of sluggish growth, reduced
policy buffers, and rising risks, there is scope for
international policy cooperation and coordination


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 short
term, concerted actions could include increased
fiscal spending in countries that have fiscal space
to boost global aggregate demand (Furman and
Shambaugh 2016). They could also include
strengthened international safety nets for the most
fragile countries—particularly those with elevated
poverty rates—that are vulnerable to additional
growth setbacks or financial stress.


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 on
commodity exports. Structural reforms to boost infrastructure and human


capital and to pursue greater economic diversification are key to support
EMDE growth.


B. Education gap between EMDEs and


advanced economies


A. Global infrastructure investment


gap


1.01
0.27 0.04 0.12


0.75


0.71


0.58 3.5


Ro
a


ds Ra
il


Po
rts


Ai
rp


or
ts


Po
w


er


W
at


er


Te
le


co
m


To
ta


l


Percent of global GDP


1.0


1.2


1.4


1.6


1.8


2.0


Advanced EMDE
Education attainment


score


Index


0


3


6


9


12


Advanced EMDE
Education spending


(RHS)


Percent of GDP


D. Importance of resource sector,


2014


C. Trade diversification, 2014


0.0


0.2


0.4


0.6


0.8


1.0


Oil
exporters


Metals
exporters


Agriculture
exporters


Other
EMDEs


Range
Median


Export Diversification Index


0


10


20


30


40


50


60


Exports Government
revenues


GDP


Oil exporters
Metal exporters


Percent


Sources: World Bank, International Monetary Fund, Organisation for Economic Cooperation and
Development, McKinsey Global Institute.


A. This depicts global investment in infrastructure (share of GDP) required over 2015-30, as projected
by 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 score


indicates 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 in
world 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, Qa-


tar, Russia, Saudi Arabia, Turkmenistan, Uzbekistan, United Arab Emirates, and Venezuela, RB.


9Other potentially beneficial integration initiatives include the
ASEAN Economic Community and the Regional Comprehensive
Economic Partnership.




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 44








investment, especially in EMDEs with narrow
fiscal space and deteriorating creditworthiness.


Policy makers representing the G20 countries have
recognized that the weak global growth
environment represents a shared challenge. They
have repeatedly affirmed their commitment to
inclusive and sustainable growth-enhancing
policies—to be implemented in a cooperative
manner (G20, 2016). This does not constitute the
type of urgent “internationally coordinated action”
seen at the height of the global financial crisis, but
it does communicate a fundamental message that
each 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 their
business cycles, the appropriate policies to lift
growth will vary—and, as in the past, the
challenge lies in the effective implementation of
these policies at the national level.


The historically high number of refugees suggests
the need for a more coordinated response. While
large inflows of refugees are creating significant
challenges in Europe, host countries in Africa and
the 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 require
innovative approaches and close coordination
between humanitarian, development, and global
partners, including governments.


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—are
commodity-exporters. Although commodity exporting EMDEs account for
less 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.


B. Share of world population and


world poor living in commodity ex-


porting EMDEs


A. Share of commodity exporting


countries among EMDEs


0
10
20
30
40
50
60
70
80
90


SSA LAC MNA EAP ECA SAR


All EMDE
LIC


Percent of countries in each group


0
10


20


30
40


50


60


Poor in
EMDE


Poor in
LIC


Population
in EMDE


Population
in LIC


Agricultural exporters
Energy exporters
Metals exporters


Percent of world


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 or
individual 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 in
infrastructure and human capital, and the
decisive support of free trade of goods and
services. 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 and
financing of infrastructure and human capital




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 45








ANNEX TABLE 1 List of emerging market and developing economies1


Commodity Exporters2 Commodity Importers3
Algeria* Malawi Afghanistan Palau
Angola* Malaysia* Albania Philippines


Argentina Mali Antigua and Barbuda Poland
Armenia Mauritania Bahamas Romania


Azerbaijan* Mongolia Bangladesh Samoa
Bahrain* Mozambique Barbados Serbia


Belize Myanmar* Belarus Seychelles
Benin Namibia Bosnia and Herzegovina Solomon Islands


Bhutan* Nicaragua Bulgaria St. Lucia
Bolivia* Niger Cabo Verde Swaziland


Botswana Nigeria* Cambodia Thailand
Brazil Oman* China Tunisia


Burkina Faso Panama Comoros Turkey
Burundi Papua New Guinea Croatia Tuvalu


Cameroon* Paraguay Djibouti Vanuatu
Chad* Peru Dominica Vietnam
Chile Qatar* Dominican Republic


Colombia* Russian Federation* Egypt, Arab Rep.
Congo, Dem. Rep. Rwanda El Salvador


Congo, Rep.* Saudi Arabia* Eritrea
Costa Rica Senegal Georgia


Côte d'Ivoire Sierra Leone Haiti
Ecuador* South Africa Hungary


Equatorial Guinea* South Sudan* India
Ethiopia Sri Lanka Jordan


Fiji St. Vincent and the Grenadines Kiribati
Gabon* Sudan* Kosovo


Gambia, The Tajikistan Lao PDR
Ghana* Tanzania Lebanon


Guatemala Timor-Leste* Lesotho
Guinea Trinidad and Tobago* Liberia


Guinea-Bissau Togo Macedonia, FYR
Guyana Tonga Maldives


Honduras Turkmenistan* Marshall Islands
Indonesia* Uganda Mauritius


Iran, Islamic Rep.* Ukraine Mexico
Iraq* United Arab Emirates* Micronesia, Fed. Sts.


Jamaica Uruguay Moldova
Kazakhstan* Uzbekistan Montenegro


Kenya Venezuela, RB* Morocco
Kuwait* West Bank and Gaza Nepal


Kyrgyz Republic Zambia Pakistan
Libya* Zimbabwe




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 of
any 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 not
available, 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 are


exporters of certain commodities (e.g. Mexico).


3 Commodity importers are all EMDE economies that are not classified as commodity exporters.


Madagascar




CHAPTER 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 46








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Svensson, L. 2010. “Inflation Targeting.” NBER
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Van Zandweghe, W. 2016. “The Drag of Energy
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Winters, A., N. McCulloch, and A. McKay. 2004.
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Winters, A., and A. Martuscelli. 2014. “Trade
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SPECIAL FOCUS 1


Recent Credit Surge in
Historical Context






SPECIAL FOCUS 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 57




Introduction


Since the global financial crisis, credit to the
nonfinancial private sector has risen rapidly in
several emerging markets and developing
economies (EMDEs, Figure SF 1.1). This post-
crisis credit growth has reflected a rotation in


borrowing from households to corporates: in
contrast to 2006-10, most of the post-crisis
increase in EMDE private sector credit has been to
nonfinancial corporates. Credit growth has been
accompanied by rapidly rising corporate bond


issuance 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 and
Obstfeld 2012; Schularick and Taylor 2012;
Claessens, Kose, and Terrones, 2012; Annex Table
1). In the past, such credit booms have often been


accompanied by an accumulation of non-
performing bank loans that were revealed once the
boom subsided. A typical credit boom raised non-
performing loans from 2.5 percent to 10 percent
of gross loans (Mendoza and Terrones 2008).1


Several factors have encouraged post-crisis private
sector credit growth in EMDEs. Exceptionally
accommodative monetary policy by major central


banks has fostered benign borrowing conditions
for EMDEs, notwithstanding bouts of volatility.
Rising financing needs have increased demand for
borrowing, 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 a
trend increase in the scale of EMDE corporates’
business operations and international reach. As
EMDE corporates have become increasingly


globally active and expand their international
sales, production, and supply chains, borrowing
needs have risen with more sophisticated liquidity
management, centralized treasury operations and
larger 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 by


depreciation, 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 to
service debt at rising cost. The subsequent
deleveraging process would impair growth at a
time when EMDEs are already struggling to adjust
to a difficult external environment.


Special 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 associated


with 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.


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 non-


performing loans over total assets exceeds its trend by 2 percentage
points during credit booms.




SPECIAL FOCUS 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 58



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 in
commodity 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.


B. Credit to the nonfinancial private


sector


A. Credit to the nonfinancial private


sector


D. Credit growth (broader sample) C. Credit to the nonfinancial private


sector in 14 EMDEs


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 the
main text for a detailed description of the sample and the classification of commodity importers and


exporters. 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.


F. Number of EMDEs with post-crisis


peak in credit (broader sample)


E. Credit-to-GDP (broader sample)


Financing conditions have already begun to
tighten. 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 and
metals and mining companies, which are
struggling 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 have
shortened 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.


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 with
past episodes of credit booms?


• How near are current credit-to-GDP ratios to
thresholds identified in the literature as early
warning indicators?


Evolution of private sector


credit


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 this


broad definition of credit are available from the
Bank for International Settlements for 14
EMDEs, including seven commodity exporters
(Argentina, Brazil, Indonesia, Malaysia, the
Russian Federation, Saudi Arabia, South Africa)


and seven commodity importers (China, Hungary,


0


30


60


90


120


150


180


210


1990-99 2015


Range
Median
Average


Percent of GDP


0


6


12


18


24


30


Commodity importers Commodity exporters


2010-2014 2015
Number of countries


50


60


70


80


90


Commodity
exporters


Commodity
importers excl.


China


All


1996 1997 2010 2015Q3
Percent of GDP


0


50


100


150


200


250


RU BR M
Y ID ZA AR S


A
CN TR TH P


L
M


X IN HU


2015 2010


Percent of GDP


Commodity exporters Commodity importers


-3
-2
-1
0
1
2
3
4


20
10


20
11


20
12


20
13


20
14


20
15


Q3


20
10


20
11


20
12


20
13


20
14


20
15


Q3


20
10


20
11


20
12


20
13


20
14


20
15


Q3


Commodity
exporters


Commodity
importers excl.


China


All


2003-2008
1995-2008


Percentage points of GDP


35


40


45


50


55


60


20
07


20
08


20
09


20
10


20
11


20
12


20
13


20
14


20
15


Commodity exporters
Commodity importers, excl. China


Percentage points of GDP




SPECIAL FOCUS 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 59


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 access
international financial markets to a lesser extent
and typically have less developed domestic bond


markets. For these countries, credit from the
domestic banking system remains the main source
of credit. For them, annual data on claims by
banks on private sector, provided by the IMF’s
International Financial Statistics, are used as


proxies for missing data for credit to the
nonfinancial private sector. This extends the
sample by another 41 countries, mainly from
2000 onwards.3 The combined sample, of 55
countries, consists of 37 commodity exporters and


18 commodity importers.


Private sector credit growth. Private sector credit
growth is measured as the change in the ratio of
credit 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 increased
by 14 percentage points of GDP, to 84.5 percent
of GDP, in the five years to the third quarter of
2015 in the 14 EMDEs, for which such
comprehensive data are available and in some cases


by about 30 percentage points of GDP or more.
On average among these countries, credit to the
nonfinancial private sector now exceeds levels of
the 1990s (Figure SF 1.1). Credit growth was
particularly pronounced in commodity exporting


economies, where it has been well above the long-
term average. As a result, in almost all these
EMDEs, credit to the nonfinancial private sector
reached post-crisis peaks by 2015.


2Data from Bank for International Settlement is 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.
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, Cote


d’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).


FIGURE SF1.2 Credit to corporates and households


Two thirds or more of private sector credit growth since 2010 has been to
corporates. Credit to corporates now accounts for almost two-thirds of
credit to the nonfinancial private sector.


B. Credit to the nonfinancial private


sector, 2015Q3
A. Contribution to private sector credit


growth, annual average 2010-2015Q3


D. Credit to households C. Credit to nonfinancial corporates


Source: Bank for International Settlements.
Note: Unweighted average credit (from residents and nonresidents) to nonfinancial corporates and


households 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 a
modest fraction of credit to EMDE corporates.


B. Contribution of debt securities to


nonfinancial corporate credit growth


A. Credit to corporates by instrument


D. Contribution of cross-border credit


to nonfinancial corporate credit


growth


C. Credit to corporates by creditor


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.


0


10


20


30


40


50


60


2007 2010 2015


Other instruments
Debt securities


Percent of GDP


0


1


2


3


Commodity
exporters


Commodity
importers excl.


China


All


Corporates
Households
Total


Percentage points of GDP


0
10
20
30
40
50
60
70
80
90


Commodity
exporters


Commodity
importers excl.


China


All


Corporates
Households
Total


Percent of GDP


0
20
40
60
80


100
120
140
160
180


M
Y


RU BR S
A ZA ID AR CN HU IN TH P


L
TR M


X


Commodity exporters Commodity importers


2015 Q3
Post-crisis peak
2010


Percent of GDP


0
20
40
60
80


100
120
140
160
180


M
Y ZA BR RU ID S


A AR TH CN P
L


HU TR M
X IN


Commodity exporters Commodity importers


2015 Q3
Post-crisis peak
2010


Percent of GDP


0


10


20


30


40


2000-2007 2007-2010 2010-2015


Contribution of debt securities
Contribution of other instruments


Percentage points


0


10


20


30


40


50


60


2007 2010 2015


Domestic


Cross-border


Percent of GDP


0


10


20


30


40


2000-2007 2007-2010 2010-2015


Domestic


Cross-border


Percentage points




SPECIAL FOCUS 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 60


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 the
nonfinancial private sector rose by more than 20
percentage points in some oil exporters. In other
countries, credit to the nonfinancial private sector


has begun to ease from 2013-14 peaks, especially
in 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).


Increase in credit to corporates. Since 2010, most
of the increase in credit to the nonfinancial private
sector has reflected credit to corporates, as


corporates in both commodity exporters and
importers have taken advantage of low financing
costs. Credit to corporates has accounted for more
than three quarters of the increase in credit to the
nonfinancial private sector since 2010 in


commodity-exporting EMDEs, where financing
needs have risen sharply, and more than half in
commodity-importing EMDEs (Figure SF 1.2).
As a result, credit to the corporate sector now
accounts for about two-thirds of credit to the
nonfinancial private sector, and somewhat more


in commodity-exporting EMDEs. While, on
average, credit to corporates rose at a similar pace
in commodity importers and exporters alike, the
pace of credit growth to households in commodity
importers (excluding China) was less than half the


pace 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 in
others.


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 (and


aggregate) debt, which is gradually shifting
towards local currency, the share of foreign


FIGURE SF1.4 Corporate bond and equity markets


Emerging markets corporate bond spreads surged during the second half
of 2015, especially in the metals and mining sector, but started to ease in
the beginning of 2016. While corporate bond issuance started to drop from


2013, redemptions are estimated to surge in 2017 and stay at historically
high levels through 2020. About two-thirds of bond issuance was placed in
international debt markets, almost entirely in foreign currency
denominations.


B. Contributions to cumulative equity


market change since end-June 2014


A. Corporate bond spreads


D. Corporate bond redemption C. Corporate bond issuance


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 the
theoretical 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 is
used 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.


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


market


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 since
2010, to 60 percent of GDP in the third quarter


200


400


600


800


1000


M
ar


-
15


Ju
n


-
15


Se
p-


15


D
ec


-
15


M
ar


-
16


All (Spread)
Industrial
Metals and Mining
Oil and Gas
All (Option-adjusted spread)


Basis points


-60


-40


-20


0


Brazil
(Ibovespa)


Colombia
(COLCAP)


Kazakhstan
(KASE)


Nigeria
(NGSE)


Energy
Other


Percent


0


50


100


150


200


0


20


40


60


80


100


20
00


20
02


20
04


20
06


20
08


20
10


20
12


20
14


Industrial (LHS)
Oil and Gas (LHS)
Metals and Mining (LHS)
Total (RHS)


US$, billions


0


20


40


60


80


100


120


0


10


20


30


40


50


60


20
00


20
02


20
04


20
06


20
08


20
10


20
12


20
14


20
16


20
18


20
20


Industrial (LHS)
Oil and Gas (LHS)
Metals and Mining (LHS)
Total (RHS)


US$, billions


0


20


40


60


80


2007 2010 2015


Percent of credit to corporates


0


2


4


6


8


10


12


Metals
and mining


Oil and
gas


Industrial Average


2007
2010
2015


Year




SPECIAL FOCUS 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 61


currency-denominated credit in credit to non-
financial corporates has increased (McCauley,
McGuire and Sushko 2015; Chui, Kuruc and


Turner 2016). Foreign currency-denominated
debt 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 most
countries, 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 is


accounted for by domestic currency denominated
credit.4


Bond issuance. Since 2004, credit to nonfinancial
corporates has shifted from bank loans to bond
issuance (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 less
procyclical and more resilient during the global


financial crisis than bank lending (Cortina, Didier,
and Schmukler forthcoming; Contessi, Li, and
Russ 2013; Adrian, Colla, and Chin 2013, Figure
SF1.4). However, despite strong corporate bond
issuance since 2010, the bulk of corporate credit
growth continued to be contributed by non-


securities credit. Debt securities accounted for
only 19 percent of credit to the corporate sector in
2015 (compared with 16 percent in 2007). The
predominance of bank lending may reflect limited
access for smaller EMDE corporates to bond


markets. For EMDE corporates, access to bond
markets 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 a
foreign 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.


bank does not consider the EMDE a core market
with long-established lending relationships (de
Haas and van Lelyveld 2012; Cetorelli and


Goldberg 2009 and 2012; de Haas and van Horen
2012; Claessens and van Horen 2012). Despite a
modest increase since 2010, the share of cross-


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 last
less 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 in
commodity exporters. In commodity importers, credit-to-GDP ratios have
been considerably higher than in past credit booms but have been
stagnant or declining.


B. Evolution of credit growth A. Evolution of credit


D. Deleveraging after credit booms C. Duration of credit booms


Sources: Bank for International Settlements, Haver Analytics, International Monetary Fund
International Financial Statistics and World Economic Outlook.


Notes: A credit boom is defined as an episode during which the cyclical component of the
nonfinancial 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 credit-
to-GDP ratio declines in the following year. “0” is the peak of the credit boom event. 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 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 still
developing 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 sharp
deleveraging (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.


0


20


40


60


80


100


-3 -2 -1 0 1 2 3
Year


2012-2015 commodity exporters
2012-2015 commodity importers
Median
Upper and lower quarti les


Percent of GDP


-10
-5


0
5


10


15
20


-3 -2 -1 0 1 2 3
Year


2012-2015 commodity exporters
2012-2015 commodity importers
Median
Upper and lower quartiles


Percentage points of GDP


0


5


10


15


20


25


30


1 2 3 4 5


Number of episodes


Years


0


20


40


60


1 3 5


Mild deleveraging
Sharp deleveraging


Percent of credit booms


Years




SPECIAL FOCUS 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 62


The shifting composition of credit to the
corporate sector may have reduced vulnerabilities
to bank funding shocks and to foreign bank


funding 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 of
credit to EMDE corporates remains from the


domestic banking system (more than 80 percent)
and, on average, denominated in domestic
currency (80 percent). Similarly, the bulk of the
credit growth has been accounted for by credit
from the domestic banking system and in


domestic currency.


Recent credit growth in light


of past episodes


Event study. A rich literature has documented
that credit booms are sometimes followed by sharp
deleveraging episodes in subsequent years (e.g.
Barajas et al. 2010; Elekdag and Wu 2011). Both


the credit booms and the subsequent sharp or
gradual deleveraging cycles have been
accompanied by considerable macroeconomic
volatility. To illustrate the developments during
credit 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 more
than 1.65 standard deviations above its Hodrick-
Prescott 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-to-
GDP ratio begins to fall. Conversely, a
deleveraging episode is defined as an episode


during 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 the


credit-to-GDP ratio begins to climb.5 Credit
booms and deleveraging episodes are studied


border credit remains modest at less than 20
percent in the third quarter 2015, well below the
2000-07 average. Since 2010, credit from the


domestic banking system has continued to be the
main 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, the
outstanding syndicated loans and debt securities of
state-owned energy corporates grew at double-
digit average annual rates and the stock of debt of


oil and gas firms has more than tripled (Domanski
et al. 2015).


FIGURE SF1.6 Macroeconomic developments during


credit booms


Credit booms in the EMDEs were accompanied by widening current
account deficits and faster real GDP growth.


B. Inflation A. Current account balance


D. Growth C. Monetary policy interest rate


Sources: Bank for International Settlements, Haver Analytics, International Monetary Fund
International 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-Prescott
filter). 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).


-6


-4
-2


0
2
4


6


-3 -2 -1 0 1 2 3
Year


2012-2015 commodity exporters
2012-2015 commodity importers
Median
Upper and lower quartiles


Percent of GDP


-6


-4
-2


0
2
4


6


-3 -2 -1 0 1 2 3
Year


2012-2015 commodity exporters
2012-2015 commodity importers
Median
Upper and lower quartile


Percent


0


3


6


9


12


15


-3 -2 -1 0 1 2 3
Year


2012-2015 commodity exporters
2012-2015 commodity importers
Median
Upper and lower quartiles


Percent


-6
-4


-2
0
2


4
6


-3 -2 -1 0 1 2 3
Year


2012-2015 commodity exporters
2012-2015 commodity importers
Median
Upper and lower quarti les


Percent deviation from trend


5The results are robust to using thresholds of 1.75 or 1.55 standard
deviations.




SPECIAL FOCUS 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 63


within a 7-year event window that covers their
peak 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


Characteristics of credit booms. In a credit boom,
private sector credit grows, on average, by more
than 6 percentage points of GDP per annum and


private 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 episode
lasting 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


Characteristics of deleveraging episodes. Within
three years of the end of the credit boom, about
one-third of booms were followed by at least a
mild deleveraging episode (in which the private
sector credit-to-GDP ratio fell more than 1


standard deviation below trend). During a
deleveraging episode, private sector credit
contracted by almost 2 percentage points of GDP
per year and private sector credit fell to 35 percent


of GDP, on average (Figure SF 1.7). The average
deleveraging episode lasted over 1.4 years, with the
longest episode lasting four years.10 Only one-third


of deleveraging episodes were preceded by, at least
mild, credit booms in the previous three years.
Deleveraging episodes were associated with


FIGURE SF1.7 Characteristics of deleveraging episodes


Deleveraging episodes are associated with a period of mild declines in
private 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.


D. Credit booms before deleveraging


episodes


C. Duration of deleveraging episodes


Sources: Bank for International Settlements, Haver Analytics, International Monetary Fund
International 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 credit-
to-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-to-


GDP 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.


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 is
available 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 than
previous studies partially because the sample has been expanded to


cover 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 be
about 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 in
real claims on the private sector and different thresholds to
identifying 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 more
smoothed data and a lower threshold for the starting and ending
points for a boom.
9Mendoza and Terrones (2008), Elekdag and Wu (2011), and


Arena et al. (2015), also found that growth tends to rise before booms
and decline towards the end of it. Jorda et al. (2013) further suggest
that faster credit growth tends to be followed by deeper recessions
and slower recoveries.


B. Evolution of credit growth A. Evolution of credit


0


20


40


60


80


100


-3 -2 -1 0 1 2 3
Year


Median Upper and lower quartiles


Percent of GDP


-5


0


5


10


-3 -2 -1 0 1 2 3
Year


Median Upper and lower quartiles


Percent of GDP


0


4


8


12


16


20


24


1 2 3 4


Number of episodes


Years


0


20


40


60


1 3 5


Mild credit boom
Sharp credit boom


Percent of deleveraging episodes


Years


10This is broadly in line with findings of other authors (Barajas et
al. 2010).




SPECIAL FOCUS 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 64




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 than


during previous credit booms but credit growth
has been well below levels associated with past
booms. In contrast, commodity-exporting countries’
credit and credit growth have been near levels
associated with past credit booms (Figure SF 1.5).


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 to
ease.


B. Inflation A. Current account balance


D. Growth C. Monetary policy interest rate


Sources: Bank for International Settlements, Haver Analytics, International Monetary Fund
International 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-Prescott
filter). 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).


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 and
financial 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 were
preceded 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).


Most EMDEs are still some distance away from
the 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 in
many EMDEs is near or above levels that
preceded 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 weigh
on 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 been
found to be no longer growth-enhancing (Arcand
et al. 2012; Cecchetti, Mohanty, and Zampolli
2011). Again, credit-to-GDP ratios in most


EMDEs are still well below these thresholds, with
few exceptions in which credit to the private, or
corporate, sector exceeds 80 percent of GDP.


-6


-4


-2


0


2


4


6


-3 -2 -1 0 1 2 3
Year


Median Upper and lower quartiles
Percent of GDP


-6


-4


-2


0


2


4


6


-3 -2 -1 0 1 2 3
Year


Median Upper and lower quartile


Percent


0


5


10


15


20


-3 -2 -1 0 1 2 3
Year


Median


Upper and lower
quartile


Percent


-6


-4


-2


0


2


4


6


-3 -2 -1 0 1 2 3
Year


Median Upper and lower quartile


Percent deviation from trend




SPECIAL FOCUS 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 65


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 have


risen above 1990s averages.


• How does credit growth compare with past


episodes of credit booms? Since 2012, credit to the


nonfinancial private sector in commodity-


importing 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


FIGURE SF1.9 Comparison: Credit and early warning


indicators


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


B. Credit to the private sector


compared to thresholds, 2015Q3


A. Credit to the private sector


compared to thresholds, 1997


Sources: Bank for International Settlements, Haver Analytics, International Monetary Fund
International 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.


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 A. Government borrowing cost


0
2
4
6
8


10
12
14
16
18


1997-2000 2001-05 2006-10 2011-15


Percentage Points


Russian Crisis
(Oct 1998)
Dot-Com bubble


crash (MAR 2000) Global Crisis
(Oct 2008)


C. Emerging market bond redemption profile


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.


19
96


19
96


20
07


20
01


19
98


19
98


20
09


20
02


0
20
40
60
80


100
120
140
160
180


Indonesia Thailand Latvia Argentina


Percent of GDP


0


50


100


150


2016 2017 2018 2019


Sovereigns
Financial corporates
Non-financial corporates


US$, billions


credit-to-GDP ratios associated with past credit


booms.


• How near are current credit-to-GDP ratios to
thresholds identified in the literature as early
warning indicators? Most EMDEs are still some
distance away from the thresholds identified by
these studies.


-20
-10


0
10
20
30
40
50
60


Drehman (2013) Gourinchas and
Obstfeld (2012)


Range Median Threshold
Percent of GDP


-20


-10


0


10


20


Drehman (2013) Gourinchas and
Obstfeld (2012)


Range Median Threshold
Percent of GDP




SPECIAL FOCUS 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 66


could force governments to tighten fiscal policy in
the midst of a growth slowdown.


Various policy options could help contain risks


from rapid credit growth while maintaining a
broadly 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-to-
value ceilings on first and second mortgages.
Other measures can help contain risks from the


corporate credit growth, for example, increased
stress testing of listed corporates’ balance sheets;
and pre-emptive legislative and regulatory steps to
facilitate restructuring of nonperforming loans and
corporate 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.


In general, policy buffers to respond to financial
stress are considerably higher than in the 1990s.
On average in EMDEs, reserves (in percent of


GDP) are now more than 60 percent higher than
in 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
accompany a post-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 of
financial stress, such outlays markedly increased
public debt above and beyond the increases
attributable to the fiscal deficit (Laeven and


Valencia 2012; Claessens et al. 2014; Bova et al.
2016; World Bank 2015b). As in previous
episodes, fiscal space can shrink rapidly and
borrowing cost can rise steeply during periods of
elevated financial stress (Figure SF 1.10). This




SPECIAL FOCUS 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 67




-6


-3


0


3


6


-3 -2 -1 0 1 2 3
Year


Deviation from non-event years
95 percent confidence interval


Percentage points of GDP


-5


0


5


10


-3 -2 -1 0 1 2 3
Year


Deviation from non-event years
95 percent confidence interval


Percentage points


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 the


peak 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 (blue
dotted 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 the


sample 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 the


differences 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-Prescott


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 USD dollars) in percent of its trend (derived


using a Hodrick-Prescott filter).


-20


-10


0


10


20


30


-3 -2 -1 0 1 2 3
Year


Deviation from non-event years
95 percent confidence interval


Percentage points


-5


0


5


10


-3 -2 -1 0 1 2 3
Year


Deviation from non-event years
95 percent confidence interval


Percent deviation from trend


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 Hodrick-
Prescott filter) is larger than 1.65 times its
standard deviation (i.e. outside the 90 percent
confidence interval). The episode starts when the
cyclical component of private sector credit-to-
GDP 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 is
expanded by setting the data for 2016-18 to be
equal to the data in 2015.


An ordinary least squares regression is estimated
for the private sector credit-to-GDP ratio (in
percent of GDP), real GDP, current account
balances (in percent of GDP), the monetary policy
rate, and inflation on dummy variables for each of
the 3 years before the peak of a boom or trough of
a 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 for
other country-specific factors.


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 these
variables during an event from a non-event. The
95 percent confidence intervals are shown in
dotted blue lines.


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


ANNEX SF1.1 Robustness exercises


ANNEX FIGURE SF1.1 Developments during credit


booms


During credit booms, credit-to-GDP ratios rise significantly above non-
events. Current account balances widen, inflation rises, and growth in-
creases significantly more than in non-events.


B. Evolution of credit growth A. Evolution of credit


C. Current account balance




E. Monetary policy interest rate


D. Inflation


F. Growth


0


10


20


30


40


-3 -2 -1 0 1 2 3
Year


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


Percentage points of GDP


-15


-10
-5


0


5


10
15


-3 -2 -1 0 1 2 3
Year


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


Percentage points of GDP




SPECIAL FOCUS 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 68


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.


Sources: Bank for International Settlements, Haver Analytics, International Monetary Fund
International 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, the


trough 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 Hodrick-
Prescott 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 non-
events. Current account deficits turn into
surpluses and growth falls statistically significantly
(although only at the 10 percent confidence level)
below growth in non-events.


B. Evolution of credit growth A. Evolution of credit


C. Current account balance


E. Monetary policy rate


D. Inflation


F. Growth


-10


-5


0


5


10


15


-3 -2 -1 0 1 2 3
Year


Deviation from non-event years
95 percent confidence interval


Percentage points of GDP


-10


-5


0


5


10


-3 -2 -1 0 1 2 3
Year


Deviation from non-event years
95 percent confidence interval


Percentage points of GDP


-6


-3


0


3


6


-3 -2 -1 0 1 2 3
Year


Deviation from non-event years
95 percent confidence interval


Percentage points of GDP


-5


0


5


10


-3 -2 -1 0 1 2 3
Year


Deviation from non-event years
95 percent confidence interval


Percentage points


-20


0


20


40


60


-3 -2 -1 0 1 2 3
Year


Deviation from non-event years
95 percent confidence interval


Percentage points


-4


-2


0


2


4


-3 -2 -1 0 1 2 3
Year


Deviation from non-event years
95 percent confidence interval


Percent deviation from trend




SPECIAL FOCUS 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 69


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


Authors Data Coverage Methodology Results


Abiad et al.
(2011)


23 OECD countries
and 25 EM,
1970-2009


Panel data
analysis, probit
analysis and
difference-in-
difference method


Creditless recoveries—defined as episodes where real credit growth is
negative in the first three years following a recession—follow about one in
five 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 and
contracting sharply in a downturn, bond financing surges during downturns.
During the 2007-09 crisis, the total amount of new issuances of loans and
bonds decreased by 50 percent. Loans decreased 75 percent, but bond
issuance 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 the
East 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 from
the 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.


Arcand et al.
(2012)


108 countries,
1970-2000


Cross-country
and panel
analysis


Finance starts having a negative effect on output growth when credit to the
private sector reaches 100 percent of GDP. The true relationship between
financial depth and economic growth is non-monotone. Findings are not
driven by output volatility, banking crises, low institutional quality, or by
differences in bank regulation and supervision.


Arena et al.
(2015)


135 developing
countries,
1960-2011


Descriptive
analysis, stylized
facts


Credit booms in developing countries, defined as episodes when the cyclical
component of real credit is larger than 1.65 times its standard deviation, are
similar 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 are
associated with depreciations (by 2 percent on average), drops in
investment, 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).


Ayala et al.
(2015)


47 EM, 2000-2013


Censored panel
regressions with
fixed effects




Institutions and macro fundamentals (e.g. current account ratio) create an
enabling environment for bond market development. During the recent
boom, however, global cyclical factors accounted for most of the variation of
bond shares in total corporate debt. The sensitivity to global factors varies
with relative bond market size rather than local fundamentals. Foreign bank
linkages help explain why bond markets increasingly substituted for banks in
providing liquidity to EMs.


Barajas et al.
(2010)


18 MENA
economies,
1983-2008


Panel data
analysis


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 for
3.5 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.




SPECIAL FOCUS 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 70




Authors Data Coverage Methodology Results


Bech et al.
(2012) 24 AE, 1960-2016


Panel data
analysis


Deleveraging during financial crisis-led recessions is associated with
stronger 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, and
Zampolli
(2011)


18 OECD economies,
1980-2010


Panel data
analysis


Government, 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 are
potential channels.


Cetorelli and
Goldberg
(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 to
developed-country banking, such as those that occurred in the United
States in 2007-08, have reduced lending in local markets through
contractions in cross-border lending to banks and private agents and also
through contractions in parent banks’ support of foreign affiliates.


Cetorelli and
Goldberg
(2012)


50 U.S. banks with
foreign 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.


Chen et al.
(2015)


12 EM and 24 AE,
1960-2013


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 an
increase in annual growth of about 0.4 percentage points over the
subsequent 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 the
deleveraging episode is associated with higher annual average real
growth rate in the next 5 years by 13-24 basis points.


Claessens,
Kose and
Terrones
(2012)


44 countries,
1960Q1-2010Q4


Descriptive
statistics;


Duration analysis


By analyzing the interactions between business and financial cycles, it is
found that there are strong linkages between the different phases of
business and financial cycles. In particular, recessions associated with
financial disruptions, notably house and equity price busts, tend to be
longer 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 and
van 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.


De Haas and
van Horen
(2013)


Individual syndicated
loans, 2000-09 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).


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




SPECIAL FOCUS 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 71




Authors Data Coverage Methodology Results


De Haas and
van 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.


Dell’Ariccia et
al. (2014)


170 economies,
1960-2010


Panel data
analysis


Bank credit booms are episodes when the credit-to-GDP ratio is more
than 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 improves
by 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.


Demirguc-
Kunt and
Detragiache
(2005)


N/A
Literature/
methodology
survey


Credit growth (defined as the rate of growth of real domestic credit to the
private 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 from
professional 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.


Drehmann
(2013)


39 EM and AE,
1970-2010


Descriptive
analysis.


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


Edison
(2000)


20 EM and AE,
1970-2009


Signals
approach; Case


study


In an extension of the basic signals approach used to predict crises,
vulnerability to crisis is signaled when one or more "indicator
variables" (on current account, capital account, real sector and financial
sector) deviate significantly (more than 2.5 standard deviations) from
their 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 were
moderately successful in predicting financial crises in Mexico.


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 real
credit is larger than 1.55 times its standard deviation, are associated with
worsening 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.


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




SPECIAL FOCUS 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 72




Authors Data Coverage Methodology Results


Feyen et al.
(2015)


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


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 a
country-industry is above its historical average; (2) decrease individual
bond yields and spreads; and (3) raise bond maturities, after controlling


for country pull factors, bond characteristics.


Gourinchas and
Obstfeld (2012)


22 AEs and 57 Ems,
1973-2010


Discrete panel data
analysis


For EM, domestic credit growth and real currency appreciation are the
most 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 associated
with a lower likelihood of banking crisis by 5.2 percent.


IMF (2015a) 40 EM, 2004-13 Descriptive and panel data analysis


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


IMF (2015b) China, 2007-14 Descriptive and panel 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.


IMF (2015c) 128 countries, 1980-2013
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 and
0.7 with 1 being the maximum). When financial development proceeds
too fast, deepening financial institutions can encourage greater risk-
raking and high leverage, which leads to economic and financial
instability.


Jassaud and
Kang (2015) Italy, 2007-14 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.


Jorda,
Schularisk, and
Taylor (2013)


14 advanced
countries, 1870-2008


Local projection
method


Financial-crisis recessions are more painful than normal recessions,
and the credit intensity of the expansion phase is closely associated
with 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.


Kaminsky,
Lizondo, and
Reinhart (1998)


5 industrial, 15
developing
economies, 1970-95


Signals approach,
OLS analysis


A “signals” approach helps predict currency crises. Among all, the real
exchange rate serves as the most effective predictor of currency crises:
57 percent of crises were signaled. For credit growth (defined as the
change 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.


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




SPECIAL FOCUS 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 73




Authors Data Coverage Methodology Results


Milesi-Ferretti and
Tille (2010) 75 countries Panel regression


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


Reinhart, Reinhart,
and Rogoff (2012)


14 AEs


1800-2011
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 associated
with growth over one percent lower than during other periods. The
growth effects are significant even in the many episodes where
debtor countries were able to secure continual access to capital
markets at relatively low real interest rates.


Schularick and
Taylor (2012)


14 AEs


1870-2008
Panel data
analysis


In the pre-war era (1870-1939), credit and money growth are
tightly 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-to-
GDP 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 of
crisis by 2.45-2.8 percentage points.


Shin (2014) NA Descriptive
analysis


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


Mendoza and
Terrones (2012)


61 emerging and
industrial countries, 1960
-2010


Trend
decomposition,
Panel data
analyses


Credit 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 three
similarities 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 similar
frequencies in industrial and emerging economies); and (3) credit


booms often follow surges in capital inflows, TFP gains, and
financial reforms, and are far more common with managed
exchange rates.


Mendoza and
Terrones (2008)


27 AEs and 22 Ems,
1960-2006


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 vice


versa for credit contractions. Credit booms tend to last about 6-7
years.


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




SPECIAL FOCUS 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 74


Working Paper 15/148, International Monetary
Fund, Washington, DC.


Barajas, A., R. Chami, R. Espinoza, and H. Hesse.
2010. “Recent Credit Stagnation in the MENA
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Working Paper 10/219, International Monetary
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Bech, M., L. Gambacorta, and E. Kharroubi.
2012. “Monetary Policy in a Downturn: Are
Financial Crises Special?” Working Paper 388,
Bank for International Settlements, Geneva.


Bova, E., M. Ruiz-Arranz, F. Toscani, and H. E.
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Buttiglione, L, P. Lane, L. Reichlin, and V.
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Cetorelli, N., and L. Goldberg. 2009. “Globalized
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Cetorelli, N., and L. Goldberg. 2012. “Liquidity
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Cecchetti, S., M. Mohanty and F. Zampolli.
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Chen, S., M. Kim, M. Otte, K. Wiseman, and A.
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Chui, M., I. Fender, and V. Sushko. 2014. “Risks
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Mendoza, E., and M. Terrones. 2012. “An
Anatomy of Credit Booms and their Demise”
Working Paper 18379, National Bureau of
Economic Research, Cambridge.


Milesi-Ferretti, G., and T. Cédric. 2011. “The
Great Retrenchment: International Capital Flows
during the Global Financial Crisis.” Economic
Policy 26 (66): 285-342.


Reinhart, C.M., V. R. Reinhart and K. S. Rogoff.
2012. “Debt Overhangs: Past and Present”
Working Paper 18015, National Bureau of
Economic Research, Cambridge.


Schularick, M., and A. Taylor. 2012. “Credit
Booms Gone Bust: Monetary Policy, Leverage
Cycles and Financial Crises, 1870–2008.”
American Economic Review 102(2): 1029-61.


Shin, H. S. 2014. “The Second Phase of Global
Liquidity and Its Impact on Emerging
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edited by K. Chung, S. Kim, H. Park, C. Choi,
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Takáts, E. and C. Upper. 2013. “Credit and
Growth after Financial Crises.” Working Paper
416, Bank for International Settlements, Geneva.


World Bank. 2011. Republic of Indonesia:
Financial Sector Assessment. Washington, DC:
World Bank.


______. 2013. Malaysia: Financial Sector
Assessment. Washington, DC: World Bank.


______. 2014. Poland: Financial Sector
Assessment. Washington, DC: World Bank.


______. 2015a. Global Economy in Transition:
June 2015 Global Economic Prospects.
Washington, DC: World Bank.


______. 2015b. Using Fiscal Space and Having It:
January 2015 Global Economic Prospects.
Washington, DC: World Bank.


7363, Washington, DC, World Bank.


Gourinchas, P-O., and M. Obstfeld. 2012.
“Stories of the Twentieth Century for the Twenty-
First,” American Economic Journal: Macroeconomics
4(1): 226-65.


International Monetary Fund. 2015a. “Corporate
Leverage in Emerging Markets – A Concern?”
Global Financial Stability Report, Chapter 3,
Washington DC: International Monetary Fund.


International Monetary Fund. 2015b. “Article IV
Consultation with the People’s Republic of
China.” Washington, DC: International
Monetary Fund.


Jassaud, N., and K. Kang. 2015. “A Strategy for
Developing a Market for Nonperforming Loans in
Italy.” Working Paper 15/24, International
Monetary Fund, Washington, DC.


Jorda, O., Schularisk, M., and A. Taylor. 2013.
“When Credit Bites Back” Journal of Money,
Credit and Banking 45(2):3-28.


Kaminsky, G., S. Lizondo, and C. Reinhart. 1998.
“Leading Indicators of Currency Crises.” IMF
Staff Papers 45(1): 1-48.


Lo, S., and K, Rogoff. 2015. “Secular Stagnation,
Debt Overhang and Other Rationales for Sluggish
Growth, Six Years on.” Working Papers 482,
Bank of International Settlement.


Laeven, L., and F. Valencia. 2012. “Systemic
Banking Crises Database: An Update.” Working
Paper 12/163, International Monetary Fund,
Washington, DC.


McCauley, R.N., P. McGuire and V. Sushko
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14049, National Bureau of Economic Research,
Cambridge.




SPECIAL FOCUS 2


Quantifying Uncertainties
in Global Growth Forecasts






SPECIAL FOCUS 2 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 79




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 in
models or expert judgment, or heightened
volatility around economic turning points or
during episodes of financial stress. The likelihood
of actual outcomes deviating from projections is
therefore 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 growth
forecasts can be achieved in different ways. A first
approach is to look at past prediction errors as a
rough guide to likely future forecast deviations.
This provides an objective but static and
unconditional measure of uncertainty, which does
not reflect current circumstances that might affect
forecast 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 of
models and expert judgment. Measures of
uncertainty should reflect this process, linking


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 that
of 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 market-
implied or consensus forecast distribution of these
forward-looking indicators are extracted and
weighted 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 to
global 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


Special 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.


Note: This Special Focus was prepared by Franziska Ohnsorge,
Yirbehogre Modeste Some and Marc Stocker, with research assistance
from Peter Williams. Going forward, the fan chart developed in this


analysis will be updated on a semi-annual basis, maintaining fixed
weights over three-year windows.




SPECIAL FOCUS 2 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 80


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


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


Several episodes of heightened uncertainty stand
out from the analysis of these risk factors (Figure
SF 2.1). The first one is the global financial crisis
of 2008-09. Its unexpected severity was associated
with financial market disruptions and a broad-
based increase in volatility and risk aversion (Stock
and 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,


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 around
cyclical turning points (Geraats 2008; Siklos
2014). The evolution of such disagreements has
been shown to affect the probability distribution
of 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 of
which are tightly connected to growth
prospects. 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 make
growth prospects more uncertain. A supply-
driven decline in oil prices tends to improve
global growth prospects.


For each risk factor, its forecast distribution
captures both the degree of uncertainty and the
balance of risks:


• The degree of uncertainty surrounding each
risk 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 is
used for current year forecast whereas 18-
month maturity implied volatility is used for
next year forecast.2 For global term spread, the


1The data sample is from January 2006 to April 2016.
2Ideally, the fan chart would extend into 2018. However, reliable
market-based indicators derived from liquid option markets are not


available at this horizon.


3Only countries with available data on interest rates are used in the
aggregations. These include: Australia, Canada, France, Germany,
India, Indonesia, Italy, Japan, Netherlands, Republic of Korea,


Sweden, Spain, Switzerland, the United Kingdom, and the United
States.
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 to
shifts in the price of the underlying asset. The framework assumes
that the option-implied distribution generates a volatility curve that is
linear 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.




SPECIAL FOCUS 2 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 81



FIGURE SF2.1 Uncertainty and balance of risks for risk


factors


Uncertainty. The implied current-year volatility of equity price options and
next-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 distribution
of future equity prices is increasingly tilted to the downside while that
of oil price futures is tilted to the upside. Movements in the skewness
of term spread forecasts are mixed. Together, these developments


suggests higher uncertainty and rising downside risk to global growth for
2016 and 2017.


B. S&P500: Balance of risks A. S&P500: Degree of uncertainty


D. Term spread: Balance of risks C. Term spread: Degree of uncertainty


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 formula


from 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 the


underlying asset. This skewness measure is scaled down by a factor of 3 to match the equivalent
skewness 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.


F. Oil price: Balance of risks E. Oil price: Degree of uncertainty


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


Risk indicators and global


growth


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


In order to calculate the degree of uncertainty and
balance of risks of global growth forecasts from the
selected risk factors, a number of assumptions are
needed regarding the functional form of their
respective distributions, as well as the weight given
to individual risk factors. In line with other
authors (Blix and Sellin 1998 and Kannan and
Elekdag 2009), a two-piece normal distribution is
used to characterize both global growth forecasts
and individual risk factors. The uncertainty and
balance of risks (measured by the dispersion and
skewness) of global growth forecasts is recovered
from the corresponding statistics of the
distribution of the three risk factors, assuming a
linear relationship between them.


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 and
Maximiano 2003). This consists of simulating the
forecast distribution under alternative scenarios
and then minimizing the distance between the
baseline 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.


-1.4


-1.2


-1.0


-0.8


-0.6


20
06


20
07


20
08


20
09


20
10


20
11


20
12


20
13


20
14


20
15


20
16


Current year Next year
Current year median Next year median


Skewness


0.1


0.2


0.3


0.4


0.5


0.6


20
06


20
07


20
08


20
09


20
10


20
11


20
12


20
13


20
14


20
15


20
16


Current year Next year
Current year median Next year median


Standard deviation


-0.7
-0.5


-0.3
-0.1
0.1
0.3


0.5


20
06


20
07


20
08


20
09


20
10


20
11


20
12


20
13


20
14


20
15


20
16


Current year Next year
Current year median Next year median


Skewness


-0.5


-0.4


-0.3
-0.2


-0.1


0.0
0.1


20
06


20
07


20
08


20
09


20
10


20
11


20
12


20
13


20
14


20
15


20
16


Current year Next year
Current year median Next year median


Skewness


10


20


30


40


50


60


20
06


20
07


20
08


20
09


20
10


20
11


20
12


20
13


20
14


20
15


20
16


Current year Next year
Current year median Next year median


Implied volatility


0


10


20


30


40


50


20
06


20
07


20
08


20
09


20
10


20
11


20
12


20
13


20
14


20
15


20
16


Current year Next year
Current year median Next year median


Implied volatility




SPECIAL FOCUS 2 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 82


FIGURE SF2.2 Risks to global growth


Uncertainty surrounding global growth forecasts has increased since the
January 2016 Global Economic Prospects and is slightly above the
historical median. Upside risks have decreased while downside risks for


the 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.


B. Uncertainty of global growth


forecasts
A. Risks to global growth


D. Balance of risks of global growth


forecasts


C. Contribution of risk factors to fore-


cast uncertainty


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 crisis
of 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 crisis
of 2008-09 and the intensification of the Euro area debt crisis in 2010 and 2012.


F. Probability of global growth being


1 percentage point below baseline


forecasts


E. Contribution of risk factors to the


balance of risks to global growth


1


3


5


1


3


5


20
14


20
15


20
16


20
17


50 percent
80 percent
90 percent
Baseline
90 percent in JAN16


Percent


0.0


0.4


0.8


1.2


1.6


2.0


20
06


20
07


20
08


20
09


20
10


20
11


20
12


20
13


20
14


20
15


20
16


Current year Next year
Current year median Next year median


Standard deviation


0.0


0.5


1.0


1.5


2.0


2.5


3.0


2016 (GEP
JAN16)


2016 2017 (GEP
JAN16)


2017


Variance Oil
S&P500
Term spread
Other factors
Total


-0.2


-0.1


0.0


0.1


0.2


0.3


20
06


20
07


20
08


20
09


20
10


20
11


20
12


20
13


20
14


20
15


20
16


Current year Next year
Current year median Next year median


Skewness


0


5


10


15


20


Current year (2016) Next year (2017)


Average 2006-16


Percent


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 are
used as weights for the skewness and variance at all
forecast horizons, ignoring any lag structure and
potential 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 the
forecast horizon (Ang et al. 2006; Wheelock and
Wohar 2009). More refined approaches to
estimating 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 from
the OLS-based approach proposed by Kannan and
Elekdag (2009) in two ways: in the selection of
the risk factors and in the estimation of the weight
parameters used in the aggregation of risk factors.
In the approach used here, the weights assigned to
each 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 the
share 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 of
risks of individual risk factors into a global balance
of risks are the impulse responses of global growth
to 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 the
recursive 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.


-0.2


-0.1


0.0


0.1


0.2


2016 (GEP
JAN16)


2016 2017 (GEP
JAN16)


2017


Oil
S&P500
Term spread
Total


Skewness




SPECIAL FOCUS 2 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 83


spillovers (World Bank 2016a).6 Using this
weighted average global uncertainty and balance
of risks, a fan chart can be drawn around the
baseline global growth forecast (Figure SF 2.2).7


Balance of risks to global


growth


The resulting fan chart shows confidence intervals
at 50, 80 and 90 percent probability around the
growth projections in the June 2016 Global
Economic Prospects (Figure SF 2.2). The fan chart
uses information available up to May 2016. It
illustrates that the uncertainty surrounding global
growth forecasts has risen marginally above the
long-term average and increasingly tilted to the
downside.


The period around the global financial crisis in
late 2008– early 2009 illustrates the risks captured
in the fan chart. After sharp corrections in most
asset prices (financial, housing, or commodities),
the balance of risks may have been on the upside.
However, this bias was negligible compared to the
record-high uncertainty that opened up.


Uncertainty about growth forecasts for 2016 and
2017 is estimated to be near the historical median
but 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 the
downside for 2016. Rising downside risks reflect,
especially, growth concerns captured in falling
equity price futures.


Compared to the January 2016 projection, upside
risks to the baseline forecast have decreased, with
equity markets suggesting a lower probability of


strengthening growth. For 2017, risks may be
turning more balanced. Downside risks to oil
prices could boost global growth in 2017 and
expectations 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 to
global growth.


Some of the downside risks have materialized since
the January forecasts, resulting in forecast
downgrades for 2016 and 2017. That said, the
probability 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 probability
of growth falling to or below 1 percent (the
growth rate likely associated with global recession)
is somewhat above the 10-year average for 2006-
16.9


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 the
time of forecasting, which might vary with
incoming data, past forecast performance, and
changing expectations. In this special focus three
questions have been addressed:


• What are the selected risk indicators used to
assess 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 of
risks for global growth.


• How can different risk factors be combined in
a single fan chart? Signals extracted from the
distribution of individual risk factors are


8The probability of global growth being 1 percent lower than
currently 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.


6The ordering of the variables used in the Cholesky decomposition
is as follows: global term spread, stock-market returns (S&P500), oil
prices, 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 three
selected 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 World


Bank Group assessments of risks (Blix and Sellin 1997).




SPECIAL FOCUS 2 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 84


aggregated using weights estimated from a
vector autoregression model of global growth
on 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 the
historical median but has increased since early
January 2016, especially for 2017. The
balance of risks to global growth forecasts for


2016-17 has tilted further to the downside
since January 2016.


Some downside risks have materialized since the
January 2016 forecasts. As a result, a forecast
downgrade has accompanied rising uncertainty
around global growth forecasts and a balance of
risks 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.




SPECIAL FOCUS 2 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 85




global investors’ risk aversion (Adrian and
Shin 2014, Bekaert, Hoerova and Lo Duca
2013). The implied volatility of the S&P 500
returns at 6- and 18-months-ahead option
contracts at 100 percent moneyness is
obtained from Bloomberg and used as a proxy
for 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 in
term 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 and
next-year term spread forecasts are compiled
from monthly surveys published by
Consensus 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 make
growth prospects more uncertain. A supply-
driven decline in oil prices raises global
growth prospects (Baffes et al 2015; Kilian
2014). As in the case of the S&P 500, the
implied volatility at 100 percent moneyness of
Brent and WTI crude oil prices at 6- and 18-
months-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 a
simple average of that of Brent and WTI.


This annex provides the technical details of
assessing the uncertainty surrounding the GEP
global growth forecast. For computational
tractability and in line with previous authors, a
two-piece normal distribution is used to
characterize both global growth forecasts and
individual risk factors.10 The assumption of a two-
piece normal distribution for global growth allows
asymmetry to be captured by a combination of the
mode and standard deviation of two individual
normal distributions. The skewness and standard
deviations of the risk factors are directly computed
from the distributions of the market-based and
survey-based data.


Assessing uncertainty in the global growth
forecast


The degree of uncertainty surrounding the
forecast points relative to historical levels of
uncertainty is measured by the mean square errors
of historical forecast. As in Kannan and Elekdag
(2009) and Blix and Sellin (1998) global growth
risk 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 of
term 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—are positively correlated with
prospects for the U.S. and global economy.
Their implied volatility signals changes in


ANNEX SF2.1 Estimating the distribution


of the global growth forecast


10For more properties of the two-piece normal distribution, see
Kannan 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 most
countries, especially emerging markets and developing countries
(EMDE), the most immediate risks to monetary policy are already
captured by equity prices and term spreads.


12Harvey (1989), Estrella and Hardouvelis (1991), Estrella and
Mishkin (1996), Haubrich and Dombrosky (1996), Dueker (1997);
Kozicki (1997), Dotsey (1998), Stock and Watson (2003), and Kao


et al. (2013).




SPECIAL FOCUS 2 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 86


Changes in risk stemming from these risk factors
signal a change in the distribution of global
growth forecast. The current measure of the h-
period ahead global growth forecast uncertainty
is assumed to be linearly related to its
historical level as:




where is the mean square errors of the
historical global growth forecast and is a
scaling parameter for a given forecast horizon h
calculated as:




where is the current measure of h-period
ahead forecast uncertainty extracted from risk
factor j and the corresponding historical
measures and is the weight (defined to be
positive) of factor j in explaining the forecast
errors variance of global growth. is the weight
of 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 historical
uncertainty by the uncertainty surrounding
individual risk factors. A responsive to variations
in uncertainty of the risk factors adds objectivity
to the assessment of global growth uncertainty.
Notice that subjective judgements can be allowed
in the computation of the parameter to reflect
the forecaster’s view of the current state of
uncertainty (Blix and Sellin 1997). For example, if
for any reason the forecaster view is different from
the market predictions, the parameter can be
modified to allow the forecaster to discount the
signals extracted from the market.


A starting point (baseline) of the analysis would be
the case where =1. In this case global growth
forecast 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 than


historical uncertainty and vice versa when
The intuition behind the expression of
is that an increase in uncertainty of the risk
factors relative to their historical levels will
increase and thus signal an increase in
uncertainty 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 that
the global growth forecast uncertainty remains
unchanged relative to historical levels.


The weight parameters are estimated as the
shares 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 in
a vector autoregression (VAR) with orthogonalized
error terms:




where is 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 the
historical uncertainty of global growth for a
given forecast horizon:




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


terms and as the shares


of variance of the global growth forecast errors at a
given horizon explained by risk factor j and by
global growth’s own forecast error, respectively.
Estimates of these parameters can be obtained by a
variance decomposition analysis in a VAR
including global growth and the selected risk
factors. Notice that in the analysis, the
contribution of other factors to the uncertainty of
global growth forecast at a given horizon h—that


is, —is kept constant at its historical average.





SPECIAL FOCUS 2 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 87



ANNEX FIGURE SF2.1 Risks to growth: January and


June 2016


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 of
growth shocks.


B. OLS-based estimates A. VAR-based estimates


1


3


5


1


3


5


20
14


20
15


20
16


20
17


50 percent
80 percent
90 percent
Baseline
90 percent in JAN16


Percent


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 the
variables used in the Cholesky decomposition
is as follows: global term spread, S&P500, oil
prices, and global growth. The derived
dispersion of the forecast error distribution is
scaled to match the mean square root of past
forecast errors since 2010.


• Estimating weights for skewness. The weight
assigned to each risk factor in the estimation
of global growth skewness is estimated using
the impulse responses of global growth at the
forecast horizons of interest (2, 4, 6, and 18
quarters) from the same VAR. The Cholesky
ordering is the same as for the estimation of
weights for dispersion.


As a result, each of these recovered statistics
characterizing the shape of the global growth
forecast 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 OLS-
based approach produces a smaller variance of
global growth forecast than the VAR approach.
This reflects the presence of other risk factors that
are not captured in the OLS estimates of Kannan
and Elekdag (2009) but are important residual
terms in the VAR estimates.


Assessing the balance of risk to global
growth


It is assumed that the skewness of the global
growth distribution can be approximated as a
linear combination of the skewness of the selected
risk factors as in Blix and Sellin (1998). Denote
by and the skewness of h-period ahead
forecast of global growth and risk factor j
respectively:




where is the weight associated with the risk
factor j at the forecast horizon h.13 Equation (6) is
an approximation of the true forecast error
skewness. The parameter can be thought of
as the elasticity of h-period ahead global growth
with respect to risk factor j. Notice that the
contribution of each risk factor to the skewness of
global growth depends on both its skewness and
weight. The weight parameters are thus as
important as the skewness of the risk factors in the
estimation of the balance of risk of global growth.


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), and
global growth. Two lags are selected based on one
or more information criteria. Impulse responses
and variance decompositions are evaluated at the
forecast horizons of 2, 4, 6, and 8 quarters (Annex
Table SF2.1). Quarterly data from 1991Q1-
2015Q3 are used in the estimation.


• Estimating weights for dispersion. The
weight assigned to each risk factor is estimated
as the share of the global growth forecast error
variance explained by each of the risk factors.
The variance decomposition is derived from a
recursive identification based on the
assumption 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 of
each risk factor is adjusted for its mean over the full time series.


1


3


5


1


3


5


20
14


20
15


20
16


20
17


50 percent
80 percent
90 percent
Baseline
90 percent in JAN16


Percent




SPECIAL FOCUS 2 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 88


The methodology described above yields the
moments of the two-piece normal distribution of
global growth: dispersion, mode (the June 2016
Global Economic Prospects forecasts), and
skewness. 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).




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.


B. Probability of global growth below


threshold: OLS-based estimates


A. Probability of global growth below


threshold: VAR-based estimates


0


20


40


60


80


100


0.0 1.4 1.9 2.4 2.9 3.5 4.0
Threshold (percent)


2016
2017


Percent


0


20


40


60


80


100


0.0 1.4 1.9 2.4 2.9 3.5 4.0
Threshold (percent)


2016
2017


Percent


Source: World Bank Staff estimates.


VAR-based weights OLS-based
weights




6-months
ahead


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 OLS-
regression of global growth on oil prices, S&P500 and global term spreads. Regressions use annual data for 1982-2014.


VAR-based weights OLS-based
weights




6-months
ahead


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 for
1982-2014


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




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




SPECIAL FOCUS 2 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 89


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




Author
Country/


Variable of
interest


Methodology Variables included


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.
Budget
balance


Uses the procedure proposed by Kannan and Elekdag (2009) to
construct the forecast distribution of Canadian Parliament
budget 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, real
GDP


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 the
construction of a fan chart for inflation, real GDP growth, and
interest 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 and
macroeconomic outlook test model. Data are from 1998Q1 -
2012Q2.


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


National Bank
of Czech
Republic


Czech
Republic.
Inflation, real
GDP growth,
interest rate


Fan chart based on historical smoothed forecast errors. Inflation, real GDP growth.


Alvaro and
Maximiano
(2003)


Euro Area.
Inflation,
GDP growth


A critique to the Bank of England linear approximation of the
forecast 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 growth
outside 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 Bank
of India, Apr.
2016 (Banerjee
and Das 2011)


India.
Inflation, real
GDP growth


Fan charts for inflation and GDP growth are constructed based
on 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.


Bank of Japan,
Outlook for
Economic
Activity and
Prices, Jan.
2016


Japan.
Inflation, real
GDP growth


Distributions of forecasts are based on the Policy Board
members’ assessment of uncertainty and their judgement of the
balance of risk associated with their forecasts. The distributions
of Board members forecast are presented to illustrate the extent
of uncertainty and balance of risk associated with the
projections.


Inflation, real GDP growth.




SPECIAL FOCUS 2 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 90





Author Country/Variable
of interest Methodology Variables included


Banco de
Portugal,
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 of
Governors 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 of
individual series are presented to illustrate the distributions of the
forecasts.


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


Britton and
Whitley (1998)


United Kingdom.
Inflation, real GDP
growth


Methodology of U.K. Inflation Report fan chart construction. Fan
chart is based on historical forecast errors variance of the
Monetary 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 the
construction 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 cyclical
and 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 and
using the OLS estimation coefficients as weights.


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


Gürkaynak et
al. (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 used
covers 1960Q1 - 2000Q3.


Real GDP growth, inflation,
Fed funds interest rate.


Kannan and
Elekdag
(2009)


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


Incorporate market-based and survey-based relevant global growth
risk 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 parameter
is a function of risk factors uncertainty. Use of data from 1970 to
2007 to estimate the weight as elasticities by OLS.


Baseline: WEO's forecast of
real 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.


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




SPECIAL FOCUS 2 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 91




Author Country/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
growth


OLS estimation of the elasticity of global growth with respect to
each risk factor. Dependent variable: global growth;
Independent variables: lag of global growth and standardized
risk factors


IMF, WEO Oct 2015 World /Forecast of global real GDP growth Same as in Elekdag and Kannan(2009)


Blix and Sellin
(1998) Sweden/Inflation, GDP growth


Elasticity of inflation or the variable of interest with respect to
each 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 from BVAR with
stochastic volatility


Alvaro and
Maximiano (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.B Literature review: Estimation of weight parameters for risk factors


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




Author Country/Variable Methodology


Mixon (2011) U.S./S&P500 (25delta Put - 25delta Call)/50 delta


Bates (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




SPECIAL FOCUS 2 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 92


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Recent developments


Growth in the East Asia and Pacific (EAP) region
slowed from 6.8 percent in 2014 to 6.5 percent in
2015, in line with previous expectations (Table
2.1.1). The deceleration reflects the gradual
slowdown in China—from 7.3 in 2014 to 6.9
percent in 2015.1 Other commodity-importing
economies in the region saw an acceleration of
activity, 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 weak
trade and tightened financing conditions (World
Bank 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 energy-
intensive, highly polluting, inefficient enterprises
in older sectors (raw coal and crude steel for


example), have caused a sharp drop in industrial
production (Figure 2.1.2). Weak external demand
and periods of financial market volatility have also
contributed to the slowdown in activity.
Expansionary policies have moderated the
deceleration. 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 in
spending on social welfare (poverty reduction and
social housing), and education. These measures are
expected to contribute to a record budget deficit
of 3 percent of GDP in 2016. The PBC kept an
easing 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 of
property market policy, including higher down
payment requirements for home buyers and
tighter oversight on financing through the shadow
banking system, was implemented in March, and
aims to moderate the surge in first tier housing
prices. There are also indications that credit
growth started to ease in April, reflecting new
measures implemented by the PBC to temper
excessive borrowing.


Note: The author of this section is Ekaterine Vashakmadze. Re-
search assistance was provided by Liwei Liu.
1Chinese official statistics indicate that growth has declined gradu-


ally from 10.6 percent in 2010 to 6.9 percent in 2015. Alternative
assessments by some analysts, weighing industrial activity more heavi-
ly suggest a sharper slowdown.


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 the
downside, they include a sharper-than-expected slowdown in China (although a low-probability scenario), and
tighter 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.




CHAPTER 2. 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 100


China’s economic rebalancing continues, from
investment to domestic consumption, and from
manufacturing 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 in
2015 (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 a
depletion of about 20 percent ($0.8 trillion) of
foreign reserves compared with their August 2014
peak. About two fifths of these outflows were
related to a repayment of short-term external debt
and diversification of assets by residents. The
remaining capital outflows may partly have
reflected expectations of renminbi depreciation.
Tighter enforcement of capital controls and
improved communication of policy objectives,
including exchange rate policies, helped to clarify
policy objectives, stabilize financial markets, ease
pressures on the renminbi, and slow outflows.
China’s net foreign asset position remains firmly
positive (14 percent of GDP at the end of the
third 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 of
activity 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 a
recovery of public investment.


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 in
Indonesia (one of the emerging economies considered


fragile 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 to


ease or maintain an accommodative monetary policy stance
in late 2015 and early 2016 (Figure 2.1.3). For example,


Indonesia lowered policy rates in January, February, and
March, in response to the stabilization of the rupiah and a


decline in inflation. Flexible exchange rates, occasionally
supplemented with foreign currency interventions to


smooth 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 of


investment-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 to
reduce 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-to-


GDP 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 and
targeted 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 growth


and improved tax administration.





EAST ASIA AND PACIF IC GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 101


Export growth slowed in the region as a whole in
2015, 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—these
countries benefit from sizeable foreign direct
investment into their highly cost-competitive
manufacturing, including production of garments
and other consumer goods. Growth in the
Philippines has been bolstered by steady inflows of
remittances and trade in services.


Despite weak exports, compression of import
values 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 in
2015 (Figure 2.1.4). In net-energy exporters such
as Malaysia, the current account surplus narrowed
but remained positive, with strong non-
commodity export performance (particularly
electrical and electronics manufactures).


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


Outlook


The regional outlook remains broadly unchanged,
with growth expected to ease slightly, but remain
above 6 percent through 2018. This assumes an
orderly slowdown in China, where growth is
projected to slow gradually from 6.7 percent in
2016 and 6.3 percent in 2018, which in turn
depends on smooth progress of structural reforms,
with appropriate policy stimulus as needed. In the
remainder 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


large economies (Indonesia, Malaysia, Thailand),
low commodity prices (Thailand, the Philippines,
Vietnam), and strong consumption (the
Philippines).


Commodity exporters


Growth is expected to edge up in Indonesia to
slightly over 5 percent in 2016 and 5.5 percent by
2018. Investment is likely to lead the recovery,


FIGURE 2.1.1 EAP growth


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 rest


of the region. Activity in the region excluding China has been supported by
public investment, but exports have been weak.


B. Real GDP A. Real GDP


D. Investment in selected economies C. GDP components


Sources: World Bank World Development Indicators; International Monetary Fund, International
Financial Statistics; World Economic Outlook; Haver Analytics; United Nations Conference on Trade


and 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 Cam-
bodia, Kiribati, Lao PDR, Philippines, Solomon Islands, Thailand, and Vietnam.


F. Exports of goods for China, Thailand, and Vietnam.


F. Values of exports of goods and


services


E. Foreign direct investment


0


4


8


12


C
hin


a


Co
m


m
od


ity
ex


po
rte


rs


Co
m


m
od


ity
im


po
rte


rs
(e


xc
l.


Ch
in


a)


2011-12 2013-14 2015
2016f 2003-08 1990-08


Percent


0.0


0.5


1.0


1.5


2.0


Co
m


m
o


di
ty


ex
po


rte
rs


Co
m


m
od


ity
im


po
rte


rs
(e


xc
l.


Ch
in


a
)


2011 2012 2013 2014 2003-08
Percent of world


-3


2


7


12


17


C
on


su
m


pt
io


n


Ex
po


rts
In


ve
st


m
en


t
Im


po
rts


C
on


su
m


pt
io


n


Ex
po


rts
In


ve
st


m
en


t
Im


po
rts


C
on


su
m


pt
io


n


Ex
po


rts
In


ve
st


m
en


t
Im


po
rts


2010-14 2015 2016f 1990-08Percent


China Commodity
exporters


Commodity importers
(excl. China)


0
2
4
6
8


10
12


Ch
in


a


EA
P


(ex
cl.


Ch
ina


)


Co
m


m
o


dit
y


ex
po


rte
rs


Co
m


m
o


dit
y


im
po


rte
rs



(ex


cl.
Ch


in
a


)


2011-12 2013-14 2015
2016f 1990-08


Percent, year-on-year


0


5


10


Ch
in


a


M
al


ay
sia


In
do


ne
sia


Ph
ilip


pi
ne


s


Th
ai


la
nd


2015Q1 2015Q2
2015Q3 2015Q4
2016Q1 2015


Percent, quarter-on-quarter


-12


-2


8


18


Vi
et


na
m


Ch
in


a


Th
ail


an
d


Ph
ilip


pi
n


es


In
do


n
es


ia


M
a


la
ys


ia


1990-08 2010-13
2014-15 2016Q1


Percent


Commodity importers Commodity exporters




CHAPTER 2. 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 102


Growth is expected to rebound gradually in 2017-
18, 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 a
mining boom, with economic activity held back
by 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 year
of production, and reflecting domestic adjustment
to low liquefied natural gas (LNG) prices. In
Timor-Leste, growth in the non-oil economy is
expected to rebound to 5.5 percent on average in
the medium term, with investment, especially
public sector construction projects, the major
driver of growth.


Commodity importers


Among the large developing ASEAN economies,
Vietnam and the Philippines have the strongest
growth prospects. In the Philippines, growth is
projected to firm to 6.4 percent in 2016, with an
accelerated 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
direct investment, growing exports of
manufactures, and solid labor markets. In
Thailand, growth is expected to strengthen
gradually as investor confidence returns, but is
likely to remain below 3 percent in 2016-18,
reflecting weak global trade.


Growth in several of the smaller economies in the
region should be supported by strong FDI. They
are also likely to benefit from export growth (such
as garments in Cambodia and electricity in Lao
PDR), despite weak global demand, reflecting
competitive price advantages. Growth in
Cambodia will to ease only slightly and should


helped by an acceleration of public spending.
However, with external demand still facing
headwinds, this projection depends on the
implementation of an ambitious public
investment program and the success of recent
government reforms to reduce red tape and
uncertainty 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 weak
commodity prices and public spending cuts due to
lower natural resource sector revenues. Tight labor
market 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.


FIGURE 2.1.2 China: Activity, exchange rates, and


external 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 rebound


of activity in 2016. Financial markets have stabilized. Pressures on the
renminbi (RMB) eased and capital outflows slowed after contributing to
about a 20 percent fall in foreign reserves from the August 2014 peak.


B. Purchasing Managers Index A. Real GDP growth


D. Balance of payments C. Nominal and real effective
exchange rates (REER)


Sources: World Bank; Bloomberg; Haver Analytics; International Monetary Fund, International Finan-
cial 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.


0
2
4
6
8


10
12
14


2010 2011 2012 2013 2014 2015 Q1
2016


Industry and construction
Services
GDP


Percent, year-on-year


45


50


55


60


Ap
r-


10
O


ct
-


10
Ap


r-
11


O
ct


-
11


Ap
r-


12
O


ct
-


12
Ap


r-
13


O
ct


-
13


Ap
r-


14
O


ct
-


14
Ap


r-
15


O
ct


-
15


Ap
r-


16


Composite Manufacturing
Services


Index


-1


0


1


2


3


90


100


110


120


130


20
11


Q3
20


12
Q1


20
12


Q3
20


13
Q1


20
13


Q3
20


14
Q1


20
14


Q3
20


15
Q1


20
15


Q3
20


16
Q1


Onshore vs offshore rate spread (RHS)
RMB per U.S.dollar
REER CPI based


Index. Jan. 2010=100 Percent


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


10


2010 2011 2012 2013 2014 2015


Current account
Net capital flows
Change in reserves


Percent of GDP




EAST ASIA AND PACIF IC GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 103


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.


Risks


Short-term risks to the forecast are balanced. On
the downside, they include a sharper-than-
expected slowdown in China (although a low-
probability 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 in
Indonesia, Malaysia, and Thailand. The
magnitude of spillovers from China would be
more pronounced if growth fluctuations are
amplified via the confidence channel (World Bank
2016b). Other risks are related to weaker-than-
expected global trade and bouts of volatile and
tighter global financial conditions, similar to the
episodes in August 2015 and January-February
2016. A renewed decline in commodity prices is
mainly an upside risk for the region as a whole,
which is a net commodity importer, but a
downside risk for commodity exporters (World
Bank 2016d).


Policy challenges


China


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


slowdown in growth, but it would need to be
undertaken within a medium-term fiscal
consolidation framework. In particular, the
government should reduce its extensive contingent
liabilities to strengthen its government sheet
(World Bank 2015b, 2016a; IMF 2015b). Reform
of Chinese state-owned enterprises (SOEs)
represents a key policy challenge (Peng, Shi, and
Xu 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).


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


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. Deleverag-


ing should focus on up-front balance sheet adjustments.


FIGURE 2.1.3 EAP excluding China: Selected indicators


Since the taper-tantrum of mid-2013, policy tightening in Indonesia and
strengthened 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 early
2016. Improved macroeconomic frameworks led to lower bond yields.


B. Real credit growth A. Policy rates


D. Ten-year Treasury Bond yields C. Inflation (year-on-year)


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.


0
2
4
6
8


10
12
14


M
on


go
lia


In
do


ne
si


a


M
al


ay
si


a


Vi
et


na
m


Ph
ilip


pi
ne


s


Th
ai


lan
d


2011-12 2013-15 Q1 2016
Percent


Commodity exporters Commodity importers


-2


3


8


13


18


In
do


ne
sia


M
a


la
ys


ia


Th
ai


lan
d


Vi
et


na
m


Ph
ilip


pin
es


2011 2012 2013 2014 2015
Percent


Commodity exporters Commodity importers


0
2
4
6
8


10
Ch


ina


EA
P


(ex
cl.


Ch
in


a)


Co
m


m
od


ity
ex


po
rte


rs


Co
m


m
od


ity
im


po
rte


rs
(ex


cl.


C
hin


a)


2011 2012-14 2015
2016 2003-08


Percent


0


3


6


9


12


In
do


ne
sia


M
ala


ys
ia


Vi
e


tn
am


Ph
ilip


pi
ne


s


Th
a


ila
nd


2011-12 2013-15 2016
Percent


Commodity exporters Commodity importers




CHAPTER 2. 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 104


goal should be to facilitate reallocation of credit
and factors of production toward more productive
sectors, and away from declining sectors with
excess capacity. Reducing the role of
administrative measures in the financial sector and
allowing a more market-based allocation of capital
would help.


Rest of the region


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 through
strengthening medium-term fiscal and macro-
prudential frameworks (ADB 2016; World Bank
2016a). Medium-term fiscal consolidation to
stabilize debt and reduce financing requirements
would be particularly important for economies
where domestic demand growth has been
accompanied 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


Fiscal policy measures should be established
within a medium-term framework to create fiscal
space and improve public expenditure efficiency.
This can be achieved through improved revenue
mobilization (Cambodia, Indonesia, the
Philippines, Lao PDR), reduced dependence on
fiscal revenue from energy sectors (Malaysia,
Mongolia, Papua New Guinea), and increased and
more efficient investment (Indonesia, the
Philippines, Thailand). Better fiscal institutions
would provide support for such reforms (World
Bank 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 and
improve the operation of institutions designed to
manage commodity price volatility, such as
sovereign wealth funds. State-owned enterprise
reforms, including measures to enhance
transparency and governance, could reduce drains
on fiscal resources (Thailand, Vietnam). In


3Notwithstanding some stabilization, total debt remains high in
China, Malaysia, and Thailand.


oriented and institutional reforms may exacerbate
volatility. Institutional reforms—such as better
corporate governance, enhanced auditing and
accounting standards, and stronger regulatory
frameworks—are also required. In the absence of
broad reforms of this nature, inefficient resource
allocation, lower productivity growth, and
wasteful investment may persist. This would
weaken growth, worsen the debt overhang, and
heighten risks to the financial system (Prasad
2016). 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 and
monetary and fiscal stimulus. To create the
conditions for sustainable increases in income, the


FIGURE 2.1.4 EAP excluding China: Selected indicators


(continued)


Plunging oil prices contributed to solid current account balances for


energy importers in the region, with the exception of Vietnam. Net energy
exporters fared less well. Financial market conditions were volatile in early
2016 but have stabilized more recently. Regional currencies have
appreciated against the U.S. dollar since February, and equity and bond
markets have generally recovered.


B. Current account balances, capital


flows and change in reserves


A. Current account balances


D. Stock markets C. Currency changes against the U.S.


dollar


Sources: World Bank; Haver Analytics; Bloomberg; International Monetary Fund, International Finan-
cial Statistics.


B. Net capital flows include net errors and omissions.
C. Positive values indicate depreciation.


D. 2016 data are through May.


-6


-1


4


9


14


M
ala


ys
ia


In
do


ne
sia


Th
ai


lan
d


Ph
ilip


pin
es


Vi
et


n
am


2011 2012 2013
2014 2015 2003-08


Percent of GDP


Main commodity exporters Main commodity importers


0


50


100


150


200


250


In
do


ne
sia


M
a


la
ys


ia


Ph
ilip


pin
es


Th
ai


lan
d


Vi
et


na
m


2011-12 2013-14 2015 2016
Index, Jan. 2010 = 100


Commodity exporters Commodity importers


-40


-20


0


20


40


60


80


2011 2012 2013 2014 2015


Current account
Net capital flows
Change in reserves


US$ billions


-3


17


37


57


M
o


ng
ol


ia


In
do


ne
sia


M
ala


ys
ia


Th
ai


lan
d


Ph
ilip


pin
es


Vi
et


n
am


So
lo


m
o


n
Is


lan
ds


Sep 2011-May 2016 May 2013-Oct 2013
Percent


Commodity exporters Commodity importers




EAST ASIA AND PACIF IC GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 105




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, and
appropriate 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 to
smooth 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 public
debt), and foreign currency reserves—are robust in


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


While low inflation has allowed reductions in
policy 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 capital
in Cambodia, Mongolia, and Vietnam.
Strengthened financial sector (macro- and micro-
prudential) policies could help buttress financial
stability in the event of market turmoil. Relevant


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 the
region 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, and


Thailand.


B. Total debt and real GDP growth in China A. Housing prices in China C. Fiscal balances


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.




E. External debt, China D. Total debt in EAP F. External debt in EAP, 2015


6


8


10


12


14


16


0


50


100


150


200


250


300


20
06


20
07


20
08


20
09


20
10


20
11


20
12


20
13


20
14


20
15


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


-7


-5


-3


-1


1


K
H


M


P
H


L


LA
O


M
Y


S


ID
N


M
M


R


C
H


N


V
N


M


2009 2015Percent of GDP


Improvement Deterioration


0
40
80


120
160
200
240


20
07


20
15


20
07


20
15


20
07


20
15


20
07


20
15


China Malaysia Thailand Indonesia


Public debt Private debt
Percent of GDP


0
10
20
30
40
50


S
ha


re


o
f G


D
P


Sh
a


re


o
f


re
s


e
rv


e
s


S
ha


re


o
f G


D
P


Sh
a


re


o
f


re
s


e
rv


e
s


External debt Short-term debt


Q1 2015 Q4 2015Percent of GDP


0
20
40
60
80
100


0


30


60


90


M
a


la
ys


ia


In
do


n
e


s
ia


Th
a


ila
n


d


P
hi


lip
pi


n
e


s


C
hi


n
a


External debt
Short-term debt (RHS)


Percent of GDP Percent of total


-10


0


10


20


30


40


Ju
l-1


1
N


o
v-


11
M


a
r-


12
Ju


l-1
2


N
o


v-
12


M
a


r-
13


Ju
l-1


3
N


o
v-


13
M


a
r-


14
Ju


l-1
4


N
o


v-
14


M
a


r-
15


Ju
l-1


5
N


o
v-


15
A


pr
-


16


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


Percent change, year-on-year




CHAPTER 2. 1 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 106




China, and are generally adequate in the rest of
the region. Several countries, however, especially
those with sizeable external financing needs,
should rebuild these buffers. High leverage is the
most important vulnerability across the region.
Tighter macro-prudential policies in several of the
larger regional economies (Malaysia, Thailand, the
Philippines) 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 greater
labor force participation to mitigate the impact of
aging populations and slower labor force growth
in 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 and


4Twelve countries in the Pacific Rim, including Malaysia and
Vietnam, recently concluded negotiations on the Trans-Pacific
Partnership (TPP).


FIGURE 2.1.6 Policy issues


Across the region there is a room to improve business environment to
boost competitiveness.


B. Share of countries lower than


EAP’s ranking
A. Share of countries lower than


China’s ranking


Sources: 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 a


transparency 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 Competitiveness
Index. 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 and
primary 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 by
averaging these ten economic freedoms, with equal weight being given to each. The latest rank is for


2016. The Ease of Doing Business Index ranks countries against each other based on how the
regulatory 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.


reductions in the cost of doing business should
be a high priority in Cambodia, Lao PDR,
Myanmar, Papua New Guinea, Timor-Leste, and
the 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 the
2015 Corruption Perceptions Index reported by
Transparency International, as well as on other
governance indicators (Figure 2.1.6). Enhanced
transparency, strengthened accountability, and
more responsiveness by state institutions to the
needs 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 and
investment integration through lower non-tariff
barriers would further boost productivity and
competitiveness. New partnerships, including the
Trans-Pacific Partnership agreement, signed in
2015, and other regional trade agreements,
including the ASEAN economic community and
the proposed Regional Comprehensive
Economic Partnership, should all help anchor
structural reforms and raise potential growth in
the region.4


86


65


19


54


86
64


22


54


0
20
40
60
80


100


O
pe


n


Bu
dg


et
In


de
x


In
st


itu
tio


n
s


Ec
o


no
m


ic
Fr


e
e


do
m


Ea
se



of



D


o
in


g
Bu


si
ne


ss


2010 Latest
Share of countries


43
55


37
52


41
53 53 52


0
20
40
60
80


100


O
pe


n


Bu
dg


e
t


In
de


x


In
st


itu
tio


n
s


Ec
o


no
m


ic
Fr


ee
do


m


Ea
se



o


f D
o


in
g


Bu
si


n
es


s


2010 Latest
Share of countries




EAST ASIA AND PACIF IC GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 107








(percentage point difference
from January 2016 projections)


2013 2014 2015e 2016f 2017f 2018f 2015e 2016f 2017f 2018f
EMDE EAP, GDPa 7.1 6.8 6.5 6.3 6.2 6.1 0.1 0.0 0.0 -0.1


(Average including countries with full national accounts and balance of payments data only)b


EMDE EAP, GDPb 7.1 6.8 6.5 6.3 6.1 6.1 0.1 0.0 -0.1 -0.1
GDP per capita (U.S. dollars) 6.4 6.0 5.7 5.6 5.5 5.5 0.0 0.0 0.0 -0.1
PPP GDP 7.0 6.7 6.4 6.3 6.1 6.1 0.0 0.0 0.0 -0.1
Private consumption 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 8.5 5.7 2.1 4.0 4.8 5.4 -1.1 -0.7 -0.3 -0.2
Net exports, contribution to growth -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


TABLE 2.1.1 East Asia and Pacific forecast summary


(Real GDP growth at market prices in percent, unless indicated otherwise)


Source: World Bank.
World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in


other Bank documents, even if basic assessments of countries’ prospects do not differ at any given moment in time.
a. 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).






(percentage point difference
from January 2016 projections)


2013 2014 2015e 2016f 2017f 2018f 2015e 2016f 2017f 2018f
Cambodia 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
Timor-Lesteb 2.8 6.0 4.3 5.0 5.5 5.5 -2.5 -1.9 -1.5 -1.5
Vietnam 5.4 6.0 6.7 6.2 6.3 6.3




0.2 -0.4 0.0 0.3


TABLE 2.1.2 East Asia and Pacific country forecastsa


(Real GDP growth at market prices in percent, unless indicated otherwise)


Source: World Bank.
World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in


other Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time.
a. GDP 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.






Recent developments


Activity in emerging market and developing
economies (EMDE) of the Europe and Central
Asia (ECA) region contracted by 0.1 percent in
2015, compared to the 1.8 percent expansion in
2014 (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 from
the previous year’s pace. Recent data point to


continued weakness across much of the region, as
low oil prices put pressure on exporters
(Azerbaijan, Kazakhstan, Russia), geopolitical
tensions dampen confidence (Russia, Turkey,
Ukraine), and external financing conditions
become more difficult with wide spreads and
ratings downgrades. Exchange rates have come
under pressure, and in some countries non-
performing loans have ticked upwards or remain
at elevated levels. High inflation rates and efforts
to defend exchange rates have led to tight or pro-
cyclical tightening of monetary policy stances
(Azerbaijan, Kazakhstan, Russia). The U.S. dollar
value of recorded remittances is estimated to have
fallen 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, and
touching lows of under $30 per barrel in January
2016, export receipts and government revenues


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. Tur-
key 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 Azerbai-
jan, Kazakhstan and Russia, where government policy buffers are eroding. Regional growth is expected to pick
up to only 1.2 percent in 2016, as the Russian economy contracts further (albeit at a shallower pace) and politi-
cal uncertainty in Turkey and Ukraine weighs on confidence. With a return to positive growth in Russia and
Ukraine, regional growth will accelerate to about 2.6 percent in 2017-18. Key downside risks include geopoliti-
cal 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 accom-
modation. Priorities for non-commodity exporters center on making the most of the lower fuel import bill and
implementing structural reforms to lift productivity and long-term growth.


Note: 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 sub-
groupings 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; all
except 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.




CHAPTER 2. 2 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 110


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.


B. Sub-region growth and forecast


revisions


A. EMDE ECA growth and forecast


revisions


D. Nominal effective exchange rates C. Current account balances


Sources: 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 of


Macedonia, 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, where
data are available. A decline denotes depreciation. Latest observations are December 2015.


have fallen, current account balances have
generally weakened, and reserves and other buffers
have eroded. Commodity exporters have seen
sharp exchange rate devaluations and
depreciations, which though necessary for
adjustment, added strains to financial systems in a
context of vulnerabilities associated with the build-
up of private nonfinancial debt (Chapter 1,
Special Focus 1). The ongoing recession in Russia
is bringing adverse spillovers through trade and
remittances, 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.


The western part of the region is comprised of
commodity 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 a
context 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.


Real GDP in Russia declined by 1.2 percent (year-
on-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 to
adjust to continued low oil prices, trade embargoes
and geopolitical concerns. Though necessary to
support 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, the
country’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 in
some sectors may be bottoming out. Industrial
production is recovering, despite shrinking
investment and restricted access to external
financing 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 in
2015. Domestic demand was strong, despite the
uncertainty associated with two rounds of
elections, and rising geopolitical risks (World
Bank 2016g). Lower fuel costs helped narrow the
current account deficit to 4.5 percent of GDP.
Indicators on industrial production, exports and
retail sales suggest continued solid growth in the
first half of 2016. However, tourism slowed
sharply so far this year, and geopolitical tensions
(violence in the East, terrorist attacks in


-1


0


1


2


3


20
12


20
13


20
14


20
15


20
16


20
17


20
18


EMDE ECA
GEP Jan 2016 forecast


Percent


-4


-2


0


2


4


6
20


12


20
13


20
14


20
15


20
16


20
17


20
18


Commodity exporters
Commodity importers
GEP Jan 2016 forecasts


Percent


-6


-5


-4


-3


-2


-1


0


2012 2013 2014 2015


Commodity exporters
Commodity importers


Percent of GDP


80


90


100


110


120


Ja
n-


10
Ju


n-
10


No
v


-
10


Ap
r-


11
Se


p-
11


Fe
b-


12
Ju


l-1
2


De
c-


12
M


ay
-


13
O


ct
-


13
M


ar
-


14
Au


g-
14


Ja
n-


15
Ju


n-
15


No
v


-
15


Commodity exporters
Commodity importers


Index, 2010 = 100




EUROPE AND CENTRAL AS IA GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 111


metropolitan centers, and the refugee crisis
emanating from Syria) are weighing on
confidence. In the three months to May, the
manufacturing Purchasing Managers’ Index (PMI)
weakened to levels signaling contraction, and
capital inflows have been easing, pointing to some
moderation in growth ahead.


Growth in Poland slowed to 3 percent year-on-
year in the first quarter of 2016, easing from the
robust expansion of 3.6 percent registered in
2015. Private consumption and investment
growth accelerated in the first quarter on
continued 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 of
deflation, the central bank has kept interest rates
at a record-low of 1.5 percent since March 2015.


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, and
retail sales persisted through the first quarter of
2016. The sharp devaluation, followed by the
move to a floating exchange rate in August 2015,
boosted inflation and put pressure on domestic
borrowers, as about 30 percent of loans in the
banking system in mid-2015 were denominated in
foreign currency, mostly U.S. dollars. While
policy interest rates were lowered by 200 basis
points to 15 percent in May, they remain elevated
as the authorities seek to support of the tenge,
sharply constraining domestic borrowing.
Government spending supported by a drawdown
of 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 the
contraction of 9.9 percent in 2015 was not as


severe as previously anticipated. Other data so far
this year also suggest that the recession has
bottomed out. Following steep price increases in
2014 and 2015 associated with the devaluation of
the hryvnia and price reforms, inflation slowed as
the currency stabilized, enabling a lowering of
policy interest rates to 18 percent in May. The
western part of Ukraine is not directly affected by
conflict and is recovering. Still, exports and
imports are down by more than half from their
2012 levels and remain weak. The capacity of the
banking sector to lend is sharply constrained.
External financing remains costly, with average
spreads on euro and U.S. dollar-denominated
borrowings more than 400 basis points above
those of other countries in the region during the
first quarter of 2016 (Figure 2.2.5). Additional
downgrades by ratings agencies could contribute
to keeping spreads elevated. Tensions over a debt
dispute with Russia continue. The authorities are
endeavoring to maintain progress on the reform
program agreed with the IMF, despite the fall of
the ruling coalition, which was replaced in mid-
April with an administration that has pledged to
combat corruption and promote closer ties with
the EU.


Several other countries in the region are
maintaining robust economic activity.


FIGURE 2.2.2 Remittances


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 in
recipient countries.


B. Remittance outflows from Russia


and oil prices


A. Remittance inflows


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. Remittance


outflows for 2015 are estimates based on IMF Balance of Payments Statistics available up to 2015
Q3.


0
20
40
60
80
100
120
140


0
5


10
15
20
25
30
35
40


20
05


20
06


20
07


20
08


20
09


20
10


20
11


20
12


20
13


20
14


20
15


Remittance outflows from Russia
Oil Price (RHS)


US$, billions US$ per barrel


0
2
4
6
8


10
12


Uk
ra


in
e


Uz
be


kis
ta


n


Se
rb


ia


R
om


a
ni


a


Ta
jiki


st
a


n


Bo
sn


ia



H


er
z.


M
o


ldo
va


,


R
ep


.


Bu
lg


ar
ia


Ky
rg


yz


Re
p.


Ar
m


e
ni


a


2013
2014
2015f


US$, billions




CHAPTER 2. 2 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 112



subdued fuel costs boosting the purchasing power
of consumers. Growth projections for the mostly
commodity exporting eastern part of the region
have been revised downward relative to the
January 2016 Global Economic Prospects, amid the
ongoing 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 is
considerable variation in prospects. Russia’s
economy is projected to decline by 1.2 percent in
2016, led by falls in private investment and
consumption, before returning to modest growth
in 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 the
central 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 be
helped by additional public spending in the form
of 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, and
banking sector reforms that will support a
resumption of lending.


The outlook for the external sector across the
region diverges between commodity importers and
exporters, 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 of
trade 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


FIGURE 2.2.3 Terms of trade


The sharp fall in commodity prices has led to substantial changes in the
terms of trade in both commodity exporters and importers.


B. Terms of trade: commodity


exporters and importers


A. Terms of trade of selected


countries


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 to
2014, and indications so far this year are of further
slowing. Also posting growth above 3 percent in
2015 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 and
Ukrainian economies, went into recession in
2015, and both encountered sharp falls in
industrial production in early 2016.


Outlook


Despite 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 in
eastern Ukraine and the Caucasus, terror attacks
in Turkey, and the ongoing refugee crisis, are
weighing 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 Euro
Area and strengthening domestic demand, with


60
70
80
90


100
110
120
130


20
07


20
08


20
09


20
10


20
11


20
12


20
13


20
14


20
15


Commodity exporters


Commodity importers


Index, 2012=100


40
50
60
70
80
90


100
110
120


R
us


si
an


Fe
de


ra
tio


n


K
az


ak
hs


ta
n


U
kr


a
in


e


Ar
m


e
ni


a


Se
rb


ia


Hu
ng


a
ry


R
om


a
ni


a


Po
la


nd


Tu
rk


ey
2013 2014 2015Index, 2012=100




EUROPE AND CENTRAL AS IA GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 113



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 have
seen a pickup. The steep fall in activity in Ukraine has bottomed out.


B. Turkey A. Russian Federation


D. Kazakhstan C. Poland


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.


F. Azerbaijan E. Ukraine


countries are being adversely affected by spillovers
in the form of reduced trade and remittances
(Armenia, Georgia, Kyrgyz Republic, Moldova,
Tajikistan). Trade embargos and quantitative
trade restrictions will affect Russia, Turkey, and
Ukraine. Commodity importers, however, will
continue to reap windfalls in the form of low fuel
prices, helping to strengthen current account
balances 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 and
Comprehensive Free Trade Area with the
European Union.


External financing conditions are expected to
remain challenging for several countries in the
region. Despite some easing of spreads in March
and April, they remain elevated (Kazakhstan,
Russia, Turkey, Ukraine; Figure 2.2.5), and
downgrades in 2016 by ratings agencies (Armenia,
Azerbaijan, Croatia, Kazakhstan, Poland), and
sanctions imposed on Russia have raised
borrowing costs or constrained access to
international 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 and
Herzegovina, Georgia, Kosovo, Montenegro,
Serbia, Turkey), managing external financing will
remain 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 the
region is predicated on an easing of conflict in the
southeast of Turkey and eastern Ukraine, and a
subsiding of terrorist attacks in urban centers in
Turkey.


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 in
eastern Ukraine and the South Caucasus), terror
attacks and conflict in Turkey, and the refugee
crisis emanating from Syria could intensify,
dampening confidence, capital inflows,
investment, tourism and growth. Knock-on effects
could include sharply increased contingent


-6


-4


-2


0


2


4


6


-6


-4


-2


0


2


4


6


2012 2013 2014 2015 2016


Current account (RHS)
Industrial production
GDP


Percent of GDPPercent, year-on-year


-9
-6
-3
0
3
6
9
12


-6
-4
-2
0
2
4
6
8


2012 2013 2014 2015 2016


Current account (RHS)
Industrial production
GDP


Percent, year-on-year Percent of GDP


-8


-4


0


4


8


12


-4


-2


0


2


4


6


2012 2013 2014 2015 2016


Current account (RHS)
Industrial production
GDP


Percent, year-on-year Percent of GDP


-6
-4
-2
0
2
4
6
8


-6
-4
-2
0
2
4
6
8


2012 2013 2014 2015 2016


Current account (RHS)
Industrial production
GDP


Percent, year-on-year Percent of GDP


-20


-16


-12


-8


-4


0


4


-25


-20


-15


-10


-5


0


5


2012 2013 2014 2015 2016


Current account (RHS)
Industrial production
GDP


Percent, year-on-year Percent of GDP


-14


-7


0


7


14


21


28


-5


0


5


10


2012 2013 2014 2015 2016


Current account (RHS)
Industrial production
GDP


Percent, year-on-year Percent of GDP




CHAPTER 2. 2 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 114



FIGURE 2.2.5 External financing


Despite some easing in the first quarter of 2016, spreads remain elevated
among major borrowers in the region. Elevated bond repayments fall due
in 2016-18.


B. Bond repayments A. Emerging market sovereign bond
spreads


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 more
difficult and volatile, despite low bond yields and
generally loose monetary conditions in advanced
market economies, as greater risk aversion is
reflected 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) and
could precipitate disorderly adjustments, including
further fiscal deterioration, sharp exchange rate
depreciations, and financial system instability.
Financial strains and fiscal deterioration could lead
to further pro-cyclical policy tightening to
preserve 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 to
strengthen the overall policy framework.
Geopolitical concerns in Turkey may lead to a
sharp reduction in tourist arrivals, especially from
the Euro Area and Russia. Since the region
remains heavily dependent on trade, financial and
labor market ties with the Euro Area (World Bank
2016b), growth would disappoint in the event of
slower-than-anticipated Euro Area growth. On the
positive side, if as expected oil prices do not rise
significantly, 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 of
trade shock from the drop in oil prices, while
trying to sustain domestic demand, ensure
financial sector stability, and mitigate
vulnerabilities. The western part of the region is
seeing a windfall from lower fuel import costs, but
faces challenges in public expenditure
management and structural issues. A decline in the
working age share of the population underscores
the need to boost productivity.


The scope for countercyclical monetary policy is
limited in several commodity exporters, as they are
constrained by concerns about the exchange rate
and persistent or above-target inflation, leading to
pro-cyclical monetary tightening or maintenance
of 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 wealth
funds and reserves (Azerbaijan, Kazakhstan) are
scaling back their exchange market intervention in
support of depreciating currencies, which had led
to significant reserve losses.


0
5


10
15
20
25
30
35
40


Ru
ss


ia


Tu
rk


ey


Po
la


n
d


Uk
ra


in
e


Ka
z


ak
hs


ta
n


2016 2017 2018
US$, billions


0


1000


2000


3000


4000


5000


0


200


400


600


800


O
ct


-
14


De
c-


14
Fe


b-
15


Ap
r-


15
Ju


n-
15


Ju
l-1


5
Se


p-
15


No
v


-
15


Ja
n-


16
M


ar
-


16
M


ay
-


16


Russia
Turkey
Poland
Kazakhstan
Ukraine (RHS)


Basis points Basis points




EUROPE AND CENTRAL AS IA GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 115


Oil importing countries are benefiting from
reduced fuel import costs. Those with very
subdued inflation or deflation (Croatia, Poland,
Romania) have more room for maneuver, helped
by the accommodative monetary policy stance of
the European Central Bank. In Turkey, inflation
pressures 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 sound
macro-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 increasing
transparency (IMF 2015c, 2015d). Together with
efforts 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 of
government 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 for
many years and reserve funds are very large, such
as Azerbaijan, face challenges balancing pressures
for fiscal consolidation and stimulus, and may
need to pursue pro-cyclical tightening to stem
fiscal deterioration over the medium-term.


Oil importers are realizing fiscal savings, especially
those that are taking advantage of low energy
prices to implement subsidy reforms (Romania,
Ukraine). Still, many countries entered the period
of low commodity prices carrying substantial
structural fiscal deficits and elevated public debt
levels. Given limited fiscal space, they will need to
consolidate spending (Armenia, Georgia). Efforts


FIGURE 2.2.6 Monetary and fiscal policy


Over 40 percent of eastern commodity exporters have implemented pro-
cyclical 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.


B. General government debt A. Number of countries implementing
pro-cyclical monetary tightening


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 in
past 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 of
social support.


Structural reforms will be central to responding
effectively to the economic headwinds faced by the
region. Mounting evidence shows that structural
reforms play an important role in improving
resource allocation, boosting productivity and
raising long-term growth (Dabla-Noris, Ho and
Kyobe, 2016). Gains in EMDEs are largest from
enhancing the efficiency of the banking system,
facilitating capital market development, and
improving the business environment. For
example, firm-level data from 10 ECA EMDEs
suggest that reforms improving access to finance
for smaller, younger firms may increase
manufacturing productivity by 17 percent (Larrain
and Stumpner 2013). More generally, structural
reforms provide a boost to investor confidence,


0


1


2


3


4


5


EMDE ECA
commodity importers


EMDE ECA
commodity exporters


2014 2015 2016
Number of countries


0


10


20


30


40


50


EMDE ECA
commodity importers


EMDE ECA
commodity exporters


2014 2015 2016
Percent of GDP




CHAPTER 2. 2 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 116




2013 2014 2015e 2016f 2017f 2018f 2015e 2016f 2017f 2018f


EMDE ECA, GDPa 2.3 1.8 -0.1 1.2 2.5 2.8 0.0 -0.4 -0.1 0.0
EMDE ECA, GDP excl. Russia 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
Memo items: GDP


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


TABLE 2.2.1 Europe and Central Asia forecast summary


(Real GDP growth at market prices in percent, unless indicated otherwise)



Source: World Bank.


World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in
other Bank documents, even if basic assessments of countries’ prospects do not differ at any given moment in time.


a. 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.


(percentage point difference


from January 2016 projections)


and over time have substantial benefits through
improved allocation of resources and productivity.
The pull of the European Union is also helping to
incentivize reform efforts, especially in the western
parts of the region.


Structural reforms are needed if firms in the
tradeable goods sector are to benefit from the
relative price advantages associated with weaker
currencies. 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 role
in the economy. Key initiatives that would raise
productivity and growth in these countries include
privatization, trade liberalization, and the
promotion of foreign direct investment, especially
by multinationals that can facilitate integration
into supply chains, transfer technology, and
enable the transition towards higher value-added
exports (Mitra et al. 2016).




EUROPE AND CENTRAL AS IA GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 117




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


2013 2014 2015e 2016f 2017f 2018f 2015e 2016f 2017f 2018f


TABLE 2.2.2 Europe and Central Asia country forecastsa


(Real GDP growth at market prices in percent, unless indicated otherwise) (percentage point difference


from January 2016 projections)




Source: World Bank.


World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in


other Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time.


a. GDP at market prices and expenditure components are measured in constant 2010 U.S. dollars.






Recent developments


The Latin America and Caribbean (LAC) region is
expected to suffer a second consecutive year of
recession 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 the
three sub-regions (see Box 2.3.1). South America,
the largest sub-region, is expected to remain in
recession this year with output contracting 2.8
percent, significantly steeper than last year’s 1.9
percent drop. In contrast, Mexico and Central


America will see output continue to expand in
2016 at 2.7 percent, while the Caribbean will
grow 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 ongoing
macroeconomic adjustment in Argentina, have
weighed 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, with
metal and agricultural prices also declining, most
economies in the region will be held back by the
deterioration 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 bond
issuance and monetary policy rate increases,
particularly in South America. Moderating the
slowdown, the real depreciation of regional
currencies has improved the competiveness of
exports.


Note: The author of this section is Derek H. C. Chen, with
research 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 high-
income 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 sub-
region 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.


Latin America and the Caribbean is expected to face another year of weak economic performance due to
domestic challenges among the region’s largest economies, depressed commodity prices, and tighter regional
monetary conditions. Output is expected to shrink another 1.3 percent this year, after declining 0.7 percent in
2015, 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.




CHAPTER 2. 3 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 120



FIGURE 2.3.1 GDP growth: Latin America and the


Caribbean


The LAC region is expected to see another year of economic contraction in
2016, its first multi-year recession since the Latin American debt crisis in
1981-1983. Domestic challenges and the slump in commodity prices have


weighed on growth, especially among South American economies.


B. Sub-regional real GDP growth, 2014


-2016e


A. Regional real GDP growth, 1980-


2016e


Source: World Bank.
Note: e = estimated. GDP weighted average.


Amid market concerns about global prospects and
possible further increases in U.S. interest rates,
investor risk aversion has increased. Within the
region, this aversion has been compounded by
domestic political uncertainty, weak regional
economic activity, and the renewed decline in
commodity 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 the
year. 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 and
nominal terms (Figure 2.3.2). At the same time,
international bond issuance from LAC slumped
61 percent (year-on-year) in 2015Q4, amounting


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 bond
spreads 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.


C. Real effective exchange rates A. Exchange rates against U.S. dollar


D. Selected countries: Sovereign bond spreads


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.


F. LAC bond issuance E. Selected countries: Sovereign bond spreads


0


30


60


90


120


20
13


20
14


20
15


20
15


Q
1


20
15


Q
2


20
15


Q
3


20
15


Q
4


20
16


Q
1


US$, billions


0


200


400


600


800


Ja
n


-
15


M
ar


-
15


M
a


y-
15


Ju
l-1


5


Se
p-


15


N
ov


-
15


Ja
n


-
16


M
ar


-
16


M
a


y-
16


Brazil Dominican Rep.
Colombia Peru
Mexico


Basis points


B. Selected countries: Exchange rates against


U.S. dollar


0


7


-4


-2


0


2


4


6


8


19
80


19
83


19
86


19
89


19
92


19
95


19
98


20
01


20
04


20
07


20
10


20
13


20
16


Multi-year recession Actual Estimated
Percent


-30


-20


-10


0


10


South America Mexico & Central
America, and


Caribbean


2014 2015 YTD 2016
Percent change


-40


-20


0


20


Ar
ge


nt
in


a


Ur
u


gu
a


y


M
e


xic
o


Ho
n


du
ra


s


Gu
a


te
m


a
la


Pe
ru


Do
m


in
ica


n
Re


p.


Ch
ile


Co
lo


m
bi


a


Br
a


zil


2014 2015 YTD 2016
Percent change


-20


-10


0


10


South America Mexico & Central
America, and


Caribbean


2014 2015 YTD 2016
Percent change


0


1000


2000


3000


4000


5000


Ja
n


-
15


M
ar


-
15


M
a


y-
15


Ju
l-1


5


Se
p-


15


No
v-


15


Ja
n


-
16


M
ar


-
16


M
a


y-
16


Belize Ecuador Venezuela, RB
Basis points


-3


-1


1


3


5


LAC South
America


Mexico &
Central
America


Caribbean


2014 2015 2016e
Percent




LAT IN AMERICA AND THE CARIBBEAN GLOBAL ECONOMIC PROSPECTS | JULY 2 016 121












BOX 2.3.1 Sub-regional divergence in Latin America and the Caribbean


In 2015, Latin America and the Caribbean saw its first


contraction 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 in


2015. However, there is substantial heterogeneity among


the three sub-regions.


In South America, a region of major hydrocarbon and


metal 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 process
against the president. The substantial depreciation


against the U.S. dollar of over 30 percent in 2015 and


the removal of energy subsidies have lifted inflation to


around 10 percent. To re-anchor inflation
expectations, the central bank has maintained its tight


monetary policy stance, despite contracting output,


and the one-year ahead inflation expectations are


coming back into the target range. High inflation and
rising unemployment have eroded real incomes and


weighed 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 multi-


fold in 2016. Public finances have deteriorated


sharply with the collapse of oil prices and reduced oil
production, despite some measures to contain


spending pressures, including a 6000 percent increase


in domestic gasoline pump prices, which is still


heavily subsidized. Even with the introduction of a
two-tier exchange rate system, foreign reserves have


fallen 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, a
widening fiscal deficit, severe import controls and


restricted access to international capital markets. The


new Macri administration has employed a series of


policy measures to reduce economic distortions and
set 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 floating
exchange rate, and cut energy and transport subsidies.


While these policy adjustments should serve to


strengthen the Argentine economy in the medium


and long-term, economic activity will be subdued in
the short-term, with a modest contraction in 2016.


• Other countries in South America (virtually all


commodity 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 to


above-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, growth


among 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 a


moderate rate in the Mexico and Central America sub-


region, largely owing to its close economic ties with a
steadily growing United States, competitiveness gains from


real depreciation, and consumption supported by rising


real incomes amid falling unemployment rates and


inflation. In Mexico, excess capacity and lower oil prices
have led to lower inflation rates, aided by some


improvements brought by the telecom reform. The sub-


region has been weighed down by commodity prices and
worsening terms-of-trade, although to a lesser extent than


South America. Despite being an oil exporter, Mexico’s


exports are largely diversified away from primary


commodities. 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, low


inflation and strong U.S. demand, other countries in
Central 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


2The second tier DICOM exchange rate is still heavily managed, being
valued at about one-third of the parallel exchange rate in May 2016.




CHAPTER 2. 3 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 122




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.


The Caribbean also enjoys close ties to the United States


in terms of trade, investment and tourism. With the
United States steadily growing in 2015, Caribbean tourism


growth was robust, with international visits increasing 7


percent (7.5 percent in the Dominican Republic, the


Caribbean’s largest tourist destination). Tourism


expenditures also increased 4.2 percent (EIU 2016a). This


has resulted in robust growth of more than 3 percent in
2015 at the sub-regional level. However, there was some


degree of heterogeneity among Caribbean economies.


Poor weather conditions in Belize and Haiti have taken a


toll on agricultural production, contributing to a
significant slowdown in overall growth in 2015. In


contrast, a post-drought rebound in agricultural


production supported growth in Jamaica, along with an


increase in tourism growth and a recovery in the
manufacturing sector.




FIGURE 2.3.3 Export growth and current account


balances


Exports expanded in a number of countries in 2015, supported by weak
exchange rates. Weighed down by low commodity prices and reduced
export revenues, current account deficits widened in South America and


Central America.


B. Selected countries: Growth of total


export volumes


A. Regional exports: Growth of total


export volumes


D. Selected countries: Current


account balances


C. Regional current account balances


Sources: International Monetary Fund, World Economic Outlook; Haver Analytics.
A. C. GDP weighted average.


-2


0


2


4


6
8


10


LAC Region South
America


Mexico &
Central
America


Caribbean


2014 2015
Percent, year-on-year


-10


-5


0


5


10


M
ex


ico


Br
a


zil


G
ua


te
m


a
la


Pe
ru


Ho
nd


u
ra


s


Do
m


in
ica


n
R


ep
.


C
ol


om
bi


a


Ch
ile


Ar
ge


nt
in


a


Co
st


a


Ri
ca


2014 2015Percent, year-on-year


-5


-4


-2


LAC Region South
America


Mexico &
Central
America


Caribbean


2014 2015Percent of GDP


-8
-6
-4
-2
0
2


Co
lo


m
bi


a


Pe
ru


Br
az


il
Ec


ua
do


r


Ar
ge


n
tin


a


El


Sa
lva


do
r


M
e


xic
o


C
os


ta


Ri
ca


Do
m


in
ica


n


Re
p.


G
u


at
em


al
a


2014 2015Percent of GDP


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.


overall volume of issuance at the regional level last
year. 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 across
the 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 the
region’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 and
the closing of the Intel chip manufacturing plant
in 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 to only $8.4 billion, the lowest level since mid-


2009, at the height of the global financial crisis
(EIU 2016b). This large reduction is in part
because Brazil has been absent from international
bond markets until March 2016, reducing the


BOX 2.3.1 Sub-regional divergence in Latin America and the Caribbean (continued)




LAT IN AMERICA AND THE CARIBBEAN GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 123




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 most
countries 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 of
commodity importers and hence lower import
costs, 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 to
hike 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 the
exception, 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


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.


B. Selected countries: Headline inflation A. Regional headline inflation C. Selected countries: Core inflation


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.




F. Central bank policy rates in Mexico, Central


America and the Caribbean
E. Central bank policy rates in South America


0


4


8


12


16


20


LAC Region South
America


Mexico &
Central
America


Caribbean


2014 2015
Percent, year-on-year


D. Regional policy rates


-4


0


4


8


12


Br
a


zil


Co
lo


m
bia


Pa
ra


gu
ay


Ch
ile


Pe
ru


G
ua


te
m


al
a


Ja
m


aic
a


M
ex


ico


Do
m


in
ica


n


Re
p.


Co
st


a
Ri


ca


Headline 2015
Headline YTD 2016
Upper & lower inflation targets


Percent, year-on-year


-2


2


6


10


Br
a


zil


Co
lo


m
bia


Pa
ra


gu
a


y


Ch
ile


Pe
ru


G
ua


te
m


ala


N
ica


ra
gu


a


M
ex


ico


Do
m


in
ica


n


Re
p.


Co
st


a
Ri


ca


Core 2015 Core YTD 2016
Percent, year-on-year


2


4


6


8


10


12


Ja
n


-
14


Ju
n


-
14


No
v-


14


Ap
r-


15


Se
p-


15


Fe
b-


16


South America
Mexico, Central America & Caribbean


Percent


0


4


8


12


16


2


4


6


8


10


Ja
n


-
14


M
a


y-
14


Se
p-


14


Ja
n


-
15


M
a


y-
15


Se
p-


15


Ja
n


-
16


M
a


y-
16


Percent Chile Colombia
Paraguay Peru
Brazil (RHS)


Percent


0


2


4


6


8


10


Ja
n


-
14


M
a


y-
14


Se
p-


14


Ja
n


-
15


M
a


y-
15


Se
p-


15


Ja
n


-
16


M
a


y-
16


Percent Mexico Costa Rica
Dominican Rep. Guatemala
Honduras




CHAPTER 2. 3 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 124




(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 were
distinct differences among the sub-regions. South
America, 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 to
support growth (Bolivia, Peru). In contrast, fiscal
deficits in the Mexico and Central America sub-
region, 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 the
deteriorating fiscal position, the Mexican
authorities implemented budget cuts for 2016,
amounting to 2 percent of GDP.


Outlook


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 and
domestic political uncertainty moderating. Also,
the baseline assumes that the use of expansionary
fiscal policies will be limited, reflecting lower
commodity prices, lower fiscal revenues, and
widening fiscal deficits. Fiscal consolidation across
the region will weigh on growth. However, there
are contrasting paths among the three sub-regions.
Underpinning the regional outlook, South
America, after two years of recession, is projected
to have a mild recovery in 2017 followed by a
gradual 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 and
2018.


Brazil’s outlook continues to be challenging. The
continuing contraction in 2016 expected to carry
over into 2017, amid attempts at policy
tightening, rising unemployment, and shrinking
real incomes (Table 2.3.2). If political
uncertainties 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 the
adverse effects, the substantially depreciated real is
likely to continue boosting net exports in the short
-term.


As a result of ongoing macroeconomic
adjustments and structural reforms, activity in
Argentina is projected to be in a modest recession
in 2016, before picking up on a firmer basis in
2017-18. Capital inflows are expected to
strengthen from 2016-17, following a formal exit
from technical debt default and regained access to
international debt markets, and a return of
investor confidence. Net exports will be helped by
a significantly weaker Argentine peso. The recent


FIGURE 2.3.5 Fiscal indicators


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.


B. Selected countries: Central


government fiscal balances
A. Regional general government fiscal


balances


D. Selected countries: Gross public


debt


C. Regional gross public debt


Sources: International Monetary Fund, World Economic Outlook; Haver Analytics.
A.C. GDP weighted average.


-10


-8


-6


-4


-2


0


LAC Region South
America


Mexico &
Central
America


Caribbean


2014 2015Percent of GDP


-8


-6


-4


-2


0


2


Br
az


il


C
hil


e


Co
lo


m
bi


a


Ec
u


ad
or


Gu
at


e
m


al
a


M
ex


ico


U
ru


gu
a


y


2013 2014 2015Percent of GDP


-8.7


45


50


55


60


65


LAC Region South
America


Mexico &
Central
America


Caribbean


2014 2015Percent of GDP


0


10


20


30


40


50


Br
az


il


M
e


xic
o


Ch
ile


C
olo


m
bi


a


Ec
u


ad
or


El


Sa
lv


ad
or


2013 2014 2015Percent of GDP




LAT IN AMERICA AND THE CARIBBEAN GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 125


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 to
weigh on the outlook.


The economic downturn in the República
Bolivariana de Venezuela has yet to bottom out,
with continuing macroeconomic imbalances and
elevated 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 of
sovereign bonds maturing this year and even more
in 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 to
continue contributing to inflationary pressures,
weighing on output.4


Elsewhere in South America, once commodity
prices stabilize, generally sound economic
fundamentals will continue to underpin growth in
Chile, Colombia, and Peru. However, the outlook
for these three countries will be weighed down by
relatively 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 that
will be met to varying degrees by production and
investment adjustments. Oil output in Colombia
is expected to dip in the medium term, owing to a
lack 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 by
enhanced security due to the expected internal
peace agreement.


Chile, the world’s largest producer of copper, has
either 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 and
water, copper production has been surging in Peru
with the recent opening of the Las Bambas mine
and expansion of existing mines, despite low
copper prices. Capacity will be expanding in the
medium term with investment in new mines and
further development of current mines, lifting
Peru’s near-term outlook. Ecuador is projected to
experience a sharp contraction in the near term,
reflecting low oil prices, loss of export
competitiveness due to the strong U.S. dollar, and
scarce 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 and
Central America sub-region is more closely linked
to the U.S. economy for trade, investment, and
remittance 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 the
real depreciation of local currencies spurs net
exports and the U.S. economy continues to
expand. Household consumption is expected to
continue picking up, as real incomes are supported


FIGURE 2.3.6 Regional outlook


The region as a whole is expected to rebound in 2017, with growth
strengthening to 2.1 percent in 2018, as domestic policy uncertainty
moderates, commodity prices stabilize and weakened exchange rates


support exports.


B. Prices of key commodity exports A. GDP growth


Source: World Bank.
Note: e=estimated; f=forecast.


-4


-2


0


2


4


LAC South
America


Mexico &
Central
America


Caribbean


2015 2016e 2017f 2018fPercent


-60
-45
-30
-15


0
15
30


Cr
u


de


o
il


So
yb


ea
ns


W
he


a
t


Iro
n



o


re


C
o


pp
er


G
o


ld


2015 2016e 2017f 2018f
Percent change, year-on-year


4A new amendment to the law governing the Central Bank passed
by the National Assembly in 2009 allows the Central Bank to
purchase bonds issued by PDVSA, thus bridging PDVSA’s deficit in


domestic currency. The continuous financing of PDVSA has been
one of the main causes of the expansion in the monetary base in
recent years and has led to a considerable increase in the amount of
money in circulation (liquidity) in the economy (Vera 2015).




CHAPTER 2. 3 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 126




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 normalization
from a bumper year in 2015. Major tourism-
associated construction is winding down, and a
number of Caribbean economies are pursuing
fiscal consolidation to strengthen public finances
and lower heavy public-debt burdens. While there
is a substantial downside risk posed by the Zika
virus outbreak, tourism is expected to continue to
expand and support growth.6 Fiscal consolidation
in several countries (Dominican Republic, most
OECS economies) will weigh on growth in the
medium-term.


In particular, the opening of Cuba presents
tourists from the U.S. with an additional


destination within the Caribbean. Total tourist
arrivals in Cuba have already been surging, with
January 2016 arrivals jumping 12.7 percent (year-
on-year) Tourist arrivals from the United States
jumped 77 percent in 2015, albeit from a low
base, a figure that excludes the hundreds of
thousands 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 (Romeu
2014), leading to increased employment creation
and growth (Garsous, Novoa, and Velasco 2015;
Castillo et al. 2015).


Risks


The balance of risks to the regional outlook is
markedly tilted to the downside for a number of
reasons. First, the baseline outlook for the region
assumes that commodity prices will stabilize
around current prices in the medium term. Should
commodity prices drop further, the terms-of-trade
of 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 of
external 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 additional
risk that they may spill over to other countries in
the region. In particular, negative growth shocks


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 of
debt maturing swells in 2017, exerting additional financing pressures.


B. LAC-issued bond redemption A. Total external debt


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.


0


20


40


60


80


20
14


20
15


20
14


20
15


20
14


20
15


20
14


20
15


20
14


20
15


20
14


20
15


20
14


20
15


20
14


20
15


ARG CHL BRA COL CRI MEX PER URY


Long-term domestic currency
Short-term domestic currency
Long-term foreign currency
Short-term foreign currency


Percent of GDP


5For example, the end of 2015 saw further progress in energy
reform with the successful completion of the first of three public
tenders for oil exploration, paving the way for more investments in


the 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).


0


25


50


75


100


20
15


20
16


20
17


20
18


20
19


20
20


20
21


20
22


20
23


20
24


Argentina Brazil
Chile Colombia
Mexico Peru
Venezuela, RB Others


US$, billions




LAT IN AMERICA AND THE CARIBBEAN GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 127


from Brazil can lead to statistically significant
declines in growth for Argentina, Chile,
Colombia, Ecuador, Paraguay, and Peru (World
Bank 2016b).


Fourth, the Zika virus has spread rapidly across
Latin 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. The near-term
economic costs associated with the virus could be
considerable this year, especially if the mosquito-
borne illness is not quickly contained (World
Bank 2016j). However, the estimated economic
impact across the region is modest, but could be
larger 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 growth
across the region. Moreover, in a number of LAC
countries, low fiscal buffers limit the use of
counter-cyclical fiscal policy. In addition, some
economies, especially those in South America, are
also facing above-target inflation, limiting the
capacity for counter-cyclical monetary policy.
More importantly, given that commodity prices
are projected to stabilize at current low prices, and
global growth is expected to remain tepid in the
medium 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, countercyclical
policies to support growth, leading to a build-up
of debt and a narrowing of fiscal space. For many
countries, these policies were not fully unwound
in the post-crisis years (World Bank 2015c). Amid


the extended decline in commodity prices and the
slowdown in economic activity, fiscal balances
have therefore further worsened in a number of
countries.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). Novel
approaches 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 to
trim 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 to
minimize adverse effects on growth, poverty, and
income distribution will be important. Options
include consolidating social assistance programs
and improving targeting, enhancing access of low-
income families to education and health services,
expanding coverage of the Personal Income Tax,
and pension reform by increasing the retirement
age (IMF 2014).


Given that commodity prices are expected to
stabilize around the current low levels in the
medium term (World Bank 2016k), the ability of
the region to boost economic growth in the
medium and long-term will increasingly hinge on
diversifying the economy and improving the
competitiveness of other sectors through
productivity improvements, so as to achieve a
broader export base.


In support of the economic diversification agenda,
governments could focus on the reduction of labor
market rigidities and the retraining of workers.
This would facilitate the transition of labor away
from sunset industries towards blooming ones (de
la Torre et al. 2015).


Productivity growth in LAC has been muted for
the 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 (Carneiro
and 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).




CHAPTER 2. 3 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 128


between Latin America economies and the United
States widened from 1980 to 2011 (OECD, UN
and CAF 2014). Slowing productivity growth was
a 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 from
grooming a sufficiently-skilled and appropriately-
trained labor force, and investing in a modern and
accessible information and communications, and
energy and transport infrastructure, governments
could encourage firms to invest in R&D and other
productivity enhancing investments. Recent
investment projects in LAC have already resulted
in productivity improvements in a wide range of
sectors.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, and


Ponticelli 2016). In Uruguay, ICT investments have boosted
productivity in the service and manufacturing sectors (Aboal and
Tacsir 2015).


FIGURE 2.3.8 Total factor productivity growth and


infrastructure 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 and
accessible infrastructure is the ease of obtaining electricity, where a
number of LAC economies rank poorly.


B. Ease of obtaining electricity A. Total factor productivity growth


Source: World Bank.
A. LAC is the Latin America the Caribbean region; EAP is the East Asia and Pacific region.


-2


0


2


4


2003-08 2010-12 2013-14


LAC EAP
Percent


0


40


80


120


160


Gu
a


te
m


al
a


Br
a


zil
Co


s
ta



R


ic
a


Ur
u


gu
ay


Ch
ile


Pe
ru


Co
lo


m
bi


a
M


e
xi


co
LA


C
Av


er
a


ge
Ja


m
a


ic
a


Ar
ge


n
tin


a
N


ic
a


ra
gu


a
Ec


ua
do


r
B


ol
ivi


a
El



Sa


lva
do


r
H


a
iti


Ho
n


du
ra


s
D


o
m


in
ica


n


R
e


p.
Ve


n
e


zu
e


la
,



R


B


Ranking




LAT IN AMERICA AND THE CARIBBEAN GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 129





(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
EMDE LAC, GDPa 2.9 1.0 -0.7 -1.3 1.2 2.1 0.2 -1.3 -0.9 -0.3


(Average including countries with full national accounts and balance of payments data only)b
EMDE LAC, GDPb 2.9 1.0 -0.7 -1.3 1.2 2.1 0.2 -1.3 -0.9 -0.3
GDP per capita (U.S. dollars) 1.7 -0.1 -1.8 -2.4 0.1 1.0 0.2 -1.3 -0.9 -0.4
PPP GDP 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, GNFSc 2.8 -0.2 -3.0 -0.9 1.2 3.8 0.2 -1.5 -1.0 0.4
Net exports, contribution to growth -0.3 0.4 1.3 1.0 0.7 0.3 0.1 0.3 0.2 -0.1
Memo items: GDP


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
Caribbeanf 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


TABLE 2.3.1 Latin America and the Caribbean forecast summary



Source: World Bank.


World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in
other Bank documents, even if basic assessments of countries’ prospects do not differ at any given moment in time.


a. 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.




CHAPTER 2. 3 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 130




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


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


Guyana 5.2 3.8 3.0 4.0 3.9 3.8 -0.5 0.2 -0.1 -0.2


TABLE 2.3.2 Latin America and the Caribbean country forecastsa


(Real GDP growth at market prices in percent, unless indicated otherwise)
(percentage point difference


from January 2016 projections)



Source: World Bank.


World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in
other Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time.


a. GDP 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




Recent developments


Growth in the Middle East and North Africa was
an estimated 2.6 percent in 2015, slightly weaker
than the already subdued rate of 2.9 percent in
2014 (Tables 2.4.1 and 2.4.2, and Figure 2.4.1).1
Performance diverged in oil-exporting and oil-
importing country groups, with 2015 activity
slowing in exporters and strengthening in
importers from the previous year. Low oil prices
and ongoing conflict in the region are holding
back growth.


In oil-importing countries, growth reached 3.3
percent in 2015. Strong public investment and
resilient 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


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 and
security challenges, continued spillovers from
external conflicts slowed growth in these two
countries 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, and
with reserves hovering around just three months of
imports, the central bank devalued the currency by
14 percent in March 2016 and announced that it
would adopt a more flexible exchange rate policy


Note: The author of this section is Dana Vorisek. Research assis-
tance 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 Arab
Emirates—to the developing MENA grouping. All GCC countries
are oil exporters. Other oil exporters are Algeria, the Islamic Republic
of Iran, Iraq, and Libya. Oil importers in the region are Djibouti,


Egypt, Jordan, Lebanon, Morocco, Tunisia, and West Bank and
Gaza. The Syrian Arab Republic and the Republic of Yemen are
excluded from regional growth aggregates due to data limitations.


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 are
major 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 Iran
following the lifting of sanctions in January 2016. Growth in most other oil-exporting countries, including most
Gulf 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 are
tilted to the downside and include further declines in oil prices, the escalation of conflict in some countries, and
fragile 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.




CHAPTER 2. 4 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 132



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 the


lifting of most sanctions in January is benefiting the domestic economy but
is occurring in an environment of already high supply, including in other
producers in the region.


B. GDP growth A. Oil production in five largest pro-
ducers in MENA


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 to
limit the impact of higher import prices on
inflation, which had moderated in the previous
months but was still elevated, at 9 percent (year-
on-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 and
growth expectations for 2016 led the central bank
to lower interest rates in March. In some oil-
importing countries (Lebanon, Morocco), low
global energy prices reduced the cost of imports in
2015, narrowing current account deficits,
although Lebanon’s deficit remains very large, at
an 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 the
remittances to other North African countries are
denominated (World Bank 2016f).


Though the extended period of low oil prices has
not been followed by a significant boost to growth
in oil-importing countries in the region, it has


allowed several countries to adjust policy to
contain 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 to
fiscal 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, and
are financed by a combination of domestic and
international borrowing, including concessional
loans from international financial institutions
(Jordan, Morocco, Tunisia). Budget shortfalls are
contributing 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, and
rose to 15.4 percent in Tunisia in the fourth
quarter, continuing an upward trend underway
since mid-2014. Unemployment in the West
Bank and Gaza is also persistently high, at 26
percent. In Egypt, however, unemployment fell
slightly 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 of
recession in 2015, despite low oil prices. In most
other oil-exporting countries, the steep decline in
oil prices translated into 2015 growth rates that
were below the 2000–13 average. In the Islamic
Republic of Iran, the combination of low oil prices
and uncertainty surrounding the timeline for the
lifting of sanctions slowed growth significantly.


With fiscal and export revenues in most oil-
exporting 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


7.5
8.0


8.5


9.0
9.5


10.0


10.5


2.0
2.5


3.0


3.5
4.0


4.5


5.0


Ja
n-


10


Ja
n-


11


Ja
n-


12


Ja
n-


13


Ja
n-


14


Ja
n-


15


Ja
n-


16


Iran, Islamic Rep. Iraq
Kuwait UAE
Saudi Arabia (RHS)


Million barrels per day Million barrels per day


0


1


2


3


4


5


MENA Oil
importers


Oil
exporters


2014 2015 2000-13Percent




M IDDLE EAS T AND NORTH AFRICA GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 133



FIGURE 2.4.2 Macroeconomic conditions in


oil-importing countries


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 to


persistent deflation in Jordan and Lebanon. Fiscal and current account
deficits are significant, and in some countries worsening, despite the
extended period of low-priced oil imports. Budget shortfalls are
contributing to already very high public debt in Egypt, Jordan, and,
especially, Lebanon.


B. Inflation A. Exchange rate and foreign reserves
in Egypt


D. Government debt C. Fiscal and current account
balances


Sources: Haver Analytics; International Monetary Fund, World Economic Outlook database; Moody’s;
World Bank.


balances the government budget) in 2015,
particularly in Libya, Bahrain, and Saudi Arabia.
As a result, fiscal positions have worsened, with
large 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 in
current account balances. Algeria, Iraq, and
Oman, and even more so Libya, face especially
large twin deficits. In GCC countries and in
Algeria, public assets (foreign reserves and
sovereign wealth funds) have been drawn down to
finance 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 bond
issuance in 2016.


Budget adjustment in oil exporters is underway,
predominantly through cuts in infrastructure
spending, fuel and utility subsidies, and
government 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, other
indications 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 since
receded, but in Saudi Arabia and Bahrain they
remain elevated compared to levels of the past 12
months.


In contrast to high and rising inflation in most
emerging 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 of
these countries have kept nominal exchange rates
stable. However, low oil prices, together with an
appreciated 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


Algeria, Iraq, and Saudi Arabia) to defend pegs or
to support budget overruns. With limited
monetary autonomy, central banks in Bahrain,
Kuwait, Saudi Arabia, and the United Arab
Emirates followed the U.S. Federal Reserve’s
December 2015 interest rate hike, despite their
soft 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.


2Among oil-exporting countries in the region, Kuwait pegs its
dinar to an undisclosed basket of currencies, while other GCC coun-
tries and Iraq maintain conventional pegs against the U.S. dollar.


0


2


4


6


8


105


6


7


8


9


10


Ja
n


-
10


Ju
l-1


0
Ja


n
-


11
Ju


l-1
1


Ja
n


-
12


Ju
l-1


2
Ja


n
-


13
Ju


l-1
3


Ja
n


-
14


Ju
l-1


4
Ja


n
-


15
Ju


l-1
5


Ja
n


-
16


Exchange rate
Reserves (RHS)


Egyptian pounds per US$ Months of imports


-5


0


5


10


15


Ja
n-


13
Ap


r-
13


Ju
l-1


3
O


ct
-


13
Ja


n-
14


Ap
r-


14
Ju


l-1
4


O
ct


-
14


Ja
n-


15
Ap


r-
15


Ju
l-1


5
O


ct
-


15
Ja


n-
16


Ap
r-


16


Egypt Jordan Lebanon
Morocco Tunisia


Percent, year-on-year


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


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


20
14


20
15


20
14


20
15


20
14


20
15


20
14


20
15


20
14


20
15


Egypt Jordan LebanonMorocco Tunisia


Fiscal balance (LHS)
Current account balance


Percent of GDP Percent of GDP


0


10


20


30


40


50


0


30


60


90


120


150


20
14


20
16


20
14


20
16


20
14


20
16


20
14


20
16


20
14


20
16


Egypt Jordan LebanonMorocco Tunisia


Debt (LHS)
Interest on debt/revenue


Percent of GDP Percent




CHAPTER 2. 4 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 134



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 by


receding 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.


B. Fiscal and current account


balances, other oil-exporting


countries


A. Fiscal and current account


balances, GCC countries


D. Foreign reserves C. Inflation


Sources: International Monetary Fund (IMF), World Economic Outlook database; Haver Analytics;
Bloomberg; Kuwait Central Statistical Bureau; IMF International Financial Statistics database; World


Bank.
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 months


of 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 for
Kuwait and Oman and March 2016 for Qatar, Saudi Arabia, and United Arab Emirates.


Outlook


The 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 path
for 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 price
will rise to $50 in 2017 and $53 in 2018. Other
assumptions are that there is no further worsening
of negative spillovers from the conflict in Syria;
that the security situation in Iraq will continue to
improve slowly in 2016; and that Libya’s political
agreement will be endorsed by the internationally-


recognized parliament in the east of the country
and that the new government established under
the agreement will take office. In addition, growth
in the Euro Area, a major trading partner of
several countries in the region, is expected to
remain steady but modest in 2016–18. Given that
oil 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.


The main reason for the slight improvement in
regional growth in 2016 is stronger activity in the
Islamic Republic of Iran, the region’s second-
largest 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 in
regaining territory from ISIS, notwithstanding
supply disruptions early in the year.


Excluding the Islamic Republic of Iran, growth in
oil-exporting countries in the region will be
somewhat 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 in
2016. Growth in these countries is forecast to fall
from 2.9 percent in 2015 to 2.0 percent this year,
the slowest pace since 2009. In Algeria, the
coming 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 faster
pace than in 2015.


For oil-importing countries, a lower aggregate
forecast for 2016 is due to slowing growth in the
largest economy, Egypt, where expected growth of
3.3 percent in FY2015/16 is well below the
authorities’ target of 5 percent. The weakness is
due to a sharp downturn in tourism since October
2015, softening business sentiment, and the
foreign currency shortage that plagued the
economy 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.


-30
-20
-10
0
10
20
30
40


-30
-20
-10


0
10
20
30
40


20
14


20
15


20
14


20
15


20
14


20
15


20
14


20
15


20
14


20
15


20
14


20
15


BahrainKuwait Oman Qatar Saudi
Arabia


UAE


Fiscal balance (LHS)
Current account balance


Percent of GDP Percent of GDP


-20
-15
-10
-5
0
5


-20
-15
-10
-5
0
5


20
14


20
15


20
14


20
15


20
14


20
15


Algeria Iran,
Islamic Rep.


Iraq


Fiscal balance (LHS)
Current account balance


Percent of GDP Percent of GDP


-1


1


3


5


7


9


Ja
n-


13
Ap


r-
13


Ju
l-1


3
O


ct
-


13
Ja


n-
14


Ap
r-


14
Ju


l-1
4


O
ct


-
14


Ja
n-


15
Ap


r-
15


Ju
l-1


5
O


ct
-


15
Ja


n-
16


Ap
r-


16


GCC
Iraq
Algeria
Other EMDE energy exporters


Percent, year-on-year


0
100
200
300
400
500
600
700


0


20


40


60


80


100


Ku
w


ai
t


O
m


a
n


Qa
ta


r


U
AE


Sa
ud


i
Ar


ab
ia


(R
HS


)


2015H1average
2015H2 average
Latest month


US$, billions US$, billions


+39%
-6%


-11%


+11%
-16%




M IDDLE EAS T AND NORTH AFRICA GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 135



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 growth
is expected to remain below the 2000-13 pace for the duration of the forecast period.


B. Purchasing managers indexes A. GDP growth C. Oil price outlook


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 price
competitiveness of Egypt’s exports, however. In
Morocco, a significant contraction in agricultural
output in the early part of the year due to a
drought 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) and
subsiding 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 reduction
in outward remittances from GCC countries in
2017 and 2018 will impact some oil-importing
countries in the region (World Bank 2016f).


Procyclical fiscal consolidation is underway in
most oil-exporting countries. Public expenditure
cuts of 14 percent in Saudi Arabia, 11 percent in
Oman, 9 percent in Algeria, 8 percent in Iraq, and
smaller amounts in Kuwait, Qatar, and the United
Arab Emirates have been outlined in 2016
budgets. Energy subsidy reforms were
implemented in all GCC countries in 2015 or
early 2016, and have begun to be put into effect in
Algeria. Modest efforts to expand revenue have
also been implemented, including raising


corporate and consumption taxes, but in the short
term will not make up for large revenue losses in
2015 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 beginning
of 2018 was announced in March. Increasingly,
governments will rely on domestic and
international debt issuance to finance deficits, and
in 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 in
tandem with any rate increase in the United
States. Central banks in the GCC and Iraq remain
committed to their longstanding currency pegs,
despite pressure on forward exchange rates in
some 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 end
of 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 manufacturing
industries (Ianchovichina, Devarajan, and Lakatos


0


1


2


3


4


5


MENA Oil
importers


Oil
exporters
excl. Iran


Iran,
Islamic
Rep.


2015 2016 2017 2018 2000-13Percent


35


40


45


50


55


60


65


Ja
n


-
10


Ju
l-1


0
Ja


n
-


11
Ju


l-1
1


Ja
n


-
12


Ju
l-1


2
Ja


n
-


13
Ju


l-1
3


Ja
n


-
14


Ju
l-1


4
Ja


n
-


15
Ju


l-1
5


Ja
n


-
16


Egypt
Lebanon
Saudi Arabia
United Arab Emirates


Composite PMI, >50 = expansion


20


40


60


80


100


120


20
00


20
02


20
04


20
06


20
08


20
10


20
12


20
14


20
16


20
18


Average annual price
Forecasted price
Average monthly price, 2000M1-2014M6


US$ per barrel




CHAPTER 2. 4 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 136



FIGURE 2.4.5 Policy outlook in oil-exporting countries


Public expenditure cuts are being implemented in response to the
prolonged period of low oil prices, but will not be enough to offset large
declines in public revenues in the near term. Budget sustainability will


remain a challenge in the forecast period. Central banks intend to maintain
exchange 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 and


spot exchange rates in GCC countries


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.


Risks


Risks to the growth outlook for the Middle East
and 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 a
trough 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; further
pressure on exchange rate pegs; and, in Bahrain,
Iraq, and Libya, set the stage for a rise in
government debt beyond already high levels.5 In
addition, low oil prices have the potential to
generate negative feedback effects through the
financial sector. In Saudi Arabia, low growth of oil
prices and nonoil private sector GDP are found to
be associated with nonperforming loan ratios and
lower 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, these
conflicts have resulted in significant loss of human
and physical capital in domestic, and neighboring,
economies (Devarajan and Mottaghi 2016). Some
estimates indicate that direct and indirect losses of
the war in Syria and the advance of ISIS had been
a 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 and
Ivanos 2016). In Yemen, infrastructure and public
service delivery damage from conflict in four cities
between March and October 2015 is estimated to
have been $4.1 to 5 billion (World Bank 2016m),
approximately 13 percent of Yemen’s GDP as of


2016). There is also potential to exploit large,
untapped natural gas reserves, although this is
contingent upon significant investment in the
sector and improvement in the domestic business
and 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 oil-
producing countries, including those in the
Middle East. Moreover, higher Iranian oil output
will occur as other developments, including an
announcement by Saudi Arabia in May to increase
production in 2016 and the mid-April collapse of
a draft agreement among major oil exporters to
freeze production at January 2016 levels, may put
downward pressure on prices. The impacts of the
Islamic Republic of Iran’s reintegration into the
global economy through trade channels are more
challenging to assess, but exports from the
European Union to the Islamic Republic of Iran,
for instance, stand to approximately double if they
rebound to the levels seen prior to the tightening
of sanctions in 2012.4 Countries neighboring Iran
may benefit from increased trade links and travel.


-350


-250


-150


-50


50


150


250


350


-160


-120


-80


-40


0


40


80


120


160
US$, billions US$, billions


DZA KWTIRQ
(RHS)
SAU QATOMN ARE


Revenue


Expenditure


20
14


20
15


20
16


e


-100


500


1100


1700
4/


2/
20


14


7/
2/


20
14


10
/2


/2
01


4


1/
2/


20
15


4/
2/


20
15


7/
2/


20
15


10
/2


/2
01


5


1/
2/


20
16


4/
2/


20
16


Bahrain
Kuwait
Oman
Qatar
Saudi Arabia
United Arab Emirates


Forward points


5In Bahrain, government debt in 2015 was already above the 60
percent threshold stipulated by the future GCC monetary union, and
is expected to rise to approximately more than 80 percent in 2016


and significantly higher in the medium term.


4A positive effect for the European Union (EU) is consistent with
the findings of Ianchovichina, Devarajan, and Lakatos (2016), which
finds that the EU’s economic output would increase following the


removal of sanctions on the Islamic Republic of Iran.





M IDDLE EAS T AND NORTH AFRICA GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 137


FIGURE 2.4.6 Risks


Major terrorist attacks in the region over the past year have been followed
by sharp contractions in tourist arrivals and value added in the hotels and
restaurants sector. Internal conflict risk in the Middle East and North Africa


has risen much more over the past five years than in other emerging and
developing regions.


B. Conflict risk A. Tourist arrivals around major


terrorist events


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 each
region ranked in the PRS Group’s International Country Risk Guide. The internal conflict risk score


assesses political violence and its actual or potential impact on governance and is based on three
subcomponents, 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 = South


Asia, and SSA = Sub-Saharan Africa.


2013, the year of the most recently compiled
national accounts.6


In several countries not grappling with widespread
domestic 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.


Policy challenges


Policy challenges in Middle East and North
African countries are centered on ensuring
macroeconomic stability in an environment of
sustained low oil prices, ongoing conflict, and
longstanding challenges related to competitiveness.


Both oil-exporting and oil-importing countries
face substantial fiscal challenges. While
expenditure cuts in oil exporters implemented in
2015 and underway in 2016 are a step in the right
direction, additional cuts are needed to achieve
fiscal 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 to
be carried out against the backdrop of already
subdued growth and shrinking foreign assets.
With increasing reliance on sovereign debt
issuance to finance government deficits, oil-
exporting countries should ensure that they have
solid debt management frameworks in place. Oil
exporters would also benefit from implementing
fiscal frameworks that better manage oil price


volatility. Among oil importers, government debt-
to-GDP ratios need to be reduced to more
manageable levels in Egypt, Jordan, and especially
Lebanon, where debt levels are among the highest
of all emerging and developing economies. The
complex situation posed by the continued
presence of a large number of Syrian refugees will
complicate debt reduction in Jordan and Lebanon,
however.


Monetary policy challenges in the region are less
pronounced than fiscal policy challenges but are
notable in some countries. As the Islamic Republic
of Iran reintegrates into the global economy, the
country’s monetary authorities will need to keep
inflation in line with the stated targets and unify
the exchange rate regime (the latter of which is
intended to be complete by the end of
September), and to ensure banking sector stability
(IMF 2015e). In Egypt, the central bank will need
to continue efforts to rein in inflation against the
backdrop of stabilizing oil prices and the pass-
through of subsidy reductions in 2015 and the
devaluation in the first quarter of 2016.


GCC policymakers are putting greater priority on
structural reforms to reduce pressure on public


-500


-300


-100


100


300


500


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


Egypt: October 2015 Sinai plane crash
Tunisia: June 2015 Sousse attack


Deviation from 3-year average, thousands


Months


6


7


8


9


10


Ap
r-


06


Ap
r-


07


Ap
r-


08


Ap
r-


09


Ap
r-


10


Ap
r-


11


Ap
r-


12


Ap
r-


13


Ap
r-


14


Ap
r-


15


Ap
r-


16


EAP ECA LAC MENA SAR SSA
Score, scale 0–12, 0=highest risk


6The assessment covers the health, education, energy, water and
sanitation, transport, and residential housing sectors in Sana’a, Aden,
Taiz, and Zinjibar.




CHAPTER 2. 4 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 138



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 need


to address uncompetitive business environments, labor market inefficiency,
and insufficiently developed financial markets—measures by which
countries in the Middle East and North Africa have largely stagnated or
backtracked in recent years relative to other emerging and developing
economies.


B. Ease of doing business A. Oil dependence, 2014


D. Financial market development C. Labor market efficiency


Sources: 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 and
developing 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 and


developing economies included in the World Economic Forum’s Global Competitiveness Survey for
labor 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 and
privatizing state-owned companies. The details of
reforms, such as those outlined in Saudi Arabia’s
Vision 2030 plan released in April, are still being
developed. In the medium term, the export and
government revenue losses imposed by low oil
prices highlight the need to reduce high
dependence on oil in Algeria, Iraq, and most of the
GCC countries (Figure 2.4.7). Yet in an
environment of continued low oil prices, which
are expected be well below 2010–14 levels in the
medium term, diversification is likely to be
challenging. Large emerging markets in other
regions that have successfully diversified their
economies 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 are
for the most part already quite competitive among
emerging and developing economies, the
experience 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 comparative
advantage) 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, labor
market inefficiency, insufficiently developed
financial markets, and insufficient and poor-
quality infrastructure (in particular, electricity;
Mitra et al. 2016). Recent assessments of countries
in the Middle East and North Africa indicate that
some countries are now faring worse in
comparison to other emerging and developing
economies than they were during the past decade
(World Economic Forum 2015; Doing Business
Indicators 2016).




0
20
40
60
80


100


Ira
q


Sa
u


di


Ar
a


bi
a


Qa
ta


r


Om
a


n


Ku
w


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Ba
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in


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Ar
a


b


Em
ira


te
s


Al
ge


ria
Ira


n
,



Is


la
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p.


Government revenues
Goods exports


Percent


0


20


40


60


80


100
Tu


n
isi


a


M
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ro
cc


o


Jo
rd


a
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Le
ba


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Ye
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2016 2011 2006Percentile


W
es


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n
k


Ira
n,




Isl
am


ic


R
ep


.


G
CC


a
ve


ra
ge


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20


40


60


80


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ge
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D
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a
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2015-16 2013-14
Percentile


Ira
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m
ic


R
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p. 0


20


40


60


80


100


G
CC


a
ve


ra
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a
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t


Tu
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is
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Al
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Li
by


a


2015-16 2013-14 2010-11
Percentile


Ira
n,




Is
la


m
ic


R
e


p.




M IDDLE EAS T AND NORTH AFRICA GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 139


TABLE 2.4.1 Middle East and North Africa forecast summary
(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
EMDE MENA, GDPa 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




Memo items: GDP
Oil exporters 1.8 3.0 2.5 2.9 3.5 3.5 -0.1 -1.2 -1.0 -0.5
GCC countriesd 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


Oil importers 2.9 2.7 3.3 2.9 3.7 4.0 -0.2 -0.6 -0.4 -0.4
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



Source: World Bank.


World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in
other Bank documents, even if basic assessments of countries’ prospects do not differ at any given moment in time.


a. 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.





CHAPTER 2. 4 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 140


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 in
other 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.





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 business
environment (e.g., energy and infrastructure
constraints), fiscal pressures, and poor weather
have encumbered activity in some of the region’s
economies.


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 by
domestic demand. Partly thanks to the ongoing
liberalization 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 the
computer software and automotive sectors
attracting the bulk of this investment.
Manufacturing activity, though dampened by
weak external demand, accelerated 9.3 percent in
the final quarter of FY15/16. Relative to other
large 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 from
strengthening 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


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 bank
and 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.


Note: The author of this section is Allen Dennis. Research
assistance was provided by Yiruo Li.


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 of


India, staff costs rose by an average of 15.4% in FY2014/15 and
FY2015/16.




CHAPTER 2. 5 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 142



FIGURE 2.5.1 Domestic growth


Domestic demand is the main driver of the region’s growth.


B. Contribution to regional growth by


domestic demand and net exports


A. GDP growth by country


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.


contributing to an improved business
environment and reduced supply-side constraints.
Nonetheless, India faces notable headwinds. Rural
consumption has been hard-hit by two years of
poor monsoons (rainfall in 2015/16 was 14
percent below the historical average). Despite five
interest rate cuts since 2015, credit growth to the
corporate sector remains sluggish because of
stressed 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 by
several positive factors: an improving security
situation, lower oil prices, higher remittances, an
acceleration 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 were
curtailed. Ongoing security concerns (even if
improving) and chronic energy deficiencies have
weakened FDI, but a pick up is expected with the
commencement of the China Pakistan Economic
Corridor program. Nonetheless, domestic
investment remains weak.


In Bangladesh, growth is estimated to have
reached 6.5 percent in FY2015/16, supported by
increased public investment, public sector wage
increases, and steady remittance flows. Despite the
contraction in global trade, Bangladeshi exports
expanded by 15.5 percent in FY2015/16, with
rapid growth in garment exports, where it holds a
significant labor cost advantage. However, private
investment continues to be held back by a poor
business environment, inadequate infrastructure,
energy bottlenecks, weak bank balance sheets, and
occasional civil unrest. Economic activity in Sri
Lanka steadied at 4.8 percent in 2015 supported
by robust consumption, and strong growth in the
services and agricultural sectors. However, earlier
loose monetary policy and rising fiscal deficits
have led to a deterioration in the current account
balance 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), reduction
of administered food and energy prices (Sri
Lanka), and in some countries benign weather
conditions for food production (Bangladesh) have,
to various degrees, reduced inflationary pressures
across 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).


-1
0
1
2
3
4
5
6
7
8


2013 2014 2015e 2016f


Net exports
Domestic demand
GDP growth


Percent


FIGURE 2.5.2 Foreign direct investment and PMIs


The opening up of more sectors for foreign participation, along with other
reforms, 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.


B. Manufacturing PMI A. Growth in foreign direct investment
to India


Source: Haver Analytics.
B. Index numbers greater than 50 represent an expansion and vice versa.


42
44
46
48
50
52
54


Ja
n-


15


Ap
r-


15


Ju
l-1


5


O
ct


-
15


Ja
n-


16


Ap
r-


16


India Brazil China Russia South Africa
Index


0


2


4


6


8


In
dia


Bh
ut


an


Ba
ng


lad
es


h


Sr
i L


a
nk


a


Pa
kis


ta
n


M
ald


ive
s


Af
gh


a
nis


ta
n


Ne
pa


l


2014 2015e 2016fPercent


-40


-25


-10


5


20


35


2009 2010 2011 2012 2013 2014 2015


Percent




SOUTH ASIA GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 143


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, trade
disruptions with India, and poor monsoon rains.


Fiscal Policy. The fiscal situation remains diverse
across the region. India and Pakistan are on a path
of fiscal consolidation, whereas fiscal deficits are
on 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 the
removal of tax exemptions, better expenditure
control, and rationalization of some subsidies (in
India, fuel subsidies fell to 0.1 percent of GDP in
2015 from 0.75 percent; see IMF 2016g).
Notwithstanding delays to the Goods and Services
Tax (GST) reform, other measures underway in
India include: further fiscal decentralization as the
states are to receive greater share of revenues from
the central government; better targeting of
transfers through the use of direct benefit
transfers; higher rates of indirect taxes; and
improvements 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 package
of 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 rolling
back of tax exemptions and increases to petroleum
and excise taxes (IMF 2016h). If the planned
divestment from state-owned enterprise
materializes in both India and Pakistan, it will
contribute to further fiscal consolidation.


In Bangladesh, above-inflation public sector wage
increases and below-target revenue collection (due
to 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 the
deterioration in public finances, including the
increase in the VAT rate from 11 to 15 percent.
Government debt levels in South Asia are higher


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 sustained
at moderate levels for most economies in the region.


B. Central bank policy rates A. Inflation


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 for
the latest 3 months.


5


7


9


11


Ja
n-


14


Ap
r-


14


Ju
l-1


4


O
ct


-
14


Ja
n-


15


Ap
r-


15


Ju
l-1


5


O
ct


-
15


Ja
n-


16


Ap
r-


16


Bangladesh Sri Lanka
India Pakistan


Percent


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.


B. Debt A. Fiscal balances


D. Tax revenue to GDP C. Tax revenue to GDP


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 Arab
Emirates 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 and
developing 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.


AFG IND


NPL
PAK LKA


0


10


20


30


40


50


5 6 7 8 9 10 11 12
Real GDP per capita


Tax revenues, percent of GDP


0


5


10


15


20


EC
A


EM
DE


W
or


ld


SS
A


EA
P


Pa
kis


ta
n


In
di


a


Sr
i L


an
ka


Ba
ng


la
de


sh


Af
gh


an
ist


a
n


Region South Asia SAR average
Percent of GDP


-9


-6


-3


Pa
kis


ta
n


In
di


a


Sr
i L


an
ka


Ba
ng


la
de


sh
2013 2014
2015e 2016f


Percent of GDP


0


20


40


60


80


Sr
i L


an
ka


Pa
kis


ta
n


In
di


a


EM
DE


Ba
ng


la
de


sh


Ne
pa


l


Percent of GDP


0
1
2
3
4
5
6
7


Ba
n


gla
de


sh


In
di


a


Pa
kis


ta
n


Sr
i L


an
ka


CPI Inflation target Core inflation
Percent




CHAPTER 2. 5 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 144




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, fiscal
pressures are mounting as aid inflows decline and
the deteriorating security situation puts pressure
on military expenses.


Current Account. Notwithstanding weak trading-
partner growth, current account balances have
improved for most of the region’s economies, in
large part due to the decline in oil prices (Figure
2.5.5). Remittance flows have been broadly steady
in Bangladesh and Sri Lanka, and increased in
Pakistan, as a result of rising migrant populations
and a gradual improvement in some destination
economies (e.g., in Europe). In contrast, Bhutan’s
current account deficit widened to 30 percent in
FY2015/16 as a result of capital imports for large
hydropower projects. These projects are being


funded by India; upon their completion, they are
expected to increase Bhutan’s electricity exports to
that country.


Gross International Reserves. Reserve buffers remain
comfortable or improved in most countries in the
region, compared to a year ago. In Pakistan,
increased disbursements from the IMF and other
multilateral and bilateral sources have contributed
to the build-up of its gross international reserves.
Reserves are also higher in Bangladesh, India, and
Maldives. 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 were
limited during the global financial market turmoil
earlier this year. However, Sri Lanka, along with
other 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, a
downward revision from the January forecast,
mainly due to external factors. Weaker-than-
expected 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 external
borrowing costs for economies with access to
international capital markets (notably corporate
borrowing in India and public sector borrowing in
Sri Lanka). Poor monsoons in India continue to
have a negative impact on rural incomes, and on
output in agriculture-intensive sectors. In some
countries, these factors will be mitigated, at least
in 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


FIGURE 2.5.5 Current account balances and remittances


The decline in oil prices and resilient remittance flows have supported the
improvement in current account balances, notwithstanding weak export
demand.


B. Reserves A. Current account balances


D. Remittance inflows C. Remittance inflows


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. How-


ever, 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.


0


10


20


30


Ne
pa


l


Sr
i L


an
ka


Ba
ng


la
de


sh


Pa
kis


ta
n


In
di


a
Percent of GDP


-3.5


-2


-0.5


1


Sr
i L


an
ka


In
di


a


Pa
kis


ta
n


Ba
ng


la
de


sh
2013 2014
2015e 2016f


Percent of GDP


-30


0


30


60


90


Ja
n-


15


Ap
r-


15


Ju
l-1


5


O
ct


-
15


Ja
n-


16


Ap
r-


16


Bangladesh India


Sri Lanka Pakistan


Percent, year-on-year


5


10


15


20


60


64


68


72


In
di


a
(LH


S)


Pa
kis


ta
n


Ba
ng


la
de


sh


Sr
i L


an
ka


Ne
pa


l


2014 2015e
US$, billions US$, billions




SOUTH ASIA GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 145


subsides) will lift agricultural output in
Bangladesh and India.


India will continue to grow faster than its large
emerging market peers, with growth rates of 7.6-
7.7 percent from FY2016/17 to FY2018/19.4
Rural incomes and spending should improve with
the return to normal monsoons, as the benefits of
direct transfers through the rolling out of the
mobile banking initiative (Jan Dhan Aadhaar
Mobile) are realized and improvements in
agricultural 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 streamlining
of business procedures and of the tax regime, are
expected to alleviate some constraints, and crowd-
in private investment (Bahal, Raissi, and Tulin
2015). Nonetheless, private investment will still be
held back by infrastructure bottlenecks, a
challenging regulatory environment, and by tight
credit amidst the ongoing resolution of stressed
assets in the banking sector. If implemented as
planned, continued fiscal consolidation from 2016
onwards should support investor confidence in
India 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 demand
in 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


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 in
Afghanistan will be subdued. Security problems
hinder private investment, especially FDI into the
minerals sector, and a decline in aid inflows
exacerbates the fiscal situation. In Bhutan,
construction of large hydropower projects and
their 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 downside
and 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 Chadha
2016). Reforms delays may be related to
entrenched political obstacles to privatization
(Pakistan), and land and tax reforms (India).
Delays would compromise future productivity and
dampen growth prospects and, in some instances,
increase fiscal pressures (in both India and
Pakistan, the budget projections take into account
proceeds from strategic disinvestments).


Although the region’s systemic banks do not rely
heavily on wholesale funding, vulnerabilities in
bank balance sheets may lead to financial stress
and 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


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.




CHAPTER 2. 5 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 146


deterioration in asset quality (Lindner and Jung
2014).


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, even
though 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 weaker
buffers 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 and
output 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 with
bumper harvests (NOAA 2016). Hence the
possibility of La Niña could yield an upswing to
agricultural output, rural income and spending,
and lower food inflation. Average GDP growth in
India for La Niña years has been 8.4 percent
(India Ministry of Finance 2016), well above the
current projection through 2018.


Policy challenges


Growth in South Asia has been remarkably strong,
and with it, a steep decline in poverty rates over
the past two decades.5 However, some of the
tailwinds that have supported South Asia’s recent


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 the
introduction 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 are
complemented with better quality of spending. To
this end, appropriate measures include
strengthened public financial management
(Bangladesh, Sri Lanka), and a shift from
recurrent spending to spending on physical capital
(roads, ports, energy infrastructure) and human
capital (health and education). Such investments
lay a long-term foundation for growth (Mallick
2016; Leduc and Wilson 2012; Pereira and
Pereira 2015). To contain fiscal spending and
inflationary 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 their
accommodative policy stances. Since the drop in
energy prices is responsible for only part of the
decline in inflation, as evidenced by the low rate
of core inflation, policy easing has been warranted.
In contrast, in Sri Lanka, rising core inflation and
high credit growth have compelled the central


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).




SOUTH ASIA GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 147


bank to tighten policy. Once oil prices stabilize or
eventually begin to rise, monetary policy rate
tightening may also be required elsewhere in the
region if inflation rises above targets or more
sharply than consistent with macroeconomic
stability.


Stressed assets in the banking sector implies some
impairment of bank capital, hence the need for a
swift recapitalization of systemically important
banks to restore buffers against future
contingences (Rajan 2016). In India, the share of
stressed 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 total
banking 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 the
total loan portfolio (Figure 2.5.6).


Sound insolvency legislation and procedures
encourage bank lending and support the
reallocation of resources to the most productive
uses. Bankruptcy processes in South Asia are
among the most challenging, with insolvency
processes that take an average of two and half
years, and recovery rates of only about 32 cents on
the dollar (Doing Business Indicators 2016). Such
barriers to legal resolution of debts delay the exit
of 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 this
regard, the recent passing of India’s new
bankruptcy law, which introduces time limits to
the recovery of debts, should help improve the
business regulatory environment and a more
efficient allocation of resources.


Addressing energy bottlenecks in South Asia
remains critical for sustaining the region’s long-
term growth (Wijayatunga and Fernando 2013).
In Pakistan, which has an annual energy deficit of
about 5000MW, power shortages may have
shaved off about 4 percentage points of GDP
growth per year (Kugelman 2015). Similar
shortages are reported in Bangladesh. These can be
addressed with a combination of institutional
reforms, additional generation capacity,
privatization of state-owned generation and
distribution companies, rationalization of utility
tariffs, improved tariff collection, and measures to
conserve energy (Sethi 2015). Some success is
evident 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 cross-
border 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)


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


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.


0


4


8


12


16


M
al


div
es


Af
gh


an
ist


a
n


Pa
kis


ta
n


Bh
ut


a
n


Ba
ng


la
de


sh


Sr
i L


an
ka


In
di


a


Percent of total loans


0


2


4


6


FY
20


12
-


13
Q4


FY
20


13
-


14
Q1


FY
20


13
-


14
Q2


FY
20


13
-


14
Q3


FY
20


13
-


14
Q4


FY
20


14
-


15
Q1


FY
20


14
-


15
Q2


FY
20


14
-


15
Q3


FY
20


14
-


15
Q4


FY
20


15
-


16
Q1


Private and foreign banks
Public banks
All


Percent of gross
advances




CHAPTER 2. 5 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 148



TABLE 2.5.1 South Asia forecast summary


(Real GDP growth at market prices in percent, unless indicated otherwise) (percentage point difference


from January 2016 projections)


Source: World Bank.


World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in
other Bank documents, even if basic assessments of countries’ prospects do not differ at any given moment in time.


a. 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).




2013 2014 2015e 2016f 2017f 2018f 2015e 2016f 2017f 2018f
EMDE South Asia, GDPa, b 6.1 6.8 7.0 7.1 7.2 7.3 0.0 -0.2 -0.3 -0.2


(Average including countries with full national accounts and balance of payments data only)c
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
Private consumption 5.7 6.0 6.0 6.7 6.8 6.5 -0.5 0.1 0.5 0.3
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
Imports, GNFSd -2.4 0.7 -1.8 1.6 5.0 6.3 -3.4 -3.0 -0.8 -0.2
Net exports, contribution to growth 2.6 0.4 -0.2 0.1 -0.1 0.0 -0.3 0.4 0.3 0.5




South Asia excluding India 4.9 5.4 5.3 5.3 5.5 5.4 -0.4 -0.5 -0.5 -0.6
India 6.6 7.2 7.6 7.6 7.7 7.7 0.3 -0.2 -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


Memo items: GDPb 13/14 14/15 15/16e 16/17f 17/18f 18/19f 15/16e 16/17f 17/18f 18/19f




SOUTH ASIA GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 149




(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


Calendar year basis a
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 15/16e 16/17f 17/18f 18/19f 15/16e 16/17f 17/18f 18/19f
Fiscal year basis a




Bangladesh 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


TABLE 2.5.2 South Asia country forecasts



Source: World Bank.


World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in
other Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any given moment in time.


a. 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.






Recent developments


GDP growth in Sub-Saharan Africa (SSA) slowed
markedly 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 the
region. Per capita GDP growth weakened to 0.3
percent, compounding the challenge of
accelerating poverty reduction. The slowdown was
particularly pronounced among oil exporters
(Nigeria, Republic of Congo), but activity also
weakened substantially in non-energy mineral
exporters (Botswana, South Africa, Zambia).
Domestic impediments were an important
contributory factor in countries affected by
electricity 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 to
register robust growth, reflecting their more
diverse export base. This was the case in Cote
d’Ivoire and more broadly the West African
Economic and Monetary Union (WAEMU),


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 a
significant 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 terms
of 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 quarter
of 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-


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 to
weigh 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 in
major 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 of
growth.


Note: The author if this section is Gerard Kambou. Research
assistance was provided by Xinghao Gong.




CHAPTER 2. 6 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 152



FIGURE 2.6.1 Economic activity


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.


B. Commodity prices A. GDP growth in Sub-Saharan Africa


D. South Africa: GDP growth C. Nigeria: GDP growth


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 issuance
declining. 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 at
favorable coupon rates. However, sovereign bond
spreads have remained elevated among oil
exporters (Figure 2.6.2), reflecting markets’
assessment of deteriorating economic conditions,
and suggesting that Eurobond issuance is likely to
remain 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


agricultural production and exerting pressures on
their fiscal and external positions.


The current account balances of oil exporters
have deteriorated sharply. A decline in export
volumes has compounded the fall in oil prices in
some countries (Nigeria, South Sudan).
Non-oil commodity exporters also saw their
current 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 reversal
of 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 of
commodity exporters, raising the value of their
public debt denominated in foreign currency. As a
result, a number of countries (Angola,
Mozambique, Zambia) that have tapped the
international bond market face significant
refinancing and exchange rate risks, which are
compounded by rising sovereign spreads. Most of
the region’s currencies stabilized at the end of the
first 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 of
drought on food supply and the removal of fuel
subsidies, contributed to a rise in inflation in
commodity exporters (Figure 2.6.3). Headline
inflation has increased sharply in Angola,
Mozambique, Nigeria, and Zambia, exceeding the
central 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 the
Central Bank of Nigeria have helped stabilize the
official exchange rate. However, the parallel


0
1


2
3


4
5


6


Sub-Saharan
Africa oil
exporters


Sub-Saharan
Africa oil
importers


Sub-Saharan
Africa


2013 2014
2015e 2016f


Percent


-80


-60


-40


-20


0


Oi
l


N
at


ur
a


l g
as


Iro
n


o
re


Pl
at


in
um


C
op


pe
r


Co
ffe


e


Te
a


Co
co


a


Go
ld


June-Dec. 2014
Dec. 2014-Apr. 2016


Cumulative percent change of nominal index,
2010=100


0


2


4


6


8


10


12


20
10


20
11


20
12


20
13


20
14


20
15


20
16


Real GDP
Non-oil GDP


Percent


-4


-2


0


2


4


6


8


20
05


20
06


20
07


20
08


20
09


20
10


20
11


20
12


20
13


20
14


20
15


20
16


Electricity, gas and water
Total GDP


Percent




SUB- SAHARAN AFRICA GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 153



FIGURE 2.6.2 External sector developments


External positions weakened across the region as a result of the decline in
commodity 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-border
bank lending fell and bond issuance softened from their record 2014
levels. Sovereign spreads rose in the region and have remained elevated
among oil exporters. The deterioration of the current account balances


across countries increased the region’s external debt.


B. Capital flows A. Current account balance


D. Total external debt C. Sovereign bond spreads


Sources: Bloomberg; Haver Analytics; World Bank; International Monetary Fund, Regional Economic
Outlook.


exchange rate has depreciated sharply against the
U.S. dollar. This has driven inflation higher,
stifled private sector demand, and contributed to
the slowdown in non-oil GDP growth and decline
in reserves. In March, against the backdrop of a
sharp increase in core inflation, the Central Bank
of Nigeria raised its key policy rate, but left the
foreign exchange restrictions in place. Nigeria’s
real GDP contracted by 0.4 percent (y/y) in
Q12016. In contrast, in a number of oil-
importing countries (Kenya, Tanzania, Uganda),
inflation has eased in recent months, reflecting a
steady exchange rate and disinflationary pressures
from 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.


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 weak
growth, which depressed revenues. The median
government debt ratio reached 48 ½ percent of
GDP in 2015, up from 36 ½ in 2014, driven by
rising fiscal deficits in some countries (Angola,
Mozambique, Zambia) and currency depreciations
in others (Tanzania, Zimbabwe). In this context,
sovereign debt ratings have been recently
downgraded in a number of countries, including
Angola, Mozambique, Republic of Congo, and
Zambia.


Outlook


The external environment confronting Sub-
Saharan Africa is expected to remain less favorable
in the near term. Commodity prices will remain
low (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 2017-
18. 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.


Average per capita GDP growth is expected to
remain 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 weak
in 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 to
lower fuel prices, should support real incomes and
consumer spending. However, food price inflation
due to drought in a number of countries (Zambia,


100
300
500
700
900


1100
1300
1500


Ju
n-


11
No


v
-


11
Ap


r-
12


Se
p-


12
Fe


b-
13


Ju
l-1


3
De


c-
13


M
ay


-
14


O
ct


-
14


M
ar


-
15


Au
g-


15
Ja


n-
16


Africa region
Emerging markets
Gabon
Ghana
Nigeria
South Africa


Basis points


0


10


20


30


40


50


2013 2014 2015 2016
Jan-Apr


Equity issue
Bond issue
Bank loans


US$, billions


-15


-10


-5


0


5


10


2010 2011 2012 2013 2014 2015 2016f


Oil exporters
Oil exporters ex. Nigeria
Oil importers


Percent of GDP


0
5


10
15
20
25
30
35
40


2010 2011 2012 2013 2014 2015 2016f


Oil exporters
Oil exporters ex. Nigeria
Oil importers


Percent of GDP




CHAPTER 2. 6 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 154










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 share
of commodities in the region’s exports. Fuels, ore, and
metals account for more than 60 percent of the region’s
exports, compared with 16 percent for manufactured and
10 percent for agriculture goods (World Bank 2015g). Oil
prices have declined markedly, falling by 67 percent since
mid-2014. Despite a recent rebound, oil prices have
remained 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 a
strong El Niño episode. Looking to 2017, a modest
recovery is projected for most commodities as demand
strengthens. 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 Haram
insurgencies (Cameroon, Chad) diverted resources from


development goals.


Economic activity weakened substantially in non-energy,
mineral-exporting countries (Botswana, Guinea, Liberia,
Sierra Leone, South Africa, Zambia). Sharp declines in the
price of metals, their main commodity exports, played a
major role. The adverse impact of low metal prices was
compounded 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 in
electricity production also reflected inadequate investment
in the power sector. Insufficient electricity supply
constrained activity in the manufacturing sector, slowing
the overall pace of GDP growth. In addition, political
tensions kept business confidence low and put pressures on
the currency. In Guinea, Liberia, and Sierra Leone, the


economy had already been hit by the Ebola crisis, which


began to recede at the end of 2015.


In comparison, the slowdown has been less pronounced in
other non-oil exporting countries. In Mozambique,
planned investment projects for the liquefied natural gas
sector were delayed due to low commodity prices, which
weighed on growth. In Uganda, a large currency
depreciation spurred a tightening of monetary conditions
that dampened domestic demand. Nevertheless, compared
to the regional average, growth has remained robust in
these countries, reflecting their more diversified export
base. Among oil importers, Ethiopia, Rwanda, and
Tanzania 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 in
part by increased agricultural production. However, a
severe political crisis contributed to a contraction of output


in Burundi.


External positions. External positions weakened across the
region in 2015. The current account deficit widened
significantly in Angola and the Republic of Congo; in
Nigeria, the current account surplus swung into deficit in
2015. The current account deficit deteriorated in several
non-energy commodity exporters (Ethiopia, Mozambique,
Namibia, Niger), in part because exports continued to fall
but also due to strong import growth on the back of large
public infrastructure investments. Ghana’s current account
deficit 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 and
oriented their lending activities toward developing Asia.
Eurobond issuance also softened; in addition, reflecting in
part 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 account
balances and currency depreciations increased external
debt, triggered a decline in reserves, and put pressures on
exchange rates. The median external debt in the region is
estimated at 28 percent of GDP in 2015, up from 23
percent of GDP in 2014. On aggregate, external debt




SUB- SAHARAN AFRICA GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 155




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 is
more expensive than concessional loans and carries
significant refinancing and exchange rate risks. Across the
region, international reserves have declined, with the
median estimated at 3.6 months of imports, down from
4.2 months of imports in 2014. Reserve levels fell most
markedly among oil exporters (Angola, Nigeria) and in
countries 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 account
of the stable peg to the euro and terms of trade
improvements. However, sizeable currency depreciations,
compounded by the effects of El Niño-related drought on
food 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 of
Congo, Gabon, Nigeria) experienced a substantial decrease
in revenues that put pressures on the overall fiscal balance.
The fiscal policy response to the revenue shortfalls has
varied, 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), the
government continued with its ambitious infrastructure
investment program, financed in some cases through
advances from the domestic banking system (Republic of
Congo). 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 median
government debt is estimated at 48 ½ percent of GDP in
2015, up from 36½ percent of GDP in 2014, with
significant country-level variations. Public debt rose
marginally in Nigeria in relation to GDP. However, a
number 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 increased
by 5 percentage points on average. In several countries
(Kenya, Niger), the increase in government debt reflected
rising 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 in
2015 were well above levels in 2011-13, with both external
and domestic debt contributing to the increase in public
debt. Debt sustainability assessments deteriorated in a


number of countries (World Bank 2016m).




CHAPTER 2. 6 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 156


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 in


inflation 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.


Zimbabwe), high unemployment (South Africa),
and the price level impact of currency
depreciation, combined with interest rate
increases, could moderate these effects.


Investment growth is expected to slow across the
region in 2016, particularly among oil and
mineral exporters. China’s rebalancing, lower
commodity prices, and deteriorating growth
prospects in many commodity exporters, are
expected 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 signs
of 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, are
experiencing delays in inward investment in their
resource 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’s
largest oil exporters, are seeking assistance from
international development institutions and other
donors to alleviate public investment cuts, but
further fiscal adjustment may be necessary unless
oil 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 in
infrastructure investment spending, also face the
need 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 as
export volumes rise in some countries. Demand
from advanced economies is expected to stay
modest, given their moderate prospects for
medium-term growth. Among oil importers,
current account balances are expected to
deteriorate in many countries on account of
continued 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 the
region’s three largest economies in 2016. In
Nigeria, foreign exchange restrictions, fuel
shortages, and oil output disruptions will


B. Inflation A. Exchange rates


D. Policy interest rates C. Inflation: actual vs. target


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.


0


5


10


15


20


25


30


Ja
n-


10
Ju


l-1
0


Ja
n-


11
Ju


l-1
1


Ja
n-


12
Ju


l-1
2


Ja
n-


13
Ju


l-1
3


Ja
n-


14
Ju


l-1
4


Ja
n-


15
Ju


l-1
5


Ja
n-


16


Sub-Saharan Africa
Angola
Kenya
Mozambique
Nigeria
South Africa
Zambia


Year-on-year, in percent


0
4
8


12
16
20
24
28


An
go


la


Gh
a


n
a


Ke
n


ya


N
ige


ria


So
ut


h
Af


ric
a


U
ga


n
da


Za
m


bi
a


Inflation target
Latest, year-on-year


Percent


0


10


20


30


Ja
n-


12


Ju
l-1


2


Ja
n-


13


Ju
l-1


3


Ja
n-


14


Ju
l-1


4


Ja
n-


15


Ju
l-1


5


Ja
n-


16


Ghana
Kenya
Nigeria
South Africa
Uganda
Zambia


Percent


-50


-40


-30


-20


-10


0


10


Ja
n-


14


Ap
r-


14


Ju
l-1


4


O
ct


-
14


Ja
n-


15


Ap
r-


15


Ju
l-1


5


O
ct


-
15


Ja
n-


16


Ap
r-


16


Angola
Ghana
Kenya
Mozambique
Nigeria
Uganda
South Africa


LCU/US$, percent change since January 1, 2014




SUB- SAHARAN AFRICA GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 157



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 domestic
banking system. Meanwhile, in a number of oil importers, expenditure
overruns coupled with a decline in grants caused the fiscal deficit to
widen. As a result of the limited fiscal adjustment, public debt burdens


increased in the region.


B. Government debt A. Fiscal balance


Sources: Haver Analytics; Bloomberg; World Bank; International Monetary Fund, Regional Economic
Outlook, International Monetary Fund, World Economic Outlook.


weigh on economic activity, exacerbating the
effects of low oil prices. In South Africa, low
business confidence will slow investment
growth, while high unemployment and tight
monetary policy will limit private
consumption. In Angola, low oil prices, a
weak investment climate, and rising inflation
will weigh on growth. Reforms of labor and
product markets to spur private investment
should help enhance growth prospects in these
countries.


• Among the region’s frontier markets, growth
is expected to pick up moderately in Ghana,
helped by improving investor sentiment, new
oilfields, 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 stemming
from the drought and a weak currency will
weigh on domestic demand. However,
growth is expected to remain robust in Cote
d’Ivoire, Kenya, and Senegal, supported by
ongoing infrastructure investment, private
consumption, and agriculture.


• The outlook for the region’s LICs is expected
to include a modest pickup in growth in oil
and mineral exporters, as they continue to
adjust to low commodity prices. In
Mozambique, delayed investment into the
liquefied natural gas sector, rising inflation,
and low investor confidence will adversely
impact growth. Activity 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. Infrastructure investment and an
increase in iron ore exports should help boost
activity in Liberia, Guinea, and Sierra-Leone
as 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, and
Niger, 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.


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 or
cancelation of planned investment projects in
their resource sectors. Weaker-than-expected
growth in the Euro Area, an important
trading partner for many countries in the
region, could further lower exports, and
reduce investment flows as well as official aid.
A renewed decline in the price of oil would
further strain the fiscal and current account
balances of oil producers, which could force
more cuts in public expenditure than
envisaged. 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 to
the commodity price shock in the most
affected countries would create policy
uncertainties that could weigh on investor


-10
-8
-6
-4
-2
0
2
4
6
8


2010 2011 2012 2013 2014 2015 2016f


Oil exporters
Oil exporters ex. Nigeria
Oil importers


Percent of GDP


0


10


20


30


40


50


60


2010 2011 2012 2013 2014 2015 2016f


Oil exporters
Oil exporters ex. Nigeria
Oil importers


Percent of GDP







CHAPTER 2. 6 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 158




sentiment. A worsening of drought conditions
would dampen growth in agriculture, reduce
hydroelectricity production, and accentuate
inflationary pressures through higher food
prices. Militant insurgencies and terrorist
attacks remain a concern in West Africa and
Kenya, with potential spillovers to
neighboring countries. Risk of political
upheavals in Burundi and South Sudan could
further hurt growth in these countries, with
implications for trading partners in their sub-
region.


Policy challenges


Commodity exporters across the region need to
adjust to a protracted period of lower commodity
prices. With commodity markets likely to be less
supportive than in the past, the region will also
need to focus on developing new sources of
growth. Meanwhile, widening fiscal and current
account deficits have increased economic
vulnerabilities that are reflected in depreciating
currencies, falling reserves, and rising inflation and
debt levels. This has prompted central banks in
some 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.


• For most countries, adjusting to low
commodity prices will need to include
stronger efforts to strengthen domestic
resource mobilization. In particular, resource-
rich countries would benefit from improving
their non-resource tax systems. While tax
revenues in SSA, as a share of GDP, have
increased since the 1980s, much of the
improvement was driven by the growth in
commodity revenues. Excluding resource-
based revenues, there has been limited
improvement in the domestic mobilization of
tax revenues in the region. Increasing
domestic revenue will require stronger efforts
to broaden the tax base and strengthen tax
administration. This could be achieved by
removing tax preferences, managing better
transfer pricing by multinational companies,
taxing extractive industries fairly and
transparently, 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 in
commodity prices. Policymakers may need to
tighten monetary policy where inflation
induced by currency depreciation is persisting,
and where drought-related increases in food
prices may have a second round inflationary
effect. However, tighter monetary policy
could adversely impact private sector activity
through higher borrowing costs.


• The increased external and fiscal
vulnerabilities point to the need for greater
efforts to rebuild policy buffers. For most
countries, this would require measures to
rationalize 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 to
increase infrastructure investment spending,
fiscal and current account deficits have
remained elevated. These countries should
adjust their policies to build buffers and


FIGURE 2.6.5 Outlook


The external environment confronting Sub-Saharan Africa is expected to
remain 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 in
2017-18, driven by a gradual improvement in the region’s largest
economies as commodity prices stabilize and policies become more
supportive of growth.


B. Growth forecasts 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.


-1
0
1
2
3
4
5
6
7
8


20
09


20
10


20
11


20
12


20
13


20
14


20
15


20
16


20
17


20
18


Sub-Saharan Africa excluding South Africa
EMDE Sub-Saharan Africa
EMDE excluding China


Percent


10


30


50


70


90


110


130


19
80


19
83


19
86


19
89


19
92


19
95


19
98


20
01


20
04


20
07


20
10


20
13


20
16


20
19


20
22


20
25


Agriculture
Energy
Metals


Index, 2010=100




SUB- SAHARAN AFRICA GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 159




2013 2014 2015e 2016f 2017f 2018f 2015e 2016f 2017f 2018f


EMDE SSA, GDPa 4.8 4.5 3.0 2.5 3.9 4.4 -0.3 -1.7 -0.7 -0.3


(Average including countries with full national accounts and balance of payments data only)b
EMDE SSA, GDPb 4.7 4.5 3.0 2.5 3.9 4.3 -0.4 -1.7 -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 consumptionc 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
Imports, GNFSd 6.6 2.9 3.3 3.3 3.4 3.5 0.5 0.4 0.3 0.4
Net exports, contribution to growth


-2.8 0.5 -0.6 -0.5 -0.4 -0.3 -0.3 -0.3 -0.2 -0.1
Memo items: GDP




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
CFA countriesf 4.6 5.6 4.0 5.3 5.3 5.7 -0.4 -0.4 -0.7 -0.2


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


TABLE 2.6.1 Sub-Saharan Africa forecast summary


(Real GDP growth at market prices in percent, unless indicated otherwise)
(percentage point difference


from January 2016 projections)


Source: World Bank.
World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently, projections presented here may differ from those contained in


other Bank documents, even if basic assessments of countries’ prospects do not differ at any given moment in time.
a. 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.


address vulnerabilities that could emerge if the
external environment suddenly deteriorates.
Countries needing a deeper and faster fiscal
adjustment as a result of the commodity price
shock 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.


• Notable progress has been made across
the region in recent years to improve
the quality of regulations that enhance
business activity (Doing Business 2016).
During 2014/15, reforms were implemented
that have increased access to electricity


(Kenya, Senegal, Uganda), eased access to
credit information (Kenya, Uganda), and
facilitated cross-border trade (Benin,
Mauritania). Accelerating structural reforms
aimed at boosting competitiveness and
diversification 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, trade
reforms to reduce trade logistics cost and
regulatory barriers to services trade,
enhancing the quality of education, and a
more inclusive financial sector (World Bank
2016p).




CHAPTER 2. 6 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 160






2013 2014 2015e 2016f 2017f 2018f 2015e 2016f 2017f 2018f
Angola 6.8 3.9 2.8 0.9 3.1 3.4 -0.2 -2.4 -0.7 -0.4
Benin 5.6 5.4 5.2 5.5 5.8 6.1 -0.5 0.2 0.7 1.0
Botswanab 9.3 4.4 -0.3 3.7 4.3 4.4 -3.3 -0.3 0.1 0.2
Burkina Faso 6.7 4.0 4.0 5.2 5.5 6.0 -0.4 -0.8 -1.5 -1.0
Burundi 4.6 4.7 -2.5 3.0 3.5 4.0 -0.2 -0.5 -1.3 -0.8
Cabo Verde 1.0 1.8 1.0 1.5 1.9 2.2 -1.9 -2.0 -2.2 -1.9
Cameroon 5.6 5.9 6.2 6.0 6.1 6.2 -0.1 -0.5 -0.4 -0.2
Chad 5.7 6.9 1.8 -0.4 1.6 5.2 -2.3 -5.3 -4.5 -1.3
Comoros 3.5 3.0 2.3 2.4 3.0 3.1 0.0 -0.1 -0.1 0.0
Congo, Dem. Rep. 8.5 9.0 7.7 6.3 7.7 8.5 -0.3 -2.3 -1.3 -0.5
Congo, Rep. 3.4 6.5 2.6 3.8 3.2 3.0 1.3 0.3 -2.4 -2.6
Côte d'Ivoire 9.2 9.0 8.4 8.5 8.0 8.1 0.0 0.2 0.0 0.1
Equatorial Guinea -4.8 -3.1 -15.5 1.5 -1.0 -1.6 -6.2 -0.8 -0.6 -1.4
Eritrea 1.3 1.7 3.0 4.0 4.3 4.3 2.1 2.0 2.1 2.1
Ethiopiab 10.5 9.9 9.6 7.1 9.4 8.6 -0.6 -3.1 0.4 -0.4
Gabon 4.3 4.3 4.0 3.9 4.4 4.6 -0.1 -1.2 -0.9 -0.7
Gambia, The 4.8 0.9 -2.5 -4.0 4.5 5.5 -6.5 -8.5 -0.8 0.2
Ghana 7.3 4.0 3.4 5.2 8.2 7.5 0.0 -0.7 0.0 -0.7
Guinea 2.3 -0.3 0.1 4.0 5.0 6.0 -0.3 0.5 1.0 1.8
Guinea-Bissau 0.8 2.9 5.1 5.7 6.0 6.0 0.7 0.8 0.7 0.7
Kenya 5.7 5.3 5.6 5.9 6.1 6.2 0.2 0.2 0.0 0.1
Lesotho 4.6 2.0 2.7 2.6 3.7 4.0 0.1 -0.2 -0.8 -0.5
Liberia 8.7 0.7 0.3 3.8 5.3 5.6 -2.7 -1.9 -1.5 -1.2
Madagascar 2.4 3.0 3.0 3.7 3.7 3.7 -0.2 0.3 0.1 0.1
Malawi 5.2 5.7 2.8 3.0 4.1 5.4 0.0 -2.0 -1.7 -0.4
Mali 1.7 7.2 5.5 5.3 5.1 5.0 0.5 0.3 0.1 0.0
Mauritaniac 5.5 6.9 3.0 4.2 4.5 3.3 -0.2 0.2 0.5 -0.7
Mauritius 3.2 3.6 3.6 3.8 4.0 4.0 0.1 0.1 0.3 0.3
Mozambique 7.3 7.4 6.3 5.8 7.7 8.3 0.0 -0.7 0.5 1.1
Namibia 5.7 6.4 4.5 4.2 5.4 5.5 -0.5 -1.3 -0.5 -0.4
Niger 4.6 6.9 4.2 5.4 6.3 7.0 -0.2 0.1 -3.0 1.3
Nigeria 5.4 6.3 2.7 0.8 3.5 4.0 -0.6 -3.8 -1.8 -1.3
Rwanda 4.7 7.0 7.1 6.8 7.2 7.1 -0.3 -0.8 -0.4 -0.5
Senegal 3.6 4.3 6.5 6.6 6.8 7.0 1.5 1.3 1.5 1.7
Seychelles 6.6 2.8 4.3 3.7 3.6 3.6 0.8 0.0 0.0 0.0
Sierra Leone 20.1 7.0 -21.5 6.5 5.3 5.4 -1.5 -0.1 0.0 0.1
South Africa 2.2 1.5 1.3 0.6 1.1 2.0 0.0 -0.8 -0.5 0.4
South Sudan 13.1 3.4 -6.3 3.5 6.9 7.4 -1.0 0.0 -0.1 0.4
Sudan 3.3 3.1 3.2 3.3 3.8 4.0 -0.3 -0.1 -0.1 0.1
Swaziland 2.8 2.5 1.7 1.3 1.4 1.6 0.4 0.5 0.6 0.8
Tanzania 7.3 6.8 7.0 7.2 7.1 7.1 -0.2 0.0 0.0 0.0
Togo 5.1 5.7 5.5 5.6 5.0 5.5 0.4 0.7 0.3 0.8
Ugandab 4.4 4.7 5.0 5.0 5.9 6.8 0.0 0.0 0.1 1.0
Zambia 6.7 4.9 3.6 3.4 4.2 5.0 0.1 -0.4 -1.2 -1.0
Zimbabwe 4.5 3.8 1.1 1.4 5.6 3.5 0.1 -1.4 2.6 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 in


other 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.


TABLE 2.6.2 Sub-Saharan Africa country forecastsa


(Real GDP growth at market prices in percent, unless indicated otherwise) (percentage point difference


from January 2016 projections)




CHAPTER 2 GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 161






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Fading Tailwinds. Spring 2016. Washington, DC:
World Bank.


______. 2016o. “Commodity Markets Outlook,
April 2016: Resource Development in an Era of
Cheap Commodities.” World Bank, Washington,
DC.


______. 2016p. “Africa’s Pulse.” Volume 13.
April 2016. World Bank, Washington, DC.


World Economic Forum. 2015. The Global
Competitiveness Index Historical Dataset. Geneva:
World Economic Forum.






STATISTICAL


APPENDIX






S TATIST ICAL APPENDIX GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 169


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


United Kingdom 2.2 2.9 2.2 2.0 2.1 2.1 2.7 1.8 2.4 1.8 2.4 1.4
Emerging Market and Developing
Economies 4.7 4.2 3.4 3.5 4.4 4.7 4.0 2.2 3.8 4.2 3.2 3.8


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 .. .. .. .. .. ..
Europe and Central Asia 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 .. .. .. .. .. ..


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 ..




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 .. .. .. .. .. ..




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




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 .. .. .. .. .. ..




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




Russian Federation 1.3 0.7 -3.7 -1.2 1.4 1.8 .. .. .. .. .. ..




Croatia -1.1 -0.4 1.6 1.9 2.0 2.4 .. .. .. .. .. ..




S TATIST ICAL APPENDIX GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 170


TABLE 1 Real GDP Growth (continued)


Annual estimates and forecastsa Quarterly growthb


2013 2014 2015e 2016f 2017f 2018f 14Q4 15Q1 15Q2 15Q3 15Q4 16Q1e




Latin America and the
Caribbean 2.9 1.0 -0.7 -1.3 1.2 2.1 1.8 -1.1 -3.0 -1.5 -1.3 0.9




Argentina 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 .. .. .. .. .. ..
Middle East and North Africa 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 .. .. .. .. .. ..


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 .. .. .. .. .. ..




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 .. .. .. .. .. ..




Jordan 2.8 3.1 2.4 3.0 3.3 3.6 .. .. .. .. .. ..




S TATIST ICAL APPENDIX GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 171


Annual estimates and forecastsa Quarterly growthb


2013 2014 2015e 2016f 2017f 2018f 14Q4 15Q1 15Q2 15Q3 15Q4 16Q1e
South Asia 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 .. .. .. .. .. ..


Bangladeshc 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 .. .. .. .. .. ..


Nepalc 3.8 6.0 2.7 0.6 4.7 4.4 .. .. .. .. .. ..
Pakistanc d 3.7 4.0 4.2 4.5 4.8 5.1 .. .. .. .. .. ..
Sri Lanka 3.4 4.9 4.8 5.3 5.3 5.3 .. .. .. .. .. ..
Sub-Saharan Africa 4.8 4.5 3.0 2.5 3.9 4.4 4.6 0.6 0.0 3.3 1.3 ..


Angola 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 .. .. .. .. .. ..


Mauritaniae 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 .. .. .. .. .. ..


TABLE 1 Real GDP Growth (continued)




S TATIST ICAL APPENDIX GLOBAL ECONOMIC PROSPECTS | JUNE 2 016 172


TABLE 1 Real GDP Growth (continued)
Annual estimates and forecastsa Quarterly growthb


2013 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, and
Ukraine.


Latin America and the Caribbean: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Paraguay, Peru, and
Uruguay.


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.




SELECTED TOPICS GLOBAL ECONOMIC PROSPECTS | JUNE 2016 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 Pacific January 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







SELECTED TOPICS GLOBAL ECONOMIC PROSPECTS | JUNE 2016 174




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








Global Economic Prospects: Selected Topics, 2015-16






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