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Global Economic Prospects 2013: Assuring Growth Over the Medium Term

Report by The World Bank, 2013

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This report examines growth trends for the global economy and how they affect developing countries. It includes three-year forecasts and long-term global economic prospects and long-term global scenarios which look ten years into the future. Topical analyses cover financial markets, industrial production, global trade, inflation, exchange rates and commodities.




Global
Economic
Prospects


Volume 6 | January 2013


The World Bank


Assuring
growth over
the medium term













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Global Economic Prospects



Assuring growth over the medium term














































January 2013





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© 2013 International Bank for Reconstruction and Development / The World Bank


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Attribution—Please cite the work as follows: The World Bank. 2013. Global Economic Prospects, Volume 6,
January 2013. Washington, DC: World Bank.


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DOI: 10.1596/ 978-0-8213-9882-1


Cover photo: Jonathan Guy; Cover design: Roula I. Yazigi




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


unless otherwise indicated.





5




Acknowledgments


This report is a product of the Prospects Group in the Development Economics Vice Presidency of the World


Bank. Its principal authors were Andrew Burns and Theo Janse van Rensburg.




The project was managed by Andrew Burns, under the direction of Hans Timmer and the guidance of Kaushik


Basu. Several people contributed substantively to the report. The modeling and data team was led by Theo Janse


van Rensburg, assisted by Trung Thanh Bui, Muhammad Adil Islam, Irina Magyer, and Sabah Zeehan Mirza. The


projections, regional write-ups and subject annexes were produced by Dilek Aykut (Finance, Europe & Central


Asia), John Baffes (Commodities), Damir Cosic (Commodities & Latin America & Caribbean), Allen Dennis (Sub


-Saharan Africa and International Trade), Sanket Mohapatra (South Asia, Middle East & North Africa, Industrial


Production and Exchange Rates), Eung Ju Kim (Finance), Cristina Savescu (Latin America & Caribbean, Indus-


trial Production), Theo Janse van Rensburg (Latin America & Caribbean and High-Income Countries) and


Ekaterine Vashakmadze (East Asia & the Pacific and Inflation). Regional projections and annexes were produced


in coordination with country teams, country directors, and the offices of the regional chief economists and PREM


directors. The short-term commodity price forecasts were produced by John Baffes, Damir Ćosić, and Betty Dow.
The remittances forecasts were produced by Gemechu Ayana Aga and Dilip K. Ratha. Simulations were performed


by Irina Magyer and Theo Janse van Rensburg.




The accompanying online publication, Prospects for the Global Economy, was produced by a team comprised of


Sarah Crow, Betty Dow, Muhammad Adil Islam, Vamsee Krishna Kanchi, Sabah Mirza, Katherine Rollins, and


Dana Vorisek, with technical support from David Horowitz, Ugendran Machakkalai, and Malarvishi Veerappan.




Cynthia Case-McMahon, Indira Chand, and Merrell Tuck-Primdahl managed media relations and the dissemina-


tion. Hazel Macadangdang managed the publication process.




Several reviewers offered extensive advice and comments. These included Abdul de Guia Abiad, Ahmad Ahsan,


Jorge Araujo, Merli Baroudi, Deepak Bhattasali, Andrew Beath, Zeljko Bogetic, Oscar Calvo-Gonzalez, Kevin


Carey, Mei Leng Chang, Shubham Chaudhuri, Punam Chuhan-Pole, Tito Cordella, Jose Cuesta, Uri Dadush, Au-
gusto de la Torre, Shantayanan Devarajan, Tatiana Didier, Hinh Truong Dinh, Sebastian Eckardt, Olga Emelyanov,


Pablo Fajnzylber, Manuela V. Ferro, Caroline Freund, Bernard G. Funck, Ejaz Ghani, David Michael Gould,


Guenter Heidenhof, Bert Hofman, Zahid Hussain, Elena Ianchovichina, Satu Kristina Kahkonen, Markus Kitzmul-


ler, Auguste Tano Kouame, David Kuijper, Roumeen Islam, Jeffrey D. Lewis, Connie Luff, Ernesto May, Denis


Medvedev, Juan Carlos Mendoza, Claudia Nassif, Antonio M. Ollero, Kwang Park, Samuel Pienknagura, Miria


Pigato, Mohammad Zia Qureshi, Susan R. Razzaz, Christine M. Richaud, Kaspar Richter, Elliot Riordan, David


Rosenblatt, Sudhir Shetty, Carlos Silva-Jauregui, Yvonne M. Tsikata, Cevdet Unal, Mark Roland Thomas, Axel


van Tortsenberg, Sergei Ulatov, Aristomene Varoudakis, Gallina Vincelette, Ekaterina Vostroknutova, Herman


Jorge Winkler, Soonhwa Yi, Juan F. Zalduendo, and Albert Zeufack.





6




Table of Contents


Main Text ........................................................................................................................................1


Topical Annexes ...............................................................................................................................


Financial markets .......................................................................................................................33


Industrial production. .................................................................................................................43


Inflation. .....................................................................................................................................49


Global trade ................................................................................................................................59


Exchange rates ............................................................................................................................65


Prospects for commodity markets ..............................................................................................75


Regional Annexes


East Asia & the Pacific ...............................................................................................................91


Europe & Central Asia .............................................................................................................103


Latin America & the Caribbean ...............................................................................................115


Middle East & North Africa .....................................................................................................125


South Asia ................................................................................................................................139


Sub-Saharan Africa ..................................................................................................................155










Four years after the onset of the global financial
crisis, the world economy continues to struggle.
Developing economies are still the main driver
of global growth, but their output has slowed
compared with the pre-crisis period. To regain
pre-crisis growth rates, developing countries
must once again emphasize internal productivity
-enhancing policies. While headwinds from
restructuring and fiscal consolidation will persist
in high-income countries, they should become
less intense allowing for a slow acceleration in
growth over the next several years.


Financial market conditions have improved
dramatically since June


The cumulative effect of national- and EU-wide
measures to improve fiscal sustainability, and
the augmentation of measures that the European
Central Bank (ECB) would be willing to take in
defense of the Euro have resulted in a significant
improvement in global financial markets. Unlike
past episodes of reduced tensions, when market
conditions improved only partially, many market
risk indicators have fallen back to levels last
seen in early 2010 – before concerns about Euro
Area fiscal sustainability took the fore.


The decline in financial market tensions has also
been felt in the developing world.


 International capital flows to developing
countries, which fell by between 30 and 40
percent in May-June, have reached new highs.


 Developing country bond spreads (EMBIG)
have declined by 127 basis points (bps) since
June, and are now 282 bps below their long-
term average levels.


 Developing country stock markets have
increased by 12.6 percent since June (10.7
percent for high-income markets)


but the real-side recovery is weak and business-
sector confidence low


While signals from financial markets are
encouraging, those emanating from the real-side
of the global economy are more mixed. Growth
in developing countries accelerated in the third
quarter of 2012, including in major middle-
income countries such as Brazil and China,
where mid-year weakness contributed to the
global slowdown. Early indications for the
fourth quarter point to a continued acceleration
in East Asia & the Pacific, Europe & Central
Asia and South Asia; but slowing in Latin
America & the Caribbean.


Among high-income countries, investment and
industrial activity in the United States show
unusual weakness – seemingly due to
uncertainty over the stance of fiscal policy in the
run up to November‘s elections and the end-of-
2012 fiscal cliff. In Japan, the economy appears
to be contracting – in part because of political
tension with China over the sovereignty of
islands in the region and the expiration of
automobile purchase incentives. Activity in
Europe ceased to contract at alarming rates in
Q3, but the economy appears to have weakened
again in Q4 — perhaps reflecting weak demand
for capital goods from the United States and
Japan.


Prospects are for a modest acceleration of
growth between 2013 and 2015


Overall, the global economic environment
remains fragile and prone to further
disappointment, although the balance of risks is
now less skewed to the downside than it has
been in recent years. Global growth is expected
to come in at a relatively weak 2.3 and 2.4
percent in 2012 and 2013 respectively and
gradually strengthen to 3.1 and 3.3 percent in
2014 and 2015 (table 1).


Global Economic Prospects January 2013:


Assuring growth over the medium term




Overview & main messages





2


Table 1. The global outlook in summary
(percent change from previous year, except interest rates and oil price)


2011 2012 2013e 2014f 2015f


Global conditions


World trade volume (GNFS) 6.2 3.5 6.0 6.7 7.0


Consumer prices


G-7 Countries 1,2 5.3 -0.6 -0.1 0.9 1.0


United States 2.4 2.1 2.4 2.5 2.5


Commodity prices (USD terms)


Non-oil commodities 20.7 -9.5 -2.0 -3.2 -2.8


Oil price (US$ per barrel) 3 104.0 105.0 102.0 102.2 102.1


Oil price (percent change) 31.6 1.0 -2.9 0.2 -0.1


Manufactures unit export value 4 8.9 -1.9 1.9 2.2 1.9


Interest rates


$, 6-month (percent) 0.8 0.5 0.7 1.1 1.4


€, 6-month (percent) 1.6 0.2 0.5 1.2 1.5


International capital flows to developing countries (% of GDP)


Developing countries


Net private and official inflows 4.9 4.1 4.2 4.2 4.2


Net private inflows (equity + debt) 4.7 4.1 4.2 4.2 4.1


East Asia and Pacific 4.9 3.5 3.8 4.1 4.2


Europe and Central Asia 5.7 4.8 5.3 5.2 4.8


Latin America and Caribbean 5.5 5.7 5.2 4.7 4.3


Middle East and N. Africa 1.3 1.1 1.4 1.6 1.9


South Asia 3.5 3.3 3.4 3.5 3.4


Sub-Saharan Africa 5.3 5.0 4.7 4.7 4.9


Real GDP growth 5


World 2.7 2.3 2.4 3.1 3.3


Memo item: World (2005 PPP weights) 3.8 3.0 3.4 3.9 4.1


High income 1.6 1.3 1.3 2.0 2.3


OECD countries 1.5 1.2 1.1 2.0 2.3


Euro Area 1.5 -0.4 -0.1 0.9 1.4


Japan -0.7 1.9 0.8 1.2 1.5


United States 1.8 2.2 1.9 2.8 3.0


Non-OECD countries 5.0 2.9 3.5 3.8 3.8


Developing countries 5.9 5.1 5.5 5.7 5.8


East Asia and Pacific 8.3 7.5 7.9 7.6 7.5


China 9.3 7.9 8.4 8.0 7.9


Indonesia 6.5 6.1 6.3 6.6 6.6


Thailand 0.1 4.7 5.0 4.5 4.5


Europe and Central Asia 5.5 3.0 3.6 4.0 4.3


Russia 4.3 3.5 3.6 3.9 3.8


Turkey 8.5 2.9 4.0 4.5 5.0


Romania 2.5 0.6 1.6 2.2 3.0


Latin America and Caribbean 4.3 3.0 3.5 3.9 3.9


Brazil 2.7 0.9 3.4 4.1 4.0


Mexico 3.9 4.0 3.3 3.6 3.6


Argentina 8.9 2.0 3.4 4.1 4.0


Middle East and N. Africa 6 -2.4 3.8 3.4 3.9 4.3


Egypt 7 1.8 2.2 2.6 3.8 4.7


Iran 1.7 -1.0 0.6 1.6 2.8


Algeria 2.5 3.0 3.4 3.8 4.3


South Asia 7.4 5.4 5.7 6.4 6.7


India 7, 8 6.9 5.1 6.1 6.8 7.0


Pakistan 7 3.0 3.7 3.8 4.0 4.2


Bangladesh 7 6.7 6.3 5.8 6.2 6.5


Sub-Saharan Africa 4.5 4.6 4.9 5.1 5.2


South Africa 3.1 2.4 2.7 3.2 3.3


Nigeria 6.7 6.5 6.6 6.4 6.3


Angola 3.4 8.1 7.2 7.5 7.8


Memorandum items


Developing countries


excluding transition countries 6.5 5.2 5.8 6.0 6.0


excluding China and India 4.5 3.3 4.0 4.3 4.4


7.


8. Real GDP at market prices. GDP growth rates calculated using real GDP at


factor cost, which are customarily reported in India, can vary significantly from


these growth rates and have historically tended to be higher than market price


GDP growth rates. Growth rates stated on this basis, starting with FY2011-12


are 6.5, 5.4, 6.4, 7.1, and 7.3 percent – see table SAR.2 in the South Asia


regional annex.


In keeping with national practice, data for Bangladesh, Egypt, India, and Pakistan


are reported on a fiscal year basis in table 1.1. Aggregates that depend on


these countries are calculated using data compiled on a calendar year basis.


Source: World Bank.


Notes: PPP = purchasing power parity; e = estimate; f = forecast.


1. Canada, France, Germany, Italy, Japan, the United Kingdom, and the United


States.


2. In local currency, aggregated using 2005 GDP weights.


3. Simple average of Dubai, Brent, and West Texas Intermediate.


4. Unit value index of manufactured exports from major economies, expressed in


USD.


5. Aggregate growth rates calculated using constant 2005 dollars GDP weights.


6. Comparison with the summer 2012 GEP is not included as country coverage





3


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


This modest growth outlook is subject to risks.


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


 In the United States, solid progress toward
outlining a credible medium-term fiscal
consolidation plan that avoids periodic
episodes of brinksmanship surrounding the
debt ceiling is needed. Policy uncertainty has
already dampened growth. Should
policymakers fail to agree such measures, a
loss of confidence in the currency and an
overall increase in market tensions could
reduce US and global growth by 2.3 and 1.4
percent respectively.


 While a progressive decline in China‘s
unusually high investment rate over the
medium– to long-term is not expected to
perturb global growth, there would be
significant domestic and global consequences
if this position were to unwind abruptly.
Impacts for developing commodity exporters


would be especially harsh if commodity
prices fell sharply.


 An interruption to global oil supply and a
resurgence in the price of internationally-
traded food commodities remain risks,
especially given low maize stocks. Should
local food prices rise markedly, nutrition and
health outcomes for the very poor could be
hit.


 On the upside, a rapid resolution to policy
uncertainty in the United States, a decrease in
tensions in Asia, or an improvement in
European confidence could speed the return
of high-income countries to stronger growth
— with positive effects for developing-
country exports and GDP.


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


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


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




Global Economic Prospects January 2013 Main Text





4


Global Economic Prospects January 2013 Main Text


Financial market nerves and
conditions have improved markedly


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


The practical effect of these steps has been a fall
in the price of risk worldwide. For example, the
cost of insuring against sovereign default on
high-spread European countries has fallen by
more than 500 basis points from their earlier
highs. Credit default swap (CDS) rates for most


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


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


Source: World Bank, Datastream.


0


500


1000


1500


2000


Jan '10 Jul '10 Jan '11 Jul '11 Jan '12 Jul '12 Jan '13


Basis points


EU excluding Greece


Spain


Ireland


Portugal


Figure 1. Substantial progress has been made in reducing fiscal deficits, but debt levels continue to rise


Source: World Bank.


-16


-14


-12


-10


-8


-6


-4


-2


0


Euro Area USA Japan Middle-income
countries


Low-income
countries


2009


2012


Fiscal Deficit (% of GDP)


0


50


100


150


200


250


Euro Area USA Japan Middle-income
countries


Low-income
countries


2009


2012


Government Debt (% of GDP)





5


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


Declines in the price of risk have contributed
to much looser financial conditions in
developing countries


Perceived credit risk also declined among
developing countries, with CDS rates falling by
about 112 basis points on average since the end
of June (figure 3). High-spread developing
countries, such as Romania, Ukraine, and
Venezuela, experienced the largest
improvements — although Argentina was a
notable exception.FN3


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


countries having received 27 upgrades (versus
19 downgrades), which compares with a total of
20 downgrades among high-income countries.FN5
Stock markets in developing countries have also
recovered and are up 12.7 percent since June,
and 13.9 percent for 2012 as a whole.


The global decline in the price of risk, coupled
with the additional monetary stimulus provided
by high-income (and many developing-country)
central banks (box 1) helped prompt a rebound
in capital flows to developing countries since in
the second half of 2012 (figure 4). Gross capital
flows to developing countries, which fell by 15.5
percent in the second quarter of 2012 amid Euro
Area tensions, have rebounded sharply reaching
an estimated $170 billion in 2012Q4, the highest
level of inflows since the crisis began in August
2008.


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


Global Economic Prospects January 2013 Main Text


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


Source: World Bank, Datastream, Dealogic.


0


100


200


300


400


500


Jan '10 Jul '10 Jan '11 Jul '11 Jan '12 Jul '12 Jan '13


Basis points


East Asia & Pacific


Europe & Central Asia


Euro Area (excluding Greece)


Latin America & Caribbean


Middle East & N. Africa


Figure 4. Gross capital flows to developing countries
have rebounded


Source: World Bank, Dealogic.


0


20


40


60


80


Jul '09 Jan '10 Jul '10 Jan '11 Jul '11 Jan '12 Jul '12


New Equity Issuance Bond Issuance Syndicated Bank-Lending


$ billions





6


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


International syndicated bank lending to
developing-world borrowers has recovered as
well, coming in at a post-crisis high of $62bn in
2012Q4 (figure 5). The recovery appears to have
begun in the second quarter of 2012 and likely


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


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


Global Economic Prospects January 2013 Main Text


BFN1 In Turkey key policy rate used under the inflation-targeting framework is one week repo auction rate. In addition, inter-


est rate corridor and required reserve ratios are also used as policy instruments.


Box 1. Recent monetary policy developments


Central banks around the world intensified their efforts to stimulate growth through policy rate cuts and liquidity


injections beginning in the second half of 2011 after an earlier period of monetary tightening. Brazil and Turkey


were among the first large developing economies to reduce their policy rates by 50 basis points each in August


2011.BFN1 The majority of other monetary authorities have implemented a series of policy rate cuts since then, in-


cluding the European Central Bank (ECB) and the central banks of Australia, Brazil, China, Indonesia, Kazakh-


stan, South Africa and many others (box figure 1.1). By the third quarter of 2012, nominal policy rates worldwide


were actually lower than in 2009 during the worst of the financial crisis. Key policy rates settled at 7.25 percent in


Brazil, at 6 percent in China, at 5.75 percent in Indonesia and at 5 percent in South Africa.


Policy rate cuts were complemented by liquidity injections by major economies, where already low level of inter-


est rates prevented further policy-rate cuts. Currently, policy rates remain below one percent in Japan (since Sep-


tember 1995), in the US (since December 2008) and in the UK (since April 2009). Euro Area policy rates dropped


below one percent only more recently — in July 2012. Among the most recent monetary easing actions, a third


round of quantitative easing (involving central bank purchases of mortgage backed securities) in the United States,


and the European Central Bank‘s commitment to conduct Outright Monetary Transactions if necessary were par-


ticularly notable.


Given the weak economic outlook, G3 and other high income countries‘ policy rates are expected to be left loose,


and central banks are expected to continue with unconventional monetary policy throughout 2013-2014, and possi-


bly till mid-2015.


Box figure 1.1 Policy rate cuts (peak-less trough), Jan. 2011– Sep. 2012
Key policy rates, selected years


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


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a


B
ra


zi
l


C
hi


na


Tu
rk


ey


In
do


ne
si


a


R
om


an
ia


S
ou


th
A


fr
ic


a


P
ol


an
d


M
ex


ic
o


P
hi


lip
pi


ne
s


2005


2009


2012


percent





7


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


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


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


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


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


For the year as a whole, net international capital
flows to developing countries fell an estimated
19.7 percent in 2012, with inflows having
declined 9.5 percent and outflows rising 15.8


Global Economic Prospects January 2013 Main Text


Figure 6. FDI inflows to selected developing coun-
tries fell in the second quarter


Source: World Bank, national central banks.
Note: Total FDI for Brazil, Bulgaria, Chile, China, India,
Indonesia, Kazakhstan, Latvia, Lithuania, Malaysia, Mex-
ico, Peru, Romania, Russia, South Africa, Thailand, Tur-
key, Ukraine and Venezuela.


60


78


96


114


132


150


Nov '08 Apr '09 Sep '09 Feb '10 Jul '10 Dec '10 May '11 Oct '11 Mar '12


$ billions


Figure 5. Bank lending and equity issuance show trend rise, while bond issuance has been more volatile


Quarterly gross capital flows to developing countries, $ billions


Source: World Bank, Dealogic.


0


5


10


15


20


25


2009 2010 2011 2012


Gross Syndicated Bank Lending


0


5


10


15


20


25


2009 2010 2011 2012


Gross New Equity Issues


0


5


10


15


20


25


2009 2010 2011 2012


Gross Bond Issuance





8


percent (table 2). The sharpest declines were
among bank inflows and short-term debt flows
reflecting mid-year weakness cause by
deleveraging in high-income Europe and the
weakness of global trade in 2012. Both are
projected to pick up in 2013 and in the case of
bank lending are already on the rise. Overall
bank lending is projected to increase 12.7
percent in 2013 (15.5 percent for short-term
debt). However, the recovery will be only partial
and even as late as 2014 net bank flows are
projected to remain below their 2011 levels and
less than half of their 2008 levels.


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


4.1 and 4.2 percent of recipient country GDP in
2013 and 2014 (figure 8).


Improved financial conditions have
had only a modest reflection in real-
side activity


The increase in financial market uncertainty in
May and June of 2012 cut into economic activity
at the global level, ending recoveries in some
high-income countries and accelerating policy-
induced slowdowns that were occurring in
several middle-income countries that hit capacity
constraints in 2011. Faced with yet another
round of market uncertainty, firms, and
households cut back on investments and big-
ticket expenditures – causing global industrial
production, which had been growing at a 5.9
percent annualized pace in the first quarter, to
shrink in the second quarter.


Industrial production started to rebound in the
third quarter of 2012 , but the recovery has been
anemic particularly among high-income


Global Economic Prospects January 2013 Main Text


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


2008 2009 2010 2011 2012e 2013f 2014f 2015f


Current account balance 412.9 240.5 187.5 152.1 12.6 -8.0 -65.4 -80.4


Capital inflows 812.6 701.7 1,219.1 1,112.4 1,007.2 1,134.1 1,250.9 1,351.5


Private inflows, net 782.2 620.7 1,145.9 1,082.4 993.1 1,123.4 1,244.2 1,348.4


Equity Inflows, net 583.3 542.0 710.8 647.8 644.5 761.2 856.1 902.9


Net FDI inflows 636.9 427.9 582.7 638.8 600.1 693.2 756.5 783.0


Net portfolio equity inflows -53.6 114.2 128.2 8.9 44.4 68.0 99.6 119.9


Private creditors, net 198.8 78.7 435.1 434.6 348.6 362.2 388.1 445.5


Bonds -8.6 61.0 129.7 123.8 143.3 126.1 108.4 110.5


Banks 223.3 -11.9 37.2 108.2 71.5 80.6 88.9 105.1


Short-term debt flows -17.1 17.8 257.6 189.3 126.7 146.3 180.4 220.1


Other private 1.3 11.7 10.7 13.3 7.1 9.2 10.4 9.8


Official inflows, net 30.4 81.0 73.2 30.0 14.1 10.7 6.7 3.1


World Bank 7.2 18.3 22.4 6.6 4.6 .. .. ..


IMF 10.8 26.8 13.8 0.5 -3.9 .. .. ..


Other official 12.4 35.9 36.9 22.8 13.4 .. .. ..


Capital outflows -321.4 -174.5 -310.0 -320.0 -370.6 -373.4 -414.3 -463.6


FDI outflows -211.8 -144.3 -213.9 -213.1 -238.0 -275.0 -325.0 -370


Portfolio equity outflows -32.3 -75.2 -46.5 -15.9 -17.6 -19.4 -22.3 -28.6


Private debt outflows -78.3 50.7 -57.3 -81.0 -103.0 -72.0 -61.0 -56


Other outflows 1.0 -5.7 7.7 -10.0 -12.0 -7.0 -6.0 -9


Net capital flows (inflows + outflows) 491.2 527.2 909.1 792.4 636.6 760.7 836.6 887.9


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


Source: World Bank


Note: e = estimate, f = forecast


/a Combination of errors and omissions, unidentified capital inflows to and outflows from developing countries.





9


Global Economic Prospects January 2013 Main Text


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


Disappointing outturns in high-income
countries partly reflect policy uncertainty


In the United States, uncertainty over future
policy in the run up to the November elections
and from the so-called fiscal cliff contributed
significantly to the dampening of the recovery in
US growth during the second half of 2012.


Normally, with improving labor market and
consumer demand conditions, business
investment should be growing quickly, instead it
fell at a 1.8 percent annualized pace in the third
quarter. Had it instead expanded as might
normally have been expected (approximately 3.5
percent), GDP growth would have been much
stronger (perhaps growing by 3.4 instead of the
recorded 3.1 percent). Initial data for the fourth
quarter suggest that it too will be weak despite
improving retail sales, housing markets, and
employment (orders of capital goods are falling
or very weak, figure 9).


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


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


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


Figure 8. Net private capital flows to slowly recover
from 2012 lows


Source: World Bank.


-0.2


0


0.2


0.4


0.6


0.8


1


1.2


1.4


0


1


2


3


4


5


6


7


8


9


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


ST Debt %GDP (right axis) FDI Inflows Portfolio Equity Bond Flows Bank Lending


$ trillion % of recipient GDP


Figure 7. Money has come flooding back into develop-
ing country mutual funds


Source: World Bank, EFPRI.


-6


-4


-2


0


2


4


6


Oct '07 Jul '08 Apr '09 Jan '10 Oct '10 Jul '11 Apr '12 Jan '13


4-week moving average ($ billion)


Inflows into bond funds
Inflows into equity funds


Nov '12


Figure 9. Capital goods orders remain weak in high
income countries


Source: World Bank, Datastream.
Note: U.S. capital goods orders exclude defense and
aircraft orders.


-60


-40


-20


0


20


40


60


80


Apr '10 Sep '10 Feb '11 Jul '11 Dec '11 May '12 Oct '12


% change, 3m/3m saar


Germany


Developing


Japan


United States


Countries





10


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


In Japan, the boost to growth from
reconstruction spending in the aftermath of the
Tohoku earthquake and nuclear disaster has
faded, and as a result GDP fell at a 0.1 percent
annualized pace in the second quarter. Political
tensions between Japan and China, compounded
these woes in the second half of the year, with
the yen value of Japanese exports to China
falling by 17 percent between June and
November 2012 — contributing to a 3.5 percent
annualized decline in GDP in the third quarter.


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


Developing country growth is firm but is
being dampened by high-income weakness


Box 2 gives an overview of recent developments in the
developing regions, while the regional annexes (http://
worldbank.org/globaloutlook) provide additional detail as well as


country-specific forecasts.


For developing countries, the weak external
environment had an obvious moderating
influence on growth in the second quarter of
2012. Nevertheless, during the third quarter there
were increasing signs of strengthening domestic
demand in developing countries. In contrast with
high-income countries, developing-country retail
sales grew at a 13.9 annualized pace in Q3, and
capital goods orders picked up. Industrial
production also gained steam.


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


widely available, also accelerated and grew at a
5.3 percent annualized pace in the third quarter.


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


Data for the fourth quarter remains sparse. The
pace of industrial production growth in
developing countries has picked up to 8.6
percent during the three months ending
November 2012, with output accelerating in East
Asia & Pacific, Europe and Central Asia, and
South Asia toward year‘s end. Growth remains
slow and actually weakened in Latin America
and the Caribbean, while Q4 data are not
available elsewhere. Business sentiment
indicators such as purchasing manager indexes
(PMIs) are improving, although they remain
very low (figure 12).


Global Economic Prospects January 2013 Main Text


Figure 10. Industrial production in developing coun-
tries outside East Asia continues to strengthen


Source: World Bank, Datastream.


-10


-5


0


5


10


15


20


Jan '11 Apr '11 Jul '11 Oct '11 Jan '12 Apr '12 Jul '12 Oct '12


China


Other developing


Euro area


Other High-income





11


Global Economic Prospects January 2013 Main Text


Box 2. Following a second quarter slowdown, growth has picked up developing countries


Economic activity in the East Asia & Pacific region has rebounded, driven by robust domestic demand in China,


Indonesia, Malaysia, Philippines and Thailand and a surge in exports toward the newly industrialized economies


(NIE) of the region. Trade in the region surged toward the end of the year, with Chinese exports rising at a 8.6
percent annualized pace during the three months ending November, and it imports increasing at a 12.5 percent clip.


Reflecting these developments industrial activity in the region East Asia & Pacific has accelerated to an 15.0 percent


annualized pace through November, led by China. Inflationary pressures remain contained and well within the


targeted rates across the region. Asian equities have outperformed the major global and regional stocks markets and


have surged further in December reflecting an improving global and regional economic outlook.


Output in the developing Europe and Central Asia region had also a rebound during the final months of 2012 but the


economic performance was mixed across countries. While industrial production grew fast in Turkey, Lithuania, and


Kazakhstan, it contracted sharply in Bulgaria, Ukraine, Latvia, and modestly in Russia, Serbia and Romania during


the three months ending November. And, the summer drought cut into agriculture production in Russia, Romania,


Serbia, and Bosnia and Herzegovina. Despite weak import demand from high-income Europe, regional (especially


Turkey and Russia) trade rebounded toward the end of the year, reflecting low base effects and increased non-


European, including South-South sales. Despite slow growth, inflation gained momentum in the second half of 2012


reflecting increased food prices, supply constraints and increased taxes and administrative tariffs.


Despite a relatively weak external environment, domestic demand in the Latin American and the Caribbean region


held-up relatively well, recording GDP growth of 1.9 percent in the third quarter, as slightly stronger (albeit still


weak) growth in Brazil compensated for decelerating growth elsewhere, particularly in Argentina and Mexico. The


recovery in industrial production was even more marked, with output expanding at a 3.4 percent annualized pace


during the third quarter, due to a recovery in Brazil and Argentina. However, growth appears to have slowed once


again in Q4. Regional import demand has picked up, rising at a 9.5 percent annualized pace during the 3 months


ending November 2012 — following 5 months of decline. Exports growth remaining relatively weak, with
merchandise export volumes growing at a 3.8 percent annualized pace during the 3 months ending November.


Economic activity in the Middle East & North Africa continues to be buffeted by political turmoil, with aggregate


growth rising and falling as individual countries exit/ enter and re-enter periods of domestic turbulence that can be


very disruptive of short-term activity. Among oil importers in the region, activity declined sharply at an 9.8 percent


annualized pace in the third quarter as political uncertainty in Egypt, Jordan and Morocco weighed on economic


activity. And the combination of domestic disruption and weak Euro Area demand has seen export volumes plummet.


Output among developing oil exporters, has declined in aggregate as production increases in Libya and Iraq were


offset by declines in Iran following the tightening of international sanctions. Many countries in the region face rising


fiscal challenges due to heavy spending in an effort to dampen domestic discontent, with fiscal balances in many oil-


importers particularly sensitive to oil (and to a lesser extent food) prices due to subsidization policies.


After a very weak April-June quarter of 2012, economic activity in South Asia appears to have stabilized, with


industrial output growing at a 2.4 percent annualized pace during the three months ending November. While India


dominates the regional trend, industrial output in Pakistan also picked up sharply in the second half of the year. After


declining in line with weak global growth, South Asia‘s export volumes have also picked up in recent months —
although the US dollar value of regional exports are still down 2.2 percent in November from a year earlier. Inflation


in the region has moderated to an annualized 6.2 percent pace in the three months to November, in part reflecting a


stabilization and even decline in international commodity prices. Nevertheless, inflation in the region remains high


(more than 7.5 percent (y/y) in Bangladesh, and close to 10 percent in India, Nepal, Pakistan, and Sri Lanka),


reflecting structural capacity constraints, large fiscal deficits and entrenched inflationary expectations.


Among the 4 economies in Sub-Saharan Africa with available monthly industrial production data are available,
output in the oil exporting economies (Angola, Nigeria and Gabon) slowed in-line with developments elsewhere.


Activity in South Africa was disrupted by labor unrest, with GDP declining in the second quarter and picking up


modestly in the third quarter. Still high commodity prices are stimulating investment activity throughout the region,


and contributing to increased productive capacity and exports. Thus, despite the mid-year global economic slump,


export volumes were expanding rapidly mid-year year (at a 30 percent annualized pace in the second quarter, versus a


more modest 2.2 percent annualized growth rate for imports. Since then the pace of the export expansion has eased to


2.5 percent during the three months ending August. Headline inflation for the region decelerated steadily from a 10.4


percent annualized pace at the end of 2011 to a 6.3 percent pace during the three months ending October 2012.





12


Monetary policy may have exacerbated the
cycle in developing countries


The stop-go pattern of developing country
growth in the recent past partly reflects the
deterioration in international confidence during
the second quarter of 2012 and the end of year
weakness. However, it also reflects a significant
swing in domestic monetary policies (see earlier
box 1).


In response to rising inflationary pressures and
increasingly binding capacity constraints, many
developing countries appropriately tightened
policy during the second half of 2011 (figure 13).
As a result, real credit growth among several
large middle-income economies operating close
to capacity has decelerated during 2012. In
China, real credit growth dropped to an 11.6
percent annualized rate during the three months
ending in July from a peak of 25.3 percent in
February (figure 14). Similarly, a tighter
monetary stance in Brazil and India contributed
to a 5-8 percentage point drop in annualized real
credit growth rates.


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


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


Global Economic Prospects January 2013 Main Text


Figure 12. Business sentiment is improving but re-
mains low


Source: World Bank, Markit, and national sources.


40


44


48


52


56


60


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


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


China


Developing countries


Euro area


High Income


excl. ChinaNon-EU


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



Source: World Bank, Datastream.


-25


-20


-15


-10


-5


0


5


10


15


20


East Asia &
Pacific


Europe &
Central Asia


Latin America &
Caribbean


Middle-East &
North Africa


South Asia Sub-Saharan
Africa


2011 2012


Quarterly industrial production growth, % saar


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


Source: World Bank, Bloomberg.


0


5


10


15


20


25


Jan '11 Apr '11 Jul '11 Oct '11 Jan '12 Apr '12 Jul '12 Oct '12


Number of changes


Cuts


Increases





13


Developing country imports have been a
motor for global growth


Global trade has been very weak in 2012, and
estimates suggest that developing country
exports of goods and services increased by only
4.2 percent for the year as a whole. Developing
country imports held up better, rising 5.4 percent
reflecting the better economic performance of
developing countries. Overall global trade rose
only an estimated 3.5 percent in 2012 (compared
with a pre-crisis average of 6.2 percent).


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


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




Headwinds should diminish,
supporting a gradual acceleration of
growth


While there have been substantial forces acting
to slow the global economy in 2012, and many
of these are expected to persist through 2013 and
into 2014/15, there are also growing forces of
recovery that should support prospects going
forward.


In the United States, improving labor market
conditions (since June 789,000 jobs have been
added to the US economy and the unemployment
rate has fallen from 8.2 to 7.8 percent) are
helping to support income and consumer demand
growth. These improvements should, if fiscal
uncertainty is lifted, result in a strengthening of
investment growth.


In addition, the restructuring in the housing
market, which has been a persistent drag on
growth since 2005 (between 2005Q4 and
2011Q1 residential investment activity fell by 58
percent), appears to have reached a turning point.
While there are still many problems (including
underwater mortgages and regional oversupply),
the overall market has begun growing, supported
by low mortgage rates. Some observers argue
that the housing sector alone could add as much
as 1.5 percentage points to US growth in 2013
(Slok, 2012). Indeed, increasingly tight housing
market conditions have supported a recovery in


Global Economic Prospects January 2013 Main Text


Figure 14. Real credit growth has slowed in many ma-
jor developing countries


Source: World Bank, IMF IFS.


-10


0


10


20


30


40


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


Real credit growth, 3m/3m saar


Brazil


China


India


Turkey


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


Source: World Bank, Eurostat.


-8


-6


-4


-2


0


2


4


6


Domestic demand Net exports GDP growth


Italy


Ireland


France


Euro Area


Spain


Japan


U.S.


Germany


Portugal





14


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


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


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


In the baseline forecast of table 1, a deal is
assumed to be found before March 2013 that
prevents the remaining elements of the fiscal


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


The fiscal compression of this baseline is about
0.6 percentage points larger than in 2011, which
contributes to a slowing of GDP growth from an
estimated 2.2 percent in 2012 to 1.9 percent in
2013. In the outer years of the forecast, growth
should pick up to around 3 percent, as the
contractionary effects of continued consolidation
are partially offset by improved confidence that
the fiscal accounts are returning to a sustainable
path. Should the fiscal impasse remain
unresolved, the implications for growth in the
United States and the rest of the world could be
much more negative (see the more detailed
discussion below).


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


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


Global Economic Prospects January 2013 Main Text


Figure 16. An increasing share of developing country
exports goes to other developing countries


Source: World Bank, IMF Direction of Trade Statistics.


0


20


40


60


80


100


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


High income countries Developing countries


% of developing country exports by destination





15


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


In Japan, the current dispute with China is


sapping growth, while the country‘s huge fiscal
debt requires attention. Assuming that relations


with China improve during the course of 2013,


output is expected to gradually strengthen but to


expand by only 0.8 percent in 2013 before


strengthening toward 1½ percent by the end of


the forecast period.



Developing country growth should accelerate
slowly


Regional outlooks, including country-specific


forecast, are outlined in more detail in the regional


annexes to this report and are summarized in box 3.


Based on data to date, developing-country GDP
is estimated to have expanded a relatively weak
5.1 percent in 2012, largely on account of
developments during the first half of 2012. The
monetary policy easing undertaken by both high-
income and developing countriesFN12 in 2012 is
expected to lift liquidity, consumption and
investment spending in both high-income and
developing countries in the months to come.
This, plus the gradual improvement in demand
conditions in high-income countries is projected
to underpin a gradual acceleration of growth in
developing country growth to 5.5 percent in
2013, before firming further to close to 6 percent
in 2014 and 2015.


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


capacity and slowly recovering domestic and
external conditions underpin the projected pick
up in growth. The recovery in the developing
Middle-East & North Africa aggregate
principally reflects an assumed gradual decline
in political and military turmoil.


Commodity prices should stabilize or decline
in this moderate growth environment


Although they have been subject to significant
fluctuations during the course of 2012, the
average of industrial commodity prices in 2012
was broadly stable as compared with 2011. The
barrel price of crude oil was broadly unchanged
in 2012 at $106 versus, $104 in 2011, while
metals and minerals declined 15 percent. On
average, internationally traded food prices were
up only 1 percent in 2012 from 2011, as prices
were roughly equally high in early 2011 and late
2012. As of mid January 2013 internationally
traded USD prices of wheat and maize are 19
and 7 percent higher than in early January 2012,
down 30 percent from their August 2012 highs.


The surge in maize and wheat prices mid-year
was due to hot and dry conditions in the US that
mainly affected maize, while adverse weather in
Russia and to a lesser extent in Western Europe
cut into wheat production. The spike had less
severe consequences than the price hike in 2007-
08, mainly because fewer crops were involved
and because the supply shock was not


Global Economic Prospects January 2013 Main Text


Figure 17. Growth is expected to be capacity con-
strained in several regions


Source: World Bank.


-4


-2


0


2


4


6


8


10


12


East Asia &
Pacific


Europe &
Central Asia


Latin America &
Caribbean


Middle-East &
North Africa


South Asia Sub-Saharan
Africa


2010 2011 2012


2013 2014 2015


Annual GDP growth, %





16


Box 3. Regional outlook


GDP growth for East Asia and the Pacific region is projected to slow to 7.5 percent in 2012 – largely on account of


weak external demand and policy actions in China directed towards moderating domestic demand and controlling


inflation. Going forward, GDP growth in the region is projected to accelerate to 7.9 percent in 2013 before stabi-


lizing at around 7.5-7.6 percent in 2014-2015 – mirroring a modest acceleration in China in 2013 followed by


growth stabilization through 2015. GDP growth in the remaining countries in the region is forecast to average 5.9


percent over 2013-2015 underpinned by accelerating global trade and a rebalancing of regional demand toward


consumption. Disposable income in the region is forecast to benefit from appreciating (real) exchange rates, rapid


growth in wages in China and ASEAN-4 (Indonesia, Thailand, Malaysia) and an accommodative monetary policy


stance in the context of low inflation across the region. However, the envisaged recovery remains vulnerable to a


renewed crisis in the Euro Area, weaker than expected recovery in the US, and the possibility that a decline in Chi-


nese investment is not offset by robust consumption growth.


GDP growth in Europe and Central Asia is estimated to have eased to 3.0 percent in 2012 from 5.5 percent in


2011 as the region faced significant headwinds including: weak external demand, deleveraging by European


banks, a poor harvest and inflationary pressures. Growth slowed most in countries with strong economic linkages


to the Euro-area, while it was relatively robust in most resource-rich economies that have benefited from high


commodity prices. GDP growth in the region is projected to rebound to 3.6 percent in 2013 and to 4.3 by 2015,


supported by: improved agricultural performance, reduced deleveraging pressures, and strengthening external de-


mand. Medium-term prospects for the region will critically depend on progress in addressing external (large cur-


rent account deficits) and domestic (large fiscal deficit, unemployment, and inflation) imbalances; lack of competi-


tiveness; and structural constraints.


Growth in Latin America and the Caribbean decelerated in 2012 to 3 percent, in response to softening domestic


demand in some of the largest economies in the region and a weak external environment. Among the larger econo-


mies the growth deceleration was particularly sharp in Brazil (-1.8 percentage points) and Argentina (-6.9 pp.). A


more accommodative policy environment, stronger capital flows (notably FDI) and more robust external demand


are expected to lift regional growth over the 2013-2015 forecasting horizon to an average growth of 3.8 percent.


Labor and tax reforms underway in some of the larger economies, and a drive to boost infrastructure investment


should help address some of the structural issues that have constrained growth in the region. Risks remains tilted


to the downside with the possibility of larger-than-expected fiscal consolidation in high-income countries and a


hard landing in East Asia representing central concerns. Striking the right balance between demand stimulus poli-


cies and policies that enhance the region‘s supply potential remains a central challenge.


Output in the Middle East and North Africa region has recovered to above 2010 levels, but continuing political


uncertainty and unrest in several countries are weighing on economic activity. Regional GDP grew by 3.8 percent


in 2012, mostly due to a 4.6 percent rebound among oil exporters as crude oil production in Libya recovered to-


wards 2010 levels and output in Iraq continued to expand. Growth in oil importers in the region was significantly


weaker at 2.5 percent in 2012 due to the adverse impact of Euro Area economic contraction on regional exports


and tourism, and a combination of domestic problems, including a poor harvest in Morocco, fiscal difficulties in


Jordan, and continuing uncertainties in Egypt. Regional GDP growth is projected to slow to a 3.4 percent pace in


2013, as growth in oil producers returns to more sustainable rates, and then rise to around 4.3 percent by 2015 —


assuming that the negative influence on growth of ongoing uncertainty and domestic unrest eases during the pro-


jection period. The war in Syria and the sanction-fueled downturn in Iran are notable sources of instability and


weakness in the region.


South Asia's growth weakened to 5.4 percent in 2012, mainly reflecting a sharp slowdown in India. Weak global


demand exacerbated region-specific factors including: subdued investment rates, electricity shortages, policy un-


certainties, and weak monsoon rains. Sri Lanka's growth was also dampened by policy efforts to contain overheat-


ing and a poor harvest, while growth in Bangladesh slowed in part due to weakening exports. Inflation eased in


most South Asian countries during 2012; however, structural capacity constraints and entrenched inflationary ex-


pectations suggest limited scope for policy easing to support growth. South Asia‘s GDP is projected to rise 5.7
percent in 2013 and by 6.4 and 6.7 percent in each of 2014 and 2015, helped by policy reforms in India, stronger


(Continued on page 17)


Global Economic Prospects January 2013 Main Text





17


exacerbated by policy moves that served to
reduce international supply further.


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


Low maize and wheat stocks make these
markets particularly susceptible to additional
supply shocks


The stock-to-use ratio for maize currently stands
at 13.4 percent, the lowest level since 1972/73.
The wheat market is better supplied with a stock-
to-use ratio of 26.2 percent — more than 5
percentage points higher than in 2007/08. In
contrast, rice markets remain well-supplied, with
no notable price movements. At these levels,
wheat and maize prices could spike sharply once
again if there are further significant disruptions
to supply.


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


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


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


Global Economic Prospects January 2013 Main Text


investment activity, and a gradual improvement in global demand for South Asia‘s exports. Migrant remittances,


in particular from the oil-rich Gulf Cooperation Council (GCC) countries, are projected to remain resilient and


support domestic demand in Nepal, Bangladesh and Pakistan.


Growth in Sub-Saharan Africa has remained robust at 4.6 percent in 2012 (6.1 percent if South Africa is ex-


cluded), supported by resilient domestic demand and still relatively high commodity prices. Strong domestic de-


mand, an accommodative policy environment, increasing foreign direct investment flows, relatively high commod-


ity prices, and increased export volumes in countries with new mineral discoveries (Sierra Leone, Niger and Mo-


zambique) in recent years are expected to underpin a return to the region‘s pre-crisis growth rate of 4.9 percent in


2013 and even stronger growth in 2014/15. Nonetheless, risks remain tilted to the downside, as the global econ-


omy remains fragile. Weaker growth in China, ongoing fiscal consolidation in the Euro Area and the United States


could potentially derail the region‘s growth prospects.


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


Source: World Bank.


0


50


100


150


200


250


2000 2002 2004 2006 2008 2010 2012 2014 2016


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


Energy


Food


Metals & Minerals





18


Box 4. How is the global energy landscape evolving in response to high oil prices


The landscape of the global energy map is changing rapidly. The International Energy Agency (2012) recently


announced that thanks to increased production of natural gas and shale oil, the United States will become world‘s


largest oil producer surpassing Saudi Arabia by the mid-2020s, while North America (Canada, Mexico and the


U.S.A. combined) will become a net oil exporter by 2030.


These developments are to a large extent a natural market reaction to the quadrupling of international oil prices


between 2000-02 and 2010-12, which saw a substantial uptick in global exploration efforts and made profitable


extraction technologies.


High prices have boosted supply and moderated demand


In the United States, new techniques such as horizontal drilling and hydraulic fracturing (―fracking‖), have permit-


ted the wide-spread exploitation of until-now uneconomic shale oil; shale natural gas; and so-called ―tight-oil‖


deposits. As a result, U.S. crude oil and natural gas production has increased 30 percent during 2005-2011. Ulti-


mately, these technologies have already added over 1 mb/d to US crude oil output so far, and they are expected to


add much more. Partly as a result of these technologies, global proven reserves have risen by 33 percent since


2000, with 70 percent of the increase coming from increased extraction estimates (reserves growth) as opposed to


new discoveries. New discoveries have also been playing an import role, accounting for about 40 percent of pro-


duction during the same period (IEA, 2012). Associated investment has contributing importantly to growth in a


range of developing countries, including in Sub-Saharan Africa (see Sub-Saharan Africa regional annex).


The demand-side has also reacted, with a rapid increase in the energy efficiency of motor vehicle fleets both


through the introduction of new more energy efficient technologies such as hybrid cars and reduced demand for


energy inefficient vehicles. Since 2000, the average automobile mileage of new cars sold in the United States has


increased by 18 percent and that of the existing fleet by 7.7 percent. BFN1 Similar trends are observable throughout


the high-income world. As a result, OECD demand for oil has declined a total of 7.6 percent since 2005 (IEA,


2012B). Over the long run the IEA now expects OECD total liquids demand (crude and refined hydrocarbons)


demand to fall a further 11 to 21 percent depending on policies.


Demand outside of the OECD (mainly developing countries) has been more robust, with total liquids consumption


rising 3.5 percent annually since 2005, partly reflecting rising vehicle use. More than half of global oil output is


consumed by the transportation industry, which is the fastest growing component of oil demand, especially in


China, India, and the Middle East. These trends are expected to continue although at somewhat slower pace after


2020, with global oil and liquids demand rising by an annual average rate of 0.6 and 0.7 percent between 2011 ad


2035.


Yet, oil prices have remained resilient


Despite the equilibrating trends in supply and demand, world prices remain in excess of $100 per barrel, and are


expected to remain above $100 over the medium-to-long term, mainly because of the elevated extraction cost of


newly discovered and new-technology oil.


Yet, downside and upside risks exist. On the downside, the process of substitution away from oil and toward new


extractive technologies is not yet complete. Currently U.S. natural gas and coal trade at an 80 percent discount to


brent oil — opening up huge arbitrage opportunities, that are likely to exercise increasing downward pressure on


international prices as pipeline reversals and liquefied natural gas exports begin to de-compartmentalize interna-


tional markets. Over the longer-run, changes in battery technology and/or expanded use of natural gas could sig-


nificantly erode the engineering advantage of crude oil products (see Commodity Annex), allowing abundant and


low-cost coal to compete indirectly with liquid fuels through electrical vehicles.


A significant upside risk, stems from the environmental costs associated with new extraction techniques. For the


moment, there remains a lively debate concerning the potential for geological damage pollution to aquifers from


the chemicals and heavy fresh-water use of fracturing techniques.


Global Economic Prospects January 2013 Main Text


BFN 1. Increase in new vehicle passenger car efficiency between 2011 and 2000; Increase in short-wheel base vehicles 2009-2000 Bureau of
Transportation Statistics (2012).





19


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


Policy makers should be prepared
for continued global volatility


While a great deal of progress has been made in
improving fiscal sustainability and crisis-
management institutions in the Euro Area, much
more needs to be done before the risk of further
crises can taken off the table. In the United
States the major fiscal contraction threatened by
the fiscal cliff has passed, but uncertainty
continues to surround the future path of fiscal
policy and the threat of serious economic
disruption posed by the persistent possibility that
the debt-ceiling will not be raised is also a
source of external risk for developing countries.


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


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


Developing countries remain vulnerable to a
deterioration of conditions in the Euro Area


As previously discussed, the Euro Area crisis has
already significantly impacted developing
economies, slowing GDP growth and the pace at
which incomes rise — translating directly into
slower progress in relieving poverty.
Importantly, the range of national and pan-
European measures taken over the past several
years, including by the ECB, has significantly
reduced the risk of an acute crisis.


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


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


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


 Tourism, especially from high-income Europe,
would be reduced with significant implications


Global Economic Prospects January 2013 Main Text





20


for countries in North Africa and the
Caribbean.


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


 Commodity prices: The weakening of global
growth in the Euro Area scenario causes a 7.5
percent decline in oil prices and a 7.4 percent
decline in metal prices. Such declines, are
likely to cut into government revenues and
incomes in oil and metal exporters, but helping
to cushion the blow among oil importing
economies.


 Banking-sector deleveraging: A crisis scenario
could accelerate the process of bank-
deleveraging in Europe, with economies in
Europe and Central Asia most likely (among
developing countries) to be affected.


Continued fiscal policy uncertainty in the
United States could hit developing countries
fairly hard


Following five years of large budget deficits, the
United States has yet to agree on a set of policies


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


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


The simulation results in table 3 report the
impact on GDP, current-account and fiscal
balances of developing countries in 2013 from
such an alternative scenario. It assumes that the
uncertainty generated by prolonged negotiations
— including surrounding the debt ceiling —
continues to weigh on investment and consumer
durable spending in the United States, but also in


Global Economic Prospects January 2013 Main Text


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


Source: World Bank.


2013 2014 2015


Real GDP


Current


account


balance


Fiscal


balance


(% change in


level)


U.S. -1.0 -0.6 -0.2 -2.3 0.6 -0.5


World -1.3 -0.8 -0.4 -1.4 0.0 -0.5


High-income countries -1.4 -0.9 -0.4 -1.5 0.1 -0.6


Euro Area -2.3 -1.4 -0.8 -1.1 0.2 -0.4


Developing countries -1.1 -0.7 -0.3 -1.0 -0.1 -0.5


Low-income countries -0.6 -0.4 -0.1 -0.7 0.1 -0.2


Middle-income countries -1.1 -0.7 -0.3 -1.0 -0.1 -0.5


Developing oil exporters -1.3 -0.9 -0.4 -1.2 -1.1 -1.0


Developing oil importers -0.9 -0.6 -0.3 -0.9 0.3 -0.2


East Asia & Pacific -1.0 -0.7 -0.3 -1.1 0.4 -0.2


Europe & Central Asia -1.3 -0.9 -0.4 -0.9 -1.0 -0.8


Latin America & Caribbean -1.2 -0.8 -0.3 -1.2 -0.4 -0.6


Middle East & N. Africa -1.0 -0.7 -0.3 -0.8 -0.7 -1.4


South Asia -0.5 -0.3 -0.2 -0.4 0.6 0.0


Sub-Saharan Africa -1.0 -0.7 -0.3 -0.9 -1.3 -0.8


Euro crisis US fiscal paralysis


2013


(% change in level of GDP)


(change, % of GDP)





21


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


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


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


An abrupt fall in China’s high investment
rates could slow global growth


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


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


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


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


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


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


Global Economic Prospects January 2013 Main Text


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


Source: World Bank.


0


10


20


30


40


50


1960 1970 1980 1990 2000 2010


Nominal investment as % of GDP


China


Developing countries


High Income Countries


Post-crisis stimulus


2005/08 boom period


Bringing investment rate down to pre-boom and crisis level


of 35% implies a 10% of GDP reallocat ion of demand.


China in 2030 sees 35% investment rate as consistent


with China's long-term production potential.


excl. China





22


share of new investments to realize hoped for
profits, resulting in a spike in unpaid loans and a
rapid tightening of credit conditions.FN14 In such
a scenario, investment growth would likely come
under significant pressure.


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


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


Among the developing countries in the region,
GDP in Vietnam and Thailand, could decline by
0.7 percent (relative to baseline), while in
Indonesia the hit would be somewhat smaller at
0.6 percent. Other impacts range between 0.4
percent in Malaysia and 0.2 percent in Lao PDR.


But these regional impacts are not the largest.
China currently consumes 40 percent or more of
many of the world‘s metals. A sharp decline in
its investment rate would have significant impact
on commodity prices, with large knock on
effects for commodity exporting countries. In the
above mentioned scenario, oil prices are


projected to decline by 2.8 percent and metal
prices by 4.3 percent relative to baseline.


As a result, in oil exporting countries such as
Nigeria, Oman, and Saudi Arabia the balance of
payments (as percent of GDP) would decline by
more than 0.5 percentage points. In metal-
exporting countries such as Chile and Peru
current account balances could also weaken
substantially. The simulations suggest that
declining incomes due to weaker export prices,
could results in GDP declines ranging from 0.9
percent in Kazakhstan to around 0.5 percentage
points in Mexico and Nigeria.


Fiscal balances would also be affected in
commodity exporting countries, adding to the
drag on growth – especially among those
countries running already large deficits. With so
many commodity exporters located in Sub
Saharan Africa, the region would feel the impact
of the Chinese slowdown more strongly than its
direct trade linkages might suggest. Simulations
suggest that the region‘s current account and
fiscal balances could decline by 0.6 and 0.3
percent of GDP in 2013.


Global Economic Prospects January 2013 Main Text


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


Source: World Bank.


Real GDP Current account


balance


Fiscal balance


(%change in


level)


China -1.4 1.7 -0.3


East Asia & Pacific -1.3 1.3 -0.3


East Asia & Pacific (excl China) -0.6 0.0 0.0


World -0.5 0.0 -0.2


High-income countries -0.4 -0.2 -0.2


Euro Area -0.4 -0.1 -0.1


Developing countries -0.7 0.4 -0.3


Developing countries (excl China) -0.3 -0.3 -0.2


Low-income countries -0.3 -0.2 -0.1


Middle-income countries -0.7 0.4 -0.3


Developing oil exporters -0.4 -0.5 -0.3


Developing oil importers -0.8 0.8 -0.2


Europe & Central Asia -0.3 -0.5 -0.3


Latin America & Caribbean -0.3 -0.2 -0.2


Middle East & N. Africa -0.3 -0.4 -0.5


South Asia -0.2 0.0 0.0


Sub-Saharan Africa -0.3 -0.6 -0.3


(change,% of GDP)





23


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


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


However, the majority of developing countries
are facing a different set of challenges. Unlike
high-income countries, they have by and large
recovered from the 2008/09 crisis. For most of
these countries, the policy focus needs to shift
back to structural efforts to enhance potential
growth, and away from demand management. At
the same time, they need to continue working
toward reducing both domestic and external
vulnerabilities.


For many developing countries this means
rebuilding the fiscal, monetary and social policy
buffers that were consumed during the 2008/9
crisis, so that if some of the still-present risks
facing the global economy are realized , these
economies would once again be in a position to
respond forcefully.


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


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


policy making more challenging than normal.
But these difficulties are magnified by
uncertainty over both the level and rate of
growth of potential output (the level of activity
and pace of growth that an economy can
maintain without generating inflationary or
current account pressures) in developing
countries. To the extent that policy makers over-
estimate potential and follow a more stimulative
policy than conditions warrant, they could end
up wasting scarce resources by raising future
debt burdens and inflation with little or no
benefit in terms of additional (sustainable) real
GDP growth.


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


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


Despite progress in reducing fiscal deficits,
more needs to be done


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


Global Economic Prospects January 2013 Main Text





24


Fortunately in most developing economies this
does not appear to be the case. In aggregate,
developing country fiscal balances have
improved markedly from -4.5 percent of GDP in
2009 to an estimated -2.9 percent in 2012 (figure
21). The improvement reflects both improved
cyclical tax revenues due to the firming business


cycle, and a 1.3 percent of GDP improvement in
the structural (cyclically adjusted) budget
balance – implying that on average countries are
gradually re-establishing buffers (box 6).


Nevertheless, compared with 2007 levels, fiscal
deficits as a percent of GDP have widened in


Global Economic Prospects January 2013 Main Text


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


Source: World Bank.


-10


-8


-6


-4


-2


0


2


4


6


8


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


Estimated Output gap, percent of potential GDP


Figure 21. Fiscal deficits in developing countries are
mainly structural in nature


Source: World Bank.


-5


-4


-3


-2


-1


0


1


2


3


2005 2006 2007 2008 2009 2010 2011 2012 2013 2014


Structural Balance Cyclical Balance Total Balance


Fiscal balances in developing countries (%GDP)


Box 5. Estimating potential output and the cyclical position of developing economies


The boom-bust cycle through which developing (and developed) countries have passed in this millennium compli-


cates the evaluation of both the level and rate of growth of potential output. Based on pre-crisis performance, de-


veloping country policy makers could easily conclude that developing-country potential GDP growth is around 7-8


percent per year (average growth for developing countries in the 5 years through 2007 was 7.3 percent.


Naive measures of potential (such as moving averages of aggregate GDP growth or even statistical measures such


as the Hodrik-Prescott or Kalman filters) are prone to


errors (Giorno and others, 1995) – in part because they
are heavily influenced by the most recent observations.


If a measure is taken towards the end of a boom period


it will tend to over-estimate potential, while if it is


taken during a bust phase it will tend to under-estimate


(Mise, Kim & Newbold, 2005).


The preferred method is to use a production function


method that accounts for changes in labor supply and


the capital stock as well as productivity growth (see


for example OECD (2008), IMF (2005) CBO (2001)).


Measures that rely on a naïve estimate of potential


based pre-crisis performance give an excessively opti-


mistic sense of sustainable growth (7.3 percent), ver-


sus 5.9 percent based on underlying productivity, labor


force and capital growth (box figure 5.1). Importantly,


the naïve measure can lead to policy errors, suggesting


that substantially more slack exists in the system than


do more sophisticated measures.


Box figure 5.1 Using boom period growth as potential
results in a substantial over-estimation of slack


Source: World Bank.


-12


-10


-8


-6


-4


-2


0


2


4


6


15.4


15.6


15.8


16.0


16.2


16.4


16.6


16.8


1990 1995 2000 2005 2010 2015


Naïve output gap WBG output gap


Naïve potential WBG potential


Actual GDP


Log of potential GDP Output gap (%of GDP)





25


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


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


For developing countries operating at close to
potential, a strong argument can be made for
gradually tightening fiscal policy in an effort to
replenish buffers. World Bank estimates suggest
that some 14 percent of developing countries are
operating at close to potential, but have fiscal
deficits in excess of 3 percent of GDP.
Especially in a global context where the risk of a
serious external shock remains elevated, a
prudent re-establishment of depleted fiscal space


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


Global Economic Prospects January 2013 Main Text


Box 6. Output gaps and fiscal space


In the boom years prior to the financial crisis, with GDP growth exceeding potential, large positive output gaps devel-


oped, reaching 3.8 percent of GDP by 2008 in developing countries. This strong (cyclical) boost to activity raised tax


revenues (in U.S. dollar terms) in developing countries by nearly 26 percent in 2007 alone.


Fortunately, most developing countries were pursuing a cautious fiscal policy, and used the cyclical tax proceeds to re-


duce fiscal deficits, which actually turned to surpluses of 0.1 and 0.8 percent of GDP in 2007 and 2008 respectively.


With this conservative, counter cyclical fiscal policy, developing-countries created the fiscal space that in turn allowed


deficits to rise counter-cyclically during the crisis — helping to mitigate the downturn.


The speed with which developing countries recovered from the crisis nicely illustrates the advantages of having ample


buffers. Indeed, looking across regions there is a strong negative correlation between the size of fiscal surplus in 2007


and the size of the GDP hit countries took, with regions that were in surplus having generally experienced a larger fluc-


tuation in their fiscal deterioration and a smaller decline in GDP (relative to potential). The notable exception to this


pattern was the Europe and Central Asia region, which unlike other regions had been caught up in the financial excess of


the boom period and therefore suffered both an external and a domestic shock.


Box table 6.1 Output gaps and fiscal balance responses following the financial crisis


Source: World Bank.


Developing


countries
EAP ECA LAC MNA SAS SST


Fiscal Balance in 2007 0.0 0.4 3.0 -1.3 -0.1 -4.1 0.4


Change in output gaps (A) -4.0 -1.4 -10.7 -5.4 -0.1 -2.0 -3.1


Change in fiscal balances (B) -3.8 -2.7 -7.2 -3.0 -3.8 -1.6 -6.8


Elasticity (B to A) 0.9 1.9 0.7 0.5 29.4 0.8 2.2


Figure 22. Many developing countries need to con-
tinue growing fiscal space


Source: World Bank.


0


5


10


15


20


25


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


0


M
o


re


2007 2012
2007 :


2012:


25% of countries had a deficit in excess of 3% of GDP
49% were in balance or running a surplus


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


*


*


*


*


# Countries


Level of balance, % of GDP





26


levels or even pursuing a more stimulative
policy.


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


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


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


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


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


The payoff from improved macro buffers
could be large


The potential benefits of reestablishing fiscal and
monetary policy space is difficult to assess
unambiguously. However, the resilience with


Global Economic Prospects January 2013 Main Text


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


Source: World Bank, national central banks.
Note: the real interest rate is implied by the distance be-
tween the triangle and actual inflation.


0


1


2


3


4


5


6


7


8


9


China Thailand Chile Colombia Mexico Indonesia Brazil South
Africa


Russia India Turkey


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


Percent


Figure 23. Inflationary pressures are under control


Source: World Bank, Datastream and International Labor
Organization.


0


2


4


6


8


10


12


14


Apr '10 Sep '10 Feb '11 Jul '11 Dec '11 May '12 Oct '12


Percent change, 3m/3m saar


Developing Food Inflation


Developing Headline Inflation


High-Income Headline Inflation





27


which developing countries exited the recession
of 2008/9 suggests that benefits could be large.


Table 5 reports the results of a set of simulations
designed to illustrate the potential benefits of
creating additional fiscal space. It shows the
impact on developing country GDP of a uniform
5 percent decline in high-income GDP due to an
unspecified shock.


In the first set of results, automatic stabilizers are
assumed to operate in developing countries —
i.e. sufficient funds are assumed to be found on
domestic and foreign capital markets to maintain
spending at pre-shock levels despite a 3.5
percent decline in tax revenues.


In the second scenario, the same external shock
is applied but countries are assumed to be unable
to finance more than a 3 percent of GDP deficit.
For countries with a baseline exceeding 3
percent of GDP, it is assumed that no additional
borrowing can be found. For those where the
initial deficit was below 3 percent, but rose to
more than 3 percent in the unconstrained
simulation, it is assumed that only enough
financing to cover a 3 percent of GDP deficit is
obtained. In both cases, government expenditure
is cut by an amount sufficient to maintain pre-
existing deficits or a deficit of up to 3 percent of
GDP.


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






Current account and external debt positions
have also deteriorated as compared with 2007


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


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


Global Economic Prospects January 2013 Main Text


Table 5. GDP impact of an arbitrary high-income coun-
try shock (equivalent to 5 percent of GDP) on GDP


Source: World Bank.


Unconstrained


scenario


(A)


Binding constraint


scenario


(B)


Difference


(B-A)


(percentage


points)


High-income countries -5.2 -5.5 -0.3


Developing countries


countries with adequate buffers -3.4 -3.8 -0.4


countries with inadequate buffers -2.3 -3.4 -1.1


East Asia and Pacific


countries with adequate buffers -3.9 -4.3 -0.4


countries with inadequate buffers -3.1 -3.5 -0.4


Europe and Central Asia


countries with adequate buffers -2.2 -2.4 -0.2


countries with inadequate buffers -2.8 -4.3 -1.5


Latin America and Caribbean


countries with adequate buffers -2.3 -3.0 -0.6


countries with inadequate buffers -2.5 -4.3 -1.9


Middle East and N. Africa


countries with adequate buffers na na na


countries with inadequate buffers -1.9 -2.9 -1.0


South Asia


countries with adequate buffers na na na


countries with inadequate buffers -1.5 -1.7 -0.2


Sub-Saharan Africa


countries with adequate buffers -1.9 -2.1 -0.3


countries with inadequate buffers -1.9 -2.7 -0.8


(% change in GDP)





28


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


Falling international reserves and high current
account deficits may constrain monetary policy
in some middle-income countries (e.g. South
Africa and India). To the extent that reserves are
being consumed to meet external financing
requirements and imports, countries may be
forced to keep interest rates high in order to
attract foreign capital flows (or deter outflows).


Commodity exporters with weak current account
positions are particularly at risk if commodity
prices ease – either because of better supply
conditions or a slowing in global demand. Were
oil or metal prices to fall by 20 percent, both
foreign currency and government revenues in
commodity exporters would be hit hard –
potentially forcing them to cut into spending and
imports. Simulations show that in such an
instance commodity exporters could be hit by
declines in fiscal balances as high as 2.8 percent
of GDP and a 6.5 percent of GDP declines in
their current account positions. GDP impacts
will depend on the extent to which fiscal space
exists (see earlier discussion), but even in the
absence of constraints impacts could be as large
as 2.8 percent (table 6).


Global Economic Prospects January 2013 Main Text


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


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


0


20


40


60


80


100


120


140


160


180


Short-term debt as % of international reserves


0


0.5


1


1.5


2


2.5


3


3.5


Months of imports covered by reserves


Figure 26. Dual deficits pose challenges in several de-
veloping countries


Source: World Bank.


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


St. Vincent & the Grenadines
Guinea Bissau


St. Lucia
Cape Verde


Swaziland
Jamaica
Uganda


Tanzania
Lesotho


Sierra Leone
Jordan


Mala
Guyana


Mozambique
Ghana


Mauritius
Burkina Faso


Georgia
Armenia
Senegal
Tunisia


Morocco
Lebanon


Honduras
Cambodia
Sri Lanka


Syria
Kyrygz Republic


Kenya
Yemen


South Africa


Current account balance


Fiscal balance


Percent of GDP





29


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


While some demand stimulus may be in order for
developing countries that still have large output
gaps and where policy space exists, for the
majority of developing countries promoting
stronger growth will require emphasizing the
kinds of deeper long-term structural policies that
underpinned the acceleration of growth that they
have enjoyed over the past 15 years. The bulk of
that acceleration was due to increased
productivity growth, which in turn derived from
improvements in the overall policy environment,
including:


 greater macroeconomic stability (bringing
inflation, government deficits and debt under
control)


 an opening up to global trade characterized
by substantial declines in tariffs (and often
initiated unilaterally)


 a similar opening up to FDI, and the
technology transfers that accompanied it


 a strengthening of the rule of law; reductions
in corruption; and declines in regulatory
obstructions to business activity


 substantial investments in human capital
(education; health; and gender equality) as
well as investment in infrastructure


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


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


Concluding remarks


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


Global Economic Prospects January 2013 Main Text


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


Source: World Bank.


0


0.2


0.4


0.6


0.8


2000 2010 2020 2030 2040 2050


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


Slow growth (-1.0 pp pa)


Weaker growth (-0.5pp pa)


Rapid growth (+1.0pp per annum)


Faster growth (+0.5 pp pa)


Baseline


Table 6. Country vulnerabilities to changes in com-
modity prices


Source: World Bank.


Oil Food
Metals &


minerals


Kuwait -2.8 Paraguay -2.0 Mali -2.3


Yemen, Rep. -1.9 Uruguay -1.8 Peru -1.6


Nigeria -1.6 Argentina -1.2 Kyrgyz Republic -1.0


Kazakhstan -1.2 New Zealand -0.7 Chile -1.0


Iran, Islamic Rep. -0.7 Belize -0.6 Botswana -0.6


Venezuela, RB -0.7 Uganda -0.6 South Africa -0.5


Colombia -0.4 Bolivia -0.6 Bolivia -0.4


Cote d'Ivoire -0.4 Brazil -0.4 Mozambique -0.4


Latvia -0.3 Guyana -0.3 Mauritania -0.4


Trinidad and Tobago -0.3 Malawi -0.2 Guyana -0.4


Georgia -0.2 Chile -0.2 Ghana -0.3


Belarus -0.2 Kenya -0.2 Ukraine -0.3


Ecuador -0.2 Mauritius -0.2 Uganda -0.3


Russian Federation -0.1 Ecuador -0.2 Australia -0.3


Norway -0.1 Cote d'Ivoire -0.2 Namibia -0.2


20% reduction in specified commodity prices in 2013-2015


% change from baseline GDP





30


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


Developing countries can grow rapidly in this
environment. However, to do so they will need
to maintain and reinforce the reform momentum
evident during the 1990s and 2000s, and which
underpinned the acceleration in growth
observed. Given the potential volatility of the
external environment, this should be
complemented by a gradual program of fiscal
consolidation among developing countries and
where necessary monetary tightening so that
countries have the kind of policy space that
would allow them to respond forcefully in the
face of a serious downturn.


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


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


Notes


1. In this publication the aggregate developing


Europe & Central Asia refers to the low– and
middle-income countries (countries with per-


capita incomes of less than $12,276 in 2010)


of the geographical region. As such, this


classification excludes from the aggregate


Croatia, Czech Republic, Estonia, Hungary,


Poland, Slovakia, and Slovenia — countries


that may be contained within the aggregate in


other World Bank documents.


2. The average core Tier 1 capital ratio for the


23 biggest European banks by assets stood at


11.4 percent in the third quarter of 2012, up


sharply from the 6.5 percent pre-crisis level.


In the United States, the average tier 1 capita


ratio of the 30 largest banks rose to 11.9


percent at the end of September 2012,


compared with 8.5 percent in the second


quarter of 2008.


3. Spreads on Argentine government debt


surged to 3675 basis points (2408 bps since


June), following court rulings that called into


question the nation's 2001 debt restructuring


deal. Later in November however, a


temporary injunction eased the country‘s
default risk and currently spreads are around


1600 bps.


4. The decline in yields reflects both a 140 basis


point fall in EMBIG spreads since June, and a


decline in U.S. interest rates in reaction to


quantitative easing. Developing country bond


spreads are now below their long-term


average levels (of around 310 bps).


5. Most of the upgrades took place in Latin


America, including Bolivia, Ecuador,


Grenada, Panama, Paraguay, Peru, Suriname,


and Uruguay. However Argentina, Belize,


and El Salvador experienced downgrades.


Outside Latin America, Indonesia, Turkey,


and Latvia were upgraded to investment


grade, while notable downgrades occurred for


Belarus, Egypt, Serbia outlook, South Africa,


Tunisia, Ukraine, and Vietnam with most


downgrades occurring since September. In


con t r as t , h igh - i ncome coun t r i e s ‘
creditworthiness continued to deteriorate in


2012 amid the lingering European debt crisis,


with Greece, Italy, Portugal, and Spain


suffering multiple downgrades. Overall, high-


income sovereigns experienced a total of 20


downgrades, with one upgrade for Greece in


2012.


6. For high-income countries, PMI‘s are lower
than would normally be associated with


current levels of economic activity. This


likely reflects the very difficult period that the


global economy has gone through, where


Global Economic Prospects January 2013 Main Text





31


successive waves of financial market tensions


have arisen, eased and then arisen once again.


Each of these episodes of heightened tensions


has been associated with a temporary increase


in precautionary savings and a period of weak


growth. This experience may have generated a


reluctance to commit to new expenditures for


fear of a renewed slowing of activity, even


though financial conditions appear to have


improved much more than during earlier


episodes. Weak confidence and uncertainty


also have roots in the very real challenges


facing high-income countries and concern that


political realities will prevent the kind of


decisive and medium-term action that might


encourage investors and households to believe


that economies are likely to return to a


stronger and more stable growth track.


7. The Case-Shiller 20-city price index increased


at a 2.6 percent annualized pace in the three


months ending July and housing starts are up


26 percent during the first eight months of


2012 versus the same period in 2011.


8. The U.S. Office of Management and Budget


(Zeints, 2013) provides an estimate of the


fiscal savings from measures put in place


January 1, 2013 of $617bn over 10 years


against an unchanged policy scenario. This


contrasts with the somewhat misleading CBO


estimate of $3.6tn (CBO, 2013) in additional


deficits, which was based on the


counterfactual of all of the sequesters and tax


increases of the fiscal cliff having been fully


engaged.


9. On August 5 2011, Standard & Poor‘s
downgraded the sovereign debt of the United


States from a AAA to AA+ rating, citing


among other reasons, the failure of the


authorities to address medium-term fiscal


issues — including the debt ceiling (Standard
& Poors, 2011).


10.Typically, fiscal multipliers have been


estimated in the range of 0.3 to 1


(Spilimbergo, Symansky, and Schindler,


2009). Most recently, the IMF (2012) argued


that in the current recession fiscal multipliers


in high-income countries have been higher


perhaps as high as 1.7. Data derived from the


2008/9 crisis period suggests point estimates


for developing regions ranging from 0.5 to


2.6.


11.See box 3 in the June 2012 edition of Global


Economic Prospects (World Bank, 2012) for a


more complete discussion of carryover (the


influence of past year‘s quarterly growth rates
on future year‘s annual growth).


12.Policy rate cuts were complemented by


liquidity injections by major economies, for


example the Federal Reserve Bank‘s QE3 and
the ECB‘s commitment to Outright Monetary
Transactions. As a result, by 2012Q3,


monetary positions worldwide had become


very accommodative and policy rates had


declined below their 2009 levels. Key policy


rates settled at 7.25 percent in Brazil, at 6


percent in China, at 5.75 percent in Indonesia,


and Turkey 5.5 and at 5 percent in South


Africa.


13.Differences between this scenario and that


presented in the June 2012 edition of Global


Economic Prospects include the timing and


amplitude of the modeled deterioration of


conditions. In the present scenario, the


deterioration is assumed to occur in the first


quarter of 2013.


14.See also box 4.2 ―How would investment
slowdown in China affect other emerging


market and developing economies?‖ IMF
2012.


15.Quarterly inflation is in double digits in 11 of


the 38 countries where inflation exceeds 6


percent (Belarus, 30 percent; Burundi, 14.3


percent; Eritrea, 13.5 percent; Ethiopia, 26


percent, Malawi, 30 percent, South Sudan, 41


percent, Sudan, 46 percent; Iran, 30 percent,


Syria, 40 percent and Venezuela, 18 percent).




















Global Economic Prospects January 2013 Main Text





32


References


Bureau of Transportation Statistics. 2012. Table


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p u b l i c a t i o n s /


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CBO (Congressional Budget Office). 2001.


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


DC.


______. 2012. An Update to the Budget and


Economic Outlook: Fiscal Years 2012 to


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Update_to_Outlook.pdf


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Ehrman, Michael, and Frank Smets. 2001.


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domestic economies and Food Security? Food


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


Ilzetzki, Ethan, Enrique G. Mendoza, and Carlos


A. Végh. 2011. ―How Big (Small?) Are Fiscal
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International Energy Agency (IEA). 2012a. Oil


Market Report (13 November 2012). OECD/


IEA, Paris.


______. 2012b. World Energy Outlook 2012.


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IMF (International Monetary Fund). 2005. World


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______. 2012. World Economic Outlook.


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Prescott Filter at Time-Series Endpoints.‖
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OECD. 2008. Economic Outlook. Paris, France.


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reverse housing recovery. Chartbook,


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Nov. 25, 2012.


Standard & Poors. 2011. Global Credit Portal:


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States of America Long-Term Rating


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Rising Debt Burden; Outlook Negative.‖
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rating-action/en/us/. Downloaded Dec. 11,


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Spilimbergo, Antontio, Steve Symansky, and


Martin Schindler. 2009. ―Fiscal Multipliers‖
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www.whitehouse.gov/omb/blog


Global Economic Prospects January 2013 Main Text





Global Economic Prospects January2013 Finance Annex


Recent developments in financial markets


Conditions in global financial markets have


eased significantly since July following the


decisive actions taken by the European Central


Bank, US Federal Reserve and to a lesser degree


in Japan.


The announcement of possible ECB measures to


defend the Euro in late July and the actual launch


of ECB’s bond-buying program followed by the
German Constitutional Court favorable ruling on


the European Stability Mechanism in September


have lowered the risk of an acute European crisis


(box FIN.1: Recent developments in Euro-zone).


Also in September, the Federal Reserve began its


third round of quantitative easing (QE) with $40


billion asset purchase per month. A few days


later, the Bank of Japan also added ¥10 trillion


($129 billion) to its asset purchasing program.


Since July 2012 yields of high-spread Euro Area


sovereigns have narrowed substantially and


financial markets’ assessment of risk has
improved considerably. The cost of insuring


against sovereign default on high-spread


European countries has sharply from earlier


highs. Credit Default Swap (CDS) rates are now


below their January 2010 levels (prior to the


initial bout of Euro Area tensions) in most high-


income countries and those of developing


countries have declined on average 90 bps since


the end of June with largest falls recorded by


developing European economies (figure FIN.1).


The reduced likelihood of an acute European


crisis, and increased global liquidity contributed


to a recovery in global equity markets. After


losing about 10 percent of their value between


mid-March and mid-May, global stock markets


have recovered with a full year gain of 13.9


percent in developing countries and 12.7 percent


in developed countries (figure FIN.2). Despite


these improvements, investors remain concerned


over the US fiscal challenges, global economic


growth and implementation of the Euro area


rescue plan.


Improved sentiment was accompanied by a


recovery in gross capital flows to developing


countries


Gross capital flows (international bond issuance,


cross-border syndicated bank loans and equity


placements) to developing countries have


fluctuated widely with investor sentiment over


Financial Markets


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


Source: Bloomberg.


70


75


80


85


90


95


100


105


110


Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13


Emerging Markets


Developed Markets


MSCI Equity Index
Jan 2011 =100


Figure FIN.1 Developing country CDS rates tightened
as risk-aversion eased


Source: Datastream and World Bank.


0


50


100


150


200


250


300


350


400


450


500


Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13


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


CDS Sovereign rates
basis points


33





Global Economic Prospects January2013 Finance Annex


the past few years (figure FIN.3). After rebounding


during the first quarter, flows fell by about 30 and


40 percent in May-June following the heightened


uncertainty related with the Euro-area debt crisis.


Nevertheless, flows have rebounded since July—


the easing of flows in August reflecting a normal


seasonal lull—as the ECB measures reduced the
perceived probability of an acute Euro-area crisis


and monetary-easing by Federal Reserve and Japan


Central Bank increased global liquidity. With the


Box FIN 1. Euro Area developments in the second half of 2012


The Euro Area’s crisis response has progressed significantly during the second half of 2012. In mid-July, markets
concerns rose due to uncertainty surrounding several key events scheduled for the first half of September. Inves-


tors worried that thin August markets would provide limited opportunity to hedge against possible downside risks.


Market concerns were significantly eased when ECB President Draghi delivered a forceful speech in London on


July 26th, in which he emphasized that ―the ECB is ready to do whatever it takes to preserve the euro. And believe
me, it will be enough.‖ This was followed by a decision at the ECB Council meeting on September 6th to intro-
duce a new facility for Outright Monetary Transactions (OMT). The promise and follow-through actions managed


to calm the markets and led to a significant rebound in key markets. Most significantly, 10-year sovereign yields in


Spain and Italy fell by 148 and 146 basis points since late-July to 5.27 percent and 4.49 percent in December, re-


spectively (box figure FIN 1.1). Equity markets have also responded very positively, with key Spanish and Italian


equity indices up by 23.4 percent and 19.7 percent, respectively since July 27th.


In addition to the ECB’s actions, some other positive developments in September have helped to further improve-
ment in the global financial markets. The German Constitutional Court recognized the legality of the European


Stability Mechanism (ESM), thus paving the way for the ESM to begin operations in October. This was crucial as


the ECB's OMT will operate alongside a precautionary ESM facility. The Dutch election produced a solid vote for


centrist pro-euro parties. Finally, there has been some early movement in a key institutional reform: the European


Commission’s proposal to establish a single bank supervision mechanism for Euro Area banks.


By the end of November, the Troika and the Greek government agreed on a package of measures including a re-


duction in rates on bailout loans, suspension of interest payments for a decade. In December, the Greek govern-


ment completed a debt buyback program from its private sector creditors in an effort to cut the country’s public


debt level. The country was also cleared to receive a €34.4 billion loan installment in December 2012.


Considerable uncertainties still remain, however. First, markets have already priced in OMT support, though the


specifics remain to be worked out. Second, the ambitious plans and timetable for the establishment of single bank


supervision mechanism have already raised some tensions both within the Euro Area and between EU govern-


ments and outside the Euro Area.


Box figure FIN 1.1


Source: Bloomberg.


34





Global Economic Prospects January2013 Finance Annex


highest monthly flows since 2007 in September


and robust flows since then, gross flows totaled


$530 billion, recording a 17 percent increase


compared to 2011.


Bond issuance by developing countries reached a


historic high in 2012 at $257 billion, almost 50


percent higher than last year’s strong flows.
Issuances in September ($32.2 billion) was the


highest monthly issuances by developing


countries on record followed by around $30


billion issuances both in October and November.


While corporate issuers from Brazil, Russia,


Mexico, and China in financial and oil& gas


sectors continued to dominate the market, there


were also several sovereigns and developing


country corporate borrowers that came to the


market for the first time—attracted by low
borrowing costs due to unprecedented global


liquidity and investors’ intense search for yield.
Bond emissions have also been boosted by the


relative weakness of bank-lending and volatility


in equity markets (box FIN.2: The changing


landscape of international debt markets), both


symptoms of the financial turmoil of the past


few years.


Equity issuance by developing countries was


also weak in most part of 2012 as companies


stayed away from initial public offerings (IPO)


due to volatility in equity markets. Nevertheless


the issuance has picked slightly since


September. The over-subscribed equity


placement by Russia’s Sberbank for $5.2 billion
in September was followed by few large deals by


companies from China, Russia and Turkey in


November and December. As a result, total


equity issuance totaled $103.4 billion in 2012,


17 percent higher than 2011.


In contrast to bond and equity issuance,


syndicated bank lending to developing countries


remained subdued this year at $169.5 billion


recording a 12.4 percent decline compared to last


year. While it is difficult to disentangle effects,


deleveraging by high-income country banks and


the low cost of bonds are among the factors


behind these low flows. However, bank-lending


has also shown some tentative signs of recovery


in recent months perhaps reflecting less intense


Euro Area deleveraging. Syndicated bank


lending to developing countries between


September and December was the higher than


like periods in 2010 and 2011.


Foreign direct investment inflows to developing


countries fell slightly during the first half of


2012 following the heightened uncertainty in


earlier months


Foreign direct investment (FDI) inflows to


developing countries declined by 5% (year-over-


year) during the first half of the year following


the increased uncertainty in the global financial


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


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


60


70


80


90


100


110


120


130


140


150


2009Q1 2009Q4 2010Q3 2011Q2 2012Q1


$ billion


Figure FIN.3 September marked the highest
monthly flows since 2007


Source: Dealogic and World Bank.


0


10


20


30


40


50


60


70


Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12


Syndicated Bank Lending


Bond Issuance


Equity Issuance


$ billion


35





Global Economic Prospects January2013 Finance Annex


markets due to Euro-zone problems in late 2011


(figure FIN.4). The decline in actual flows was


much less acute than the 20 percent suggested by


high-frequency cross-border mergers and


acquisitions and green-field investment data. The


relative resilience of overall FDI, likely reflects


more stable re-invested earnings and intra-


company loans.


FDI performance during the first half of the year


varied across regions. Flows were very weak for


most Eastern European countries including


Russia, Latvia, Lithuania, and Serbia as these


countries continued to be affected by the


economic weakness in high-income Europe.


With the exception of Thailand and Philippines,


FDI inflows to most East Asian economies also


declined. In contrast, FDI inflows increased in


almost all Latin American countries supported


by high commodity prices and increased


investment from the United States, especially to


Argentina and Colombia.


Mixed FDI performance is expected to have


continued in the second half of the year. The


favorable financial conditions since July have


encouraged cross-border acquisitions in some


developing countries. Flows to Latin America


are expected to be strong in the second half as


the Belgian beer company AB InBEv’s mega
buy-out of Mexico’s Mexican beer maker Grupo
Modelo for $20.1 billion is fully reflected in the


data. At the same time, several countries in


emerging Europe including Russia, and Turkey


have announced plans to accelerate privatization


efforts. That said, there have already been few


postponements and less successful sales in


Russia’s banking sector since Russia’s
successful sale of a stake in Sberbank—one of
its largest banks—in September, suggesting that
investor appetite might be still limited for these


assets. In addition, inflows to large middle


income countries such as China and India are


expected to decline this year. China is


experiencing structural adjustments in their FDI


flows, including the relocation of labor-intensive


and low-end market-oriented FDI to neighboring


countries. Slow growth and some regulatory


uncertainties held back the investment flows to


India. As result, FDI inflows for the whole year


are expected to fall around 6 percent to $600


billion.


International capital flows in 2012


Net private capital inflows (earlier data referred


to gross flows) to developing countries are


estimated to have declined to $0.99 trillion (4.1


percent of GDP) in 2012 from $1.1 trillion (4.7


percent of GDP) in 2011 (figure FIN.5). Despite


the volatility in market sentiment throughout the


year, significant progress in Euro Area crisis


response followed by monetary easing by the


high-income economies ceased the downward


trend in capital inflows to developing countries


toward the middle of the year. Nevertheless with


exception of net bond and portfolio equity


inflows, all other flows marked a decline. The


largest drop was in net bank lending


(disbursement minus repayments). Net bank


lending with both types of maturities (short- and


medium & long term) declined by 33 percent.


The fall in short-term flows partly reflects


slower trade growth and reduced demand for


trade finance.


Deleveraging by international banks cut into


acquisition and trade finance


The 2008/9 financial crisis has put significant


deleveraging pressures on global banking


system. Banks have been forced to cut their loan


Figure FIN.5 Net private capital inflows fell in 2012


Source: World Bank.


-0.2


0.0


0.2


0.4


0.6


0.8


1.0


1.2


2008 2009 2010 2011 2012e


ST Debt


Bank Lending


Bond Flows


Portfolio Equity


FDI Inflows


$ trillion


36





Global Economic Prospects January2013 Finance Annex


portfolios to offset balance sheets losses from


loan and capital losses. The pressures have been


particularly strong among high-income European


banks as faltering growth prospects and debt


problems undermined the value of their


sovereign and other assets. Funding conditions


were exacerbated toward the end of 2011, when


new regulations tightened capital ratio


requirements and increased dollar liquidity


constraints. Deleveraging was achieved through


a combination of reduced lending, sales of non-


strategic assets, and exit from riskier businesses


subject to tighter capital buffer requirements.


High-income bank deleveraging and tightened


credit standards cut directly into capital flows to


developing countries—most notably those
countries and regions with close ties to European


banks.


Since 2008 spreads on all types of loans widened


sharply from a range of 100 to 150 bps to a


range 250 to 350 bps (figure FIN.6). Despite the


sharp increase in spreads, borrowing cost


actually declined because of the sharp


compression in the underlying pricing


benchmark six-month Libor rate (box figure FIN


2.2). Most of the reduction in syndicated bank


lending to developing countries concerned loans


for acquisitions purposes (figure FIN.7).


Acquisition loans are usually given to a


company to buy specific assets and are typically


used of short-term tenor. Some of the 70 percent


fall likely reflects a decline in demand for loans


due to weak economic activity and the


cancelation or postponement of expansion plans


given increased economic uncertainty. Such


loans fell most sharply in Europe and Central


Asia (93 percent)—the developing region
hardest hit by the crisis, and Latin America (73


percent) a region with close ties to the European


banking system. Loans to South Asia were


broadly stable.


Syndicated lending for trade finance purposes


was also considerably affected with a 35 percent


fall compared to its pre-crisis levels. The decline


mostly reflects retrenchment by the European


banks that played a pivotal role in global trade


finance provision. In addition to their need to


rebuild their capital stock, dollar funding


challenges of European banks constrained their


ability to fund trade activity. Most of the trade


transaction settlements are made in US dollars,


and European banks suffered from limited access


to dollar funding during the second half of 2011


after US money market funds withdrew some of


their investment as the European debt crisis.


Trade related funding shortfalls were sharpest


for Sub-Saharan Africa (70 percent) and


European countries (50 percent), followed by


Latin America and Middle East and North Africa


(25 percent). Anecdotal evidence suggests that


other international lenders (mainly Asian


financial institutions such as Japanese banks)


Figure FIN.6 Spreads on bank-loans widened
sharply


Source: Dealogic and World Bank.


0


100


200


300


400


500


2005 2006 2007 2008 2009 2010 2011 2012


Acquisitions


General corporate purposes


Others


Project finance


Refinancing


Trade finance


Working Capital


Basis Point


Figure FIN.7 Funding for acquisitions and trade
finance declined


Source: Dealogic and World Bank.


0


20


40


60


80


100


120


140


160


180


200


Ref inancing Acquisitions General
Corporate
Purposes


Trade
Finance


Project
Financing


2005-2008


2009-2012


$ billion


37





Global Economic Prospects January2013 Finance Annex


Box FIN 2. The changing landscape of international debt markets: rising bond issuance amid declining


bank-lending


Historically, the majority of developing countries relied more on bank credit rather than bond financing for their exter-


nal financing needs as cross-border bank lending tended to be cheaper, and developing higher-risk developing countries


had better access to bank lending. Information asymmetry plays an important role in differences between bank and


bond financing in terms of access and cost. Banks have closer customer relationships with borrowers than bondholders


and therefore have an advantage in monitoring creditworthiness – which has traditionally resulted in lower costs. Oth-
erwise high risk borrowers might get access to bank lending, if projects were backed by well-defined revenue streams


based on natural resource etc. Another impediment to bond lending were the institutional and legal benchmarks


(sovereign credit ratings, etc) required by bond holders. As a result, higher-risk borrowers including some sovereigns,


companies rated sub-investment grade and most low-income countries tended to have access only to bank financing.


Since the 2009 financial crisis, bond financing has played an increasingly important role in international debt flows to


developing countries. The injection of liquidity into global financial markets, quantitative easing efforts of high-income


central banks, continued improvement in developing-country credit quality (both in absolute and relative terms) have


made the conditions for bond financing more favorable for developing countries. As a result, developing countries have


issued increasing quantities of international bonds. Total bond issuance by developing countries reached $724 billion


during the 2009-2012 period compared with $374 billion during the boom years of 2005-2008 (box figure FIN 2.1).


These improvements as syndicated bank lending to developing countries fell to $632 billion during 2009-2012 com-


pared with $793 billion during 2005-2008. While many factors were at play, deleveraging pressures as well as tighter


regulations contributed to the contraction in international bank-lending. As a result, international bond issuance now


accounts for more than half of the international debt flows to developing countries since 2009, compared to less than


one-third between 2005 and 2008.


Declining cost and improved access have contributed to the increased bond flows in recent years. Cost of borrowing


through international bond issuance has declined considerably over time with the exception of the spike in November


2008 just after the crisis. Average cost of bond financing (proxied by 10-year U.S. Treasury bond yield + EMBIG cash


bond spread) has fallen to a record low level of 460 bps in November 2012 from 680 bps in January 2010. Most of the


reduction in cost was due to the fall in benchmark10-year U.S. Treasury bond yield while the very low policy rates and


quantitative easing in high-income countries have kept the price of risk and spreads low for developing countries


(Hartelius et al 2008). While cost of bond-financing remains higher than bank-loan, the cost difference between bond


and syndicated bank loans (the underlying pricing benchmark, usually the six-month Libor rate + average spread) has


also narrowed (box figure FIN 2.2). With the comparable costs, many large developing country companies relied on


bond financing as a substitute for declining bank-lending.


Also, unprecedented investor demand—supported by G3 monetary easing and increased search for yield— has enabled
frontier-market and infrequent issuers to tap the international bond market in recent years, especially during the second


half of 2012. For example, Angola and Zambia for the first time ever and Bolivia in 90 years issued sovereign bonds.


Others governments such as Kenya, Paraguay, Rwanda, Tanzania, and Uganda, as well as numerous companies with


sub-investment grade credit ratings are preparing to issue bonds for the first time in coming months.


Box figure FIN 2.1 Increasing bond flows amid de-
clining bank lending


Source: Dealogic and World Bank.


0


50


100


150


200


250


300


350


400


450


2005 2006 2007 2008 2009 2010 2011 2012


Syndicated Bank Loans


Bond Issuance
$ billion


Box figure FIN 2.2 The difference in cost of bond
financing and bank-lending narrowed


Source: Dealogic and World Bank.


0


2


4


6


8


10


12


Jan-08 Nov-08 Sep-09 Jul-10 May-11 Mar-12


International Bond Financing


Syndicated Bank Loans


Average cost of borrowing, percent


38





Global Economic Prospects January2013 Finance Annex


and domestic banks (mostly in Latin America)


filled the funding gap in their corresponding


regions. The WBG has increased its support to


trade finance in low income countries, through


the IFC’s Global Trade Finance Program, and a
program to support commodity traders from low


income countries.


Despite the decline in total loans, average


maturity for all types of syndicated bank loans


remained at their pre-crisis levels, around five to


six years. Even for project finance which tends


to be funded by longer-term loans—maturities
have remained more or less stable at around 9


years since 2005.


One cautionary factor, however, is the increased


concentration of bank loans since 2009.


Investment grade borrowers accounted for 80


percent of bank loans since 2009, up sharply


from 72 percent during 2005-2008. Increased


bias toward investment grade borrowers might


partly reflect preparation for the upcoming


regulatory changes. For example, some banks


soon will start operating under Basel III with a


range of provisions and tightening of conditions


(box FIN.3: Deleveraging in banking sector).


These banks may have been adjusting their


balance sheets in response to the enhanced


recognition of counterparty risk and an increase


in risk-weight of certain lines of business. There


are concerns that some of the provisions under


Basel III may exacerbate further deleveraging


and increase the borrowing costs for trade


finance and project finance.


Even without the burden of additional regulatory


measures, the cost of borrowing for both bond


and bank financing will increase in the medium


term when developed countries start monetary


tightening as low benchmark rates have kept the


costs down especially after the crisis.


Prospects: Going up but might be a


bumpy ride…


Medium-term prospects for capital flows to


developing countries are for continued modest


increases (as a share of recipient GDP). With


more upgrades than downgrades market


assessment of the credit quality this year, the risk


profile of developing countries continued to


improve compared with high-income countries


which experienced further deterioration in


2012—suggesting that they will continue to
attract a growing share of international capital


flows.FN1 Despite the weak growth environment,


developing countries are expected to grow


between five to six percent in coming years more


than twice as fast as high-income countries.


Flows are also likely to be attracted by these


higher growth prospects and risk-adjusted


interest rates (despite the recent easing of


monetary policy in many developing economies,


interest rates in these economies are expected to


remain higher than in rich countries).


Under the baseline scenario that there will not be


a major set-back in the resolution of Euro-area


crisis and US fiscal challenges, and that there


will be no major loss of confidence in the global


financial markets, net private capital flows are


projected to increase to $1.12 trillion (4.15


percent of developing-country GDP) in 2013 and


gradually reach $1.35 trillion (4.1 percent) by


2015 (figure FIN.8, table FIN.1). Increased


global liquidity and monetary accommodation in


major high-income countries (the US Federal


Reserve indicates its policy rate will remain low


till 2014) are expected to keep high-income


country interest rates low, prompting search for


yield and supporting capital flows to developing


Figure FIN.8 Capital flows to developing countries


Source: World Bank.


0
1
2
3
4
5
6
7
8
9


-0.2


0.0


0.2


0.4


0.6


0.8


1.0


1.2


1.4


2004 2006 2008 2010 2012e 2014f


ST Debt Bank Lending


Bond Flows Portfolio Equity


FDI Inflows


$ trillion as a share of GDP (RHS)


39





Global Economic Prospects January2013 Finance Annex


Box FIN.3 Deleveraging in the banking sector: progress has been made but pressure to do more remains


The more comprehensive yet less-up-to date data on bank-lending (discussion in the text is on only syndicated


bank lending portion) indicate that the pace of deleveraging slowed down earlier this year. Total international


claims—including all cross-border and local claims in foreign currency—by Bank of International Settlements
(BIS) reporting banks declined by $616 billion (3.2 percent) in the second quarter of 2012. While the cut reversed


the short-lived rebound of $956 billion (5.2 percent) in the first quarter supported by ECB’s large liquidity provi-
sion in December 2011 and February 2012, the reduction was still much lower than $1.3 trillion (7 percent) de-


cline in international claims in the fourth quarter of 2011. In addition, international claims on developing countries


only decreased by $8 billion during the second quarter, with all the decline coming from short-term claims (debt


with an original maturity of one year or less). The fall in short-term debt—most part trade finance in developing
countries—partly reflects the sharp decline in trade activities in the second quarter of the year (see the trade annex)


and partly confirms the tension in trade financing market.


Several factors helped to curb the pace of deleveraging process earlier this year. An important factor is the comple-


tion of the process of meeting the capital ratio requirements by European Banking Authority (EBA) by June 2012.


The deleveraging by European banks intensified in October 2011 after EBA introduced 9 percent capital ratio re-


quirement after adjustments for sovereign risk holdings. In fact, most banks announced that they fulfilled the re-


quirement earlier than the deadline. According to EBA’s October review report, more than 75 percent of the banks
reached the required capital ratio by June 2012 mostly through assets disposal and deleveraging.FN2 Second, ex-


traordinary liquidity injection by the ECB LTOR operations in December 2011 and February 2012 eased the fund-


ing pressures through boosting confidence in interbank market and helped European banks to reduce their depend-


ence on US money market funds. Several European banks were faced with dollar funding challenges during the


second half of 2011 after US money market funds withdrew some of their investment as the European debt crisis


escalated.


There are some indications that the slowdown of the deleveraging process has continued also later in the year.


First, syndicated bank-lending to developing countries was 67 percent higher in the second half of 2012 compared


to the first half of 2012. Second, the recent IIF Emerging Market Bank Lending survey indicates sharp improve-


ment in funding conditions for 2012 Q3, for the first time since 2010 especially in Emerging Europe.


Nevertheless, deleveraging pressures on all international banks are expected to continue in medium-term with


strict regulatory changes ahead. Global banks will soon start operating under Basel III with a range of provisions


and tightening of conditions including higher risk-weighted capital requirements and non-risk weighted leverage


ratio. While qualifying capital requirements gradually phase in through 2019, the adjustments to risk-weighted


asset calculations will occur instantaneously. Most banks have been deleveraging to adjust their balance sheets in


response to the enhanced recognition of counterparty risk that will lead an increase in risk-weight of certain line of


business (fixed income trading businesses) and to reach capital ratios faster in response to market and regulatory


pressure. Concerns have been raised about possible unintended consequences of Basel III on developing countries.


According to a recent report prepared for G-20 countries, in addition to higher capital requirements some Basel III


rules related with counter-party credit risk, the measurement of risk between a parent bank and its subsidiary and


capital requirements for certain business activities may exacerbate deleveraging and increase the costs of global


banks operating in developing countries, thereby reducing credit and financial market liquidity.FN3 The report also


suggests Basel III rules may significantly increase the cost of trade finance and project finance, two forms of credit


that are particularly important in the developing countries. The other highlighted concern is the possible home bias


for banks that operate globally as a result of either the design of the reforms or the way that they are implemented


in other jurisdictions.


Any change in lending strategies of international banks may have an important impact in many developing re-


gions. As of June 2012, international claims by the BIS reporting banks were $2.4 trillion in developing countries.


The importance of these claims is still the highest for the Europe and Central Asia region ($504 billion, 13 percent


of GDP) and the Latin America region ($632 billion, 12 percent) followed by the East Asia and Pacific region


($855 billion, 9.5 percent ). The claims in other regions are smaller but still significant with the Sub-Saharan Af-


rica region ($131.9 billion, 5 percent) and Middle East and North Africa ($52 billion, 4.2 percent).


40





Global Economic Prospects January2013 Finance Annex


countries in coming years. Bank lending is


expected to rise gradually as intense


deleveraging pressures have now eased.


Nevertheless the growth in private debt flows to


developing countries in the medium term will be


hindered by a tightening of regulatory and a


gradual policy tightening after 2014 in


developed countries.


FDI inflows to developing countries are


expected to increase throughout the forecast


period reaching $783 billion (2.4 percent of


GDP) by 2015. Despite the considerable real-


side uncertainties in the short-term,


multinationals continue to be attracted to


developing countries’ medium-term growth
prospects, large and growing consumer base,


natural resources and still low labor costs. In


addition, many developing countries are bringing


down barriers on foreign investment. For


example, following its recent WTO accession


Russia has committed to reducing restrictions on


foreign investors in number of services


industries. Several countries in Eastern Europe


have been pursuing privatization in their services


sector. Similarly, India might attract influx of


investment in coming years as the cap on foreign


ownership in multi-brand retail and aviation


businesses has been raised comes in the


backdrop of a worrisome decline this year.


While China continues to be experiencing rising


wages and productions costs, multinationals are


investing in China to serve its rising middle


income. FDI inflows to developing countries


will be supported by increasing South-South


flows as the capital outflows increase over the


years.


FDI inflows are expected to increase also in low-


income countries supported by rising South-


South FDI and resource-related investments.


This is particularly important as FDI is an


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


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


2008 2009 2010 2011 2012e 2013f 2014f 2015f


Current account balance 412.9 240.5 187.5 152.1 12.6 -8.0 -65.4 -80.4


Capital inflows 812.6 701.7 1,219.1 1,112.4 1,007.2 1,134.1 1,250.9 1351.5


Private inflows, net 782.2 620.7 1,145.9 1,082.4 993.1 1,123.4 1,244.2 1348.4


Equity inflows, net 583.3 542.0 710.8 647.8 644.5 761.2 856.1 902.9


Net FDI inflows 636.9 427.9 582.7 638.8 600.1 693.2 756.5 782.96


Net portfolio equity inflows -53.6 114.2 128.2 8.9 44.4 68.0 99.6 119.90


Private creditors, net 198.8 78.7 435.1 434.6 348.6 362.2 388.1 445.50


Bonds -8.6 61.0 129.7 123.8 143.3 126.1 108.4 110.50


Banks 223.3 -11.9 37.2 108.2 71.5 80.6 88.9 105.10


Short-term debt flows -17.1 17.8 257.6 189.3 126.7 146.3 180.4 220.10


Other private 1.3 11.7 10.7 13.3 7.1 9.2 10.4 9.80


Official inflows, net 30.4 81.0 73.2 30.0 14.1 10.7 6.7 3.10


World Bank 7.2 18.3 22.4 6.6 4.6


IMF 10.8 26.8 13.8 0.5 -3.9


Other official 12.4 35.9 36.9 22.8 13.4


Capital outflows -321.4 -174.5 -310.0 -320.0 -370.6 -373.4 -414.3 -463.6


FDI outflows -211.8 -144.3 -213.9 -213.1 -238.0 -275.0 -325.0 -370.0


Portfolio equity outflows -32.3 -75.2 -46.5 -15.9 -17.6 -19.4 -22.3 -28.6


Private debt outflows -78.3 50.7 -57.3 -81.0 -103.0 -72.0 -61.0 -56.0


Other outflows 1.0 -5.7 7.7 -10.0 -12.0 -7.0 -6.0 -9.0


Net capital flows (inflows + outflows) 491.2 527.2 909.1 792.4 636.6 760.7 836.6 887.9


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


41





Global Economic Prospects January2013 Finance Annex


important source of external financing for these


economies with limited or no access to other


types of capital flows. In addition, the outlook


for net overseas development assistance (ODA),


which has been a stable source of development


financing for the poor economies, looks gloomy.


As discussed in detail in the finance annex of the


June edition of GEP 2012, many high-income


countries continue to struggle with fiscal


sustainability, and it is unlikely that they will be


able to meet their Monterrey targets of providing


0.7 per cent of their national income in ODA—
except in a few instances.


The outlook for private capital flows is still


subject to serious downside risks. First despite


the recent progress towards a resolution for Euro


-area debt crisis, considerable uncertainties


remain related to the implementation of the


ECB’s announced but not-tested OMT plan; its
ability to resolve the debt issues of high-spread


economies; the speed of economic adjustment in


high-spread countries; and the establishment of a


single bank supervision mechanism. Any major


set-back could lead to a renewed crisis of


confidence and potentially a freezing up of


financial markets. A lack of progress in dealing


with the fiscal challenges in the US and Japan


have similar potential to generate confidence


issues. These uncertainties are likely to generate


volatility on the way even if they do not get to a


level to reverse the upward trend in capital


flows.




Notes:


1. With 26 upgrades and 17 downgrades


market assessments of the credit quality of


developing countries improved in 2012.


Most of the upgrades took place in Latin


America, including Bolivia, Ecuador,


Grenada, Panama, Paraguay, Peru,


Suriname, and Uruguay. However


Argentina, Belize, and El Salvador


experienced downgrades. Outside Latin


America, Indonesia, Turkey, and Latvia


were upgraded to investment grade, while


notable downgrades occurred for Belarus,


Egypt, Serbia, South Africa, Tunisia,


Ukraine, and Vietnam with most


downgrades occurring since September. In


contrast , high - income countr ies ’
creditworthiness continued to deteriorate in


2012 amid the lingering European debt


crisis, with Greece, Italy, Portugal, and


Spain suffering multiple downgrades.


Overal l , high -income sovereigns


experienced a total of 20 downgrades, with


no upgrades in 2012.


2. EBA reports states that of 37 banks with


initial shortfall, 24 of them have achieved


the capital requirement and EBA initiated


backstops only for four banks. They


excluded three banks for further action since


they are already going through deep


structuring. Also six Greek banks are


excluded since their issues are being


addressed by the Greek program.


3. ―Identifying the Effects of Regulatory
Reforms on Emerging Market and


Developing Economies: A Review of


Potential Unintended Consequences‖
prepared for G20 Finance Ministers and


Central Bank Governors by the Financial


Stability Board in coordination with Staff of


the International Monetary Fund and the


World Bank, 19 June 2012. (http://


w w w . f i n a n c i a l s t a b i l i t y b o a r d . o r g /


publications/r_120619e.pdf)






42





Global Economic Prospects January 2013 Industrial Production Annex


Recent economic developments


The financial turmoil in high-income Europe in


May and June cut sharply into economic activity


worldwide. Faced with yet another round of


market uncertainty, firms, and households cut


back on investments and big-ticket expenditures


– causing global industrial production, which
had been growing at a 5.9 percent annualized


pace in the first quarter of 2012, to remain


broadly flat in the second quarter. Although


industrial activity in both developing and


developed economies slowed, the deceleration


was more marked in developing countries (from


11.1 to 1.5 percent) than in high-income


countries where output contracted at an 1.1


percent annualized rate, following a muted


expansion in the first quarter.


The sharp decline of industrial activity in


developing countries during the second quarter


reflected a series of factors, including: a pre-


existing policy-induced slowdown in several


middle-income countries (Brazil, China, India,


Turkey, among others) that had reached capacity


constraints; a slowing in the East Asia and


Pacific region from an unsustainable pace, as


activity rebounded following the Tohoku


Tsunami and flooding in Thailand; and perhaps


most importantly an increase in precautionary


savings as the increased turmoil in Europe


sparked concerns about future demand levels and


the possibility of a major crisis (box IP.1).


Industrial activity in developing countries is


now strengthening, but industrial activity has


weakened further in high income countries


Since then the pace of activity developing


countries has picked up, but growth in high-


income countries appears to be weakening again


(table IP.1). Overall, global industrial production


rose at an 0.1 percent annualized pace during the


third quarter of 2012, but data for November


suggest a return to contraction in the fourth


quarter, mainly reflecting declining output in


high-income countries. The weakening in overall


activity comes despite a strengthening of growth


in the developing countries that is equally robust


in China and other developing regions.


Industrial production in high income countries


fell at a 5.9 percent annualized pace in the three


months ending in November. A sharp drop in


activity in Japan, by an annualized 18 percent in


the three months ending in November, reflects


an end to post-crisis auto purchase incentives on


the one hand, and a decline in exports to China


due to tensions over the sovereignty of islands in


the region. U.S. weakness appears to reflect the


impact of uncertainty about the future conduct of


fiscal policy, as it mainly reflects falling


investment expenditures, while consumer


demand has remained relatively robust with a


rebound in the housing market. Euro Area


weakness, which has spread from high-spread


economies to Germany and France likely reflects


weaker external demand for capital goods as


well as a reaction to recent policy changes.


Industrial production in the Euro Area declined


at an 7.1 percent annualized pace during the


three months ending November 2012, with


output in Germany and France falling 9.2


percent and 7.2 percent (3m/3m saar).


Industrial Production


Table IP.1 Industrial production is recovering in most
developing regions


Source: World Bank.


2011Q4 2012Q1 2012Q2 2012Q3 2012Nov


World 1.3 5.9 -0.1 0.1 -0.4


High-income 0.5 2.8 -1.1 -2.7 -5.9


United States 5.1 5.9 2.4 0.3 -1.4


Japan 1.7 5.1 -7.7 -15.8 -18.5


Euro Area -5.6 -2.6 -1.8 0.5 -7.6


Other high-income 1.4 3.7 -0.6 -2.3 -2.9


Developing 2.6 11.1 1.5 4.6 8.6


East-Asia & Pacific 3.7 16.8 3.1 7.3 15.0


Europe & Central Asia 5.3 4.6 -3.6 2.0 6.4


Latin America & Carribbean -1.0 1.9 -1.1 3.4 0.1


Middle-East & North Africa 9.6 12.6 13.1 -8.7 ..


South Asia -0.7 11.2 -7.1 -0.7 2.4


Sub-Saharan Africa -2.6 -0.6 5.0 5.5 ..


43





Global Economic Prospects January 2013 Industrial Production Annex


Figure IP.3 Robust growth in the Middle-East is
easing, as activity firms in Sub-Saharan Africa
Source: Datastream and World Bank.


Figure IP.2 Growth is picking up in Asia, led by
China
Source: Datastream and World Bank.


-20


-10


0


10


20


30


40


Jan
'10


Mar
'10


May
'10


Jul
'10


Sep
'10


Nov
'10


Jan
'11


Mar
'11


May
'11


Jul
'11


Sep
'11


Nov
'11


Jan
'12


Mar
'12


May
'12


Jul
'12


Sep
'12


Industrial production growth, 3m/3m saar


China


East Asia &
Pacific


India
Rest of
South Asia


Despite the weakness in high income countries,


available data for November suggests that


industrial activity in the developing countries is


strengthening. Developing countries’ industrial
production grew at an 8.6 percent annualized


pace in the three months ending November.


Industrial production growth improved across


most developing regions, with the exceptions of


Latin America and the Caribbean, and the


Middle East and North Africa (figure IP.1). In


East Asia and Pacific, industrial production has


accelerated sharply and is growing at a 11.5


annualized pace in China during the three


months ending November, and by 41.2 percent


(saar) through November in the remaining


countries in the region (figure IP.2).


Notwithstanding weakening external demand,


Chinese GDP growth picked up after the first


quarter to an 9.1 percent annualized pace in Q3


(q/q saar), in part due to robust growth among


services sectors reflecting a gradual reorientation


of the economy towards domestic demand. A


sharp acceleration in Indonesia, Malaysia,


Philippines, and Thailand reflects robust


domestic demand supported by accommodative


policies, tight production and trade linkages with


China (Chinese imports rose at an 12.5 percent


annualized pace in the three months ending in


November), and a surge in exports towards


newly industrialized economies (NIEs) in the


region that experienced a rebound during the last


quarter of 2012.


South Asia’s industrial production contracted at
an 7.1 percent annualized pace in the second


quarter of 2012, partly due to domestic


difficulties and a decline in export demand. But


industrial output stabilized in the third quarter,


and has picked up in Q4—regional industrial
production expanded at a 2.4 percent annualized


pace in the three months ending in November,


with industrial output in India growing at a 2.1


percent annualized pace. In Pakistan,


notwithstanding domestic security problems and


electricity shortages, industrial output picked up


Figure IP.1 Developing-country industrial output
growth has accelerated since July


Source: Datastream, World Bank.


-40


-20


0


20


40


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


Industrial production growth, 3m/3m saar


East Asia & Pacific


Europe & Central Asia


Lat in America & Caribbean


Middle East & N. Africa


South Asia


Sub-Saharan Africa


Figure IP.2 Industrial output is bouncing back in Asia


Source: World Bank, Datastream.


-40


-20


0


20


40


60


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


Industrial production growth, 3m/3m saar


China


Rest of East As ia and Pacific


India


Rest of South Asia


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


Source: World Bank, Datastream.


-10


0


10


20


30


40


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


Industrial production growth, 3m/3m saar


Russia


Other Europe


Turkey


& Central Asia


44





Global Economic Prospects January 2013 Industrial Production Annex


to an 12 percent annualized pace in the three


months ending in November, mainly due to


robust growth of textile exports.


In Europe and Central Asia, industrial


production picked up sharply to a 6.4 percent


annualized pace in the three months ending in


November 2012 (figure IP.3). The rebound in


regional production was mainly due a sharp


upturn in Turkey, where industrial output grew


at a 30.5 percent annualized pace in the three


months ending in November, helped by an


expansion in exports to non-European


economies, and partly due to extra working days


in November from a shift in timing of religious


holidays (Industrial output in November was


11.3 percent higher from a year earlier).


Industrial production also rose in Lithuania at a


26.3 percent annualized pace (rebounding from a


closure of the main refinery) and at a 6.9 percent


annualized pace in Kazakhstan in the three


months ending November. In other countries in


the region, however, industrial output was still


declining through November, reflecting mainly a


downturn in the Euro Area, the region’s largest
trade partner. Industrial production contracted


sharply in Bulgaria (by an annualized 13.1%),


Ukraine (8.6% annualized), Latvia (3.7%


annualized), and more modestly in Russia (2%


annualized percent) and Serbia (1.2 percent


annualized) in the three months ending in


November.


In Latin America, industrial production growth


appears to have slowed in the fourth quarter,


decelerating to an 0.1 percent annualized pace in


the three months ending in November from 3.4


percent annualized growth in the third quarter.


After strengthening during Q3, industrial


production growth is weakening again in several


countries. For example, Mexican industrial


production growth held up relatively well during


most of calendar 2012, but fell at a 0.2 percent


annualized pace in the three months to


November — in line with the weakening US
industrial sector (figure IP.4). Brazil’s industrial
production rebounded from a 3.7 annualized


drop in the second quarter to an 3.8 percent


annualized increase in the third quarter


Box IP.1 Normalization in industrial activity with respect to long-term trend levels


Most developing economies have recovered from the global economic crisis, with industrial output levels now in


line with long-term trends. At the aggregate level, output was actually about 2 percent above its long-term trend in


February, although high-income countries have yet to regain long-term trend levels.


Despite the severe supply chain shocks that disrupted activity in East Asia and Pacific in 2011 (Japanese earth-


quake and tsunami, severe and prolonged flooding in Thailand), industrial output there is currently 1.9 percent


above the level consistent with long-term trends (table IP.1). In Latin America and the Caribbean, and South Asia


industrial output levels are 0.3 percent and 2.2 percent above their long-term industrial output trend levels, respec-


tively. Among Latin American countries Colombia, Mexico, Peru have recovered while industrial production in


Argentina, Brazil, and Chile is yet to reach their long-term trend levels. In South Asia only Pakistan is lagging


behind in the recovery and the gap with respect to long(er) term trends remains relatively large. In contrast, many


countries in developing European and Central Asian and the Middle East and North Africa have yet to regain trend


output levels, reflecting the severity of the demand shocks in the former and the ongoing domestic political turmoil


in the latter. Among high-income countries industrial output remains below the long-term trend levels, including


the United States – with the notable exceptions of Korea; Singapore; Taiwan, China; and Germany.


Figure IP.4 A rebound in Latin America & the Carib-
bean


Source: World Bank, Datastream.


-10


-5


0


5


10


15


20


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


Industrial production growth, 3m/3m saar


Brazil


Mexico


Other Lat in America & Caribbean


45





Global Economic Prospects January 2013 Industrial Production Annex


(notwithstanding weak GDP growth in Q3). But


by November, industrial production growth had


slowed to a 1.2 percent annualized pace. And in


the rest of the region, industrial production was


declining at a 0.6 percent annualized pace in the


three months to November.


Data for Sub-Saharan Africa and the Middle East


and North Africa regions has a two month lag


with respect to other regions, with a few


exceptions within the two regions (figure IP.5).


Activity in South Africa, the Sub-Saharan Africa


region’s largest economy, was influenced by
labor unrests, with industrial production growing


at a modest 0.8 percent annualized pace during


the third quarter. But industrial production


growth subsequently picked up to an 3.2 percent


annualized pace in the three months ending in


November. In other Sub-Saharan African


countries where monthly industrial production


data are available, industrial production was


growing at a robust 6.7 percent annualized pace


in the third quarter, despite a mid-year slowdown


in several oil exporters (Angola, Nigeria and


Gabon).


Data through the third quarter for the Middle-


East and North Africa region suggest that the


rebound in activity in the first half of 2012


following an easing of political-turmoil may be


giving way to additional renewed disruptions,


with industrial output declining at an 8.7 percent


annualized pace in Q3—with a larger 9.8 percent
decline among developing oil-importers as these


countries grapple with ongoing domestic


uncertainty and an adverse external environment.


Egypt recorded an 18 percent annualized decline


in the three month to October, while production


in Jordan and Morocco rose at a modest 3


percent annualized pace in the three months to


September. Industrial output in developing oil


exporters in the Middle East and North Africa


also fell, declining at an 8.2 percent annualized


pace in the third quarter, as strong production


growth in Iraq and Libya was offset by declines


in oil output in Iran (as a result of international


sanctions) and in Syria (due to civil conflict).


Growth is expected to pick up in early 2013


A pick-up in global retail sales recently has


helped inventory adjustments and lays the


foundation for stronger industrial sector


performance in the early months of 2013.


Developing country business sentiment in


manufacturing improved in the fourth quarter,


with the official Purchasing Manager Index


(PMI) for China reaching 50.6 and the Markit


PMIs outside of China reaching 51.8 in


December — indicating a majority of developing
country firms see output expanding (figure IP.6).


In the United States, sentiment has held broadly


steady in the positive range, with the Markit


index picking up to a 6-month high in


Figure IP.6 Business confidence in developing coun-
tries remains robust


Source: World Bank, Datastream.


40


45


50


55


60


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


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


World


Euro Area


China


Developing (excl. China)


Figure IP.5 Data in the Middle-East & North Africa lags


Source: World Bank, Datastream.


-40


-20


0


20


40


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


Industrial production growth, 3m/3m saar


South Africa


Other Sub-Saharan Africa


Middle East & North Africa


46





Global Economic Prospects January 2013 Industrial Production Annex


December. A strengthening US housing market,


robust business sentiment, and a decline in


unemployment signal an underlying recovery,


notwithstanding the weak industrial output and


risks related to US fiscal policy. In the Euro


Area, business sentiment has become


significantly less negative. However, it remains


extremely low — indeed much lower than actual
industrial production data would seem to


suggest. Elsewhere, business sentiment has risen


in high-income countries outside of the Euro


Area, reflecting strengthening external demand.


However, business sentiment in Japan continues


to remain very low, indicating continued


worsening of output and orders, in part reflecting


a sharp decline in orders from China.


Risks and vulnerabilities


For countries tightly linked to the U.S. a main


downside risk is that of a protracted fiscal


impasse related to the US debt limit, as it would


result in a sharp weakening in domestic demand


in the U.S. Mexico is particularly vulnerable as


close to 80 percent of its exports are destined for


the U.S.


A sharp deterioration in conditions in Europe,


the U.S. or China would likely produce large


confidence effects for developing countries that


could cause demand for industrial imports, and


for capital goods in particular, to decline. Even a


more moderate slowdown in China could have


significant impacts on the East Asian economies


that are integrated with the Chinese supply


chain.




47





Global Economic Prospects January 2013 Inflation Annex


Global inflation was relatively stable in


2012


Globally, inflation is broadly under control, with


consumer prices rising at a 3.9 percent


annualized rate at the end of 2012. The


experience of countries at different income


levels over the past year has been diverse,


however (figure INF.1). Inflation dropped


dramatically in low-income countries (LICs),


with falling food and fuel-price inflation driving


declines (figure INF. 2). In contrast, inflation


was broadly stable in middle-income countries


(MICs) and high-income countries (HICs)


through 2012, though with a mid-year dip in


HICs and an easing in the last quarter of 2012 in


MICs.


For developing countries as a whole, inflation


moderated to a 5.1 percent annualized rate in the


three months through December 2012 (saar),


from an average 7.2 percent in 2011. By the end


of 2012, headline inflation was under 6 percent


in 80 percent of the developing countries for


which the World Bank collects data. Year-over-


year inflation of more than 14 percent was


observed in only ten developing countries as of


November 2012: Belarus (30%), Burundi


(14.3%), Eritrea (13.5%), Ethiopia (26%), Iran


(30%), Malawi (30%), South Sudan (41%),


Sudan (46%), Syria (40%), and Venezuela


(18%), reflecting disrupted supplies due to


political turmoil in some countries and large


macroeconomic imbalances in the others.


Looking ahead, inflation is expected to average


3.5-4 percent in 2013 for the world as a whole


and 6.3 percent in developing countries,


somewhat higher than in 2012, although the


outlook is subject to both upside and downside


risks. A worsening in global growth due to an


intensification of the Euro Area sovereign debt


crisis, an extended fiscal policy impasse in the


United States, or faster-than-expected unwinding


of Chinese investment could all translate into an


easing in price pressures. On the upside, supply


shocks in food or fuel markets could intensify


price pressures — especially in low-income
countries, where the weight of these


commodities in the CPI basket is high.


In low-income countries, inflation momentum


(the quarterly seasonally adjusted inflation rate


expressed at annual rates) dropped considerably


over the past year, from an average of 14 percent


Inflation


Figure INF.1 Reflecting weak economic activity, price
pressures remained subdued in 2012 and declined
considerably in low-income countries


Source: World Bank and Datastream.


0


2


4


6


8


10


12


14


16


2012M01 2012M03 2012M05 2012M07 2012M09 2012M11


Global High Income Low Income Middle Income


Headline inf lation 3m/3m, saar


Figure INF.2 Low-income country inflation eased on
moderating international commodity prices despite
limited pass-through of international food prices to
local food prices


Source: World Bank and ILO.


0


2


4


6


8


10


12


14


16


-20


-10


0


10


20


30


40


50


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


International Energy (LHS) International Food (LHS)


Developing CPI (RHS) Low Income CPI (RHS)


Developing Local Food CPI (RHS)


Price indexes, percentage change, year-on-year


49





Global Economic Prospects January 2013 Inflation Annex


in 2011 to all times low 1.6 percent in the three


months through September 2012 before starting


an upward trend in the last quarter of 2012. The


steep easing reflected the combined effect of a


stabilization of local food prices after the 2011


drought-related price hikes, policy tightening,


and the easing of fuel and food supply


disruptions during episodes of political turmoil


in the Middle East and parts of Sub-Saharan


Africa.


Though middle-income countries as a group


faced generally stable inflation in 2012, with an


easing in the last quarter of 2012, the aggregate


reflects diverging trends in major middle-income


economies (figure INF.3). In China and Turkey,


3m/3m headline inflation eased through much of


2012, while India, experienced a declining


inflation momentum during the second half of


the year. The easing of inflation observed in


2012 in the middle-income countries followed


policy tightening that was undertaken in 2010


and 2011 to address overheating pressures


(figure INF. 4). In other major middle-income


countries, on the other hand, such as Brazil and


Russia, 3m/3m headline inflation rose during


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


Source: World Bank and Datastream.


0


50


100


150


200


250


300


350


400


450


500


C
h


il
e


In
d


ia


P
e


ru


B
ra


z
il


V
ie


tn
a


m


T
h


a
il


a
n


d


C
h


in
a


C
o


lo
m


b
ia


M
a


la
y


s
ia


K
a


z
a


k
h


s
ta


n


P
h


il
ip


p
in


e
s


Basis points


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


Source: World Bank and Datastream.


0


5


10


15


20


25


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


Easing inflation


Turkey India China South Africa


Headline inf lation, 3m/3m, saar


-2


0


2


4


6


8


10


12


14


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


Rising inflation


Brazil Russia Mexico Thailand


Headline inf lation, 3m/3m, saar


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


Notes: Upper band where appropriate. Historical (2001-
2011) average wholesale price index inflation is used as a
proxy for inflation target in India. Inflation data as of No-
vember 2012 unless indicated otherwise. September infla-
tion data for Australia.
Source: World Bank and Central Bank rates.


-1


1


3


5


7


9


11


Ja
pa


n


U
.S U


K


E
ur


o
A


re
a


C
an


ad
a


A
us


tra
lia




M
ex


ic
o


S
. A


fr
ic


a


C
hi


na


B
ra


zi
l


In
di


a


R
us


si
a


Headline inflation 2012 annual inflation targets


Short-term policy rates


Percentages


50





Global Economic Prospects January 2013 Inflation Annex


much of 2012, though with an easing in the last


quarter of 2012.


Headline inflation remained high in India and


close to or above the central bank inflation


targets in Brazil, Mexico, Russia, South Africa


and Turkey, despite moderating growth and


relatively high nominal policy rates (figure


INF.5). Inflation in these countries appears to


have been building partly on account of supply


bottlenecks, suggesting that despite slower


growth, these countries may remain supply


constrained such that instead of generating


additional output, demand may contribute to


overheating.


Food price pressures were also a contributing


factor in keeping prices high in 2012 in a


number of the countries shown in figure INF.5,


including Brazil (maize price hike, together with


a bounce back in activity following flooding in


the early part of the year), Mexico (maize price


hike), India (poor monsoon) and Russia (poor


wheat crop). The last quarter of 2012 brought a


moderation in inflation momentum in India,


Mexico, Russia and Turkey, reflecting a decline


in food and fuel prices, tight monetary policies


and currency appreciation.


In general, economic growth accelerated or


remained robust and inflationary pressures did


not escalate in middle-income countries that


were able to implement effective counter-


cyclical fiscal and monetary policies and which


continued to effectively move toward more


flexible exchange rate policies and capitalize on


trade openness (including China, Chile,


Colombia, Peru, and the Philippines).


Among high-income countries, the decline in


inflation in the first half of 2012 reflected


continued weak economic activity and an


escalation of troubles within the Euro Area, but


also high unemployment and softening


commodity prices. Inflation in high-income


countries bottomed out in three months through


July, at 0.15 percent, before rising to 3.1 percent


in the three months through November (versus


an average of 2.9 percent for 2011), following


resolute policy actions undertaken by G3


countries, which stabilized the markets, resumed


consumer confidence and helped to revive global


economic activity.


Declining food prices were a major driver of


moderating inflation in low-income


countries


Local food price inflation trends in developing


regions were mixed during the 2012, with EAP


remaining roughly stable, some regions (LAC


and SSA) showing price moderation, particularly


during the first half of 2012, SAR and MENA


experiencing large declines in food prices in the


second half of 2012, and food prices accelerating


in ECA in the second half of 2012 (figure


INF.6).


A mid-year pickup in international grain prices


caused temporary headline inflation spikes in


ECA and LAC (more recent local food price data


are not available but headline inflation in various


regions is discussed in the subsequent regional


sections of this Annex). By October 2012,


headline inflation in the majority of developing


countries, including in ECA and LAC, had


stabilized, with the food price decline


representing a major contributor into this


universal price easing trend. For low-income


countries as a group, lower food price inflation


was also a major factor behind the decline in


headline inflation in 2012.


Figure INF.6 Food price inflation eased through June
picking up in Q3 particularly in ECA


Source: World Bank and ILO.


-10


-5


0


5


10


15


20


25


30


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


East Asia & Pacf ic Europe & Central Asia


Latin America & Caribbean Middle east & N. Africa


South Asia Sub-Saharan Africa


Domestic food price inf lation, percent change 3m/3m saar


51





Global Economic Prospects January 2013 Inflation Annex


Notwithstanding the slowing of food price


inflation in some developing regions, median


local grain prices are up 24 percent year-on-year


in real terms in developing countries, according


to the United Nations Food and Agriculture


Organization (FAO). The median increase in real


local currency maize price was 35 percent, while


for wheat prices it was 15 percent. Real local


currency grain (maize, rice, and wheat) prices


were up (year-on-year) in 80 percent of


developing countries for which the FAO collects


data, and these higher costs, as discussed in the


main text, are creating affordability issues for


poor households in many developing countries.


Developing countries in East and Southern


Africa and Latin America saw some of the


sharpest increases, with some of these countries


heavily dependent on imports. Less than one in


five countries reported year-on-year declines in


food prices, mostly for rice (figure INF.7).


Despite increase in grain prices, high food and


fuel prices which prevailed earlier and drove


inflationary pressures in 2011 subsided in 2012.


Declining inflation allowed the policy makers


worldwide but also in the low-income countries


to support growth through monetary easing


throughout 2012, with interest rates dropping


from 2011 historically high levels to moderate


rates by the end of 2012 (see region and country


specific discussions in the relevant sections of


this Annex).


Moderate inflation in a number of developing


countries provides scope for policy easing to


support growth if external conditions were to


deteriorate


Moderate inflation rates or rates within the


central bank targets in China, Indonesia (East


Asia and the Pacific), Chile and Colombia (Latin


America and the Caribbean), Armenia and


Georgia (Europe and Central Asia), Kenya,


Mozambique and Uganda (Africa), and Morocco


(Middle East and North Africa) provide some


space for policy easing through policy rate and


reserve requirement cuts and liquidity injections


to support growth if external shocks materialize.


In spite of recent downtick in food and fuel


prices, inflation remains high in India and close


or above the targeted rates in Brazil, Mexico,


Russia and Turkey (figure INF.8) in the context


of weakening growth. This implies less policy


space to boost domestic demand to support


growth if external conditions were to deteriorate.


Space for countercyclical policies is further


limited by high fiscal deficit in India.


Regional inflation developments


Weak and uncertain global economic activity,


together with relatively stable commodity prices,


provided the overall context for inflation trends


during 2012. However, heterogeneous country


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


Source: World Bank and FAO.


Figure INF.8 Room for policy cuts



Notes: Upper band where appropriate. Historical (2001-
2011) average wholesale price index inflation is used as a
proxy for inflation target in India. Inflation as of November
2012 unless indicated otherwise. September inflation data
for Australia.
Source: World Bank and Central Bank rates.


-0.05 -0.03 -0.01 0.01 0.03 0.05 0.07 0.09


Russia


India


Brazil


China


S. Africa


Mexico


Canada


Euro area


UK


U.S.


Japan
Difference Between inflation
target and Inflation rate


Short-term Interest rates %


52





Global Economic Prospects January 2013 Inflation Annex


circumstances shaped particular country and


regional inflation outcomes.


Headline inflation in East Asia and the


Pacific region declined in 2012


Annualized quarterly inflation in the East Asia


and the Pacific region declined substantially


between end-2010 and the second quarter of


2012, from 8 to 2 percent. Most of this decline


was due to a dramatic falloff in inflation in


China (figure INF.9) – reflecting, among other
things, policy-induced easing in the price of


residential housing resulting from new


regulations and lending guidelines. Inflation


eased significantly in Vietnam as well. For


China, appreciation of the renminbi vis-à-vis the


dollar, which reduced the price of imports for


Chinese firms and consumers while increasing


the price of Chinese exports, also helped to


moderate domestic prices.


ASEAN-4 countries (Indonesia, Malaysia,


Philippines, and Thailand) saw their quarterly


inflation ease from a 5 percent annualized pace


to 3 percent between end-2010 and the second


quarter of 2012 despite robust domestic demand


and policy easing. Currency appreciation among


ASEAN-4 countries, together with broadly


stable food prices in the region, helped to


moderate inflation in all countries, although


Indonesia saw a temporary mid-year acceleration


in inflation partly related to currency


depreciation but also due to the seasonal factors.


Several other countries in the region have also


experienced a temporary acceleration in inflation


during the course of the year, including the


Philippines in Q3, and Thailand and Vietnam


most recently partly reflecting the rapid growth


of domestic demand.


On the whole, EAP region saw a decline in the


headline inflation rates in 2012, with the sharpest


declines observed in China, Malaysia and


Vietnam followed by the Philippines and


Indonesia. The headline inflation remained


within the central bank targeted range in China,


Indonesia and Thailand.


Inflation has picked up strongly in Europe


and Central Asia


After a considerable fallback in the first quarter


of 2012 (the result of slowing economic


activity), inflation accelerated in developing


Europe and Central Asia region in the second


half of 2012 (figure INF.10). Grain price hikes


due to droughts and poor crop yields in Russia,


Ukraine, and Central Asia were partly to blame,


but utility price adjustments in Russia and new


tax policies in Turkey also factored into the


regional assessment, as did bumping against


output capacity in several countries.


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


Source: World Bank and Datastream.


-2


0


2


4


6


8


10


12


14


16


10M07 11M01 11M07 12M01 12M07


ECA excluding Belarus Russia Turkey Bulgaria


CPI, percentage change, 3m/3m saar


Figure INF.9 Inflation eased in the EAP in 2012, but
inflation momentum accelerated recently in Thailand
and Vietnam


Source: World Bank and Datastream.


0


5


10


15


20


25


30


35


-1


1


3


5


7


9


11


10M01 10M05 10M09 11M01 11M05 11M09 12M01 12M05 12M09


China Indonesia Malaysia


Philippines Thailand Vietnam (RHS)


CPI, percentage change, 3m/3m saar


53





Global Economic Prospects January 2013 Inflation Annex


Inflation in Russia accelerated to 13 percent in


the three months to September 2012 (3m/3m


saar), prompting a tightening of policy in


September 2012. The headline inflation in


Russia at 6.4 percent year-over-year in


November remains close to the central bank


target despite growth having slowed


considerably in the third quarter of 2012 and


price pressures easing in the last quarter of 2012.


Inflation pressures have been reoccurring


because of supply side bottlenecks, food price


hikes and utility and other administered price


adjustments as well as the earlier fixed exchange


rate policy in the wake of strong capital inflows


due to rising oil prices. In recent years, Russian


central bank has switched increasingly to


inflation targeting bringing inflation closer to the


targeted rates.


In Turkey, where growth rebounded strongly


after the global recession, to 9.2 percent in 2010


and 8.5 percent in 2011, headline inflation


jumped to 10.5 percent (y/y) in 2011 from 6.4


percent in 2010. Inflation moderated in the


second half of 2012 in part because of an


appreciating Turkish lira and monetary policy


tightening but also due to a good harvest in


2012.FN1 Turkey's central bank cut its benchmark


one-week repurchase rate by 25 basis points to


5.5% on December 18th in the context of


moderating inflation to support weakening


growth. Inflation rate fell to 6.4% (y/y) in


November, but remains above the central bank


targeted 5% inflation rate and is projected to


remain above the targeted level due to higher


administered prices.


Belarus has seen a major buildup in inflation


momentum over the past year, due, among other


things, to a relaxation in monetary policy,


exchange rate devaluation, and higher food


prices.


Inflation in Latin America and the Caribbean


also accelerated in the second half of 2012


Inflation in Latin America and the Caribbean


slowed to a 4.5 percent annualized pace in the


second quarter of 2012 (down from a 7.2 percent


pace in 2011), reflecting the weakening of global


activity, lower commodity prices, and the lagged


impact of a previously tight monetary policy in


the region. After the monetary policy tightening


cycle that started in mid-2010, most inflation-


targeting central banks paused in mid-2011, or


have made very minor adjustments, with the


exception of Brazil, which has lowered policy


rates aggressively (commutative 525 basis point


cut) between September 2011 and December


2012 to support weakening economic activity


(figure INF.11).


The summer of 2012 marked a reengagement of


inflationary pressure in several Latin American


countries, however, following on the modest


revival of global demand due to global policy


easing but also reflecting higher prices of


imported grain from the United States as a result


of a drought in much of the country. Latin


American countries registered some of the


sharpest increases in real domestic maize prices


in the world, which fed through to cause a


temporary acceleration of headline inflation in


the third quarter of 2012.


Headline inflation in Uruguay, for instance,


accelerated to 8.6 percent (y/y) in September,


well above the central bank’s 4-6 percent
targeted range, prompting the central bank to


increase the policy rate to 9 percent and the


government to implement a set of administrative


and fiscal measures to contain the impact of the


Figure INF.11 Inflation momentum accelerated in LAC
as economies reached their potential output levels


Source: World Bank and Datastream.


1


2


3


4


5


6


7


8


9


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


LAC excluding Venesziela Brazil


Colombia Mexico


Peru


CPI, percentage change, 3m/3m saar


54





Global Economic Prospects January 2013 Inflation Annex


price hike. The government sought an agreement


with supermarkets to reduce the prices of 200


staple items by 10 percent and considered


lowering tariffs and taxes on basic foodstuffs.


Peru managed to achieve strong growth and low


inflation (2.7 percent y/y in November, below


the central bank target of 3 percent). Chile and


Colombia, as well, have been successful in


maintaining relatively low inflation during the


recent volatile economic cycle due to effective


counter-cyclical policies.


Inflation in Venezuela has declined significantly,


from 25 percent at the start of 2011 to 13 percent


as of June 2012 (3m/3m saar), after policy


tightening, although headline inflation remains


high.


In Brazil, the largest economy in LAC, growth


slowed markedly in the third quarter of 2012,


despite considerable policy easing implemented


throughout 2012, while inflation accelerated,


reflecting a temporary food price hikes due but


also indicating that the economy is operating at


its maximum potential and is facing supply-side


bottlenecks, which are contributing to growing


price bubbles. Headline inflation was 5.8 percent


in December 2012—well above the 4.5 mid-pint
annual inflation target (4.5% +/-2).


Inflation also picked up in Mexico in late 2012,


reflecting an increase in food prices. Headline


inflation, however, declined to 3.6 percent year-


over-year in December 2012—below the
country’s quite conservative 4 percent annual
inflation target.


Inflation trends in developing MENA countries


are diverse


Among Middle East and North African


countries, Iran and Syria continue to experience


double-digit inflation. In both countries, price


pressure are to a large extent due to the impact of


international sanctions. US and UK sanctions on


Iran’s financial assets and transactions were on
Iran tightened in 2012. Syrians experienced an


acute rise in food prices through the course of


2012 (and, in some cases, a shortage of staples


such as bread), while the flood of Syrians fleeing


the country to escape the conflict is now having


spillover effects across the border in Lebanon,


which is now posting steep increases in rental


housing prices.


Food subsidies and administered prices suppress


price pressures in Algeria and Morocco (figure


INF.12). In Egypt, fuel and food subsidies,


together with weak growth and subdued


domestic demand, led to an easing of inflation


momentum during summer 2012: headline


inflation dropped to 6.2 percent on a year-on-


year basis in September, the lowest in more than


two years. Inflation has picked up in more recent


months, however, reflecting reduction in


subsidies and quotas for certain fuels. Tunisia


raised fuel prices in September but prices are


still below cost recovery levels.


Further reduction in subsidies and adjustment of


prices to cost recovery levels will raise inflation


temporarily, but their medium-term impact will


be positive through private investment and


increased domestic supplies, which in turn


would result in weakening of price pressures.


In South Asia, supply-side bottlenecks keep


inflation high, despite recent moderation in


inflation momentum


Headline inflation among South Asian countries


remained high in 2012. Price pressures stem


Figure INF.12 Falloff in inflation in MENA excluding
Iran and Syria


Source: World Bank and Datastream.


-5


0


5


10


15


20


10M01 10M05 10M09 11M01 11M05 11M09 12M01 12M05 12M09


MENA excl. Iran and Syria Algeria


Egypt Jordan


Marocco Tunisia


Headline inf lation, 3m/3m, saar


55





Global Economic Prospects January 2013 Inflation Annex


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


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


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


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


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


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


Sub-Saharan Africa has experienced a steep
decline in inflation


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


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


In East Africa, the high food and fuel prices that
drove inflationary pressures in 2011 subsided in


Figure INF.13 Inflation momentum moderated in SAS


Source: World Bank and Datastream.


-7


-2


3


8


13


18


23


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


SAS IND3MM BGD3MM
NPL3MM PAK3MM LKA3MM


CPI, percentage change, 3m/3m saar


.


56





Global Economic Prospects January 2013 Inflation Annex


2012 (figure INF.14). Declining inflation


allowed policy makers in Kenya and Uganda to


support growth through monetary easing


throughout 2012, with interest rates dropping


from 18 percent to 11 percent in Kenya and from


23 percent to 12.5 percent in Uganda between


November 2011 and December 2012.FN3


Inflation in Kenya, which hit 19.7 percent in


2011, was down to 4 percent in October 2012


(food inflation was only 3.4 percent) (figure


INF.15). Similarly, quarterly inflation in


Uganda, which had reached more than 40


percent in late 2011, turned negative in the third


quarter of 2012.


In Tanzania, inflation decelerated from the 19.8


percent y/y registered in December 2011 (due to


high local food prices related to a serious


drought) to 13.5 y/y in September 2012, still


short of the 10 prevent inflation goal set by the


central bank said for June 2012 and single digit


by the end of the 2012/2013 fiscal year (June


2013). The impact on food prices of inconsistent


rainfall in 2012 is main reason that inflation


remains relatively elevated.


Rwanda continues to buck the regional trend,


with inflation rising since June, largely due to


increasing food prices (food costs represent 54


percent of Rwanda’s CPI basket). Urban
inflation in Rwanda, however, dropped slightly


in September, to 5.6 percent y/y, compared to


5.8 percent in August; rural inflation, which is


more impacted by food prices, was 14 percent in


September.


Among West African Economic and Monetary


Union (WAEMU) countries (Benin, Burkina


Faso, Cote d’Ivoire, Guinea Bissau, Mali, Niger,
Senegal, and Togo), inflation pressures


moderated on improving grain supplies during


the last quarter of 2012 after experiencing a rise


due to an increase in prices of fuel and cereals.


The moderating prices allowed the Central Bank


of West African States (BCEAO) to keep its


benchmark marginal lending rate at 4 percent.


The impact of food prices on inflation is also


evident among West African countries. Nigeria,


for example, experienced a temporary price hike


in October with inflation rising to 11.7 percent


(y/y) reflecting food shortages due to the heavy


floods.


Global inflation is projected to pick up


somewhat from 2013 through 2015 as growth


firms


Global consumer price inflation is projected to


pick up gradually as confidence and global


demand strengthen. Weak growth will however


keep inflation pressures subdued to around 3-4


percent globally and around 6.3 percent in


developing countries—above 2012 levels but


Figure INF.14 Moderate inflation in Sub-Saharan Africa


Source: World Bank and Datastream.


-2


3


8


13


18


23


28


33


38


43


48


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


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


CPI, percent change, 3m/3m saar


Figure INF.15 Falloff in Kenya’s inflation


Source: World Bank and Datastream.


-5


0


5


10


15


20


25


0


1


2


3


4


5


6


7


8


2010
Q1


2010
Q2


2010
Q3


2010
Q4


2011
Q1


2011
Q2


2011
Q3


2011
Q4


2012
Q1


2012
Q2


Growth Inf lation


Percentages


57





Global Economic Prospects January 2013 Inflation Annex


below inflation observed in 2011. Inflation in


high income countries is projected to gradually


increase to around 2.5-3 percent by the end of


the first quarter of 2013 and remain around that


level throughout 2013. In developing economies,


price pressures are expected to build in some


countries with the rebound in economic activity


and more dynamism in the private sector.


Overall, consumer prices in these economies are


projected to accelerate to around 6.3 percent in


2013 but still below their 2011 level.


The inflation outlook is however quite uncertain


and is subject to both upside and downside


risks—with the considerable consequences for
low income countries, which are sensitive to


price fluctuations due high reliance on primary


commodities, narrow range of policy instruments


and weak fiscal and monetary buffers.


On the upside, supply side bottlenecks may push


inflation up as global demand revives. In


addition, inflation may accelerate as the


increased grain prices pass through into local


food prices – especially in the countries with the
large share of wheat and maize consumption in


their food price basket. Implementation of fiscal


measures, including increase in utility prices and


tariffs to cost-recovery levels to reduce quasi-


fiscal deficits, and increase in taxes, which have


been delayed due to economic uncertainty may


become additional source of inflation. The


upside risks to supply side shocks also include


weather related price hikes to food supplies and


risks to price stability related to supply


disruptions in case of the escalating tensions in


the Middle East.


The positive effect of continuous policy easing


by the G3 (US, EU, and Japan) as well as major


developing countries and the positive effect of


those policies on inflation expectations may be


considered as an upside risks to inflation


forecast. However, chances that those policies


would lead to a surge in inflation in the near


term are low in the present weak growth


environment and inflation expectations remain


anchored around the current target inflation


rates.


On the downside, slower growth and excess


capacity in some countries will help moderate


core inflation. Stable or declining commodity


prices will reinforce this outcome. Deepening of


economic turmoil in Euro Area and slower US


growth in case the looming ―fiscal cliff‖ of
spending cuts and tax hikes is not addressed and


undermines the US and global growth, depressed


economic activity and causes disinflation. Were


external conditions to deteriorate, some


developing countries have room to support


growth through policy easing, but others are


constrained.


Notes


1. In Turkey, the key policy rate used under the


inflation-targeting framework is the one week


repo auction rate. Turkey also uses an interest


rate corridor and required reserve ratios as


policy instruments.


2. In addition, South Africa plans to introduce a


revised CPI basket in January 2013 to reflect


changing household expenditure patterns. The


new basket will assign a higher weight to


services spending vis-à-vis goods.


3. As of July 2011, the Bank of Uganda has used


a seven-day interbank interest rate as its main


policy rate, shifting from supporting


aggregate demand via money supply growth


to targeting inflation and reducing bank credit


growth.








58





Global Economic Prospects January 2013 Trade Annex


Recent Developments


Consistent with the weakness in the global


economy, global trade volume growth


decelerated to about 3.8 percent in 2012, down


from 6.1 percent in 2011 (figure Trade.1). This


represents the weakest annual growth rate in


global trade volumes since 2009 and falls well


short of the historical average of 6.8 percent.


Developments in global trade flows were driven


mainly by ongoing weakness in high-income


economies, particularly the European Union (the


world’s largest trading bloc) as well as from a
slowdown in some of the larger developing


economies including, China, India and Brazil.


Global trade trends in 2012 were volatile on


account of economic uncertainty during the


year. After contracting at a seasonally adjusted


annualized pace of 6.2 percent in Q2 2012 –
precipitated by the then escalating financial


market tensions related to the Euro Area crisis,


and the resultant increase in precautionary


savings as business and consumer sentiment


weakened - the contraction in global trade


volumes tapered-off somewhat in Q3 2012 and


have shown signs of a pickup in Q4 2012.


Indeed, in the three months leading to October,


global trade volumes began expanding once


again at an annualized pace of 1.0 percent.


Nonetheless much of the recent expansion in


global trade has been as a result of the cyclical


uptick in developing country import demand, as


high-income country imports was still


contracting in October, albeit marginally.


Reflecting subdued growth in the global


economy, trade in industrial goods was


weaker than that of agricultural goods. Latest


available data on commodity composition of


trade suggests that global imports of industrial


inputs such as chemicals, metal and minerals and


machinery were among the hardest hit, falling by


3.4 percent, 4.1 percent and 1.3 percent


respectively in value terms over the first half of


2012 compared with the same period in 2011


(figure Trade.2). In part, this reflects weak


durable goods sales, as firms and households


postpone big-ticket purchases during periods of


uncertainty and economic weakness. The income


elasticity of agricultural goods meant that


imports of agricultural goods fared better --


rising 1.1 percent (y/y) in value terms in the first


half of 2012. Notwithstanding the slowdown in


Global Trade Annex


Figure Trade.1 Global trade growth was subdued in
2012


Source: World Bank.


-20


-15


-10


-5


0


5


10


15


20


25


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


Global Long-term average


volume, % change, 3m/3m


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


Source: World Bank.


-6.0


-4.0


-2.0


0.0


2.0


4.0


6.0


8.0


10.0


12.0


Oil Cars Agriculture Machinery Chemicals Metal ores


(percent growth in values, year-on-year)


59





Global Economic Prospects January 2013 Trade Annex


the global economy, the trend increase in per


capita oil consumption in developing countries


coupled with the shift in Japan’s energy sources
to crude and natural gas after the shut down of


it’s nuclear power plants supported the increase
in global imports of oil.


Import demand among high-income countries


have differed, reflecting the relative strength


of their respective domestic economies.
Among high-income countries, import volumes


contracted for six consecutive months through


October. With the Euro Area being at the epi-


center of the crisis, and with banking sector


deleveraging, fiscal consolidation and


unemployment rising, the contraction in import


demand was the most protracted. For each month


between May and September, import demand in


the Euro Area contracted at a double digits


annualized pace (figure Trade.3). However, the


supportive policy interventions by the European


Central Bank which helped to reduce financial


market tensions in the bloc has helped partially


recover some business confidence and support to


real side activity. Indeed, Euro Area import


demand, though still contracting in October (-


3.5%, 3m/3m saar), had improved from the


depth of contraction in Q3 2012 (-13.5%, 3m/3m


saar). In contrast to the Euro Area, and reflecting


output expansion in the US economy (even if


weak), import demand in the United States


expanded through Q2 2012. Nonetheless, its


import demand contracted at a 11.2 percent


annualized pace in Q3 2012. Import demand in


Japan accelerated in the second quarter


benefitting from government household


incentives program but however weakened in the


third quarter and fourth quarter, after the


expiration of these incentive programs, as well


as from weaker trade with China due to the


Island dispute.


External demand has helped to mitigate weak


domestic demand in several high-income


countries, particularly in the Eurozone.
Reflecting the ongoing adjustment in the Euro


Area (fiscal consolidation, banking sector


deleveraging etc), domestic demand’s
contribution to GDP growth has been negative (-


1.8 percentage points), however, net exports


contribution has been positive (1.6 percentage


points), thereby helping to partially mitigate the


recessionary domestic demand conditions in the


Euro Area economy (figure Trade.4). In both the


US and Japan, domestic demand was relatively


stronger than in the Euro Area and while net


exports contribution to growth in the US was


neutral, in Japan it was negative due to the


significant increase in it’s imports of crude oil
and liquefied natural gas due to the shut down in


it’s nuclear facilities.


Much of the supportive external demand


environment to GDP growth in high-income


Figure Trade.3 Though mostly weak, fortunes among
high-income countries diverged through 2012


Source: World Bank.


-40


-30


-20


-10


0


10


20


30


40


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


Euro Area Japan USA High-income


volume, % change, 3m/3m saar


Figure Trade.4 External demand helped to mitigate the
recessionary conditions in several Euro Area econo-
mies


Source: Eurostat and World Bank.


-8.0


-6.0


-4.0


-2.0


0.0


2.0


4.0


6.0


Domestic demand Net exports


GDP growth


Italy


Ireland


France


Euro Area


Spain


Japan


USA


Germany


60





Global Economic Prospects January 2013 Trade Annex


countries came from developing country


import demand. Even though global trade


growth was weak in 2012, consistent with


previous years, a significant share of the increase


in high-income country exports was to


developing countries. For instance, developing


countries accounted for some 63 percent of the


increase in both France and Germany’s extra-EU
exports and 58 percent of the increase in US’s
exports to the rest of the world.


Developing country trade developments are


heavily influenced by cyclical trends in high-


income countries. With increased integration


among themselves and also with high-income


countries recent developments in developing


countries confirm the synchronized nature of


business cycles between developed and


developing countries (figure Trade.5). The recent


fall and pick-up in import demand among high-


income countries was mirrored among


developing countries. Developing country


import demand contracted at a 5.7 percent


annualized pace in Q2 after an expansion of 23.8


percent in Q1. Nevertheless, reflecting stronger


domestic demand in developing countries their


imports recovered more quickly and by


November 2012, import demand in developing


countries was expanding at an annualized pace


of 16.7 percent.


Not all the mid-year slowdown in developing


countries can be attributed to spillovers from the


Eurozone. In China, for instance earlier efforts


by monetary authorities to engineer a soft


landing (particularly in the property market) was


at play in restraining domestic demand. And in


India stalled reforms, an uncertain economic


environment and a slowdown in foreign direct


investment flows constrained domestic demand.


Notwithstanding the synchronized nature of high


-income and developing country business cycles,


the decoupling of high-income and developing-


country trend growth rates points to an


Figure Trade.5 Cyclical trade trends between high-
income and developing countries remain largely
synchronized


Source: World Bank.


-30


-20


-10


0


10


20


30


40


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


High-income Developing


Developing (ex. China) Long-term average


volume, % change, 3m/3m saar


Figure Trade.6 The share of developing countries
in global trade is steadily growing in importance


Source: World Bank.


0


10


20


30


40


50


60


70


80


90


1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011


Developing High-income


(percentage share of imports in global total)


Box Trade.1 The pace of market share gain by developing countries has increased in recent years.


Over the past two decades, the share of developing countries in global trade has doubled from some 15.9 percent


to 31.5 percent, with an average annual increase in market share of some 0.8 percentage points. The great reces-


sion has only contributed to accelerating this trend as high-income countries continue to be weighed down by high


-debt, fiscal consolidation, elevated unemployment levels and slow growth (even recession in some countries).


With the economies of developing countries remaining fairly resilient since the great recession, this has allowed


them to double their pace of increase in market share since 2008 to an average of 1.5 percentage points per annum


– twice the increase in annual market share prior to the great recession.


61





Global Economic Prospects January 2013 Trade Annex


increasing role for developing countries in global


trade (figure Trade.6 and box Trade.1).


Developing country exports followed a similar


pattern to imports, but with significant


differences across countries and regions


(figures Trade.7 and Trade.8). Consistent with


the mid-year slump in global imports,


developing country exports declined for three


consecutive months through October, however,


by November developing country exports had


begun expanding once again. The recent up tick


in developing country exports has been mostly


supported by increased South-South trade as


import demand from high-income countries was


still contracting as of October, albeit at a weaker


pace than in the third quarter.


Among developing regions, the worst hit by the


Q2 slowdown included: East Asia and Pacific


(excluding China) – whose export volumes of
manufactured goods are particularly sensitive to


global demand conditions; South Asia and


Central and Eastern Europe both of which have


strong ties to European demand; and Latin


American and the Caribbean, though less


dependent on Euro Area demand are sensitive to


weakening Asian (particularly Chinese demand


for their commodity exports). Notwithstanding


the contraction in exports that each of these


developing regions experienced in Q2 2012, they


had all begun expanding once again by the third


quarter.


Data for the Middle East and Africa lag behind.


However, latest available data suggest that


developments in the Middle East and North


Africa have been influenced more by political


developments than the external economic


environment. Indeed, export volumes for the


Middle East and North Africa region has


contracted for twelve consecutive months, with


volumes in the three months leading to August


contracting at a peak 36.4 percent pace. In


contrast, annualized growth rates in Sub Saharan


Africa export volumes were at a double digit


pace in both Q1 2012 (18.3%) and Q2 2012


(29.4%). However, in the three months leading


to August, export volumes were expanding at a


subdued pace of 2.5 percent, suggesting that the


regions exports were hit by the mid-year


weakness in global demand.


Medium term prospects for global trade


Global trade is projected to pick-up over the


medium term but at relatively subdued rates.
As described in the main text, global output is


projected to remain weak but gradually firm


during 2013 and through 2015, with US and


Euro Area growth still hampered by fiscal


Figure Trade.7 Export volumes have rebounded in
recent months in some developing regions


Source: World Bank.


-30


-20


-10


0


10


20


30


40


2011M03 2011M07 2011M11 2012M03 2012M07 2012M11


Europe and Central Asia Sub Saharan Africa East Asia


volume, % change, 3m/3m saar


Figure Trade.8 Developing country exports were im-
pacted by both external and ideosyncratic domestic
developments


Source: World Bank.


-50


-40


-30


-20


-10


0


10


20


30


40


2011M03 2011M06 2011M09 2011M12 2012M03 2012M06 2012M09


South Asia


Latin America and Carribbean


Middle East and North Africa


volume, % change, 3m/3m saar


62





Global Economic Prospects January 2013 Trade Annex


consolidation, banking-sector restructuring and


high unemployment.


Growth in developing countries is also expected


to firm but remain relatively weak. As a result,


real trade growth is projected to only gradually


return to pre-crisis growth rates of 5.7 percent in


2013, 6.7 percent in 2014, and 7.1 percent in


2015.


Developing countries trade shares and


contribution to export and import growth will


continue expand. Continued productivity


differentials, policy reform and investments in


human and physical infrastructure are projected


to permit developing countries to continue


growing their share of global trade.


Developing country imports are projected to


expand at an annual average rate of 8.0 percent


between 2013 and 2015, versus a moderate 5.9


percent for high-income countries (driven mainly


by the United States).


Overall, the share of developing countries in


global trade is projected to reach 35 percent by


2015, with most of the pickup reflecting


increasing South-South trade. As of 2002, South-


South trade accounted for only 39.2 percent of


total developing country exports, but by 2010


this share had topped 50 percent – meaning that
for developing countries, other developing


countries are now more important trading


partners than high-income countries. Developing


countries are also increasingly important for high


-income countries as well. Since 2000, North-


North trade has been expanded on average by


only 7.3 percent over the past decade, whereas


high-income-country exports to developing


economies has increased at an annual average


pace of 11.8 over the past decade (figures


Trade.9 and Trade.10).


The rise in Chinese wages presents an


opportunity for other developing countries to


enter light manufacturing sector. Not only will


their share of trade increase but also the


composition of trade among developing


countries. Indeed, with the cost of labor


continuing to rise in China and assuming a


continued appreciation of the renminbi, other


developing countries may be able to enter into


some of the labor-intensive manufacturing


sectors that China has dominated in recent


decades (World Bank 2012).


The quadrupling of Vietnamese exports over the


past decade in part reflects its increasing


competitiveness vis-à-vis China in light


manufacturing – although to take advantage of
their full potential, countries in Sub-Saharan


Africa will have to address some of the binding


constraints related to infrastructure, access to


finance and human capital.


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


Source: ITC and Comtrade database.


0%


10%


20%


30%


40%


50%


60%


70%


80%


90%


100%


2002 2003 2004 2005 2006 2007 2008 2009 2010


High-income Developing


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


Figure Trade.10 South-South trade has been the most
dynamic segment of global trade over the past decade


Source: World Bank.


0


50


100


150


200


250


300


350


400


450


2001 2002 2003 2004 2005 2006 2007 2008 2009 2010


North-North North-South


South-South South-North


(Index of export values, 2001=100)


63





Global Economic Prospects January 2013 Trade Annex


Risks


Significantly weaker global growth. The


challenges faced by high-income countries


continues to be the main sources of risk for trade


going forward. Euro Area tensions, the fiscal


cliff in the United States and a sharp decline in


Chinese growth are among the risks that could


derail trade in the months and years to come.


Simulations presented in the main text suggest


that a harder landing in China could reduce


global trade growth by 0.63 percentage points


from our baseline forecasts of 5.7 percent in


2013.


The current weakness in Japan also represents a


risk for trade (Japan is the world’s fourth largest
importer) .


Should the situation in either Europe or the


United States degrade sharply, the solvency of


private-sector banks could be affected –
potentially forcing them to tighten up trade


finance – with serious consequences for trade.
Even in the absence of a global crisis, new


regulations introduced under Basle III, due to


come into force in 2016, could significantly raise


the cost of trade finance, potentially increasing


its cost and accessibility to developing-country


firms.


A drying up of bank-led trade finance could be


particularly damaging for smaller firms, who


may not have access to alternative financing


methods such as bonds available to larger firms.


A rise in protectionism. With unemployment


remaining at elevated levels, weak global


demand and little progress in multilateral trade


talks, the incidence of new restrictive trade


measures has held steady. The World Trade


Organization reports that in the seven months


leading to mid-May 2012, an additional 182 new


trade restricting or potentially distorting


measures were introduced (figure Trade.11).


Compared to the same period a year ago, where


184 new measures were introduced which


affected 0.5 percent of global trade, the recent


measures affects some 0.9 percent of global


trade. Further, only 18 percent of measures


introduced since October 2008 by G-20


countries have been removed, with current


measures estimated to affect some 3 percent of


global trade ($450 billion). Of particular concern


is that, unlike previous restrictive trade measures


that were seen as combatting the temporary


effects of the global crisis, recent trade measures


are embedded in national industrial plans, hence


appear to be of a longer term nature.


References


World Bank (2012). Light Manufacturing in


Africa.


World Trade Organization (2012). Report to the


TPRB from the Director General on Trade-


Related Developments. WT/TPR/OV/W/6.




Figure Trade.11 Trade restrictive measures continue to
rise


Source: World Bank, World Trade Organization.


0


40


80


120


160


200


mid-October 2010 -April
2011


May 2011 to mid-
October 2012


mid-October 2011 to
mid-May 2012


(Number of new trade restrictive measure by type)


Trade
remedy


Border


Other


Export


64





Global Economic Prospects January 2013 Exchange Rates Annex


High income exchange rates have been


volatile


High income exchange rates, especially cross


rates between the US dollar, Euro, and yen, have


been volatile in recent months, reflecting


alternate bouts of optimism and pessimism


among investors regarding the prospects for


resolution of the Euro Area debt crisis, fiscal and


monetary policy actions in Euro Area, United


States and Japan, and uncertainty regarding the


pace and sustainability of economic recovery in


high income countries. Indications by the


European Central Bank on July 26 that it would


take action to reduce financial market tensions,


and expectations that the ECB’s Outright
Monetary Transactions (OMT) bond purchase


program subsequently announced on September


6 would help reduce downside risks to growth,


contributed to the strong 8.6 percent appreciation


of the euro against the US dollar between July


26 and December 31 2012 (figure ExR.1). The


third round of US quantitative easing (QE3)


announced on September 11 resulted in an


immediate weakening of the US dollar against


both high income and developing countries’
currencies. Subsequent events relating to the


decision and timing of Spain’s request for a
bailout and the economic weakness in the Euro


Area temporarily tempered appreciation of the


euro. The euro appreciated strongly again in late


November and early December after Greece exit


fears receded following a debt deal in November


to cut the interest rate on official loans to


Greece, extend the maturity of loans from the


European Financial Stability Facility (EFSF)


from 15 to 30 years, and grant a 10-year interest


repayment deferral on those loans. Meanwhile,


in the United States, a temporary resolution was


reached on the so-called ―fiscal cliff‖ of
automatic tax increases and spending cuts in


early January. But the protracted fiscal policy


impasse and uncertainty regarding the upcoming


US debt ceiling negotiations have weighed on


US economic activity, and in turn the dollar.


Worsening growth outturns in Japan (partly due


to an island-related dispute with China that


caused a steep decline in exports) and aggressive


monetary policy easing also contributed to


weakening the yen against both the US dollar (-


8.5%) and the euro (-13.1%) between September


1 and December 31 2012.


Movements among high income


currencies have influenced developing


countries’ bilateral exchange rates


This ebb and flow of the high income exchange


rates has been transmitted to varying extents to


bilateral exchange rates of developing countries’
currencies relative to the three major


international reserve currencies, the US dollar,


the euro and the yen. In the second half of 2012,


bilateral exchange rates of several large


developing countries experienced appreciation


pressures relative to the US dollar, but


depreciated relative to the euro, reflecting in part


the movements in the dollar-euro rate discussed


above (figure ExR.2).


Notwithstanding the fluctuations in bilateral


exchange rates of developing countries’
currencies, their trade weighted nominal


Exchange Rates


Figure ExR.1 High income exchange rates


Source: World Bank.


90


95


100


105


110


115


120


Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13


USD/Euro
Yen/Euro
USD/Yen


Index, Jun 2012 = 100, 5-day m.a.


Source: World Bank Prospects Group and Datastream Last updated: Jan. 10, 2013


65





Global Economic Prospects January 2013 Exchange Rates Annex


effective exchange rates (NEERs) have been


considerably less volatile (figure ExR.3). On


average, bilateral exchange rates relative to the


US dollar of the developing countries in figure


ExR.3 were 22 percent more volatile than the


NEERs during the three-year period from


December 2009 to December 2012; and bilateral


exchange rates relative to the euro were 36


percent more volatile than NEERs. Exchange


rates that are more closely linked to the US


dollar (e.g., the Chinese renminbi) exhibit


considerable variation relative to the euro; while


currencies of countries with tighter trade linkage


to the Eurozone (e.g., Romanian leu) exhibit


more variation relative to the US dollar. But in


general, the diversification of trade destinations


of developing countries implies that bilateral


movements relative to the high income


currencies often offset each other in the trade-


weighted basket of currencies relevant for


developing countries. This suggests that a focus


on any specific bilateral exchange rate could be


misleading when considering trends in exchange


rates for developing countries, and it may be


more appropriate to consider effective (trade


weighted) nominal or real exchange rates.


Figure ExR.2 Developing countries’ bilateral exchange rates relative to US dollar and euro


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


92


96


100


104


108


112


Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13


Brazil China
India Chile
Mexico Russia
Turkey South Africa
US$/Euro


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


Source: World Bank Prospects Group and Datastream Last updated: Jan. 10, 2013


90.0


92.5


95.0


97.5


100.0


102.5


105.0


107.5


110.0


Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13


Brazil China
India Chile
Mexico Russia
Turkey South Africa
Euro/US$


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


Source: World Bank Prospects Group and Datastream Last updated: Jan. 10, 2013


Figure ExR.3 Bilateral exchange rates of developing countries tend to be more volatile than trade-weighted nomi-
nal effective exchange rates (Average and maximum deviation from trend)


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


0.0


0.5


1.0


1.5


2.0


2.5


3.0


3.5


4.0


4.5


5.0


China Indonesia Malaysia Romania Russia India Brazil South
Africa


Turkey


USD/local currency Euro/local currency NEER


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


0.0


2.0


4.0


6.0


8.0


10.0


12.0


China Malaysia Russia Romania India Indonesia South
Africa


Brazil Turkey


USD/local currency Euro/local currency NEER


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


66





Global Economic Prospects January 2013 Exchange Rates Annex


Unconventional monetary policies in high


income countries and gains in


international commodity prices have


caused concerns of currency appreciation


and possible loss of competitiveness


The monetary authorities in the US and Euro


Area have committed to an extended period of


unconventional monetary policies, in the context


of the third round of the US Federal Reserve’s
quantitative easing (QE3) program and the


ECB’s OMT bond purchases programs for Euro
Area countries that seek financial assistance.


Japan’s central bank has also maintained a
supportive monetary policy stance as growth


faltered. The prospect of an extended period of


accommodative monetary policies in high


income countries has raised concerns among


policy makers in some developing countries that


it could cause large ―hot money‖ inflows into
government and corporate bonds, and equity


markets, of developing countries (see Finance


Annex of the Global Economic Prospects


January 2013 report), which in turn, could result


in currency appreciation and loss of export


competitiveness (Frankel 2011, Ostry, Ghosh,


and Korinek 2012).


For commodity exporting countries, it can be


difficult to distinguish between currency


pressures related to high commodity prices and


related foreign direct investment on the one


hand, and more volatile hot money capital flows


on the other. In such countries, high-income


monetary easing-related capital inflows could


plausibly exacerbate commodity price-driven


swings in real effective exchange rates (REERs).


For example, the 28 percent real effective


appreciation of the Brazilian real since January


2009 seems to be principally a reflection of high


commodity prices, strong commodity exports,


and commodity-related foreign direct investment


flows. While hot money flows may contribute to


short-term volatility, the longer-term


appreciation of the real does not seem to reflect


these more volatile forms of capital flows (box


ExR.1).


For some time now, Brazil has actively managed


its bilateral exchange rate in an effort to prevent


loss of competitiveness of its manufacturing


sector. Peru has also taken some steps, raising


reserve requirements on local and foreign


currency bank deposits and selectively


intervening in currency markets, citing high


international liquidity and exceptionally low


international interest rates as reasons.FN1 It is


worth noting, however, that capital controls and


sustained interventions to prevent currency


appreciation could involve significant risks for


the economy over the medium term (see box


ExR.1 and the Global Economic Prospects June


2012 report).


Mexico has also experienced heavy inflows into


government bond markets in parallel with US


monetary easing and relatively strong growth.


However the peso has been allowed to float,


contributing to a 8.4 percent appreciation in real


terms since June (figure ExR.4). The South


African rand has been a notable exception to the


commodity- and capital flows-driven rally in


exchange rates, with the trade-weighted real


exchange rate declining 2.5 percent between


June and December 2012 as protracted mining


sector tensions, labor unrest, and domestic


economic weakness (compounded by a


sovereign rating cut by Moody’s in late
September) caused a loss of investors’
confidence.FN2 This has resulted in a strong


historical link to fundamentals, in particular to


the terms of trade (see Exchange Rates Annex of


Figure ExR.4 Trade-weighted real exchange rates of
commodities exporters in 2012


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


-5


-3


-1


1


3


5


7


9


11


Colombia South Africa Indonesia Peru Chile Russian
Federation


Brazil Mexico


Dec11-Dec12


June12-Dec12


REER appreciation, percent


67





Global Economic Prospects January 2013 Exchange Rates Annex


Box ExR.1 The influence of commodity prices and capital markets on developing country exchange rates


The experience during two earlier periods of sustained increase in international commodity prices and private capital


flows is illustrative. Between 2003 and mid-2008 prior to the Lehman crisis, prices of industrial commodities rose


more than 164 percent in real terms and crude oil prices rose 230 percent, implying annual increases of 21 percent and


26 percent. A second price rally occurred following the financial crisis with prices recovering close to the pre-crisis


peaks in just over two years, helped by fiscal stimulus measures and sustained monetary easing in high income coun-


tries, and a quick rebound in developing countries’ growth compared to a much weaker growth in high income coun-
tries. The period of near-zero interest rates and quantitative easing in the US, UK, Japan and other high income coun-


tries caused capital flows to developing countries to surge again. The influx of commodity-seeking inflows as well as


private capital flow (attracted by faster productivity growth), together resulted in a significant appreciation of develop-


ing countries’ currencies.


The extent of appreciation of developing countries currencies, however, varied along two dimensions—the impor-
tance of primary and industrial commodities in overall imports, and the extent of financial market openness. We


measure the latter as the share of foreign portfolio equity inflows as a share domestic product (GDP), which signals


the extent of integration into global financial markets. As box figure ExR 1.1 shows, developing countries that are in


the top third along both dimensions (e.g., Brazil, South Africa) experienced the steepest appreciation, especially com-


pared to other developing countries that are relatively well-integrated into financial markets but not significant com-


modity exporters (e.g. India, Turkey, Thailand). By contrast, the real exchange rates of other commodity exporters


that are in the bottom third in terms of our measure of financial market integration (e.g. Gabon, Cameroon, Iran) were


on average flat during the first period and lost value in the second period.


This suggests that commodity prices and capital flows can interact in complex ways to influence currencies of devel-


oping countries. A commodity price boom can attract not only foreign direct investment into resource intensive sec-


tors raising overall levels of FDI (box figure ExR 1.2), but in countries with relatively higher levels of financial open-


ness, it can also cause short-term speculative inflows into non-tradable sectors, for example, real estate, that benefit


from the increased demand caused by commodity revenues, in the process further appreciating the currency. Eventu-


ally, when international prices retreat or investor risk aversion rises, the process is reversed, as sudden capital out-


flows depreciate the exchange rate, in the process raising the local currency burden of foreign currency-denominated


liabilities (Ostry et al. 2010). Such a commodity price boom-fueled real exchange rate appreciation, especially in


countries with relatively higher levels of financial market integration, can exacerbate risks to firm and sovereign bal-


ance sheets (Korinek 2011). Although some financially-integrated commodity exporters have made efforts to mitigate


these risks through controls on cross-border flows, such as Chile’s ―Encaje‖ in the 1990s and Brazil’s more recent
IOF tax on inflows, such controls may come at the cost of reduced allocations of portfolio capital that is often redi-


rected towards countries with more open exchange rate regimes (Forbes et al. 2012), and over time, lower investment


rates, productive capacity and welfare. When there is significant cross-border spillovers of a country’s capital control
policies that can exacerbate existing distortions in others, multilateral coordination of such unilateral policies may be


beneficial (Ostry, Ghosh, and Korinek 2012).


Box figure ExR 1.1 Currencies of commodities ex-
porters that are also financially-integrated experi-
enced the largest gains during periods of commodity
price increases and capital flows


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


-5


0


5


10


15


20


25


30


Top 33 percent by
equity market


integration


Bottom 33 percent by
equity market


integration


Top 33 percent by
equity market


integration


Bottom 33 percent by
equity market


integration


Average real effective exchange rate appreciation


(percent)


Jan. 2003-Jan. 2008 Jan. 2009-Jan. 2011


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


Bottom third of countries by
commodities exports


Box figure ExR 1.2 FDI is stronger in commodity ex-
porting countries



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


0.0


1.0


2.0


3.0


4.0


5.0


6.0


7.0


8.0


9.0


10.0


2003-08 2009-10


Foreign direct investment as share of GDP


(Percent)


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


Bottom third of
countries by
commodity
exports


68





Global Economic Prospects January 2013 Exchange Rates Annex


the Global Economic Prospects June 2012


report), breaking down in the most recent period.


Indonesia’s real effective exchange rate declined
by 2.6 percent in 2012, but was 19 percent


higher compared to the level in January 2009.


Policymakers in developing countries face


difficult policy choices when faced with a


sustained surge of inward foreign exchange


flows, whether these are private flows caused by


monetary easing in high income countries,


commodity revenues from persistently high


international prices, or remittances sent by


migrants living in other countries. Policy


discussion in middle-income resource-rich


countries that are relatively well-integrated with


global financial markets such as Brazil, Chile


and Russia have typically focused on concerns


about capital-inflows induced appreciation and


possible loss of manufacturing competitiveness.


However, commodity price-driven currency


appreciation is also an important issue for other


developing countries that are experiencing


natural resource discoveries or increased


exploitation, for example, in CEMAC countries


(including Equatorial Guinea, Cameroon, Gabon


and Central African Republic); in Kazakhstan


where managing oil revenues presents


macroeconomic challenges; and in Iraq where oil


production is rising rapidly after political


transition.


How then should policymakers on commodity


revenue-dependent countries respond to these


sustained inflows? To the extent that these


inflows are used for longer-term productivity-


enhancing investments, including in human


capital and infrastructure, and used to diversify


the economy towards non-commodity sectors


such as manufacturing and services, there is less


to fear in terms of loss of competitiveness. Some


countries such as Norway and Chile have


effectively managed commodity revenues and


smoothed consumption and investment through


cycles using ―stabilization funds‖. Other
countries, including African commodity


exporters that are less advanced in managing


their commodity revenues, have experienced


large swings in public spending and higher costs


in non-commodity sectors. In such cases,


innovative solutions may be needed to manage


the consequences for growth and manufacturing


competitiveness (Frankel 2011, Devarajan and


Singh 2012).


Currencies of net crude oil importers


among developing countries remain under


pressure


With a weakening of the global economy and


steep slowdown in exports of developing


countries during the course of 2012 (see Trade


Annex of the Global Economic Prospects


January 2013 report), some developing countries


had to draw down international reserves to


support their currencies. Currencies of net oil


importers which have faced high international


prices of (and often relatively inelastic domestic


demand for) crude oil imports faced little


appreciation pressure, with their average trade-


weighted real exchange rate broadly flat between


January 2011 and December 2012. In contrast,


crude oil exporters and resource rich developing


countries experienced appreciation of 6.9 percent


and 8.6 percent, respectively, during this period


(figure ExR.5). While a depreciation of the


nominal (and in turn, real) exchange rate can


help to improve competitiveness and may be


desirable in certain circumstances, a combination


of a flat or declining real exchange rate and


falling reserves suggests that a currency may be


under pressure.


Figure ExR.5 Currencies of resource rich and crude
oil exporters have experienced greater appreciation
pressures compared to other developing countries


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


96


98


100


102


104


106


108


110


Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12


Developing crude oil importers


Developing resource rich


Developing crude oil exporters


Real effective exchange rate, index Sep 2011=100


69





Global Economic Prospects January 2013 Exchange Rates Annex


An indicator of vulnerability of the external


position, and consequently of pressures on the


exchange rate, is the ―import cover‖, the number
of months of prospective imports that can be


financed with available international reserves.


The proportion of crude oil and industrial


commodities exporters where international


reserves were less than the critical three months


of imports rose from 6.3 percent to 9.4 percent


between January 2011 and September 2012 (or


most recent available date); and the share of


countries with less than five months of import


cover rose from 12.5 percent to 25 percent


(figure ExR.6). But in the group of non-oil non-


commodities dependent countries, the share of


countries with less than three months of import


cover rose from 14 percent to 25 percent in the


same period, and those with less than five


months of import cover rose from 44.4 percent


of the total to 58.3 percent. In some countries,


the erosion of import cover has been alarming.


For instance, Egypt’s international reserves fell
from the equivalent of over 7 months of


merchandise imports in January 2011 to about 3


months by November 2012.


Among countries that are relatively better


integrated with global financial markets, reserve


accumulation as an insurance against capital


account shocks may be more important than


insuring against current account shocks, than for


countries that have relatively closed capital


accounts (Ghosh, Ostry and Tsangaridis 2012).


The former set of countries may need to


maintain adequate reserves to cover all short


term liabilities, including the maturing portion of


long term debt, in addition to covering several


months of imports in order to avoid balance of


payments shocks. A large stock of reserves may


also plausibly deter currency manipulators who


seek to profit from greater exchange rate


volatility (Basu 2012).


Despite worsening terms of trade, currencies of


some net oil importing countries have


appreciated in trade weighted real terms due to


country specific factors. For example, Turkey’s
real effective exchange rate appreciated in 2012,


initially helped by monetary support for the


currency to cope with inflation and overheating,


and later supported by an improving trade and


current account position, as weakening of


exports to Europe was offset by robust gains in


exports to the Middle East (figure ExR.7). In


contrast, the real exchange rate of India, another


net crude oil importer, depreciated by nearly 11


percent between July 2011 and September 2012


on deteriorating external balances and


weakening growth outturns. However,


significant reform efforts in September led to a


revival of investors’ interest, a surge in portfolio
inflows, and a nominal appreciation of more than


5 percent during that month alone.


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


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


0


2


4


6


8


10


12


Less than 3
months


3 - 5 months 5 - 7 months 7 - 9 months 9 - 11 months 11 months or
more


Middle income crude oil and
commodities exporters


Jan-11


MRV in 2012


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


0


2


4


6


8


10


12


14


Less than 3
months


3 - 5 months 5 - 7 months 7 - 9 months 9 - 11 months 11 months or
more


Other middle income developing
countries


Jan-11


MRV in 2012


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


70





Global Economic Prospects January 2013 Exchange Rates Annex


Figure ExR.7 Real effective exchange rates of net oil importers India and Turkey’s follow divergent paths
Source: World Bank.


External vulnerabilities vary across developing


regions and among country groups. Net oil


importers across developing regions have faced


high or widening current account deficits (figure


ExR.8) and depreciation pressures. In contrast,


developing crude oil exporters in the Middle


East, and some East Asian countries such as


China, have current account surpluses (albeit


falling in recent years in the case of China) and


large reserve buffers to draw on, and are


therefore easily able to manage pressures on


their exchange rates that may result from an


adverse external environment.


China’s closely managed bilateral exchange rate
relative to the US dollar appreciated to 6.25


renminbi/US dollar in October 2012, the highest


level in over a decade, from 8.28 renminbi/US$


in January 2005, representing a 32 percent


appreciation with respect to the US dollar and a


35 percent appreciation relative to the euro


(figure ExR.9). The renminbi’s appreciation and
fall in China’s current account surplus is one of
the elements of rebalancing the economy


towards domestic demand and further


internationalization of the currency, as evidenced


by progressively larger volumes of trade


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


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


60


65


70


75


80


85


90


95


100


105


80


85


90


95


100


105


Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11 May-12 Oct-12


Turkey REER


Turkey terms of trade [Right]


Index, Jan 2009 = 100 Index, Jan 2009 = 100


Turkey


70


75


80


85


90


95


100


105


90


92


94


96


98


100


102


104


106


108


110


Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11 May-12 Oct-12


India REER


India terms of trade [Right]


Index, Jan 2009 = 100 Index, Jan 2009 = 100


India


Figure ExR.9 The Chinese renminbi ap reciated rela-
tive to the US dollar and euro between 2005 and 2012


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


5.5


6


6.5


7


7.5


8


8.5


990


100


110


120


130


140


Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12


China's exchange rates


REER index


NEER index


Euro/yuan (index)


Yen/yuan (index)


Yuan/US$ [Right]


Index, Jan 2005=100 Yuan/US$, inverse scale


i .8 Current account surpluses have fallen in
East Asia, but deficits in several other developing
regions have widened


Source: World Bank.


-1.5


-0.5


0.5


1.5


2.5


3.5


4.5


2005 2006 2007 2008 2009 2010 2011 2012e


Sub-Saharan Africa South Asia


Middle East & N. Africa (Oil importers) Middle East & N. Africa (Oil exporters)


Latin America & Caribbean Europe & Central Asia


EAP excl. China China


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


71





Global Economic Prospects January 2013 Exchange Rates Annex


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


Looking forward


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


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


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








Notes


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


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


References


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


72





Global Economic Prospects January 2013 Exchange Rates Annex


Cashin, P., L. Cespedes, and R. Sahay. 2004.


"Commodity Currencies and the Real


Exchange Rate," Journal of Development


Economics, Vol. 75(1), pp. 239-268, October.


Devarajan, S., and Raju Jan Singh. 2012.


―Government Failure and Poverty Reduction
in CEMAC‖. Presentation at the World Bank


Forbes, K., M. Fratzscher, T. Kostka, and R.


Straub. 2012. ―Bubble thy neighbor: portfolio
effects and externalities from capital controls.‖


Frankel, J. 2011. ―How Can Commodity
Exporters Make Fiscal and Monetary Policy


Less Procyclical?‖ in Beyond the Curse:
Policies to Harness the Power of Natural


Resources, eds.: R. Arezki, T. Gylfason, and


A. Sy, International Monetary Fund.


Frankel, J. 2012. ―The Natural Resource Curse:
A Survey of Diagnoses and Some


Prescriptions.‖ In Commodity Price Volatility
and Inclusive Growth in Low Income


Countries, eds. R. Arezki, C. Pattillo, M.


Quintyn, and M. Zhu, International Monetary


Fund.


Ghosh, A, J. Ostry, and C. Tsangarides. 2012.


―Shifting Motives: Explaining the Buildup in
Official Reserves in Emerging Markets since


the 1980s‖ IMF Working Paper 12/34.
January.


Korinek, A. 2011. ―The New Economics of
Prudential Capital Controls.‖ IMF Economic
Review 59 (3), pp. 523-561


Mattoo, A., P. Mishra, and A. Subramanian.


2012. ―Spillover Effects of Exchange Rates: A
Study of the Renminbi.‖ IMF Working Paper
12/88. March.


Ostry, J., A. Ghosh, K. Habermeier, M. Chamon,


M. Qureshi, and D. Reinhardt. 2010. ―Capital
Inflows: The Role of Controls,‖ IMF Staff
Position Note 10/04. February.


Ostry, J., A. Ghosh, and A. Korinek. 2012.


―Multilateral Aspects of Managing the Capital


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


73





Global Economic Prospects January 2013 Commodity Annex


Overview


Following sharp declines during 2012Q2,


commodity prices rebounded with most of the


indices ending 2012 at levels close to where they


began (figure Comm.1). For the year as a whole,


crude oil prices averaged US$ 105/bbl, just US$


1 above the 2011 level. Food prices increased


marginally as well, though during 2012Q3 grains


reached record highs (figure Comm.2). Metal


prices declined more than 15 percent, ending the


year at levels close to mid-2010 lows. Raw


materials and beverages prices declined sharply


as well—almost 20 percent each. Fertilizer and
precious metal prices changed little.




The price declines of most commodities earlier


in the year reflected intensification of the


European debt crisis along with slower growth


prospects in emerging economies, especially


China. In the summer, however, food prices rose


sharply as hot weather and dry conditions in the


US, Eastern Europe, and Central Asia reduced


the maize and wheat outlook. Towards the end


of 2012Q3 prices of most industrial commodities


firmed following the ECB bond purchase


program and later the announcement of QE3 by


the US Federal Reserve. In addition to weakness


in the global environment, oil prices have


responded to geopolitical concerns, including


EU‘s embargo on Iranian oil and on-going
violence in the Middle East.




Under our baseline scenario, which assumes


further easing of financial tensions in Europe,


most prices are expected to decline in 2013. Oil


is expected to average 102/bbl in 2013, just 3


percent lower than the 2012 average (table


Comm.1). Agricultural prices are set to decline


more than 3 percent (food, beverages, and raw


materials down by 3.2, 4.7 and 2.2 percent,


respectively). Metal prices are expected to gain


marginally but still average 14 percent lower


than 2011. Fertilizer prices are expected to


decline 2.9 percent, while precious metal prices


will increase a little less than 2 percent.




There are a number of risks to this forecast. On


oil, global supply risks remain from the on-going


political unrest in the Middle East. A major


supply cutoff could limit supplies and result in


prices spiking well above US$ 150/bbl. Such


outcome would depend on numerous factors,


including the severity, duration, policy actions


on emergency reserves, demand curtailment, and


OPEC‘s response. Downside price risks, on the


Prospects for commodity markets


Figure Comm.1 Commodity price indices


Source: World Bank


50


100


150


200


250


Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13


Energy Metals Agriculture


$US nominal, 2005=100


Figure Comm.2 Food price indices


Source: World Bank.


50


100


150


200


250


300


Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13


Edible oils Grains


$US nominal, 2005=100


75





Global Economic Prospects January 2013 Commodity Annex


other hand, include weaker oil demand due to


slower economic growth, especially by emerging


economies. Nevertheless, the key element for


price stability will be how well OPEC (and more


importantly Saudi Arabia) can address changing


demand conditions. Historically, OPEC has been


able to respond quickly to defend a price floor


by cutting production sharply, but has been


unwilling to respond as quickly to set a price


ceiling. On the other hand, there is some room


on spare capacity and stocks. OPEC‘s spare
capacity averaged 3.9 mb/d during 2012Q3, 14


percent higher than 2012Q2 but remarkably


similar to the past decade‘s historical average (it
had reached a low of 2.3 mb/d during the first


half of 2008, when oil prices exceeded US$ 140/


bbl.) Moreover, OECD oil inventories have


recovered remarkably—up 17 percent from
2012Q2 to 2012Q3. On the demand side, while


the oil intensity of GDP in middle income


countries has been rising, it has not reached


levels that could derail economic growth. Price


risks on metals depend on the prospects for the


Chinese economy; should it deteriorate, metal


prices could decline substantially as China


accounts for almost half of global metal


consumption.




On agriculture (and most importantly food), a


key upside risk is weather. Any adverse weather


event is likely to induce sharp increases in maize


prices, in view of historically low stock levels.


The wheat market (which currently is better


supplied than maize) may come under pressure


as well. In contrast, there are limited upside price


risks for rice and oilseeds since the respective


markets are well-supplied. Trade policy risks


appear to be low as well. Despite the sharp


increases in grain prices during the summer of


2012, countries did not engage in export


restrictions—some press reports to the contrary
turned out to be unsubstantiated. Finally, growth


in the production of biofuels has slowed as


policy makers are increasingly realizing that the


environmental and energy security benefits from


biofuels are not as large as originally thought.


Crude Oil


Despite large fluctuations, oil prices (World


Bank average) ended the year at US$ 101/bbl,


close to where they began (figure Comm.3). The


decline earlier in 2012 (23 percent down


between March and June 2012), reflected weak


demand due to slower growth outlook and


heightened concerns about the European debt


crisis. However, supply concerns, mostly of


geopolitical nature, weighed in later prompting a


firming of prices.


Although Brent prices (the international marker)


topped $113/bbl in September, West Texas


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


Source: World Bank.


2008 2009 2010 2011 2012 2013 2014 2011/12 2012/13 2013/14


Energy 183 115 145 188 187 183 183 -0.4 -2.6 0.1


Non-Energy 182 142 174 210 190 186 180 -9.5 -2.0 -3.2


Metals 180 120 180 205 174 176 176 -15.3 1.3 -0.1


Agriculture 171 149 170 209 194 188 180 -7.2 -3.2 -4.4


Food 186 156 170 210 212 205 192 0.7 -3.2 -6.4


Grains 223 169 172 239 244 239 225 2.4 -2.1 -6.0


Fats and oils 209 165 184 223 230 220 206 3.3 -4.2 -6.5


Other food 124 131 148 168 158 153 143 -5.9 -3.1 -6.6


Beverages 152 157 182 208 166 158 155 -20.2 -4.7 -2.0


Raw Materials 143 129 166 207 165 162 162 -20.0 -2.2 0.4


Fertilizers 399 204 187 267 259 245 232 -2.9 -5.6 -5.3


Precious metals 158 175 272 372 378 378 353 1.7 0.0 -6.7


Memorandum items


Crude oil ($/bbl) 97 62 79 104 105 102 102 1.0 -2.9 0.2


Gold ($/toz) 872 973 1,225 1,569 1,670 1,600 1,550 6.4 -4.2 -3.1


ACTUAL FORECAST CHANGE (%)


76





Global Economic Prospects January 2013 Commodity Annex


Intermediate (the US mid-continent price) has


remained almost $20/bbl below due to the build-


up of regional stocks (figure Comm.4). A


decline in the Brent-WTI spread in late 2011/


early 2012, which reflected a euro zone-induced


decline in Brent, turned out to be temporary and


by August 2012 the spread exceeded 20 percent


once more.


Crude flows from Canada through the Keystone


pipeline that commenced in 2011, as well as


rapidly rising shale-liquids production in the US,


especially in the states of Texas and North


Dakota, have contributed to the build-up of US


stocks—at a time when U.S. oil consumption is
dropping. Currently, there is limited capacity to


transport surplus oil to the U.S. Gulf coast, apart


from some utilization of rail, truck and barges.


Although the WTI discount is expected to persist


until 2015, when the new pipelines to the U.S.


Gulf are expected to become operational, some


easing may take place earlier depending on the


speed at which the reversal of existing pipelines


will materialize.


World oil demand increased only modestly (less


than 0.8 percent or 0.67 mb/d) in 2012 (figure


Comm.5). OECD consumption is down almost 5


mb/d, or 10 percent from its 2005 peak. Japan is


the only OECD country that increased crude oil


demand by 1 mb/d. Most of the increase was


destined for power generation, following the


closing of nuclear capacity after the Tohoku


accident. Non-OECD demand is positive and


robust—currently non-OECD countries account
for almost half of global crude oil consumption


and more than all of the increase in global


demand.


On the global supply side, the decline in non-


OPEC output growth in 2011 appears to have


reversed. In 2012, non-OPEC producers added


over 1 mb/d to global supplies, mainly reflecting


earlier large-scale investments. The technology


in the exploitation of the natural gas in the U.S.


—which combines horizontal drilling and
hydraulic fracturing—is spilling into the
petroleum industry and is currently applied to


the oil-bearing shale plays of the Bakken


formation in North Dakota and Eagle Ford


Figure Comm.4 WTI/Brent price differential


Source: World Bank.


-5%


0%


5%


10%


15%


20%


25%


30%


Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13


Figure Comm.5 World oil demand growth


Source: IEA, World Bank.


-4


-2


0


2


4


1Q03 1Q05 1Q07 1Q09 1Q11 1Q13


non-OECD OECD


mb/d


Figure Comm.3 Oil prices and OECD oil stocks


Source: IEA, World Bank.


2,400


2,500


2,600


2,700


2,800


20


40


60


80


100


120


140


Jan-06 May-07 Sep-08 Jan-10 May-11 Sep-12


$US per bbl million bbl


OECD oil inventories
(right axis)


Oil price, World Bank
average (left axis)


77





Global Economic Prospects January 2013 Commodity Annex


formation in Texas. Oil production from these


two areas has risen very rapidly over the past


few years. For example, Texas and North Dakota


added 1 mb/d of crude oil in just 16 months


(from April 2011 to August 2012, figure


Comm.6). Although shale-liquids (also referred


to as tight oil) production has great potential to


be applied elsewhere in the U.S. and worldwide,


there are some public concerns about effects of


the potential ecological impacts of fracturing and


water use.


Production among OPEC countries has risen 1.8


mb/d since the end of 2010 (prior to disruptions


in Libya) with Saudi Arabia accounting for 1.5


mb/d of the net gain. In the meantime, Libya‘s
oil production has recovered to 1.3 mb/d,


compared with 1.6 mb/d pre-crisis, although


further gains may be difficult due to on-going


internal disputes. Iraq‘s production reached a pre
-war high in March 2012 of 2.84 mb/d, and


exports are increasing from a new mooring


system in the Gulf. On the other hand, Iran‘s
exports have declined by 0.3 mb/d from pre-


sanctions levels, and are set to tumble further


unless alternative buyers (or buying


arrangements) can be found. Iran‘s traditional
crude buyers are struggling to arrange payment


mechanisms, secure ships to lift oil, and to


engage insurance companies to underwrite the


trade. Numerous reports indicate that Iran is


circumventing sanctions through bilateral in-


kind trade arrangements.


The net growth in OPEC production has reduced


its spare capacity to 3.5 mb/d (figure Comm.7),


of which nearly two-thirds rests with Saudi


Arabia. The Saudi Oil Minister has promised to


keep the market well supplied, but also deems


that $100/bbl is a fair price.


Outlook


In the near term, oil prices are likely to be


capped at around $120/bbl because of price-


induced demand restraint and publicly stated


intentions of strategic reserve releases by the


U.S., UK, and France. Upside risks stem from


technical and geopolitical problems, particularly


Figure Comm.6 US crude oil production


Source: EIA


0


1


2


3


4


5


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


mb/d


Texas + N. Dakota


Other


Figure Comm.7 OPEC spare capacity


Source: IEA


0


3


6


9


Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13


mb/d


Figure Comm.8 Crude oil consumption


Source: IEA.


25


30


35


40


45


50


55


1Q00 3Q01 1Q03 3Q04 1Q06 3Q07 1Q09 3Q10 1Q12


mb/d


OECD


non-OECD


78





Global Economic Prospects January 2013 Commodity Annex


in countries struggling with conflict and security,


including Libya and Iraq.


In the medium term, world oil demand is


expected to grow moderately, at 1.5% p.a., with


all of the growth coming from non-OECD


countries as it has done in the recent past (figure


Comm.8). OECD oil consumption is expected to


continue its weakness due to efficiency


improvements in vehicle transport and a gradual


switch to electric and natural gas transport (yet


in the absence of innovations, the switch may be


slow as discussed in box Comm.1). Moreover,


environmental pressures to reduce emissions are


expected dampen oil demand growth worldwide.


Consumption growth in developing countries is


expected to be strong in the near and medium


terms, while it is expected to moderate in the


longer term as their economies mature, subsidies


are phased out, and other fuels penetrate their


fuel mix, notably natural gas.


On the supply side, non-OPEC oil production is


expected to continue its upward climb as high


prices have attracted considerable investment


associated with continued advances in upstream


technology (figure Comm.9). High oil prices


have reduced resource constraints, and new


frontiers continue to be exploited, including deep


water offshore and shale liquids discussed


earlier. Production increases are expected from a


number of areas, including Brazil, Canada, the


Caspian, West Africa, and the United States,


likely to offset declines in mature areas such as


the North Sea.


Nominal oil prices are expected to average $102/


bbl during 2013 and 2014 as supplies


accommodate moderate demand growth. Over


the longer term, oil prices are projected to fall in


real terms, due to growing supply of


conventional and (especially) unconventional


oil, efficiency gains, and a substitution away


from oil. The assumptions underpinning these


projections reflect the upper end cost of


developing additional oil capacity, notably from


oil sands in Canada, currently assessed by the


industry at $80/bbl in constant 2012 dollars. It is


expected that OPEC will continue to limit


production to keep prices relatively high.


However, the organization may be sensitive to


letting prices rise too high, for fear of inducing


technological changes that alter the long-term


price of oil.


Metals


Most metal prices declined steadily during the


first three quarters of 2012 (down 15 percent


between February and September) on global


growth concerns, weakening demand by China,


high stocks for most metals, and emerging


supply growth (figure Comm.10). Indeed,


China‘s import demand growth slowed in 2012,


Figure Comm.9 Crude oil production


Source: IEA.


25


30


35


40


45


50


55


1Q00 3Q01 1Q03 3Q04 1Q06 3Q07 1Q09 3Q10 1Q12


mb/d


Non-OPEC


OPEC


Figure Comm.10 Metal prices


Source: World Bank


-


10,000


20,000


30,000


40,000


50,000


60,000


0


2,000


4,000


6,000


8,000


10,000


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


Copper


Aluminum


Nickel (right axis)


$/ton $/ton


79





Global Economic Prospects January 2013 Commodity Annex


Box Comm.1 The “energy revolution”, innovation, and the nature of substitution


Large and sustained price changes alter relative input prices and induce innovation (Hicks 1932). The post-2004


crude oil price increases did just that in both natural gas and oil exploration and extraction through new technolo-


gies such as horizontal drilling and hydraulic fracturing. Because of these technologies, the US increased it natural


gas production by almost 30 percent during 2005-12. Similarly, US crude oil production increased by 1.3 mb/d


during the past 4 years. To put this additional oil supply into perspective, consider that global biofuel production in


terms of crude oil energy equivalent was 1.2 mb/d in 2011.


The sharp increase in natural gas supplies, not only put downward pressure on prices but also induced substitution


of coal by natural gas in various energy intensive industries, notably in electricity generation and petrochemicals.


Natural gas, which traded just 7% below oil in 2000-04 in energy-equivalent terms, averaged 82% lower in 2011-


12 and it has been traded close to parity with coal (figure Box Comm 1.1). On the other hand, growing US oil sup-


plies, coupled with weak demand, caused WTI to be traded at 20% below Brent, the international marker (figure


Box Comm 1.2). The discount is expected to persist until 2015 when new pipelines and reversal of existing pipe-


lines will move oil supplies from the mid-continent US to the US Gulf.


Yet, the shift from crude oil to other types of energy, notably electricity and natural gas, with potential use by the


transportation industry (which globally accounts for more than half of crude oil consumption) has been very slow.


Such slow response reflects the different physical properties these types of energy, namely density (the amount of


energy stored in a unit of mass) and scalability (how easily the energy conversion process can be scaled up). The


energy densities of the fuels relevant to the transportation industry are 37 MJ/liter for crude oil, 1 MJ/kg for elec-


ticity, and 0.036 MJ/liter for natural gas (in its natural state); Compressed Natural Gas (GNG), used by bus fleets


in large cities, is about 10 MJ/litter, while the density of Liquefied Natural Gas (LNG) is 24 MJ/litter. Energy den-


sity is measured in megajoules (MJ) per kilogram or liter. For comparison note that one MJ of energy can light one


100-Watt bulb for about 3 hours.


To gauge the importance of energy density associated with various fuels and technologies consider the following


illustrative example. If a truck with a net weight capacity of 40,000 lbs were to be powered by Lithium-sulphur


batteries (currently used by electric-powered vehicles) for a 500-mile range, the batteries would occupy almost 85


percent of the truck‘s net capacity leaving only 6,000 lbs of commercial space. That is, an energy conversion proc-
ess that works at a small scale (a passenger car) does not work at larger scales (a truck, an airplane, or an ocean-


liner). Similarly, to increase the energy density of natural gas, it must be liquefied, which involves cooling it to


about -62 oC at a LNG terminal, transporting it in specially designed ships under near atmospheric pressure but


under cooling, and then off loading at destination, gasified and re-injected into the natural gas pipe network. This


is a technically demanding process adding considerable costs at delivery. Contrary to natural gas, crude oil prod-


ucts have convenient distribution networks and refueling stations that can be reached by cars virtually everywhere


in the world. Thus, in order for the transport industry to substitute crude oil by natural gas at a scale large enough


to reduce oil prices, innovations must take place such that the distribution and refueling costs of natural gas be-


come comparable to those of crude oil, which explains why the transport industry is slow to utilize natural gas.


Box figure Comm 1.1 Energy prices


Source: World Bank.


0


5


10


15


20


25


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


Crude oil


Natural gas (US)


Coal


$US /mmbtu


Box figure Comm 1.2 Oil to natural gas price ratio


Source: World Bank.


0.0


2.0


4.0


6.0


8.0


2000 2002 2004 2006 2008 2010 2012


Ratio of oil to US natural gas prices


80





Global Economic Prospects January 2013 Commodity Annex


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


The extended period of high prices since mid-


2000 has generated large investment in new


capacity, and supply is rising more quickly than


demand for some metals, including nickel and


copper. During 2012Q4, however, most metal


prices reversed their downward trend as the


possibility of hard-landing in China became


remote.


An interesting characteristic of the metals (and


other industrial commodities) during the recent


boom is that their prices have been highly


volatile, even more volatile than food prices—
historically, the reverse has been the case . In


fact, non-food price volatility during the second


half of the past decade has been the highest since


1970, not surprisingly since non-food


commodities increased the most during the


recent boom. However, price volatility for most


commodities appears to have eased during the


past two years, indicating that the high volatility


during 2008-10 reflected the move from low to


high prices and the financial crisis of 2008 (see


discussion in box Comm.2).


Recent developments in metal markets


Aluminum prices fell below US$ 2,000 per ton


in the third quarter, near to their pre-2005 levels


due to a persistent global surplus and high


stocks. Prices nevertheless are now, at or below


marginal production costs, for many producers


with more limited downside risks—suggesting
that prices are unlikely to fall much further.


Furthermore, a significant amount of inventories


are tied up in warehouse financing deals, and


unavailable to the market. Aluminum


consumption continues to benefit from


substitution, mainly from away copper in wiring


and cable sectors (copper prices are now more


than four times higher than aluminum prices—
they were similar prior to the 2005 boom).


Substitution is expected to continue for as long


as the aluminum to copper price ratio is at least


2:1. Global production capacity continues to


outstrip consumption, the bulk of which comes


from China and to a lesser extent from Middle


East, Europe, and North America. The market


surplus is expected to endure in the near term.


Therefore, prices are likely to respond to higher


production costs, of which energy accounts for


40 percent alone.


Copper prices fell sharply in 2012Q2 due to


weakening import demand by China. High


copper prices have led to significant substitution


of copper use and have accelerated recycling


rates of scrap reprocessing. These trends are


expected to continue in the near term. Copper


demand is expected to increase at a modest 2.5


percent per annum over the forecast period, and


slow even further over the longer term as copper


intensity in China—which has risen sharply—
plateaus. Copper mine production, which was


flat in 2011, has not kept pace with consumption


due to various of reasons including, technical


problems, labor disputes, declining grades,


delays in start-up projects, and shortages of


skilled labor and inputs. The tightness in copper


production has been pronounced at the world‘s
two largest mines (Escondida in Chile and


Grasberg in Indonesia). However, high copper


prices have induced a wave of new mines that


are expected to come on-stream, especially from


some African countries, Peru, the US, and


China.


Figure Comm.11 Consumption of metals


Source: World Bureau of Metal Statistics


0


10,000


20,000


30,000


40,000


1990 1993 1996 1999 2002 2005 2008 2011


'ooo tons


Other


China


OECD


81





Global Economic Prospects January 2013 Commodity Annex


Box Comm.2 Commodity price movements: From levels to volatility and comovement


Applying a standard measure of volatility to 45 monthly


prices during 1970-2012 shows that even though histori-


cally non-food prices have been less volatile than food


prices, during 2005-09 non-food price volatility exceeded


that of food prices by a wide margin (9.7 versus 8.0).


Furthermore, while non-food price volatility reached re-


cord highs during 2005-09, food price volatility did not—
in other words food price volatility during the recent


boom has been high but not unprecedented. This result is


remarkably similar to Gilbert and Morgan (2010, p.


3023) who concluded that food price variability during


the post-2004 boom has been high but, with the exception


of rice, not out of line with historical experience. And,


there is some evidence that volatility has come down to


historical norms during the past 3 years (figure Box


Comm 2.1). Two factors may account for the high vola-


tility during 2005-09: the move from a lower to higher


price equilibrium and the 2008 financial crisis. The latter


is supported by the fact that volatility increases sharply


when August 2008 is included in a 2-year moving aver-


age while a similar decline becomes apparent when Janu-


ary 2011 is included in the average (figure Box Comm


2.2).


In addition to increased levels and volatility, commodity


prices have been moving in a more synchronous manner.


In fact, price comovement during the second half of the


past decade has been the highest compared to the 43-year


sample period (figure Box Comm 2.3). Moreover, while


there is some evidence that comovement has moderated


recently, it is still high by historical standards. The in-


crease in comovement implies that common factors have


been the dominant force behind post-2004 commodity


price movements (box Comm.3 elaborates further on this


point).


Price volatility is calculated as the median of


100*STDEV[log p(t)) - log p(t-1)], for 21 non-food and


24 food prices, where STDEV denotes standard devia-


tion, p(t) is the current, and p(t-1) is the lagged price of


each commodity (their logarithmic difference is the so-


called returns). The measure is applied to 5-year periods,


denoted as H1 and H2 for the first and second part of


each decade, respectively (2010:H1 includes 36 observa-


tions because the sample ends in December 2012). Vola-


tility is also presented as a 2-year trailing moving aver-


age. Apart from its simplicity, this measure of volatility is


appropriate for non-stationary variables, which is typi-


cally the case with commodity prices. Comovement is


measured as a 2-year trailing moving average of ABS[n


(up)-n(down)]/[n(up)+n(down)], where ABS is the abso-


lute value operator and n(up) and n(down) denote the


number of prices that went up and down during the


month. The index can take values between zero (when


half of the prices go up and half go down) and unity


Box figure Comm 2.1 Commodity price volatility: food
and non-food (5 year averages)


Source: World Bank


7.8


5.4 5.2


6.2


5.3 5.3
4.9


9.7


6.0


8.6 8.8


7.0
7.5


5.7 5.8 5.8


8.0


5.8


-


2


4


6


8


10


12


1970:H1 1970:H2 1980:H1 1980:H2 1990:H1 1990:H2 2000:H1 2000:H2 2010:H1


Non-Food (21 commodities) Food (24 commodities)


Box figure Comm 2.2 Commodity price volatility: all
commodities (2-year trailing moving average)


Source: World Bank


0


2


4


6


8


10


12


Jan-72 Jan-76 Jan-80 Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08 Jan-12


Box figure Comm 2.3 Commodity price comovement


Source: World Bank


-


0.10


0.20


0.30


0.40


0.50


Jan-72 Jan-76 Jan-80 Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08 Jan-12


82





Global Economic Prospects January 2013 Commodity Annex


Nickel prices rose modestly in early 2012 but


receded on sluggish market for stainless steel


(the end use of more than two-thirds of nickel


production) and rapid restart of nickel pig iron


(NPI) production in China. The country accounts


for 40 percent of global stainless steel


production—up from 4 percent a decade ago.
Stainless steel demand is expected to remain


robust, growing by more than 6 percent


annually, mainly driven by its high grade


consumer applications, initially in high income


countries and increasingly so by emerging


economies. Yet, a wave of new nickel mine


capacity is expected to keep nickel prices close


to marginal production costs. Several new


projects will soon ramp up production, including


in Australia, Brazil, Madagascar, New


Caledonia, and Papua New Guinea. Another


major source of nickel supply is NPI in China


which sources low-grade nickel ore from


Indonesia and the Philippines. However,


Indonesia has announced that it will develop its


own NPI industry and has introduced export


quotas and may ban nickel ore exports by end-


2013.


Outlook


Overall metal prices are expected to increase


marginally in 2013. Aluminum prices are


expected to increase almost 3 percent in 2013


and remain at that level for the two subsequent


years due to rising power costs, and the fact that


current prices have pushed some producers at or


below production costs.


Nickel prices are expected to increase almost 3


percent in 2013, and following a slightly upward


trend thereafter. Although there are no physical


constraints in these metal markets, there are a


number of factors that could push prices even


higher over the forecast period, including


declining ore grades, environmental issues, and


rising energy costs.


On the contrary, copper prices are expected to


decline 2 percent in 2013 and as much as 10


percent in 2014, mostly due to substitution


pressures, and slowing demand.


Agriculture


Following a sharp decline from their 2011 peaks,


agricultural prices diverged in the summer of


2012. Food prices firmed following a heat wave


that affected the Midwestern US maize


producing states while drought conditions in


Eastern Europe and Central Asia reduced the


outlook for wheat. On the other hand, oilseed


and edible oil prices weakened towards the end


of the year on better supply prospects from


South America (soybeans) and East Asia (palm


oil). Beverages and raw material prices


continued their slide as well to end the year


Figure Comm.12 Agriculture price indices


Source: World Bank


50


100


150


200


250


Jan-06 Mar-07 May-08 Jul-09 Sep-10 Nov-11 Jan-13


Food Beverages Raw Materials


2005=100


(when all prices move in the same direction). While random chance is expected to generate half increases and


half declines, because of common factors the index is likely to take values well above zero. Indeed during 1970


-2012 the index averaged 0.27, implying that of the 44 commodities of the sample, on average, 16 prices went


up (down) and 28 prices went down (up). Two key advantages of the index are that (i) it measures comovement


across a large number of prices (difficult to be measured through parametric models) and (ii) it is not subjected


to degrees of freedom limitations. However, these advantages come at the expense of measuring direction of


changes only, not magnitude, thus underutilizing the informational content of prices. The index has been used


in the financial literature (see, for example, Morck, Yeung, and Yu (2000) on the measurement of equity price


comovement in emerging economies).


83





Global Economic Prospects January 2013 Commodity Annex


about 30 percent lower than their 2011 peaks


(figure Comm.12). For the year as a whole, the


World Bank‘s agricultural price index is down
almost 7 percent.


Recent developments in global agricultural


markets


Grain prices were remarkably stable between the


end 2011 and the summer of 2012, when initial


assessments for the 2012/13 season indicated a


good crop (figure Comm.13). As a consequence,


prices of key grains fluctuated within a tight


band during this period. The outlook changed


dramatically in the summer when the heat wave


in the US and drought conditions in Europe and


Central Asia induced large declines in maize and


wheat yields. In its July update, the US


Department of Agriculture (USDA) reduced


sharply the 2012/13 assessment for global maize


production (from 950 to 905 million tons),


causing end-of-season stocks to decline by 14


percent—associated with a stock-to-use ratio of
less than 15 percent, the lowest since 1972/73.


Lesser, but important downward assessment took


place in the wheat market. Prices of both maize


and wheat increased almost 40 percent within


just a month. Since then, subsequent USDA


assessments have retained the tight outlook for


these two commodities.


During Aug-Dec 2012, maize and wheat prices


averaged US$ 313 and 353 per ton, associated


with a 9 percent premium of wheat over maize—
historically the premium has averaged 30%.


Therefore, the summer drought not only reduced


the maize stock-to-use ratio to historical lows,


but brought the wheat-to-maize price premium to


historical lows as well (figure Comm.14).


Contrary to maize and wheat the rice market is


well-supplied. During the past 3 years rice prices


have averaged $520/ton (they have exceeded


$600/ton on only a few occasions). The rice


price variability if the past year reflects, in part,


purchases through the Thai Paddy Rice


Program—Thailand is the world‘s largest rice
exporter, accounting for 25-30 percent of global


exports, hence the large influence of its policy


actions on world markets. Reports of some


damage due to floods in Thailand earlier in the


year caused some concern but turned out not to


be important. According to the USDA‘s January
2013 assessment, global rice production is


expected to reach 466 million tons, 1 million ton


above the 2011/12 record. The stock-to-use ratio


is expected to reach 22 percent, marginally lower


than 2011/12 but well within historical norms.


Trade in rice has improved as well reaching a


new record of 39.1 million tons in 2012, aided in


part by a surge in Chinese imports (2.6 million


tons in 2012, up from 0.5 million tons in 2011).


Figure Comm.14 Wheat/maize price ratio


Source: World Bank.


-10%


0%


10%


20%


30%


40%


50%


60%


1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010


Figure Comm.13 Grain prices


Source: World Bank


200


400


600


800


1,000


0


100


200


300


400


500


Jan-06 Jul-07 Jan-09 Jul-10 Jan-12


Wheat (left axis)


Maize (left axis)


Rice (right axis)


$/mt $/mt


84





Global Economic Prospects January 2013 Commodity Annex


After a 27 percent increase during the first eight


months of 2012, edible oil prices reversed course


with the World Bank edible oil price index


dropping almost 12 percent from August to


December. The decline reflects an improved


outlook for the South American crop as well as a


re-assessment of the US soybean crop whose


yields turned out to be higher than originally


expected. Palm oil supplies from Indonesia and


Malaysia are improving as well (figure


Comm.15).


Following the historic highs earlier in 2011,


beverage prices have been declining


consistently, ending the year 30 percent lower


than their early 2011 highs. The strength in


beverage prices reflected the surge in arabica


prices (which averaged close to $6.00/kg during


2011, the highest nominal level). However, news


that Brazil‘s crop for the current season will be
much higher than anticipated caused arabica


prices to plummet 36 percent in 2012—Brazil is
the world‘s largest arabica supplier. Robusta
prices have been remarkably stable during the


past year (around US$ 2.30/kg), despite a record


Vietnamese crop—Vietnam is the world‘s
largest robusta supplier. Robusta prices did not


decline because coffee roasters included more


robusta in their blends due to high arabica prices.


Cocoa prices, which reached record highs in


2011 as well, have weakened considerably in


response to better crop outlook in Côte d‘Ivoire


coupled with demand weakening in Europe. Tea


prices edged marginally percent down in 2012.


Prices have surged during the last five years to


record highs partly in response to repeated cycles


of adverse weather conditions in the producing


countries and strong demand by key tea


consumers, including Russia, Pakistan, and


various Middle East countries as well as


domestic consumption in India.


Last season‘s tight cotton supplies caused prices
to quadruple within less than a year exceeding


US$ 5/kg in March 2011. Yet, prices declined


just as sharply to drop below US$ 2.00/kg in


May 2012. The improved supply outlook for the


2012/13 crop year induced further declines in


prices which ended the year 18 percent lower


than January 2012. The cotton market is well-


supplied by historical standards; global


production is expected reach 25.5 million tons


while consumption will not exceed 23.5 million


tons. An estimated two million tons will be


added to stocks, pushing the stock-to-use ratio to


70 percent, the highest since the end of World


War II. Approximately 9 million tons of cotton


have gone to the state reserve of China during


the past two seasons, explaining why price did


not collapse (ICAC 2012). Nevertheless, from a


longer term perspective, cotton prices increased


the least during the recent commodity boom


when compared to other crops, primarily because


of the massive supply response by China and


India caused by the adoption of biotechnology


(Baffes 2011).


Natural Rubber prices have been declining


steadily to average the year almost 30 percent


lower than 2011. As was the case with cotton,


natural rubber prices reached record highs in


2011 (they exceeded $6.00/kg in February 2011,


more than a 4-fold increase within just 2 years.)


The recent decline reflects better supplies and


fears of demand deterioration, especially by


China--most natural rubber goes for tire


production and China has been the fastest


growing market. Crude oil prices play a key role


as well, because synthetic rubber, a close


substitute to natural rubber, is a crude oil by-


product. Expectations for a boom in timber


prices following the Tohoku accident were short


Figure Comm.15 Edible oil prices


Source: World Bank


200


400


600


800


400


650


900


1,150


1,400


Jan-06 May-07 Sep-08 Jan-10 May-11 Sep-12


Palm oil (left axis)


Soybeans (right axis)


US$/ton US$/ton


85





Global Economic Prospects January 2013 Commodity Annex


lived—it was expected to generate strong
demand for timber products. Malaysian log


prices are down 8 percent in 2012, effectively


reaching pre-Tohoku levels as global demand for


timber products has weakened considerably.


Global market outlook


Agricultural prices are projected to decline 3.2


percent in 2013. Specifically, wheat and maize


prices are expected to average 2.2 and 2.8


percent lower than their 2012 levels. Rice prices


are expected to decline about 4 percent to


average $540 per ton. Soybean and palm oil


prices are expected to be 3.6 and 2.1 percent


lower, respectively. Among beverage prices


coffee may experience the largest decline (9.6


percent for robusta and 7.6 percent for arabica),


while cocoa and tea will change only marginally.


On raw materials, timber and natural rubber


prices are expected to decline modestly (0.5 and


2.3 percent) while cotton prices will drop by 8.5


percent.


A number of assumptions underpin this outlook.


First, it assumes that no adverse weather


condition will affect the Southern Hemisphere‘s
crop while next season‘s outlook will return to
normal trends. In its January 2013 assessment,


USDA estimated this season‘s global grain
supplies (production plus beginning stocks) at


2.47 billion tons, down 2.5 percent from


2011/12. If history is any guide, when markets


experience negative supply shocks similar to the


one experienced in the summer of 2012,


production comes back to pre-crisis levels within


the next season through resource shifting, as was


the case for maize in 2004/05, wheat in 2002/03,


and rice in 2001/02 (figure Comm.16). However,


it takes between three seasons before stocks are


fully replenished, in turn keeping prices of the


respective commodity under pressure. As


depicted in figure Comm.14, wheat is traded


about 30 percent above maize in the long term,


indicating that it may take up to 3 years before


maize and wheat prices return to their long term


equilibrium.


Second, it is assumed that in 2013 crude oil


prices will ease marginally while fertilizer prices


will decline by more than 6 percent (both


Figure Comm.16 Grain production and stocks


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


500


600


700


800


900


1,000


0%


10%


20%


30%


40%


2000 2002 2004 2006 2008 2010 2012


Maize


400


500


600


700


0%


10%


20%


30%


40%


2000 2002 2004 2006 2008 2010 2012


Wheat


300


350


400


450


500


0%


10%


20%


30%


40%


2000 2002 2004 2006 2008 2010 2012


Rice


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


Production, million tons (right axis)


86





Global Economic Prospects January 2013 Commodity Annex


Box Comm.3 Which drivers matter most in food price movements?


The post-2004 commodity price boom took place in a period when most countries sustained strong economic


growth. Growth in low and middle income countries averaged 6.2% during 2005-12, one of the highest eight-year


averages in recent history. Yet, economic growth was only one among numerous causes of the boom. Fiscal


expansion in many countries along with low interest rates created an environment that favored high commodity


prices. The depreciation of the US dollar strengthened demand from (and limited supply for) non-US$ commodity


consumers (and producers). Other factors include low past investment, especially in extractive commodities (in


turn a response to a prolonged period of low prices); investment fund activity by financial institutions that chose to


include commodities in their portfolios; and geopolitical concerns, especially in energy markets. In the case of


agricultural commodities, prices were affected by higher energy costs, more frequent than usual adverse weather


conditions, and the diversion of some food commodities to the production of biofuels. These conditions led to


global stock-to-use ratios of some agricultural commodities down to levels not seen since the early 1970s. Lastly,


policy responses including export bans and prohibitive taxes to offset the impact of high world prices contributed


to creating the conditions for what has been often called a ‗perfect storm‘ (Box Table Comm 3.1).


Which drivers matters most for food commodities? A reduced-form econometric model applied to five food


commodities (wheat, maize, rice, soybeans, and palm oil) using 1960-2012 data shows that the most important


variable is, by far, crude oil which explains almost two thirds of the post-2004 food price increases. The second


important driver is stocks-to-use (S/U) ratio accounting for about 15%, followed by exchange rate, accounting for


10%. The remaining 15% reflects, among other drivers, policies. More detailed results can be found in Baffes and


Dennis (2013)—Borensztein and Reinhart (2012) discuss the theoretical underpinnings of the model.


As an example consider wheat. Between 1997-2004 and 2005-12 (roughly considered as pre-and post boom


periods), wheat prices increased by 81%; the S/U ratio declined by 17%, oil prices increased 228%, and the US$


depreciated 12% against a broad index of currencies. The three significantly different from zero estimated


elasticities were: -0.50 (S/U ratio), 0.28 (crude oil), and –0.86 (exchange rate). These elasticity estimates are
consistent with the literature—see, for example, Bobenrieth et al (2012) for the S/U ratio, Gardner (1981) and
Gilbert (1986) for exchange rates, and Baffes (2007) for oil prices. When these elasticities are applied to changes


of the respective drivers, they give an 83% increase of the price of wheat during these two periods [-0.50*(-17%) +


0.28*228% -0.86*(-11.8%) = 8.7% + 64.3% + 10.2% = 83.2%]. These changes imply an 11% contribution by the


S/U ratio, 77% contribution by oil and 12% by exchange rate movements. Using related methodology, von Witzke


and Noleppa (2011) arrived at a remarkably similar conclusions. World Bank (2012) used similar methodology.


Box table Comm 3.1 Most of the post-2004 ‘perfect storm’ conditions are still in place


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


1997-2004 2005-12 Change


Food price index (nominal, 2005 = 100) 89 154 73%


MACROECONOMIC DRIVERS


GDP growth (middle income countries, % p.a.) 4.6 6.2 35%


Industrial production growth (middle income countries, % p.a.) 5.4 7.3 35%


Crude oil price (nominal, US$/barrel) 25 79 216%


Exchange rate (US$ against a broad index of currencies, 1997 = 100) 118 104 -12%


Interest rate (10-year US Treasury bill, %) 5.2 3.6 -31%


Funds invested in commodities (US$ billion) 57 230 304%


SECTORAL DRIVERS


Stocks (total of maize, wheat, and rice, months of consumption) 3.5 2.5 -29%


Biofuel production (tousand b/d of crude oil equivalent) 231 892 286%


Fertilizer price index (nominal, 2005 = 100) 69 207 200%


Growth in yields (average of wheat, maize, and rice, % p.a.) 1.4 0.5 -64%


Yields (average of wheat, maize, and rice, tons/hectare) 3.7 4.0 8%


Natural disasters (droughts, floods, and extreme temperatures) 174 207 19%


Policies (Producer NPC for OECD countries, %) 1.3 1.1 -15%


87





Global Economic Prospects January 2013 Commodity Annex


fertilizer and crude oil are key inputs to


agriculture). However, because of the energy


intensive nature of agriculture—estimated to be
4 to 5 times more energy intensive than


manufacturing—an energy price spike is likely
to be followed by food price increases. The price


transmission elasticity from energy to agriculture


ranges between 0.20 and 0.30 (depending on the


commodity), implying that a 10 percent increase


in energy prices will induce a 2-3 percent


increase in food prices (see box Comm.3 for


crude oil‘s contribution to food price changes).


Third, based on recent experience there are no


foreseeable policy responses that would upset


food markets. Such risk however, depends


crucially on the degree to which markets are well


-supplied. If the assumed outlook materializes,


policy actions are unlikely and, if they take


place, they will be isolated with only limited


impact. For example, when the market


conditions for rice and cotton were tight (in 2008


and 2010, respectively), the export bans had a


major impact on market prices. However, last


year‘s Thai rice program and the Indian export
ban of March 2012 had very limited impact on


prices because these markets were (and still are)


well-supplied. News reports earlier in October


that some Central Asia grain producing countries


might introduce export bans did not materialize.


For agricultural commodities, policy responses


is, perhaps, the only risk that it covariant with


the risk of adequate supplies, which in turn


depends on weather.


Lastly, despite the marginal increase in global


biofuel production during 2011 and 2012, they


will continue to play a key role in food markets.


Currently biofuels account for 1.3/bbl of crude


oil equivalent (figure Comm.17). The 2012 joint


OECD-FAO Agricultural Outlook expects global


biofuel production to expand at an annual rate of


more than 5 percent through the next decade


(from 140 billion liters in 2012 to 222 billion


liters in 2021). Thus, at the beginning of the next


decade between 3 and 4 percent of global area


may be allocated to grains and oilseeds


(evaluated at average world yields). However,


policy makers are increasingly realizing that the


environmental and energy security benefits of


some biofuels may not outweigh their costs (in


terms of higher food prices). Yet, the likely long


term impact of biofuels on food prices is


complex as it goes far beyond the land diversion


and policy decisions. It will depend crucially on


(i) whether current energy prices make biofuels


profitable and (ii) whether technological


developments on existing biofuel crops (maize,


edible oils, and sugar cane) or new crops


increase the energy content of these crops, thus


making them more attractive sources of energy.


Thus, high energy prices in combination with


technological improvements may pose upside


risks for food prices in the longer term.


References


Baffes John (2011). ―Cotton Subsidies, the WTO,
and the ‗Cotton Problem‘.‖ The World Economy,
vol. 34, pp. 1534-1556.


Baffes John (2007). ―Oil Spills on other
Commodities.‖ Resources Policy, vol. 32, pp.
126-134.


Baffes, John and Allen Dennis (2013). ―Long
Term Drivers of Food Prices.‖ Mimeo, World
Bank, Washington, DC.


Bobenrieth, Eugenio, Brian Wright, and Zi Zeng


(2012). ―Stocks-to-Use Ratios as Indicator of
Vulnerability to Spikes in Global Cereal


Markets.‖ Paper presented at the FAO, AMIS
meeting, October 2012.


Borensztein, Eduardo and Carmen M. Reinhart


Figure Comm.17 Biofuel production


Source: BP Statistical Review of World Energy and
OECD


0.0


0.2


0.4


0.6


0.8


1.0


1.2


1.4


1990 1993 1996 1999 2002 2005 2008 2011


mbd of oil equivalent


88





Global Economic Prospects January 2013 Commodity Annex


(1994). ―The Macroeconomic Determinants of
Commodity Prices.‖ IMF Staff Papers, vol. 41,
pp. 236-261.


Gardner, Bruce (1981). ―On the Power of
Macroeconomic Linkages to Explain Events in


U.S. Agriculture.‖ American Journal of
Agricultural Economics, vol. 63, pp. 871-878.


Gilbert, Christopher L. (1989). ―The Impact of
Exchange Rates and Developing Country Debt


on Commodity Prices.‖ Economic Journal,
vol. 99, pp. 773–783.


Gilbert, Christopher L. and C. W. Morgan


(2010). ―Food Price Volatility.‖ Philosophical
Transactions of the Royal Society [Biological


Sciences], vol. 365, pp. 3023-2034.


Hicks, John R. (1932). The Theory of Wages.


Macmillan, London.


ICAC, International Cotton Advisory Committee


(2012). Cotton: Review of the Word Situation,


November-December. Washington DC: ICAC.


IEA, International Energy Agency (2012). World


Energy Outlook 2012. OECD/IEA, Paris,


France.


Morck, Randall, Bernard Yeung, and Wayne Yu


(2000). ―The Information Content of Stock
Markets: Why Do Emerging Markets Have


Synchronous Stock Price Movements?‖
Journal of Financial Economics, vol. 58, pp.


215-260.


Von Witzke, Harald and Steffen Noleppa (2011).


―Why Speculation is not the Prime Cause of
High and Volatile International Agricultural


Commodity Prices: An Economic Analysis of


the 2007-08 Price Spike.‖ HFFA Working Paper.


World Bank (2012). Responding to Higher and


more Volatile Food Prices. Report no. 68420-


GLB. Washington, DC: World Bank.


89





Global Economic Prospects January 2013 East Asia and the Pacific Annex


Overview: Growth in the East Asia and Pacific


region declined to 7.5 percent in 2012 from 8.3


percent in 2011, largely on account of weak


external demand and policy actions in China,


aimed at containing inflationary pressures.


China’s economy slowed to an estimated 7.9
percent in 2012 from 9.3 percent in 2011, its


weakest rate since 1999. Exports from the region


contracted by 8 percent in the three months to


September and caused industrial production


growth to slow to 3-4 percent in Q2. Excluding


China, growth in the region has been resilient to


the global slowdown and accelerated to 5.6


percent 2012, up from 4.5 percent in 2011 thanks


to strong domestic demand, which in major


ASEAN economies (notably Indonesia,


Malaysia and the Philippines) was effectively


supported through countercyclical measures.


This expansion also reflected the fact that the


region grew from a low base, following last


year’s flooding that cut deeply into Thailand’s
output in particular. Industrial production growth


picked up at 15 percent and export growth


accelerated to 9 percent in the three months to


November heralding economic recovery.


Economic recovery is however fragile, with the


net capital flows to the region, hit by Euro Area


tensions at the middle of 2012, expected to pick


up only gradually, from $357.4 billion in 2012 to


around $547.8 billion by 2015.


Outlook: Continued strong domestic demand,


improved global financial conditions and


intensified trade flows will boost the output


response in East Asia and the Pacific. China’s
growth will accelerate to 8.4 percent in 2013


before stabilizing at about 8 percent in 2014 and


2015 as economy re-orients toward domestic


demand and services. GDP growth in the region


excluding China is projected to accelerate to 5.8


percent in 2013, and further to 5.9 percent in


2014 and 2015 reflecting robust growth in


Indonesia (around 6.6 percent), Malaysia


(around 5 percent), the Philippines (around 6


percent) and Thailand (around 4.5 percent).


Vietnam, where growth recently slowed in


response to stabilization measures, will continue


to benefit from firming up commodity prices,


with growth projected to reach 6 percent by


2015. The region will also benefit from a


potentially rapid economic transformation in


Myanmar, where growth is projected to surpass


6 percent in 2013 and from the recent accession


of Lao PDR to the WTO which completed the


near-universal international trade integration of


the EAP region.FN1


Risks and vulnerabilities: Openness and


integration make East Asia and Pacific region


vulnerable to sources of global instability. EAP


region could see 1 percent cut in its GDP in 2013


if the risk of the Euro Area crisis unfolds. Failure


to resolve the US debt and fiscal issues would


cut regional GDP by 1.1 percent in 2013. The


regional growth outlook is subject to growth


slowdown in China, stemming from a risk of


unwinding of China’s high investment rates,
particularly if this were to occur in a generally


weak global growth context. A precipitous 5


percentage point decline in investment growth


could see Chinese GDP decline by 1.4 percent


and Chinese imports by 6 percent, shaving off


0.6 percent from the GDP of regional trading


partners. The regional growth outlook is


vulnerable to developments related to volatile


capital inflows, related asset price bubbles,


excessive credit growth and risk of sudden


capital outflows. The economies in the region


are also vulnerable to energy price spikes, in


case of supply shortages related to a possible


escalation of political tensions in the Middle


East or elsewhere in the world. The EAP region


will benefit from deepening capital markets and


implementing flexible exchange rate policies to


develop effective tools for managing volatile


capital flows and demand. Building buffers to


deal with future shocks remains a priority in Lao


PDR, Vietnam and small Pacific islands where


recent progress in global and regional integration


benefitted growth, but also made these


economies more vulnerable to the global and


regional business cycles.


East Asia and the Pacific Region


91





Global Economic Prospects January 2013 East Asia and the Pacific Annex


Recent developments


GDP growth in the East Asia and Pacific region


weakened in 2012, reaching 7.5 percent, versus


8.3 percent in 2011. The slowdown in 2012


followed an earlier decline in growth from 2010,


and was largely due to conditions in China, the


region’s largest economy. The Chinese economy
grew at an estimated 7.9 percent in 2012, its


weakest annual rate since 1999, reflecting


domestic policy tightening aimed at cooling an


overheated housing sector. The slowdown in


growth among East Asian and Pacific economies


in 2012 was also related to the weakening of


external demand following the escalation of


tensions in the Euro Area during 2012Q2.


Notwithstanding China’s historically low full-
year GDP growth number for 2012 (figure


EAP.1), growth picked up after the first quarter


of 2012, expanding at a 9.1 percent annualized


pace in the third quarter. Growth is going to


moderate in the medium term however. The


GDP growth goals for 2014-2-15 have been


revised downward reflecting the government’s
desire to reorient the economy towards domestic


sources of demand and services.


Excluding the impact of China, GDP growth in


the East Asia and the Pacific region was resilient


in 2012, with annual growth accelerating to 5.6


percent (up from 4.5 percent in 2011), partly


because of stimulus measures implemented in


ASEAN countries but also because of a rebound


of economic activity in Thailand after last year’s
floods cut into regional output in 2011.


The slowdown in growth of global trade from 6.2


percent in 2011 to an estimated 3.5 percent in


2012 had a considerable effect on trade


intensive East Asia and the Pacific region. Trade


flows slowed over the course of 2012 due to


weakening external demand in East Asia’s
largest export markets, the Euro Area and the


United States. Regional exports, which had been


growing at double-digit rates at the beginning of


the year, slowed markedly and even contracted


during Q3. This weakness, coupled with


domestic policy tightening, caused regional


industrial production to also decline sharply


(figure EAP.2). China’s industrial output, which
had been growing at a more than 11 percent


annualized pace at the beginning of the year,


slowed to a 3.5 percent pace in June, with


industrial activity in the other developing


countries in the region, notably Malaysia,


Philippines and Thailand, experiencing a short-


period of a mid-year contraction.


More recently, there are signs of recovery, with


both third quarter industrial production and


export data strengthening. Economic revival in


the region has been driven by robust domestic


demand in China, Indonesia, Malaysia,


Philippines and Thailand and a surge in exports


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


Source: World Bank.


6.5


7.0


7.5


8.0


8.5


9.0


9.5


1.3


1.5


1.7


1.9


2.1


2.3


2.5


11Q3 11Q4 12Q1 12Q2 2012Q3


GDP q/q GDP y/y


Percent q/q, saar Percent y/y, saar


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


Source: World Bank.


0


2


4


6


8


10


12


14


-40


-30


-20


-10


0


10


20


30


40


50


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


China (RHS) Philippines Indonesia


Thailand Malaysia Vietnam


Percentage change, 3m/3m saar Percentage change, 3m/3m saar


92





Global Economic Prospects January 2013 East Asia and the Pacific Annex


toward the newly industrialized economies


(NIE) of the region whose exports to the rest of


the world have also experienced a rebound in the


last quarter of 2012. Japan’s continued robust
demand for imports, stemming from


reconstruction efforts following the devastating


earthquake in March 2011, also provided


additional boost for exports among other


countries in East Asia Pacific, particularly the


Philippines. Chinese exports increased at a 8.6


percent annualized pace during the three months


ending November, and its imports grew at a 12.5


percent clip (figure EAP.3).


Reflecting these developments industrial activity


in the region has accelerated to 15 percent


annualized pace through November, led by


China and reflected among ASEAN economies,


whose production is tightly linked to activity in


China and the NIEs through multi-country


production networks across the region. The


revival of exports and industrial activity among


the developing EAP economies took longer to


engage than China and NIEs, in part because


demand for key ASEAN-produced manufactured


export products, including traditional electronics,


lagged behind the revival of global demand for


mobile devices produced in China and NIEs.


Nevertheless, industrial activity in these


countries expanded at a firm pace in the third


quarter, growing at a 5 percent or higher pace in


Indonesia, Malaysia, Philippines and Vietnam.


Production and exports in Thailand grew very


rapidly at the beginning of 2012 from a flood


affected low base with a pace of growth slowing


down later in the year as production has


recovered to the levels observed before flood


related devastation. Indicators of consumer and


business sentiment across the region, such as


purchasing manager indexes (PMIs), are low but


improving.


In Lao PDR, investments in mining and


hydropower projects supported GDP growth of


more than 8 percent in 2012. Growth in other


transition economies of the region, including


Cambodia and Vietnam slowed somewhat on


weak external demand and in the case of


Vietnam reflecting earlier policy tightening


measures. Weaker growth in China


disproportionally affected Mongolia through a


steep decline in demand for the country’s
mineral resources. As a result growth slowed


from 17.5 percent in 2011 to a still very robust


11.8 percent in 2012 and there was a significant


deterioration in the current account. Growth


outcomes in the Pacific sub-region were mixed,


with individual countries’ dependency on
different external sources of growth


(commodities (petroleum, gold and copper),


tourism and remittances) explaining much of the


variation in outturns. High commodity prices


and investments into mining and infrastructure


helped to sustain growth in PNG and Timor-


Leste. Growth continues to be weak in Fiji and


declined in crisis hit Solomon Islands


particularly vulnerable to external shocks due to


frequent natural disasters.


Weak global demand, rebalancing in China and


increased domestic demand in Indonesia


contributed to further reduction of regional


current account surpluses in 2012. Reserve


positions, however, remain strong across the


region, serving as the buffers against the heavy


external headwinds. The aggregate current


account surplus of East Asian and Pacific


countries declined by an estimated $267 billion


between 2008 and 2012. Almost all of the


decline reflects a $220 billion decline in China,


where the current account fell from $420 billion


(9.3 percent GDP) in 2008 to below $200 billion


Figure EAP.3 Export rebound in EAP in Q4


Source: World Bank.


-40


-30


-20


-10


0


10


20


30


40


50


2012M05 2012M06 2012M07 2012M08 2012M09 2012M10 2012M11


China Malaysia


South Korea Taiwan, China


Hong Kong, SAR, China Singapore


Indonesia Thailand


Export volumes, percent change, 3m/3m saar


93





Global Economic Prospects January 2013 East Asia and the Pacific Annex


(2.3 percent of GDP) in 2012 (figure EAP.4).


Net exports from China have declined because of


a weak external demand, but also reorientation


of growth toward import-intensive investments


and the gradual appreciation of the renminbi. In


Indonesia, the current account deteriorated partly


because of robust growth in domestic demand


and related strong import growth financed by


FDI and other private inflows. Indonesia posted


a record trade deficit of $1.54 billion in October


on weak external demand for the country’s
commodity exports (coal, tin and palm oil) and


strong growth of fuel imports supported by price


subsidies. Declining mineral exports to China


saw Mongolia’s current account deficit widening
to over 18 percent of GDP in 2012, with the


deficit being financed by strong FDI inflows and


foreign credit attracted by the country’s rich
mining sector.


Trade in services, including revenue from


tourism and remittances, remains an important


source of foreign exchange for small economies


in the region. East Asia is a major global tourist


destination among developing countries, having


welcomed about 204 million visitors in calendar


year 2011 (about one fifth of all international


tourists), according to the United Nations World


Tourism Organization (UNWTO). Tourist


arrivals expanded quickly during the first nine


months of 2012 in all three sub-regions of East


Asian Pacific: 7.8 percent in North-East Asia,


8.6 percent South-East Asia, and 5.4 percent in


Oceania. China, Philippines and Vietnam


continued to be among top ten recipients of


remittances globally in 2012, receiving $66


billion, $24 billion, and $9 billion, respectively,


but among East Asia and the Pacific countries,


remittances as a share of GDP is highest in


Samoa and Tonga (20 percent), Philippines (10


percent), Vietnam (7 percent) and Fiji (6


percent). Remittances to East Asia and the


Pacific increased an estimated 6.9 percent in


2012, reaching $114 billion—well off the 12.3
percent increase recorded in 2011.FN2 The growth


of remittances has been mixed across East Asia


and the Pacific countries and depends to a large


degree on the economic performance of the main


remitter countries. Remittances to Samoa, for


example, which receives inflows predominantly


from New Zealand and Australia, registered


double digit growth in 2012, while those to


Tonga, which receives about half of its


remittances from the United States, declined by


more than 20 percent. Remittances to Philippines


were much less volatile, growing at 5 percent in


2012, reflecting the diversified base of the


remittances (see Remittances brief for more


detailed discussion).


Economic policies. The majority of East Asian


economies tightened their monetary policy in the


early part of 2011 to slow down credit expansion


and contain price pressures steaming from the


overheating generated by the earlier easing


cycle. Those measures had effect with a lag. In


China, for example, where policy makers


implemented the policy tightening to stem


overheating in the housing market, tightening


contributed to a sharp deceleration in real credit


growth to an 11.6 percent annualized rate during


the three months ending July from a peak of 25.3


percent in February. Weakening of global


demand in mid 2012 exacerbated the easing of


growth among East Asia and the Pacific


economies for the year as a whole. Specifically,


the decline in global trade volumes from 6.2


percent growth in 2011 to an estimated 3.5


percent in 2012 had considerable impact on trade


intensive East Asia and the Pacific region. On


the balance, economic growth slowed across the


Figure EAP.4 Compression of current accounts as
economies rebalance


Source: World Bank.


-100


0


100


200


300


400


500


-30


-20


-10


0


10


20


30


40


50


2007 2008 2009 2010 2011 2012


China (RHS) Malaysia Thailand


Indonesia Philippines


USD billions USD billions


94





Global Economic Prospects January 2013 East Asia and the Pacific Annex


region in the last quarter of 2012 and prompted


the governments to react by stimulating demand


through a combination of fiscal and monetary


measures in the second half of 2012.


The majority of the countries engaged in


expansionary fiscal policies, with fiscal deficits


widening across the region (figure EAP.5).


Monetary policy has been eased, with the


multiple rounds of interest rate cuts in Indonesia,


Thailand and Philippines. China returned to a


monetary easing and stimulus mode in the


second quarter of 2012, implementing the


interest rates cuts, lowering reserve requirement


ratios, and implementing a series of open market


operations to inject liquidity and thus stimulate


domestic credit (figure EAP.6).


Fiscal policy was also relaxed in China in 2012


but much less so than during the previous round


of stimulus measures. Implementing demand


stimulating policy measures in China, Indonesia,


Philippines and Thailand was possible due to


comfortable fiscal positions, solid levels of


foreign reserves, sustainable debt levels and


stable prices across the region, allowing


monetary policy easing without undermining


price stability objectives. In addition, the


economic structure of East Asia and the Pacific


economies, with a dynamic private sector and


efficient and deep financial intermediation, made


monetary policies effective in generating a


supply response to monetary easing.


Monetary policy easing across the region also


helped in providing temporary liquidity support


to the private sector as international banking


flows declined in early 2012 further due to re-


emergence of the Euro Area crisis, deleveraging


among troubled European banks and


international portfolio flight toward safe havens


from EMs. However, growth and price volatility


and uncertainty had a negative impact on


investment decisions exacerbating uncertainties


related to the global economic slowdown and


reflected in the performance of asset prices (see


more detailed discussion below).


Inflation. Generally, East Asia and the Pacific


has experienced a sharp fall in inflation rates due


to slower demand, declining commodity prices


and administrative measures to cool housing


prices in China. Quarterly inflation in the region


declined from a 6.0 percent annualized pace in


the second quarter of 2011 to 2.4 percent during


the three months ending October 2012 (saar).


The pace of decline in inflation was fastest in


China and Vietnam, but inflation in the other


countries in the region has eased as well,


allowing policy rate cuts across the region


including most recent policy easing in Thailand


and Philippines. Several ASEAN countries have


Figure EAP.6 EAP Monetary policies have been ac-
commodative across the region


Source: World Bank and Central Bank rates.


-1


1


3


5


7


9


11


2006 2007 2008 2009 2010 2011 2012


China Indonesia Malaysia


Philippines Thailand


Key policy rates, percent


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


Source: World Bank.


-6.0


-5.0


-4.0


-3.0


-2.0


-1.0


0.0


Malaysia Thailand Vietnam Philippines Indonesia China


2011 2012


Fiscal balance, percent of


95





Global Economic Prospects January 2013 East Asia and the Pacific Annex


experienced a temporary acceleration in inflation


during the course of the year, mainly due to


seasonal factors, including Indonesia in Q2, the


Philippines in Q3, and Thailand and Vietnam


most recently partly reflecting the rapid growth


of domestic demand (figure EAP.7 and Inflation


Annex). On the whole, EAP region saw a decline


in the headline inflation rates in 2012, with the


sharpest declines observed in China, Malaysia


and Vietnam followed by the Philippines and


Indonesia.


Financial markets and capital flows


Capital flows toward the developing world


(including East Asia and the Pacific (table


EAP.1) declined sharply in the second quarter of


2012 as tensions over European debt


sustainability escalated, but these tensions eased


and flows regained strength in the third quarter,


following action taken by the European Central


Bank and the U.S. Federal Reserve (see main


text and detailed discussion in Finance Annex).


Despite the recovery in capital inflows to East


Asia and the Pacific countries during the third


quarter of 2012, overall net capital flows to the


region for 2012 as a whole are estimated to have


fallen by $93 billion, mainly due to reduced


short-term debt inflows reflecting the slow-down


in trade (a large share of short-term debt flows


are trade-finance related). Equity inflows, which


represent about 70 percent of total net capital


inflows to the region, are also estimated to have


declined — mainly on account of China, where
they are estimated to have fallen by about $30


billion in 2012.


Despite the decline, China continues to attract


substantial equity inflows, although the structure


of these inflows is changing. Rising wages and


production costs are reducing investment into


primary manufacturing, while investment in the


Figure EAP.7 Inflation moderated in EAP region led
by China, but inflation momentum accelerated in Thai-
land and Vietnam


Source: World Bank.


0


5


10


15


20


25


30


35


-1


1


3


5


7


9


11


10M01 10M05 10M09 11M01 11M05 11M09 12M01 12M05 12M09


China Indonesia Malaysia


Philippines Thailand Vietnam (RHS)


Headline inflation, 3m/3m, saar Headline inflation, 3m/3m, saar


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


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


2008 2009 2010 2011 2012e 2013f 2014f 2015f


Capital inflows 206.8 255.9 516.9 450.2 357.4 421.8 493.1 547.8


Private inflows, net 207.2 252.0 513.9 448.7 357.2 421.9 494.4 549.7


Equity Inflows, net 203.6 184.7 329.8 283.3 260.2 302.8 361.5 375.4


Net FDI inflows 211.2 154.5 290.0 274.9 251.7 284.8 332.0 339.2


Net portfolio equity inflows -7.6 30.2 39.8 8.4 8.5 18.0 29.5 36.2


Private creditors, net 3.6 67.3 184.0 165.4 97.0 119.1 132.9 174.3


Bonds 1.2 8.4 20.8 18.9 19.6 21.4 22.3 19.3


Banks 17.9 -6.1 13.2 1.8 -4.3 6.7 8.3 11.3


Short-term debt flows -13.3 65.0 148.9 144.9 85.1 90.7 102.1 143.2


Other private -2.3 0.03 1.1 -0.2 -3.4 0.3 0.2 0.5


Official inflows, net -0.4 3.9 3.0 1.4 0.2 -0.1 -1.3 -1.9


World Bank 1.2 2.2 2.7 0.9 0.3


IMF -0.05 0.1 -0.02 -0.03 -0.2


Other official -1.5 1.6 0.3 0.6 0.1


96





Global Economic Prospects January 2013 East Asia and the Pacific Annex


services sector is gradually rising. Capital


inflows are also experiencing a geographical


shift, as global South-South flows are rising,


with China playing a key role in outward FDI


from the developing world as firms relocate


labor-intensive and low-end production to


neighboring countries. Indonesia, Philippines


and Vietnam saw an increase in net equity


inflows in 2012, including through equity


investment from China. Bond issuance in the


region, stepped up insignificantly to an estimated


$19.6 billion in 2012, up 3.7 percent from what


was a robust pace of issuance ($18.9 billion) in


2011. Net official inflows approached nil as


repayments almost equaled new borrowing.


Asian equities have outperformed the major


global and regional stocks markets and have


surged further in December reflecting an


improving global and regional economic


outlook. The MSCI index of Asia-Pacific shares


excluding Japan delivered double-digit returns


expanding by almost 20 percent in 2012,


reflecting investors’ confidence in Asian
economies despite the present global turbulence


and experiencing a mid-year dip. Equity market


performance at the country level showed


considerable divergence, however, with


Southeast Asian equities (those in Indonesia,


Malaysia, Thailand and Philippines)


outperforming North Asian equities – namely,
those of China. The Shanghai Composite Index


gained about 4 percent in 2012 reflecting the end


-of-year recovery in December after falling


below a symbolic 2,000 benchmark level on


November 27. Relatively poor performance of


North Asian equities in 2012 reflected concerns


about China’s medium-term growth outlook
related to mid-year slowdown, uncertainty on


corporate profitability, as well as economic


reform directions related to the once-per-decade


government transition that China completed in


November 2012. In contrast, equity markets in


Thailand and the Philippines delivered over 30


percent gains in 2012 on resilient domestic-


demand-driven growth. Net capital flows to East


Asia and the Pacific are expected to recover only


gradually, growing from $357.4 billion in 2012


(3.5 percent of regional GDP) to around $547.8


billion (4.2 percent of regional GDP) by 2015—


only just surpassing the previous post-crisis peak


of $517 billion in 2010. The recovery of external


flows should also be reflected in a gradual


increase in asset prices throughout the region.


Medium-term outlook


Improved global financial conditions, a gradual


pickup of growth in high-income countries and a


return to more normal global trade growth are


expected to support a gradual strengthening of


output in East Asia and the Pacific between 2013


and 2015. Accommodative monetary policy and


low inflation in ASEAN-4 (Indonesia, Malaysia,


Thailand, Philippines) are also expected to


contribute, while ample fiscal space in most


countries in the region means that they will not


have to contend with fiscal consolidation


pressures. However, some fiscal tightening is


envisaged in Malaysia as well as Indonesia,


where plans to reduce fuel subsidies were


delayed in 2012. In Cambodia and Vietnam,


efforts to reduce high level of debt among state-


owned enterprises may serve as a drag on


growth. The East Asia and the Pacific region,


especially China and ASEAN economies, enter


2013 with a strong carryover of growth from


2012, in contrast to the situation in high-income


countries and many developing economies.


Overall, growth in developing East Asia and the


Pacific is projected to accelerate to 7.9 percent in


2013. The figure reflects a firming of growth in


China, to 8.4 percent. In the years thereafter,


China’s growth is expected to gradually ease, to
8 and 7.9 percent in 2014 and 2015, respectively,


reflecting the ongoing re-orientation of output


toward domestic demand and services. Growth


will continue to rely heavily on consumer


spending by the growing incomes and growing


credit of the expanding middle-class. In the


baseline of the January 2013 Global Economic


Prospects (see the main text), the share of


investment in China’s overall GDP is projected
to continue on a path of slow decline —
implying significantly weaker investment growth


and a gradual easing in potential output growth


as the pace of capital accumulation and labor


force growth slow.


97





Global Economic Prospects January 2013 East Asia and the Pacific Annex


The slower growth projected for China and the


rebalancing of demand toward consumption and


services will have important implications for


other countries in the region. Countries whose


economies that are heavily integrated with


China’s global production chains may need to
similarly reorient their economies toward


domestic demand, but also redirect their export


sectors toward accommodating Chinese


domestic demand. Despite the changing external


environment, growth in other major East Asia


and the Pacific economies is projected to pick up


modestly in the coming years. Reflecting the


expected recovery in the global trade flows,


demand for the exports of East Asia and Pacific


will strengthen, and with it the pace of industrial


and export activity — although growth rates are
expected to remain below the extraordinarily


high rates of the recent past.


For the major ASEAN countries, growth is


projected to increase to 5.8 percent in 2013 as


these countries benefit from the revival of world


trade (table EAP.2). Growth in this country


group is expected to increase to 5.9 percent in


2015, as Indonesia continues to grow rapidly (at


around 6.6 percent) and growth remains robust


in Malaysia (around 5 percent), Thailand (4.5


percent) and the Philippines as well (around 6


percent). Vietnam, as an oil exporter, continues


to benefit from high oil prices. Among low-


income countries in East Asia and the Pacific,


Lao PDR is projected to sustain 7.5 percent


growth, bolstered by continued strong


investment in hydropower and mining. The


country’s recent WTO accession should provide
additional boost to the economy as it expands its


market share in global markets. Growth


prospects in Cambodia (around 7 percent) are


based on achieving the dividends from focus on


higher rice production, inflows of FDI into the


growing garment industry and a growing tourism


industry. Mongolia and Myanmar also have the


potential to deliver strong growth over the


projection period due to rapid political


transformation—but this potential may not be
realized if the pace of reform weakens (table


EAP.3).


Papua New Guinea, Fiji and the small pacific


islands are also expected to benefit from the


revival in global trade and tourism, which is


projected to increase by about 6 percent per year


(globally) over the projection period. Moreover,


Table EAP.2 East Asia and Pacific forecast summary


Source: World Bank.


Est. Forecast


00-09
a


2010 2011 2012 2013 2014 2015


GDP at market prices b 8.1 9.7 8.3 7.5 7.9 7.6 7.5


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


GDP at market prices c 8.1 9.7 8.3 7.5 7.9 7.6 7.5


GDP per capita (units in US$) 7.3 8.9 7.6 6.8 7.2 7.0 6.9


PPP GDP 8.0 9.7 8.3 7.5 7.8 7.6 7.5


Private consumption 6.0 7.2 8.2 8.1 8.0 7.9 7.6


Public consumption 7.6 7.9 9.5 8.5 8.5 8.7 7.7


Fixed investment 10.6 13.8 9.5 9.0 6.5 6.8 5.7


Exports, GNFS d 10.3 23.0 8.2 4.3 10.4 9.9 9.9


Imports, GNFS d 9.6 19.5 6.2 5.9 10.3 10.8 9.3


Net exports, contribution to growth 0.8 2.5 1.3 -0.2 0.8 0.4 1.0


Current account bal/GDP (%) 4.7 3.7 2.6 1.9 1.9 1.5 1.5


GDP deflator (median, LCU) 5.3 6.8 5.6 6.5 4.6 4.2 3.9


Fiscal balance/GDP (%) -1.8 -2.5 -1.7 -2.1 -1.7 -1.5 -1.3


Memo items: GDP


East Asia excluding China 4.3 6.9 4.5 5.6 5.8 5.9 5.9


China 9.4 10.4 9.3 7.9 8.4 8.0 7.9


Indonesia 4.6 6.2 6.5 6.1 6.3 6.6 6.6


Thailand 3.5 7.8 0.1 4.7 5.0 4.5 4.5


(annual percent change unless indicated otherwise)


a. Growth rates over intervals are compound weighted averages; average growth contributions, ratios


and deflators are calculated as simple averages of the annual weighted averages for the region.


b. GDP at market prices and expenditure components are measured in constant 2005 U.S. dollars.


c. Sub-region aggregate excludes Fiji, Myanmar and Timor-Leste, for which data limitations prevent the


forecasting of GDP components or Balance of Payments details.


d. Exports and imports of goods and non-factor services (GNFS).


98





Global Economic Prospects January 2013 East Asia and the Pacific Annex


in line with projected improvements to economic


conditions in migrant receiving countries,


remittances to the region are projected to


increase by 8.3 and 9.9 percent in 2013 and


2014, respectively, with particular benefit to


Vietnam and Philippines, as well as a number of


Pacific islands, including Samoa and Tonga.


Risks and vulnerabilities


Prospects for East Asia and the Pacific region,


like those in the rest of the world, remains


vulnerable to volatility that could emerge from


the high-income countries due to several factors,


in particular a continuation (or deepening) of the


crisis in the Euro Area and the fiscal impasse in


the United States. In addition, while the


immediate concerns of a hard landing in China


have passed, the regional growth outlook is


subject to a growth slowdown in China


stemming from a risk of unwinding of China’s
high investment rates—particularly if this is to
occur in a disorderly fashion in a generally weak


global growth context. Although global financial


conditions have improved significantly since


July 2012, the economic outlook of the Euro


Table EAP.3 East Asia & the Pacific country forecasts


Source: World Bank.


Est. Forecast


00-09
a


2010 2011 2012 2013 2014 2015


Cambodia


GDP at market prices (% annual growth) b 7.4 6.0 7.1 6.6 6.7 7.0 7.0


Current account bal/GDP (%) -5.3 -10.4 -8.7 -10.0 -8.7 -7.0 -6.7


China


GDP at market prices (% annual growth) b 9.4 10.4 9.3 7.9 8.4 8.0 7.9


Current account bal/GDP (%) 5.0 4.0 2.8 2.3 2.3 2.0 2.0


Fiji


GDP at market prices (% annual growth) b 1.3 0.1 1.9 2.1 2.2 2.3 2.3


Current account bal/GDP (%) -7.7 -7.7 -9.9 -9.8 -10.0 -10.0 -9.0


Indonesia


GDP at market prices (% annual growth) b 4.6 6.2 6.5 6.1 6.3 6.6 6.6


Current account bal/GDP (%) 2.5 0.7 0.2 -2.3 -1.6 -1.7 -1.7


Lao PDR


GDP at market prices (% annual growth) b 6.2 8.5 8.0 8.2 7.5 7.5 7.5


Current account bal/GDP (%) -2.4 -6.2 -11.4 -16.3 -18.1 -19.0 -18.0


Malaysia


GDP at market prices (% annual growth) b 3.9 7.2 5.1 5.1 5.0 5.1 5.3


Current account bal/GDP (%) 12.9 11.1 11.0 7.7 5.8 3.7 2.9


Mongolia


GDP at market prices (% annual growth) b 5.8 6.4 17.5 11.8 16.2 12.2 8.0


Current account bal/GDP (%) -6.8 -14.3 -15.1 -18.0 -1.5 3.0 4.3


Myanmar


GDP at market prices (% annual growth) b 9.7 5.3 5.5 6.3 6.5 6.6 6.7


Current account bal/GDP (%) -0.7 -1.3 -2.6 -4.1 -4.2 -4.8 -5.1


Papua New Guineac


GDP at market prices (% annual growth) b 3.0 7.6 9.0 8.0 4.0 7.5 4.6


Current account bal/GDP (%) 2.3 -25.6 -35.0 -30.0 -20.0 -13.0 -8.4


Philippines


GDP at market prices (% annual growth) b 4.0 7.6 3.9 6.0 6.2 6.4 6.3


Current account bal/GDP (%) 1.5 4.5 3.1 3.2 2.9 2.7 2.5


Solomon Islands


GDP at market prices (% annual growth) b 2.4 7.8 10.5 5.3 4.0 3.3 3.3


Current account bal/GDP (%) -20.7 -30.8 -6.0 -5.8 -10.9 -9.0 -8.7


Thailand


GDP at market prices (% annual growth) b 3.5 7.8 0.1 4.7 5.0 4.5 4.5


Current account bal/GDP (%) 3.3 4.1 1.5 0.2 -0.3 -0.4 -0.7


Timor-Leste


GDP at market prices (% annual growth) b 3.3 9.5 10.6 10.0 10.0 10.0 9.0


Current account bal/GDP (%) 18.4 48.1 55.0 43.5 36.2 25.0 24.0


Vietnam


GDP at market prices (% annual growth) b 6.6 6.8 5.9 5.2 5.5 5.7 6.0


Current account bal/GDP (%) -7.4 -4.1 0.2 2.7 1.3 0.9 0.7


World Bank forecasts are frequently updated based on new information and changing (global)


circumstances. Consequently, projections presented here may differ from those contained in other


Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any


given moment in time.


Samoa; Tuvalu; Kiribati; Democratic People's Republic of Korea; Marshall Islands; Micronesia,


Federated States; N. Mariana Islands; Palau; and Tonga are not forecast owing to data limitations.


a. GDP growth rates over intervals are compound average; current account balance shares are simple


averages over the period.


b. GDP measured in constant 2005 U.S. dollars.


c. The start of production at Papua-New-Guinea-Liquefied Natural Gas (PNG-LNG) is expected to


boost PNG's GDP growth to 20 percent and shift the current account to a 9 percent surplus in 2015.


99





Global Economic Prospects January 2013 East Asia and the Pacific Annex


Area remains uncertain and continued


improvement is contingent on continued


progress implementing the structural and fiscal


reform agendas that have so-far just begun.


Failure to pursue these reforms or a significant


growth disappointment could prompt markets to


lose confidence once again, potentially pushing


the currency area into a serious crisis. Unfolding


this risk could cut EAP regional GDP by 1


percent in 2013 (see discussion in main text).


The US fiscal paralysis also pose a major risk to


the EAP regional growth outlook. Failure to


address fiscal problems in the US would result


into a sharp 2.3 percentage point cut in the US


growth in 2013 relative to the baseline. Given


the importance of the US economy globally, this


would also trigger a weaker global confidence.


Should this risk materialize, EAP region will see


a 1.1 percent cut in its GDP in 2013 relative to


baseline—slightly higher than the impact
associated with the Euro Zone related crisis.


Among the EAP developing economies China,


Thailand and Indonesia are projected to be most


affected by a growth slowdown in high income


Box EAP.1 Investment and growth in China


China’s growth model of the past 30 years has been very successful. Relying on a combination of high investment
rates, rapid capital stock accumulation, and strong productivity growth (due in part to the movement of the rural


population to higher productivity manufacturing jobs), China has recorded an average of 10 percent annual growth


since the initiation of structural reforms in 1978. During most of this high-growth period, investment (and savings)


were at a relatively high 30-35 percent of GDP. In the 2000s, investment rates jumped to 40 percent of GDP


(partly in reaction to the low cost of international capital at the time), and then to 45 percent of GDP as part of


China’s fiscal and monetary stimulus plan introduced in response to the global financial crisis in 2008. Such high
investment to GDP ratios are unprecedented. Neither Japan nor Korea – two countries that have also enjoyed
lengthy periods of rapid growth – ever saw investment rates exceed 40 percent. As China’s investment rate in-
creased, the contribution of investment to growth rose to about 50 percent of 10 percent annual growth in the


2000s. China’s capital/output ratio, which in an economy on a stable growth path will be broadly stable, increased


by almost 25 percent over the past 15 years and is still rising rapidly.


China's authorities have identified the need for a more balanced pattern of investment, that implies not just a lower


investment rate, but also a shift toward investments and expenditures in the service sector and in intangible assets


like human capital, as a major medium-term challenge for the country, including in the recently released China


2030 study (World Bank, 2012). Doing so will be challenging, as investment will have to grow slower than GDP


for a sustained period of time. Slower investment growth will imply a gradual slowing of Chinese potential output


growth, but only gradually as it will be affected by the level of the investment rate and not the rate of growth of


investment. As a result, if China is to avoid opening up a large output gap, either investment rates will have to de-


cline slowly (thus allowing demand growth to keep pace with potential) or consumption growth will have to ex-


pand very rapidly. Both processes will be challenging, even in an economy like China’s where the state plays a


strong and effective role in shaping the trajectory of growth.


Box figure EAP 1.1 China growth slowdown is likely
to result in a recessionary gap...


Source: World Bank.


0


2


4


6


8


10


12


-2


-2


-1


-1


0


1


1


2


2


3


2010 2011 2012 2013 2014 2015


Output gap (LHS) Potential (RHS) Actual (RHS)


Percent of potential GDP Percent y/y


Box figure EAP 1.2 China capital output ratio contin-
ues to increase despite declining share of invest-
ment in the output...


Source: World Bank.


2.35


2.40


2.45


2.50


2.55


2.60


2.65


2.70


2.75


2.80


38


39


40


41


42


43


44


45


2011 2012 2013 2014 2015


Investment/GDP (LHS) Capital/output (RHS)


Percent


100





Global Economic Prospects January 2013 East Asia and the Pacific Annex


countries (about 1-1.2 percent cut in GDP in


both 2013 and 2014 relative to the baseline)


followed by Vietnam and Malaysia (about 0.8-


0.7 percent cut in the GDP relative to the


baseline) due to reduced import demand in high-


income countries, much tighter international


capital conditions and increased pre-cautionary


savings within the region.


The process of bringing China’s high investment
rate down to more sustainable levels, while


likely to proceed smoothly, does carry with it the


risk of a more abrupt contraction, particularly if


this were to occur in a generally weak global


growth context. Such an outcome could arise if


consumer demand does not offset slower


investment growth, or profits from past


investment are not forthcoming, resulting in a


spike in unpaid loans and a rapid tightening of


credit conditions. Such developments could in


turn put pressure on loan repayments, new


investment, employment and incomes (see box


and discussion in main text). A precipitous 5


percentage point decline in investment growth


could see Chinese GDP decline by 1.4 percent,


and Chinese imports by 6 percent. Impacts on


regional trading partners would see their GDP


decline by around 0.6 percent. Simulations


suggest Vietnam’s export volumes and GDP
could decline by 2.2 percent and 0.7 percent


respectively, in Thailand export volumes and


GDP may fall relative to baseline by 1.7 percent


and 0.7 percent respectively and Malaysia’s
exports will contract by 1.8 percent, although the


impact on GDP is projected to be smaller than in


other countries of the region at estimated 0.4


percent of GDP. Commodity exporting countries


would be hardest hit due to the additional burden


implied by lower commodity prices, with metal


prices projected to fall by 4.3 percent in 2013


and by another 3 percent in 2014.


The regional growth outlook is vulnerable to


developments related to volatile capital inflows


and related asset price bubbles, excessive credit


growth and risk of future sudden capital


outflows. EAP region will benefit from a


continued effort to deepen structural reforms to


keep its global competitive edge in the Medium-


Term perspective. This would also include


deepening capital markets and implementing


flexible exchange rate policies to develop


effective tools for managing volatile capital


flows and demand.


East Asia and the Pacific countries are also


vulnerable to commodity price increases,


perhaps due to supply shortages following an


escalation of geo-political situation in the Middle


East. Should oil prices rise by $50 dollars per


barrel for a sustained period, growth among oil


importers could decline by 1.7 percentage points,


inflationary pressures would rise and regional


trade balances would significantly deteriorate


(see Main text). Building buffers to deal with


future shocks remains a priority in Lao PDR,


Vietnam and small Pacific islands where recent


progress in global and regional integration


benefitted growth, but also made these


economies more vulnerable to the global and


regional business cycles.


Notes:


1 With Laos joining the WTO, all East Asia


and the Pacific countries with the exception


of North Korea will be members of the


institution.


2 Remittances are measured as a sum of three


components in the IMF’s BOP Statistics:
compensation of employees, workers’
remittances and migrants’ transfers. The
compensation of employees refers to ―the
income of border, seasonal, and other short


term workers who are employed in an


economy where they are not residents and of


residents employed by nonresident entities‖.
The workers’ remittances are current
transfers by migrants ‖. Migrant transfers are
―net worth of migrants’ assets that are
transferred from one country to another at


the time of their migration‖. For the
Philippines, the estimate differs from US$


21 billion projected based on the Central


Bank’s definition of remittances. Share of
remittances in GDP is based on the last three


year average reported in the World


Development Indicators database (WDI).


101





Global Economic Prospects January 2013 Europe and Central Asia Annex


Overview: Growth in developing Europe and


Central Asia region (box ECA.1) decelerated


considerably in 2012 after a relatively strong


2011. All economies in the region had to deal


with challenging external conditions, including


the Euro Area recession and debt problems,


volatile global financial markets and a slowing


global economy. The Western Balkan countries,


with their strong economic and banking linkages


with high-income Europe, suffered the most from


declining export demand, reduced capital and


remittance flows, and banking-sector


deleveraging. Banking systems in several


countries are under considerable pressure due to


a sharp slowdown in economic activity, weak


credit demand, and tight foreign funding


conditions. Non-performing loans (NPLs) rose


especially in Bosnia and Herzegovina (12.7


percent), Moldova (15.3 percent) and Romania


(17.3 percent). NPL rates are likely to have


climbed in Ukraine, while remaining a high level


of 37 percent in Kazakhstan.


External factors have improved since September.


Export values grew by a 21 percent annualized


pace in the three months ending in November


supported by the robust import demand from non


-European markets. Improved financial


conditions have helped the region’s access to
international bond markets with increased


number of issuances by Russia and Turkey as


well as less frequent issuers such as Bulgaria,


Romania, Lithuania, Serbia and Ukraine. The


region’s industrial production growth has also
picked up since November.


GDP growth in the region is estimated to have


fallen to 3.0 percent in 2012, from 5.5 percent in


2011. And, despite high oil prices, growth in


Russia, the region’s largest economy, declined to


an estimated 3.5 percent in 2012 (4.3 percent in


2011), due to drought, rising inflation and weak


global sentiment. Several countries in the region


(Albania, Bulgaria, Macedonia and Romania)


grew by less than one percent in 2012, while


Turkey had a soft landing, after two years of


unsustainably high growth, at 2.9 percent in 2012


(8.6 percent in 2011).


Outlook: GDP growth in the region is projected


to rebound only slightly to 3.6 percent in 2013,


under the baseline assumptions that there will be


no major loss of confidence in the global


financial markets; and that there will not be a


major setback in the resolution of Euro Area


crisis and US fiscal problems. The rebound in


2013 is projected to be limited as most of the


factors that constrained the growth in 2012 are


likely to remain present albeit less forcefully.


Prospects for the region critically depend on


tackling large current account and fiscal deficits,


high unemployment and inflation, lack of


competitiveness and other structural constraints


to the economies. Regional GDP is projected to


firm to 4.0 percent in 2014 and 4.3 percent in


2015.


Risks and vulnerabilities: The region’s
economic outlook remains subject to serious


global and regional risks.


Euro Area Crisis. Given Europe and Central


Asia region’s close financial and trade ties with
high-income Europe, it would be directly


impacted by both a major deterioration of the


debt crisis or slow-growth/stagnation in the Euro


Area.


China. An abrupt unwinding of China’s high
investment rates, particularly if this were to occur


in a generally weak global growth context, will


have significant global consequences, especially


for commodity exporters.


Banking Sector. The high levels of NPLs in the


region’s banking system may further constrain
the already slowing credit growth. Nevertheless,


there is some level of resilience in most banks in


the region with their capital adequacy ratios in


excess of 10 percent by the end of 2011.


Europe and Central Asia Region


Box ECA. 1 Country coverage


For the purpose of this note, the Europe and Central Asia


region includes 21 low– and middle-income countries with
income of less than $12,276 GNI per capita in 2010. These


countries are listed in the table ECA.3 at the end of this note.


This classification excludes Croatia, the Czech Republic,


Estonia, Hungary, Poland, Slovakia, and Slovenia. The list of


countries for the region may differ from those contained in


other World Bank documents.


103





Global Economic Prospects January 2013 Europe and Central Asia Annex


Recent developments


Growth slowed down during the first half of


2012 as the region faced several headwinds…


Economic growth decelerated considerably in


Europe and Central Asia during the first half of


2012 as various factors hindered economic


activity in the region (box ECA.1). All


economies had to deal with challenging external


conditions, including the recession and debt


problems in Euro-zone, volatile global financial


markets and slowing global economy. Western


Balkan countries that have strong economic and


banking linkages with high-income Europe


suffered most from: declining export demand,


reduced capital and remittances flows (including


FDI); and banking-sector deleveraging (which


together with domestic policy tightening in some


cases contributed to a sharp decline in regional


credit growth).


The global economic slowdown reduced export


demand for commodities such as steel, which


affected Ukraine’s economy adversely. And
despite a 4.6 percent increase in gold prices this


year, a geological shift at the country's main gold


mine, and to a lesser extent strikes, led to a sharp


contraction in production growth in Kyrgyz


Republic.


Domestic consumption, which has been the main


driver of growth in the region during the


financial crisis was increasingly held back by


tighter credit conditions, fiscal tightening, and


high unemployment. A particularly sharp


adjustment in domestic demand in Turkey was


mainly the result of monetary tightening from


October 2011 through July 2012 that led to a


sharp contraction in bank lending.


In addition, unusually bad weather cut into


agricultural activity, after a relatively strong


2011 in countries such as Romania and Serbia.


Also, political uncertainty ahead of elections in


Russia, Serbia and Ukraine, and escalated


political problems in Romania also impeded


growth by slowing progress in necessary


reforms, prompting capital outflows, and


limiting external capital inflows.


The overall impact of these developments was to


cause growth to slow down during the first half


of 2012 in almost all economies in the region


(figure ECA.1). The contraction was particularly


sharp in Serbia and Macedonia FYR with


negative growth rates during the first half of the


year. Growth also eased markedly in Lithuania,


Turkey and Ukraine. Although third quarter


GDP data is available for only a few countries,


where it exists it suggests that that growth


remained weak in the third quarter. Real GDP


contracted in Ukraine (-1.3 percent saar year


over year) and Romania (-0.5 percent) and


growth weakened in Russia (2.9 percent) and


Turkey (1.6 percent), while there was a slight


improvement in Latvia (5.2 percent) and


Lithuania (4.4 percent).


High frequency data indicate that economic


performance was mixed across countries during


the later months of the year


Industrial production in the Europe and Central


Asia region rebounded sharply growing at a 6.4


percent annualized rate (3m/3m saar) in the three


-months ending in November (figure ECA.2).


The rebound was mainly supported by the strong


performance in few economies: Turkey (30.5


percent due to strong exports and extra working


days in November), Lithuania (26.3 percent as it


is still rebounding from prolonged closure of the


main oil refinery), and Kazakhstan (mainly due


Figure ECA.1 Growth has been slowing down…


Source: World Bank.


-2


-1


0


1


2


3


4


5


6


7


8


Lithuania Lativia Russian
Federation


Turkey Ukraine


2011Q4 2012Q1 2012Q2 2012Q3


GDP growth


y-o-y (%) saar


104





Global Economic Prospects January 2013 Europe and Central Asia Annex


to base effects). Industrial production growth


remained weak for the rest of the region


contracting sharply in Bulgaria (13.1 percent),


Ukraine (by 8.6 percent), Latvia (3.7 percent),


and more modestly in Russia (2 percent), Serbia


(1.2 percent) and Romania (1 percent) in the


three-months ending in November. In addition to


industrial production, the impact of the summer


drought is expected to have cut into GDP growth


in the third quarter in affected countries,


including Russia, Romania, Serbia, and Bosnia


and Herzegovina.


Business surveys for December suggest that


favorable operating conditions of the Turkish


manufacturing sector will continue as its PMI


index remained above the benchmark 50 for


December. While seasonally adjusted PMI index


for Russia’s services sector also remained above
the benchmark in December, its PMI for the


manufacturing sector went back to 50 indicating


a possible slow-down in the sector in early 2013.


External factors have improved since September


with global trade picking up….


As discussed in detail in the main text and the


finance annex, global financial market tensions


eased in late July, as confidence was slowly


restored in the Euro Area. The real side impact


of the improvements in financial conditions and


capital flows was modest in high-income


countries – although it is more visible in the data


for developing countries in general. There has


been only a modest pickup in global trade in Q3


2012, with developing country imports volumes


expanding once again, although for high-income


country imports were still contracting.


For the region, the improvement in trade is more


marked. Regional merchandise export value


rebounded growing at a 21 percent annualized


pace during the three months ending in


November 2012 (figure ECA.3). The rebound


came despite the recession and weak import


demand in high-income Europe—the region’s
main export destination (high-income European


import value growth was negative through the


third quarter and only grew at a 1.7 percent


annualized pace in November). The exports were


driven by the strong performance of large middle


income countries such as Russia (24.1 percent


saar during the three months through November


2012) and Turkey (15.5 percent). The robust


export performance of the region partly reflects


base effects and partly the increasing importance


of non-European economies including other


developing countries as destinations supported


by Russia’s accession to the WTO. Turkey's
remarkable export performance during most of


this year for example was supported by its


successful market diversification strategies,


depreciation in real effective exchange rate and


strong gold exports to Middle Eastern economies


including Iran and the United Arab Emirates.


Similarly, Latvia has been able to offset the


weak state of demand in high-income Europe by


increasing exports to Russia and other CIS


economies. Turkey continues to be a major


destination for exports from the South Caucus


region as is China for countries in Central Asia.


Export demand in the region is likely to remain


firm in coming months driven by non-European


markets especially from other developing


countries. Also, import demand from European


markets has been strengthening in recent


months. Prospects for Turkey’s export growth
remain uncertain, however.FN1 While it will


benefit from the pick-up in global trade, the


prospects for its gold exports remain uncertain in


coming months.


Figure ECA.2 Mixed IP performance in the second of
2012


Source: World Bank.


-10


-5


0


5


10


15


20


25


30


2010M01 2010M09 2011M05 2012M01 2012M09


Europe Central Asia


ECA Oil Exporters


ECA Oil importers


IP Volume Growth


3m/3m saar


105





Global Economic Prospects January 2013 Europe and Central Asia Annex


..but the improved financial market conditions


has only helped the region’s access to bond
markets while other capital flows remained weak


Following the decisive actions taken by the


European Central Bank, and liquidity injections


by G3 countries, the cost of insuring against a


sovereign default of European and Central Asian


countries has narrowed by between 100 bps and


250 bps since June. Bond yields also declined by


similar amounts. Taking advantage of lower


borrowing costs, firms in Russia issued


international bonds totaling $39.3 billion, while


Turkey issued $19.3 billion. Infrequent


sovereign issuers also took advantage, with


Bulgaria issuing $1.2 billion in bonds since July.


Other issuers included: Ukraine ($5.4 billion),


Romania ($5.2 billion), Lithuania ($2.2 billion)


and Serbia ($1.8 billion) (figure ECA.4).


Overall, despite the mid-year weakness,


international bond issuance by firms and


sovereigns in Europe and Central Asia surged in


2012 at $85 billion, its highest value in three


years. With the large equity issuances by two


Russian companies and a Turkish bank since


September, equity flows in the region increased


by 12 percent reaching 13.6 billion in 2012. In


contrast, bank lending to the region fell by 8


percent in 2012. Excluding Russia, the fall was


even larger at 14 percent.


Syndicated bank lending has been under pressure


since mid-2011 due to deleveraging by Euro


Area banks. Most of the decline in 2012


involved refinancing and general corporate


purposes loans. After the intense period during


the second half of 2011, the pace of deleveraging


in high-income Europe appears to have eased in


2012 (see Main text and the Finance annex).


Nevertheless, bank-lending has declined


substantially. According to Bank of International


Settlement data, European banks’ foreign
claims—including all the cross-border and local
lending by subsidiaries—fell by $51 billion
between June 2011 and June 2012. Countries


subject to the largest reductions included


Romania ($18 billion, 9 percent of GDP), Serbia


($5.4 billion, 12.8 percent of GDP) and Bulgaria


(4.6 billion, 8.8 percent of GDP). The impact of


deleveraging by the European banks was


compensated for fully in Russia, Uzbekistan, and


partially in Turkey by non-European banks. The


decline in cross-border bank loans is likely to


impact activity most in those countries that have


limited access to alternative financing sources


like bond-financing. Intense deleveraging has


already coincided with negative domestic growth


in many countries in the region (see the


discussion later).


FDI inflows to Europe and Central Asia have


declined sharply…


Foreign direct investment (FDI) inflows account


Figure ECA.4 Gross capital flows have rebounded


Source: World Bank.


0


5


10


15


20


25


30


Jan-11 Jul-11 Jan-12 Jul-12


Bank-lending


Bond


Equity


$ billion


Figure ECA.3 Export value growth has rebounded
mostly driven by developing country demand


Source: World Bank.


-40


-20


0


20


40


60


80


2011M01 2011M06 2011M11 2012M04 2012M09


Europe Central Asia Exports


Developing Country Imports


High-income Country Imports


EU High Income Imports


Import and Export Value
3m/3m saar


106





Global Economic Prospects January 2013 Europe and Central Asia Annex


for more than 20 percent of gross fixed


investment during 2009 and 2011 in Georgia


(36.8 percent), Kazakhstan (32.6 percent) and


Albania (31.8 percent). For the region as a


whole, FDI fell by 25 percent (year-over-year)


during the first half of 2012. While FDI declined


in other regions too, the decline in Europe &


Central Asia was much sharper–due to a severe
contraction in investment outflows from high-


income European economies. In addition, unlike


most other developing regions, reinvested


earnings were limited due to weak profitability


and intercompany loans slowed down sharply.


The largest decline was in Serbia (80 percent)


followed by countries such as Georgia, Latvia


and Lithuania with declines around 20 percent.


With the exception of Russia, the flows


increased only slightly in the second half in most


countries. While improved financial conditions


since July encouraged several countries to


accelerate privatization efforts, some


postponements and less successful sales of


stakes in state owned assets suggest that


investors still have limited appetite for these


assets.


Net private capital inflows to the Europe and


Central Asia region are estimated to have


declined to $175.9 billion (4.4 percent of the


region’s GDP) in 2012 from $194.6 billion (5.7


percent) in 2011 (table ECA.1). While these


levels are well off the unsustainably high 14


percent of GDP levels observed in the boom


years, they are nevertheless on par with other


developing regions where private capital flows


account for 4 to 6 percent of their GDP. Going


forward, assuming there is no major set-back in


the resolution of Euro-area crisis or in financial


markets confidence, net private capital inflows to


the region are expected to start rising in 2013


and gradually strengthen along with global


growth to reach $226 billion in 2015—around
4.8 percent of the region’s GDP. By 2015, all
flows are expected to increase, with bond


issuance expected to level off slightly as bank


lending picks up the pace, with the latter


supported by increased South-South flows.


Developing Europe has suffered from a sharp


decline in remittances, while Central Asian


economies benefited from the increased flows


from Russia…


Remittances are an important source of both


foreign currency and domestic incomes for


several countries in the developing Europe and


Central Asia region. They represent more than


20 percent of GDP in Kyrgyz Republic and


Moldova and about 45 percent in Tajikistan.


Remittance flows to the region are projected to


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


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


2010 2011 2012e 2013f 2014f 2015f


Capital Inflows (official+private) 180.9 200.1 174.2 209.7 224.2 224.9


Private inflows, net 157.3 194.6 175.9 211.0 226.4 226.1


Equity inflows, net 87.2 108.6 103.1 137.4 149.8 142.6


Net FDI inflows 88.0 118.7 99.5 131.2 138.7 129.1


Net portfolio equity inflows -0.8 -10.1 3.6 6.2 11.1 13.5


Private creditors, net 70.1 86.0 72.8 73.6 76.6 83.5


Bonds 21.3 13.6 22.5 27.3 21.4 19.3


Banks -5.8 33.2 23.4 15.4 16.3 18.5


Short-term debt flows 45.9 24.5 16.5 23.5 29.7 40.0


Other private 8.8 14.7 10.4 7.4 9.2 5.7


Official inflows, net 23.5 5.5 -1.7 -1.3 -2.2 -1.2


World Bank 3.5 2.4 -0.1


IMF 9.4 -1.0 -5.0


Other official 10.7 4.1 3.4


Memo item:


Workers' remittances 37 41 41 45 51 58


Central and Eastern Europe & Turkey 18 18


Commonwealth of Independent States 19 23


107





Global Economic Prospects January 2013 Europe and Central Asia Annex


remain at their 2011 level of $41 billion but with


major differences across countries (table


ECA.1). On-going economic problems in high


income European countries have led to a jump in


unemployment rates skewed against migrant


workers, with migrant unemployment rising


faster than native-born unemployment in France,


Greece, Italy and Spain causing some migrants


from European Union with free mobility such as


Romania return home. Overall, remittance


inflows have declined significantly in Serbia,


Albania, and Romania. In contrast, remittances


flows from Russia, which account for 30 percent


of the inflows to the region, benefited from high


oil prices. As a result, total inflows to Armenia,


Georgia, Kyrgyz Republic, Moldova and


Tajikistan are estimated to have grown in 2012.


Flows are expected to reach $58 billion by 2015


(see Migration and Development Brief 19).


Domestic demand growth has remained under


pressure with tighter credit conditions, rising


inflation, fiscal adjustments, and high


unemployment which are likely to linger through


next year…


Credit growth in the region has declined sharply


over the last year especially in countries with


strong European bank presence. Real domestic


credit growth has been negative for Latvia and


Lithuania since early 2009—not shown in the
figure, and has also sharply declined in countries


such as Albania, Bulgaria, Macedonia FYR,


Romania and Turkey in recent months (figure


ECA.5). With the exception of Turkey where the


slowdown in credit growth was mainly due to


domestic monetary policy tightening, the


declining credit growth reflects partly supply-


side constraints related with foreign funding.


While the demand for credit also fell as the


economic activity in the region slowed down


during the same time, the recent CESEE


Deleveraging Monitor by the Vienna Initiative


assesses that the tightening of supply conditions


have contributed decelerating credit extension in


the region.FN2


Foreign funding—particularly cross-border
lending from the parent banks to their


subsidiaries operating in the region—played an


important role in supporting the robust credit


growth before the crisis. Several countries in the


region had loan-to-deposit ratios exceeding 100


percent by large margins. Reflecting the intense


deleveraging by the parent banks in recent years,


however foreign funding has become limited and


costly. In an effort to reduce to the dependence


on cross-border lending, domestic banks hiked


deposit rates in order to attract more domestic


savings. The process has helped to reduce the


dependence on foreign funding in countries such


as Bulgaria and Romania where loan to deposits


ratios declined. While this will be beneficial in


the long-term and reduce external vulnerabilities


in the region over the longer run, over the short-


run it has also increased lending costs—
contributing to tighter credit conditions.


Even if the acute intense phase of deleveraging


has passed now, tight supply conditions are


expected to remain in the medium-term with


strict regulatory changes ahead for the global


banking system (see Finance Annex box FIN.2).


When the demand for credit pick up in tandem


with the economic activity, this might create


bottlenecks for countries with little room to


improve their local funding sources.


After easing slightly in the first half of the year,


inflation in the region has gained momentum in


recent months (figure ECA.6), reflecting


increased food prices following weak crops in


Figure ECA.5 Sharp fall in real domestic credit
growth


Source: IMF and World Bank


-10


-5


0


5


10


15


20


25


2010M01 2010M07 2011M01 2011M07 2012M01 2012M07


Albania
Bulgaria
Macedona
Romania
Turkey


Real credit growth (year over year)


108





Global Economic Prospects January 2013 Europe and Central Asia Annex


Russia, Ukraine and Kazakhstan, as well as


supply constraints and increased taxes and


administrative tariffs (Russia and Turkey). The


uptick in inflation will likely weigh on


consumption, particularly if food prices continue


to rise, and will leave less room for monetary


policy to support the growth if conditions


deteriorate. Indeed, the central bank of Russia


raised interest rates by 25bps in September on


the expectation that inflation pressures will


continue.


While the inflation in Turkey did not accelerate


in the second half of the year, it remained high


around 9 percent (year over year) up until


September. Nevertheless, the central bank of


Turkey responded to weak growth mid-year by


increasing liquidity supply to banks in July, and


cut its overnight lending rate for the first time in


seven months in September. The bank cut its


overnight lending rate which serves as the upper


bound of its interest rate corridor by 150 basis


points to 10 percent and took steps to keep loan


growth in check to avoid overheating. Further


easing came in October as the inflation has


started to fall significantly. Turkey’s inflation
reached 6.4 percent (year over year) by


November with the help of the fall in food


prices. The move also seeks to reduce


appreciation pressures as capital flows


strengthened following quantitative easing steps


in high-income countries and the upgrade of


Turkey’s credit rating to investment grade.


On-going fiscal adjustment by most of the


countries in the region has also been hampering


the domestic demand growth. Developing


countries that are part of the European Union


(EU) have been lowering structural fiscal deficits


to meet the 3 percent target required by the EU.


The further adjustments are likely to occur in


Ukraine and Romania, where government


spending increased in the run up to elections.


Russia too may adopt a tighter stance, as its


surplus has been depleted following pre-election


spending.


High rates of unemployment in the region are


another factor weighing on domestic demand.


While unemployment conditions in Turkey,


Latvia, Lithuania and Russia have improved


along with output, labor market conditions


remain very weak elsewhere, including in


Albania and Bulgaria and Serbia. Currently,


unemployment is well over 20 percent of the


labor force in Serbia, Kosovo, and Macedonia


FYR.


Outlook


Growth in the region is expected to decline


sharply to an estimated 3.0 percent in 2012 from


5.5 percent in 2011 (table ECA.2). Hit hard by


the weakness in high-income Europe, the Central


and Eastern Europe is projected to have slowed


down markedly, whereas the adjustment for CIS


countries is expected to have been less severe.


Several countries (Albania, Bulgaria, Macedonia


FYR and Romania) are forecasted to growth less


than one percent, while Serbia entered to a


recession in 2012 (table ECA.3).


GDP growth in the region is projected to


rebound only slightly to 3.6 percent in 2013,


under the baseline assumptions that there will be


no major loss of confidence in the global


financial markets; and that there will not be a


major set-back in the resolution of Euro-area


crisis and US fiscal challenges. The rebound in


2013 is projected to be limited as most of the


factors that constrained the growth in 2012 are


likely to remain present (albeit somewhat less


Figure ECA.6 Inflation has gained momentum


Source: World Bank


0


2


4


6


8


10


12


2009M01 2009M10 2010M07 2011M04 2012M01 2012M10


CPI (3m/3m saar)


CPI (y-o-y)


Rate of Inflation


109





Global Economic Prospects January 2013 Europe and Central Asia Annex


forcefully). Economic growth in high-income


Europe is forecasted to rebound but still remain


weak in 2013. Fiscal adjustments by regions’
economies will continue and domestic credit


growth will continue to be constrained on the


supply-side. Region’s growth is expected to
gradually rise to 4.3 percent by 2015.


Prospects for the region critically depend on the


progress in addressing external (large current


account deficits) and domestic (large fiscal


deficit, unemployment, and inflation)


imbalances; lack of competitiveness; and


structural constraints in their economies. Key


structural factors include strengthening policy


reform effort to reduce public debt, advancing


structural fiscal reforms, improving labor market


flexibility, improving business environment and


financial market efficiency. Some of the


countries have already progressed considerably


in reducing their fiscal deficit such as Romania


and Latvia where it is projected to fall below 3


percent required by EU.


External support from international financial


institutions has been crucial for many countries


in the region to create financial buffers and to be


a catalyst in addressing their macroeconomic


imbalances. Some countries including Bosnia


and Herzegovina, Georgia and Romania (with


precautionary IMF supported program and


lending from the World Bank) have benefited


from the financial support from the IMF and


other IFIs to cope with the deterioration of


external conditions. On the other hand, the IMF


supported programs were put on-hold during pre


-election period in Serbia and Ukraine but


discussions are expected to resume in coming


months. Both of these economies have large


external financing needs (current account and


external debt amortization) and reducing


borrowing costs is crucial going forward.


Already in recession, Serbian economy also


suffers from a large fiscal deficit, very high


unemployment rate (more than 20 percent) and


rising inflation.


After two years of unsustainably strong growth,


Turkey has had a soft-lending with growth


slowing to a projected 2.9 percent in 2012 from


Table ECA.2 Europe and Central Asia forecast summary


Source: World Bank.


Est.


00-09
a


2010 2011 2012 2013 2014 2015


GDP at market prices
b


4.2 5.3 5.5 3.0 3.6 4.0 4.3


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


GDP at market prices
c


4.2 5.4 5.6 3.0 3.6 4.0 4.2


GDP per capita (units in US$) 4.0 4.9 5.1 2.6 3.2 3.6 3.9


PPP GDP 4.3 5.1 5.3 3.0 3.6 4.0 4.2


Private consumption 5.9 5.1 6.6 3.4 4.2 4.5 4.8


Public consumption 2.5 -0.2 2.2 2.9 2.7 3.2 3.0


Fixed investment 6.6 11.7 7.2 0.0 4.5 5.0 5.6


Exports, GNFS
d


5.2 7.5 6.4 5.3 4.2 5.4 6.0


Imports, GNFS
d


7.1 17.3 11.4 3.4 5.2 6.0 6.7


Net exports, contribution to growth -0.3 -2.7 -1.6 0.6 -0.4 -0.3 -0.3


Current account bal/GDP (%) 2.3 0.7 0.8 0.6 0.0 -0.4 -0.7


GDP deflator (median, LCU) 9.3 9.2 8.6 2.2 6.0 5.6 5.4


Fiscal balance/GDP (%) -0.6 -3.5 0.3 -0.2 -1.0 -1.1 -1.2


Memo items: GDP


Transition countries
e


4.7 3.9 4.4 3.1 3.5 3.8 3.9


Central and Eastern Europe
f


4.1 -0.4 3.1 1.4 1.8 2.5 3.3


Commonwealth of Independent States
g


4.8 4.7 4.6 3.4 3.7 4.1 4.0


Russia 4.4 4.3 4.3 3.5 3.6 3.9 3.8


Turkey 3.0 9.2 8.5 2.9 4.0 4.5 5.0


Romania 4.2 -1.6 2.5 0.6 1.6 2.2 3.0


(annual percent change unless indicated otherwise) Forecast


a. Growth rates over intervals are compound weighted averages; average growth contributions, ratios and deflators are


calculated as simple averages of the annual weighted averages for the region.


b. GDP at market prices and expenditure components are measured in constant 2005 U.S. dollars.


c. Sub-region aggregate excludes Bosnia and Herzegovina, Kosovo, Montenegro, Serbia, Tajikistan and Turkmenistan.


Data limitations prevent the forecasting of GDP components or Balance of Payments details for these countries.


d. Exports and imports of goods and non-factor services (GNFS).


e. Transition countries: CEE and CIS (f + g below).


f. Central and Eastern Europe: Albania, Bosnia and Herzegovina, Bulgaria, Georgia, Kosovo, Lithuania, Macedonia, FYR,


Montenegro, Romania, Serbia.


g. Commonwealth of Independent States: Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyz Republic, Moldova, Russian


Federation, Tajikistan, Turkmenistan, Ukraine, Uzbekistan.


110





Global Economic Prospects January 2013 Europe and Central Asia Annex


8.6 percent in 2011 (table ECA.3). Most of the


deceleration came from easing domestic demand


and investment following monetary policy


tightening that led to sharp adjustment in credit


growth. The sharp adjustment has not generated


any major disturbance in the economy as the


country continues to benefit from its ongoing


access to international capital markets (bond


flows in particular). Economic rebalancing has


started already with easing current account


deficit from 10 percent in 2011 to a projected 6.8


percent in 2012. While capital flows to Turkey


are expected to be robust next year, current


account deficit remains high and makes the


country vulnerable to sudden changes in investor


sentiment. In addition, while the adjustment has


also come through declining imports, the


resilience of its exports has been mainly due to


its unprecedented exports of gold to Iran


(directly or via the United Arab Emirates) in


return for its energy imports. The impact of gold


exports on the current account is unsustainable


however since the draw down on Turkish gold


stocks (Turkey is not an important producer of


gold) will likely require an increase in imports


going forward to bring stocks back up to normal


level.


Economic growth in Russia—the largest
economy in the region—is expected to decline to
3.5 percent in 2012 from 4.3 percent in 2011 due


to unfavorable base effects, a drought in


agriculture, rising inflation, and weak global


sentiment. Despite the projected high oil price,


growth is expected to pick up only modestly to


3.8 percent by 2015 reflecting monetary


tightening, a tight labor market, and capacity


constraints. The government will find it difficult


to step up public investment in view of the large


non-oil budget deficit. Similarly, economic


growth in Kazakhstan is projected to slowdown


in 2012 due to capacity constraints and the


drought affecting the wheat production and


expected to pick up only by 2014 after a new


oilfield becomes operational.


For the commodity exporters, the key challenge


continues to be high dependence on extractive


industries. Most of them are bumping against


capacity constraints, and while current


exploration and investments should result in


increased production over the forecast period,


both the pace of income (commodity prices are


projected to decline in real terms) and output


growth is likely to be significantly slower than in


the recent past. While the extractive sectors will


remain important sources of income, policy must


focus on establishing the conditions under which


other sectors of the economy can prosper and


expand. Here there are no easy answers, but


improving the predictability and enforcement of


laws, reducing administrative burdens and


hurdles and investing in both infrastructure and


human capital are important components of any


lasting effort to diversify and reducing


dependence on commodity-related earnings.


Risks and vulnerabilities


The region’s economic outlook is still subject to
serious downside global and regional risks. On


the external front:


 Given the region’s close financial and trade
ties with high-income Europe, it would be


directly impacted by a major deterioration of


the Euro-area debt crisis (by as much as 1.3


percent of regional GDP, see discussion in


main text), but even a slow-growth or


stagnation scenario would impinge on the


recovery in Europe and Central Asia.


 The US fiscal policy paralysis is another


imminent risk. Here the direct linkages are


less strong (an estimated 0.9 percent of GDP),


with regional oil and metal exporters hit harder


due to weaker commodity prices. However,


should the situation there go very wrong knock


on effects in the Euro Area (and developing


Europe) could be serious.


 Finally, while a progressive decline in
China’s unusually high investment rate is
expected over the medium– to long-term,
there would be significant domestic and
global consequences if this position were to
unwind abruptly. Impacts for developing
commodity exporters would be especially
harsh if commodity prices fall sharply.


A sharp drop in confidence can lead to a sudden


111





Global Economic Prospects January 2013 Europe and Central Asia Annex


reversal of global financial conditions and affect


significantly the countries with high external


financing needs (current account deficits and


amortization of external debt) in 2012. Even if


the risks related with then Euro-area and US cliff


are not fully actualized, these countries are still


in a vulnerable position as these uncertainties are


likely to generate volatility in the financial


markets on the way. Some of the vulnerabilities


have decreased. According to the recent data by


Bank of International Settlements, all countries


in the region—with the exception of Bulgaria
and Ukraine—have reduced short-term debt
since 2011 lowering their external financing


needs for 2013.


The internationally-traded food prices surged in


the summer of 2012 as a result of adverse


weather shocks. So far, the current food price


shock is less severe than in 2007-08, mainly


because fewer crops have been involved.


Moreover, this time around it has not been


aggravated by a significant and simultaneously


higher oil price. The pass-through from world to


local prices during the most recent period


continued to be low. A spike in local food prices


will affect poor population with a higher share of


food in household budgets. Nevertheless the


higher volatility of commodity prices will


require a concerted policy response that should


combine continued strengthening of the capacity


of social safety nets to respond to crises, and


agricultural programs aimed at enabling the


supply response.


Aside from these global risks for the region’s
economy, banking systems in several countries


are under considerable pressure (figure ECA.7).


The sharp slowdown in economic activity, weak


credit demand and tight foreign funding


conditions have increased pressures on profits.


Non-performing loans (NPL) in some countries


rose especially in Bulgaria (17 percent), Bosnia


and Herzegovina (12.7 percent), Moldova (15.3


percent) and Romania (17.3 percent). After sharp


economic slowdown, the NPL rates are likely to


have climbed in countries such as Ukraine, while


remaining at already very high level at 37


percent in Kazakhstan. The high levels of NPL


in region’s banking system may further constrain


credit growth going forward, which has already


slowed down considerably. Nevertheless, there


is some level of resilience in most banks in the


region with their capital adequacy ratios in


excess of 10 percent by the end of 2011.


Notes:


1. Turkish gold exports totaled $14.3 billion by


October from $2.7 billion during January to


October in 2011. The Turkish government


stated on November 23rd that Iran was using


the earnings from energy sales to Turkey,


which are deposited in Turkish banks, to buy


gold. The gold is subsequently transferred to


Iran. Iran provides 18 percent of Turkey's


natural gas and 51 percent of its oil.


2. http://ec.europa.eu/economy_finance/articles/


governance/pdf/2012-11-12-deleveraging-


monitor_en.pdf


Figure ECA.7 The share of nonperforming loans in
total loans rose markedly


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


4


6


8


10


12


14


16


18


20


2010
Q1


2010
Q2


2010
Q3


2010
Q4


2011
Q1


2011
Q2


2011
Q3


2011
Q4


2012
Q1


2012
Q2


2012
Q3


Bosnia and Herzegovina


Moldova


Romania


ECA (median)


Nonperformaning Loans
percent of total loans (%)


112





Global Economic Prospects January 2013 Europe and Central Asia Annex


Table ECA.3 Europe and Central Asia country forecasts l . t l i t f t


Est.


00-09
a


2010 2011 2012 2013 2014 2015


Albania


GDP at market prices (% annual growth)
b


4.9 3.5 3.0 0.8 1.6 2.0 3.0


Current account bal/GDP (%) -8.6 -11.4 -12.6 -11.8 -9.7 -7.9 -6.0


Armenia


GDP at market prices (% annual growth)
b


7.7 2.2 4.7 6.8 4.3 4.4 4.4


Current account bal/GDP (%) -7.4 -14.6 -10.8 -10.6 -9.3 -9.1 -9.1


Azerbaijan


GDP at market prices (% annual growth)
b


14.4 5.1 0.1 2.0 4.2 3.7 3.6


Current account bal/GDP (%) 2.9 28.2 26.6 15.5 12.4 11.4 9.9


Belarus


GDP at market prices (% annual growth)
b


6.6 7.7 5.3 2.8 4.0 4.0 4.5


Current account bal/GDP (%) -4.6 -15.0 -10.5 -1.5 -3.0 -3.5 -4.4


Bulgaria


GDP at market prices (% annual growth)
b


4.0 0.4 1.7 0.8 1.8 2.4 3.0


Current account bal/GDP (%) -11.3 -1.5 0.3 -1.5 -2.9 -3.2 -3.4


Georgia


GDP at market prices (% annual growth)
b


5.6 6.3 7.1 4.9 5.1 5.4 5.6


Current account bal/GDP (%) -12.6 -11.4 -12.5 -10.8 -11.9 -11.3 -10.3


Kazakhstan


GDP at market prices (% annual growth)
b


7.5 7.3 7.5 5.0 5.5 5.7 6.0


Current account bal/GDP (%) -2.0 1.6 7.6 4.3 3.9 3.3 3.0


Kosovo


GDP at market prices (% annual growth)
b


5.8 3.9 5.0 3.6 3.3 4.0 4.0


Current account bal/GDP (%) -18.2 -25.9 -26.2 -23.6 -21.6 -18.0 -16.0


Kyrgyz Republic


GDP at market prices (% annual growth)
b


4.1 -0.5 5.7 1.0 8.5 7.5 3.5


Current account bal/GDP (%) -6.0 -6.4 -6.3 -9.1 -6.4 -4.6 -3.3


Latvia


GDP at market prices (% annual growth)
b


3.7 -0.3 5.5 5.3 3.0 3.4 3.6


Current account bal/GDP (%) -10.2 3.0 -1.2 -2.1 -2.9 -3.6 -3.7


Lithuania


GDP at market prices (% annual growth)
b


4.2 1.3 5.9 3.3 2.5 3.5 4.3


Current account bal/GDP (%) -7.1 1.5 -1.7 -3.0 -3.4 -3.3 -3.1


Moldova


GDP at market prices (% annual growth)
b


4.4 7.1 6.4 0.0 3.1 4.0 5.0


Current account bal/GDP (%) -8.4 -9.8 -12.6 -10.8 -8.9 -8.8 -8.4


Macedonia, FYR


GDP at market prices (% annual growth)
b


2.3 2.9 2.8 0.0 1.0 2.5 3.5


Current account bal/GDP (%) -6.1 -2.8 -2.6 -3.5 -4.3 -4.5 -5.2


Montenegro


GDP at market prices (2005 US$)
b


- 2.5 3.2 0.2 0.8 1.5 2.0


Current account bal/GDP (%) -11.4 -22.9 -17.7 -17.8 -18.5 -17.8 -17.0


Romania


GDP at market prices (% annual growth)
b


4.2 -1.6 2.5 0.6 1.6 2.2 3.0


Current account bal/GDP (%) -7.5 -4.4 -4.9 -3.6 -4.3 -3.9 -3.7


Russian Federation


GDP at market prices (% annual growth)
b


4.4 4.3 4.3 3.5 3.6 3.9 3.8


Current account bal/GDP (%) 9.3 4.8 5.5 4.2 3.3 2.6 1.8


Serbia


GDP at market prices (% annual growth)
b


3.6 1.0 1.6 -2.0 2.0 3.1 3.6


Current account bal/GDP (%) -9.5 -6.8 -8.9 -11.3 -9.9 -9.2 -8.8


Tajikistan


GDP at market prices (% annual growth)
b


7.7 6.5 7.4 7.5 7.0 6.0 6.0


Current account bal/GDP (%) -4.8 -0.2 0.6 -0.4 -2.5 -1.4 -1.5


Turkey


GDP at market prices (% annual growth)
b


3.0 9.2 8.5 2.9 4.0 4.5 5.0


Current account bal/GDP (%) -3.3 -6.4 -10.0 -6.8 -7.0 -6.8 -6.5


Ukraine


GDP at market prices (% annual growth)
b


3.9 4.1 5.2 0.5 2.2 3.2 3.5


Current account bal/GDP (%) 2.2 -2.5 -6.2 -7.8 -6.6 -5.6 -4.7


Uzbekistan


GDP at market prices (% annual growth)
b


6.1 8.5 8.3 8.2 7.5 7.0 6.8


Current account bal/GDP (%) 5.2 4.9 4.8 4.5 4.5 4.0 3.8


Source : World Bank.


World Bank forecasts are frequently updated based on new information and changing (global) circumstances. Consequently,


projections presented here may differ from those contained in other Bank documents, even if basic assessments of


countries’ prospects do not significantly differ at any given moment in time.


Bosnia and Herzegovina, Turkmenistan are not forecast owing to data limitations.


a. GDP growth rates over intervals are compound average; current account balance shares are simple averages over the period.


b. GDP measured in constant 2005 U.S. dollars.


Forecast


113





Global Economic Prospects January 2013 Latin America and the Caribbean Annex


Overview: Economic growth in Latin America


and the Caribbean region slowed sharply in


2012, making the region the second slowest


performer, after developing Europe and Central


Asia, amongst all developing regions of the


world. A weak external environment and a


contraction in domestic demand were largely


responsible for a tepid regional GDP growth


estimated at 3 percent in 2012 (4.3 percent in


2011). Growth in Brazil, the region’s largest
economy, decelerated markedly to an estimated


0.9 percent in 2012, from an already-modest 2.7


percent in 2011, while Argentina’s economic
growth contracted to 2 percent, from 8.9 percent


the previous year. The slowdown was modest in


Central America and the Caribbean, while


growth in Mexico, the region’s second largest
economy, remained robust expanding by an


estimated 4 percent in 2012 despite its strong


links to the fledgling US economy. Elsewhere in


the region, growth was relatively buoyant, albeit


weaker than 2011. Chile posted a brisk


performance with growth estimated at 5.8


percent in 2012, as did Panama (10 percent), and


Peru (6.3 percent).


Economic activity in the region provided a
mixed picture in 2012. Industrial production
slowed, though not uniformly, in the first half of
the year but rebounded in 3Q 2012 with signs of
weakness reappearing in 4Q again. Growth of
remittances decelerated due to weak labor
market conditions in the main migrant
destinations of the US and Europe, while the
region received the largest share of gross capital
flows (international bond issuance, cross-border
syndicated bank loans, and equity placements) to
developing countries, accounting for 33 percent
of the $412 billion global gross capital flows in


the first 10 months of 2012.


Outlook: Regional growth is expected to
accelerate to 3.5 percent in 2013 and average
about 3.9 percent over the 2014-2015 period,
mainly due to a more accommodative policy
environment in some of the larger economies in
the region, supported by stronger external


demand and robust domestic demand. Growth in
Brazil is forecast to accelerate to 3.4 percent in
2013, boosted by accommodative monetary and
fiscal policies whose full effects are yet to be
felt. Growth in Mexico is forecast to slow to 3.3
percent in 2013, in part, due to slower US
growth. Energy exporters Bolivia, Venezuela
and Ecuador will see growth slow, as will
Central America. The Caribbean will strengthen
slightly mostly on account of the Dominican


Republic.


Risks and vulnerabilities: The region remains
vulnerable to an uncertain external environment,
an increased exposure to East Asia, and to
country-specific factors.

Euro Area and the US fiscal paralysis. Should
either of these scenarios materialize, the ensuing
weak global demand and demand for
commodities would negatively impact
commodity prices, incomes, fiscal balances and
GDP growth in the region, in particular for
commodity exporting countries. Countries with
fewer macroeconomic buffers could be
particularly vulnerable in case of a significant
weakening in global demand.
Looking East. As the region, notably South
America, is becoming increasingly reliant on
exports to East Asia, particularly China, the risk
of a stronger-than-expected deceleration in
China is a downside risk for commodity
exporting countries in particular.
Policy Errors. Domestic imbalances and/or
policy errors could also be detrimental to growth
in selected economies in the region. In the
Caribbean countries, with weak financial
systems, a sharp slowdown in growth would
result in a marked deterioration in credit quality
that could further impair growth.
Hot Money. In the short-run, a possible return of
hot money may complicate policy-making in
financially integrated economies in the region,
resulting in currency appreciations. Over the
medium term, however, expectations of costlier


capital could limit investment and growth.


Latin America & the Caribbean Region


115





Global Economic Prospects January 2013 Latin America and the Caribbean Annex


Recent economic developments


Economic growth decelerated in Latin America


and the Caribbean during 2012, although


performance was mixed across economies in the


region


Growth in Latin America and the Caribbean


(LAC) slowed from 4.3 percent in 2011 to an


estimated 3 percent in 2012, largely due to a


weaker global environment, but also to a marked


slowdown in domestic demand in some of the


larger economies in the region (e.g. Brazil) and


country-specific factors (e.g. Argentina) (table


LAC.1). Growth decelerated to a 1.9 percent


seasonally adjusted annualized rate (saar) in the


third quarter of 2012, from close to 3.2 percent


in the first quarter of the year and around 4


percent in the first half of 2011. Apart from


Europe and Central Asia, where growth slowed


by 2.6 percentage points in 2012 versus 2011,


Latin America and the Caribbean experienced


the sharpest growth deceleration (1.3 percentage


points) among developing regions in 2012.


Slowdown during the latter half of 2012 was


particularly sharp in Brazil, where annual GDP


growth is estimated to have fallen to 0.9 percent,


compared to the 2.9 percent expected as of mid-


year. The slowdown was much more moderate


in the Central American sub-region, where


growth expanded by 0.1 percent in 2012, and in


the Caribbean economies, where growth


decelerated by 1.4 percentage points. On the


other hand, despite its strong links to the


relatively weak US economy, growth in Mexico


(the second-largest economy in LAC), held up


well, expanding by an estimated 4 percent in


2012.


Elsewhere in the region, growth remained


relatively buoyant, with the economies of


Colombia, Chile, Panama, and Peru continuing


to expand briskly, albeit at a slightly lower rate


than in 2011. Paraguay stood out as a poor


performer in 2012, contracting by an estimated 1


percent (following 4 percent growth in 2011) on


account of a severe drought as well as weaker


growth in major trading partners such as


Argentina and Brazil. In Colombia, tourist


arrivals performed well despite subdued global


growth in the first half of 2012; tourist arrivals in


the Caribbean and Central America were up in


2012 as well, by 5.2 and 6.8 percent,


respectively.


Industrial production exhibited similar patterns


as regional GDP growth in the first and second


Table LAC.1 Latin America and the Caribbean summary forecast


Source: World Bank.


Est. Forecast


00-09
a


2010 2011 2012 2013 2014 2015


GDP at market prices b 2.6 6.0 4.3 3.0 3.5 3.9 3.9


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


GDP at market prices c 2.6 6.1 4.4 3.0 3.6 3.9 3.9


GDP per capita 1.4 4.9 3.2 1.8 2.4 2.8 2.8


PPP GDP 2.7 6.1 4.5 2.9 3.6 4.0 3.9


Private consumption 2.9 6.0 5.2 3.0 3.5 3.8 3.9


Public consumption 2.6 4.1 2.7 2.5 2.5 2.5 2.5


Fixed investment 3.6 10.9 7.8 4.2 5.3 6.0 6.1


Exports, GNFS d 2.8 11.6 5.9 3.8 5.4 6.3 6.7


Imports, GNFS d 3.7 22.4 9.8 4.7 5.6 6.2 7.0


Net exports, contribution to growth -0.2 -2.7 -1.3 -0.4 -0.3 -0.3 -0.4


Current account bal/GDP (%) -0.3 -1.2 -1.3 -1.7 -1.5 -1.6 -1.6


GDP deflator (median, LCU) 6.3 5.1 7.0 5.5 5.8 5.4 5.8


Fiscal balance/GDP (%) -2.4 -3.0 -2.2 -2.8 -2.6 -2.4 -2.4


Memo items: GDP


LAC excluding Argentina 2.5 5.8 4.0 3.1 3.6 3.9 3.9


Central America e 1.5 5.4 4.0 4.1 3.4 3.7 3.7


Caribbean f 3.4 4.7 3.8 2.4 3.8 3.9 4.2


Brazil 2.9 7.5 2.7 0.9 3.4 4.1 4.0


Mexico 1.2 5.6 3.9 4.0 3.3 3.6 3.6


Argentina 3.4 9.2 8.9 2.0 3.4 4.1 4.0


(annual percent change unless indicated otherwise)


a. Growth rates over intervals are compound weighted averages; average growth contributions, ratios and deflators are


calculated as simple averages of the annual weighted averages for the region.


b. GDP at market prices and expenditure components are measured in constant 2005 U.S. dollars.


c. Sub-region aggregate excludes Cuba and Grenada, for which data limitations prevent the forecasting of GDP


components or Balance of Payments details.


d. Exports and imports of goods and non-factor services (GNFS).


e. Central America: Costa Rica, Guatemala, Honduras, Mexico, Nicaragua, Panama, El Salvador.


f. Caribbean: Antigua and Barbuda, Belize, Dominica, Dominican Republic, Haiti, Jamaica, St. Lucia, St. Vincent and


the Grenadines, and Suriname.


116





Global Economic Prospects January 2013 Latin America and the Caribbean Annex


quarters of 2012, slowing to 1.9 and -1.1 percent


(saar), respectively. In contrast to regional GDP


growth, which was weak in the third quarter,


industrial production in LAC economies


rebounded, reaching 3.4 percent in the third


quarter. However, this rebound in industrial


production has not been uniform across the


region and the signs of a new slowdown towards


the end of 2012 are evident. For example,


Mexican industrial production growth held up


well during most of 2012 and has only started to


slow recently. Argentina and Brazil, on the other


hand, experienced strong industrial production


growth in the third quarter, after registering


weak performance in the first half of the year,


but have started slowing down again in the


fourth quarter (figure LAC.1). In Central


American countries, industrial production trends


have been similar to those observed in Argentina


and Brazil – i.e., it troughed at around -1.5
percent in May, and have accelerated to around


4.9 percent by September and have slowed down


recently to 3.4 percent in November.


The industrial production growth patterns are


also reflected in export volumes with


Argentinean and Brazilian exports volumes on


the rise in recent months after bottoming out in


June, whereas Mexican export volumes appears


to have peaked in July and has been declining in


recent months. In Central American countries


export volumes have been under significant


pressure since peaking at 23.7 percent in


February and have declined at a 13.2 percent


annualized pace in November. Overall, regional


import growth (+9.5 percent annualized in


November) has recovered from five months of


decline – supportive of a modest improvement in
domestic demand. But exports remains weak,


with export volumes growing at only 3.8 percent


annualized pace in November, largely on


account of weak import demand from the US


and the Euro Area.


The pace of growth of remittance flows in


nominal US dollar terms to the Latin America


and the Caribbean region decelerated to


estimated 2.9 percent in 2012 from 7.3 percent in


2011, as weak labor markets and subdued


income growth in the main migrant destinations


in North America and Europe affected the ability


of migrants to send money home.


Notwithstanding a gradual recovery in the US


labor market and an upturn in the housing sector


in the second half of the year, flows to the


largest regional remittance recipient Mexico


remained broadly stable, declining by estimated


0.3 percent to $23.5 billion in 2012, compared


with a 6.8 percent increase the previous year.


Several remittance-dependent economies, and in


particular in countries with large migrant


population to the U.S. such as Honduras and


Jamaica (where these flows are 16.7 percent and


14.1 percent of GDP, respectively), have seen a


steep deceleration in estimated growth of


nominal remittance inflows to 1.7 and 2.3


percent, respectively in 2012. The sharp


economic downturn and high unemployment in


Spain and other European remittance sources has


weighted negatively on the overall remittance


volumes in Latin America as well.


Inflation in the Latin America and the Caribbean


region dropped to 4.8 percent annualized pace in


the second quarter of 2012 (down from a 7.1


percent pace in 2011) reflecting the weakening


of global activity and the lagged impact of


relatively tight monetary policy stance (earlier


on) in the region. After the monetary policy


tightening cycle that started in mid-2010 most


inflation-targeting central banks paused in mid-


2011, or have made very minor adjustments,


Figure LAC.1 Industrial production


Source: World Bank.


-15


-10


-5


0


5


10


15


20


2010M01 2010M07 2011M01 2011M07 2012M01 2012M07


Argentina


Brazil


Mexico


percent, 3m/3m saar


117





Global Economic Prospects January 2013 Latin America and the Caribbean Annex


except of Brazil which has lowered policy rates


aggressively (commutative 525 basis point cut)


to support the weakening economic activity


(figure LAC.2).


Inflation started picking up again during the


third quarter in reaction to the considerable


global policy easing, while higher food and oil


prices also contributed to price pressures during


a temporary US drought related grain price


uptick. Latin America registered some of the


sharpest increases in real domestic maize prices


affecting food price inflation and contributing to


a temporary acceleration of the headline inflation


in the third quarter of 2012 to 7 percent. The


headline inflation in Uruguay accelerated to 7.5


percent (y/y) in December well above the central


bank's 4-6 percent targeted range prompting the


central bank to increase the policy rates to 9.25


percent and the government to implement a set


of administrative and fiscal measures (e.g. seek


an agreement with the country’s supermarkets to
reduce the price of 200 basic staples by 10


percent and to consider lowering tariffs and taxes


on basic foodstuff) to contain the price hike.


Peru managed to achieve strong growth and low


inflation (2.7 percent y/y in December - within


the Central Bank’s target band of 1-3 percent).
Chile and Columbia have been successful in


maintaining relatively low inflation during the


recent volatile economic cycle due to effective


counter-cyclical policies. Moderate price


pressures allowed Columbia to cut the policy


rates in November and late December to provide


additional stimulus to the economy. Inflation


remains high in Venezuela and Argentina


reflecting expansionary policies.


Capital flows return were buoyant in the second


half of 2012


Overall capital flows to the region have


remained strong helped by intensifying search


for higher yields, renewed prospects of


appreciation of select local currencies, and still


favorable commodity prices. Net private capital


inflows rose slightly to an estimated $321 billion


in 2012 (or 6.1 percent of GDP), up 7.2 percent


from 2011, with net bond financing climbing


11.7 percent to $95 billion (or 1.8 percent of


GDP) (table LAC.2). There was a slight increase


in FDI inflows as they reached about $167


billion, 5.7 percent above the $158 billion


registered in 2011. FDI continues to be the most


significant source of financing for the current


account in many countries, with Brazil


remaining the favored destination of FDI


investors in the region—and is the second only
to China among developing countries. Short-


term debt flows showed some signs of rebound,


posting positive net flows of $4.3 billion, but


they remain well below a peak of $43.8 billion in


2010. Net portfolio equity inflows rose to $12.2


billion in 2012, after dropping sharply to $7.4


billion in 2011, while net bank lending declining


slightly to $41 billion.


Latin America received the largest share of gross


capital flows (international bond issuance, cross-


border syndicated bank loans, and equity


placements) to developing countries this year,


accounting for 33 percent of the $412 billion


registered in the first ten months of 2012. The


robust flows underlined a record pace of bond


issuance by region’s borrowers, which rose to
$91 billion, up about 22 percent year-on-year


basis. In fact, Latin American borrowers have


dominated the developing-country corporate


bond market, constituting nearly half of the total


market volume ($158 billion), as they have taken


full advantage of the low funding costs and


Figure LAC.2 Monetary policy has been on hold in
several countries


Sources: World Bank, Bloomberg, and Datastream.


0


2


4


6


8


10


12


14


Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12


Short-term Interest Rates


Brazil


Chile Colombia


Peru


Mexico


Percent


118





Global Economic Prospects January 2013 Latin America and the Caribbean Annex


unprecedented investor demand. In terms of


sectoral distribution, banks and oil & gas are


especially over-represented with a combined


share of about 60 percent. For example,


Brazilian oil company Petrobras has raised more


than $10 billion through two bond offerings in


February and September. In contrast, bank


lending and equity issuance fell sharply this year


as companies continued to move away from the


higher borrowing costs in the bank markets (and


turned to the bond market instead), and region’s
stocks markets remained fragile following global


equity-market sell-offs in 2011.


Economic outlook


Growth is accelerating starting with the final


quarter of 2012


Overall growth in the region is expected to


accelerate to 3.5 percent in 2013 and average


about 3.9 percent over the 2014-15 period.


Already there are indications that growth has


bottomed-out in the second/third quarter of the


year. Historically there has been a strong


correlation between industrial production and


GDP growth rates (figure LAC.3). With


industrial production growth increasing from -


1.3 percent in the second quarter to 3.4 percent


in the third quarter – the highest industrial


production growth rate in 6 quarters – a (modest)
rebound in GDP growth is expected.


Furthermore, a more accommodative


environment in some of the larger economies in


the region in conjunction with stronger external


demand should lift growth in 2013, while sound


macroeconomic policies, robust domestic


demand and stronger external demand should


support growth over the medium term.


Particularly in Brazil, the benefits of lower


interest rates are expected to start kicking-in


during the course of the year, which should


underpin stronger domestic demand growth.


However, this will to some extend be countered


by the reshaping of demand in China away from


investments and exports towards domestic


consumption and manufacturing, and will affect


commodity exporters in the region that rely on


Chinese demand as the main growth engine.


Most commodity prices are expected to decline


marginally in 2013, due to weaker demand, and


in some cases improved efficiency, lower


intensity of use and substitution. On an annual


basis, oil prices are an exception, as it is


expected to remain relatively stable at high


levels. Non-oil commodity prices are forecast to


decline, while manufacturing prices are expected


to recover somewhat after declining in 2012.


This means that, on one hand, the terms of trade


Table LAC.2 Net capital flows to Latin America and the Caribbean region ($ billions)


Source: World Bank.


2008 2009 2010 2011 2012e 2013f 2014f 2015f


Capital Inflows 186.0 179.6 328.5 303.9 322.4 326.2 327.1 342.3


Private inflows, net 179.3 161.6 306.1 299.1 320.5 327.1 327.8 344.7


Equity Inflows, net 127.5 126.5 166.6 165.6 179.5 198.0 200.8 214.5


Net FDI inflows 137.2 84.9 125.3 158.3 167.3 182.4 176.3 184.2


Net portfolio equity inflows -9.7 41.6 41.3 7.4 12.2 15.6 24.5 30.3


Private creditors. Net 51.8 35.1 139.5 133.4 141.0 129.1 127.0 130.2


Bonds 8.9 45.9 72.9 85.2 95.1 72.2 57.7 60.2


Banks 40.8 -1.7 21.7 51.7 41.4 42.7 45.2 51.4


Short-term debt flows 2.6 -8.6 43.8 -3.0 4.3 12.7 23.4 16.5


Other private -0.5 -0.5 1.1 -0.4 0.2 1.5 0.7 2.1


Official inflows, net 6.7 18.0 22.5 4.8 1.9 -0.9 -0.7 -2.4


World Bank 2.4 6.6 8.3 -2.9 0.4


IMF 0.0 0.4 1.3 0.2 0.1


Other official 4.3 11.0 12.9 7.5 1.4


Note: e = estimate, f = forecast


/a Combination of errors and omissions, unidentifed capital inflows to and outflows from developing countries.


119





Global Economic Prospects January 2013 Latin America and the Caribbean Annex


for non-oil commodity exporters will deteriorate


while, on other hand, the terms of trade will


improve for their non-commodity sectors as their


currencies depreciate. Marginal improvements in


terms of trade for oil exporters and


manufacturing exporters could be expected as


well (see Commodity Annex).


Growth in Brazil is forecast to accelerate to 3.4


percent in 2013, boosted by stimulative


monetary and fiscal policies whose full effects


have not yet been felt (table LAC.3). Growth


will also benefit from 2012-second half


carryover effects. The slowdown of credit


growth is expected to subtract from growth


however, as will a slightly less favorable terms


of trade.


Lower interest rates should reduce interest


payments releasing resources for countercyclical


measures over the medium term. Efforts by the


government to improve the efficiency of the


economy by reducing Custo Brazil (high input


costs and tax burden, heavy bureaucracy and


inadequate infrastructure) should support


potential GDP over the medium term


notwithstanding a deceleration in labor force


growth.


The end of tax exemptions and the lagged pass-


through of past depreciations will put upward


pressure on core inflation in 2013 in Brazil. But


this should be countered by cuts in electricity


tariffs (while also helping support to the


manufacturing sector as tariffs will be cut 28


percent for industrial users). Also, the somewhat


below potential growth will also help curtail


inflationary pressures.


Growth in Mexico is also forecast to slow to


from an estimated 4 percent in 2012 to 3.3


percent in 2013, primarily due to negative 2012


base effects (i.e., exceptionally strong growth in


the first part of 2012), but also as the economy is


impacted by still sluggish US growth. On the


other hand, the approval of labor reforms is


expected to support growth by lowering the cost


of hiring and firing, encouraging job creation


including temporary and part-time jobs that


could lead to an increase in participation rate.


The ministry of Labor estimates 400,000 jobs


would be created yearly as a result of labor


market reform. Growth in other countries with


strong macroeconomic frameworks and


competitive economies is expected to exceed the


regional average, with Colombia and Chile


growing in around 4 percent or more, with


domestic demand showing strong dynamism, in


particular private investment.


Growth performance among other commodity


exporters will be mixed. In Argentina


expectations of a record harvest next season and


high international prices for its soft commodities


exports, along with a recovery in Brazil’s
domestic demand are expected to support growth


of 3.4 percent in 2013, while continued


weakness in consumer and business sentiment


and policy uncertainties will constrain growth.


Over the medium term Argentina’s economic
performance is likely to be affected by


interventionist policies, weaker business


environment and consumer sentiment, as well as


growing imbalances. Changes to the Central


Bank Charter in March 2012 increased the limit


on Central Bank credits to fiscal authorities, in


effect increasing the ability of the Central Bank


to monetize government’s deficits. The
deterioration in fiscal balances and external


accounts is limiting Argentina’s ability (policy
room) to respond to global or domestic shocks in


Figure LAC.3 GDP growth to follow revival in indus-
trial production


Source: World Bank.


0.0


1.0


2.0


3.0


4.0


5.0


6.0


7.0


-4.0


-2.0


0.0


2.0


4.0


6.0


8.0


10.0


2010Q1 2010Q3 2011Q1 2011Q3 2012Q1 2012Q3


Industrial Production (lhs)


GDP (rhs)


percent, 3m/3m (saar)


120





Global Economic Prospects January 2013 Latin America and the Caribbean Annex


a countercyclical manner. Difficulties in


financing government deficits at both federal and


state level are expected to lead to a tightening of


fiscal spending in coming years, especially if


prices of soft commodities decline. Paraguay’s
economy is expected to recover from the 2012


recession, as agricultural output improves


sharply and as Brazilian demand recovers. GDP


is expected to continue to slow in energy


exporters such as Bolivia, Venezuela, and


Ecuador as government spending growth eases.


In Peru, growth will remain relatively steady at


around 6 percent over the forecast period.


The expansion in Central America is expected to


slow somewhat due to relatively weak


performance in the U.S., notwithstanding a more


expansionary fiscal stance in some of the


economies. An incipient modest recovery in the


U.S. housing sector will provide some support to


remittances although sluggish improvement in


labor markets and lower net migration to the


U.S. will keep remittances growth subdued.


Private consumption will also be affected by


higher food and energy prices. Panama is


forecast to remain the fastest growing economy


in Latin America, expanding 7.5 percent in 2013,


with growth driven by the expansion of the


Panama Canal and several other large investment


projects, including the Panama City project.


Growth in the Caribbean is expected to


strengthen slightly to 3.8 percent in 2013, mostly


on account of improving performance in the


Dominican Republic. Growth in other countries


in the sub-region will continue to be constrained


by high debt levels, and relatively weak


remittances and tourism revenues, despite a pick-


up in tourist arrivals. Large debt and current


account deficits will continue to constrain


growth in the sub-region.


Current account balances are expected to


deteriorate in the region overall as terms of trade


deteriorate for some of the larger economies in


the region, while stronger domestic demand and


a loss of competitiveness fuel imports.




Risks and vulnerabilities


The region remains vulnerable to an uncertain


external environment, an increased exposure to


East Asia, and to country-specific factors.


A main risk to the global economy is still posed


by the possibility of a marked deterioration in


conditions in Euro area, although this scenario is


less likely than only a few months ago. In such a


scenario, global demand and demand for


commodities would be significantly weaker than


in the baseline, negatively affecting commodity


prices, incomes, fiscal balances and GDP in


particular in commodity exporting countries. If it


unfolds this risk could cut Latin America and the


Caribbean regional growth by 1.2 percent in


2013 and 0.8 percent in 2014 (see discussion in


main text).


The US fiscal policy paralysis is another


imminent risk for countries in this region.


Failure to address fiscal problems in the US


would result into a sharp 1.8 cut in the US


growth in 2013 relative to the baseline through a


considerable fiscal drag on the US economy.


Direct impact of such scenario is as strong (an


estimated reduction of 1.2 percent of GDP in


2013 and 0.4 percent in 2013), with regional oil


and metal exporters hit harder due to weaker


commodity prices as well as economies


dependent remittances from the US.


Figure LAC.4 Region’s trade exposure to the US and
China (average 2009-2011)


Source: UN Comtrade and World Bank.


Argentina
Bolivia Brazil Chile


Colombia


Costa Rica


Dominican
Republic


Ecuador


El Salvador
Guatemala


Guyana


Jamaica


Mexico


Nicaragua


Panama


Paraguay


Peru


Latin America
and the


Caribbean


0%


10%


20%


30%


40%


50%


60%


70%


80%


90%


0% 5% 10% 15% 20% 25%


Share of exports going to China


Sh
ar


e
o


f e
xp


o
rt


s
go


in
g


to
U


S


121





Global Economic Prospects January 2013 Latin America and the Caribbean Annex


As the region, particularly South America, has


become increasingly reliant on exports to East


Asia, prospects in that region and China in


particular are increasingly important (figure


LAC.4). The risk of a stronger-than-expected


deceleration in China is another downside risk


for commodity exporting countries in particular.


Domestic imbalances and/or policy errors could


also be detrimental to growth in selected


economies in the region. In the Caribbean


countries with weak financial systems a sharp


slowdown in growth would result in a marked


deterioration in credit quality that could further


impair growth.


A possible return of hot money to the region


may complicate the fine-tuning of policy in


financially integrated economies in the region,


resulting in currency appreciation. Over the


medium term expectations of costlier capital


could limit investment and growth (Global


Economic Prospects 2010).




Table LAC.3 Latin America and the Caribbean country forecasts


Est. Forecast


00-09
a


2010 2011 2012 2013 2014 2015


Argentina


GDP at market prices (% annual growth) b 3.4 9.2 8.9 2.0 3.4 4.1 4.0


Current account bal/GDP (%) 2.7 0.8 0.0 1.1 0.3 -0.1 -0.5


Antigua and Barbuda


GDP at market prices (% annual growth) b 3.4 -8.9 -5.5 1.0 1.5 3.2 3.4


Current account bal/GDP (%) -15.4 -12.8 -10.7 -11.4 -12.2 -14.6 -16.2


Belize


GDP at market prices (% annual growth) b 3.6 2.9 2.0 4.0 2.8 2.6 2.9


Current account bal/GDP (%) -12.9 -2.9 -2.5 -2.3 -2.4 -2.6 -2.8


Bolivia


GDP at market prices (% annual growth) b 3.4 4.1 5.2 4.7 4.4 4.1 3.9


Current account bal/GDP (%) 3.7 4.9 2.7 4.3 3.7 3.2 2.4


Brazil


GDP at market prices (% annual growth) b 2.9 7.5 2.7 0.9 3.4 4.1 4.0


Current account bal/GDP (%) -0.7 -2.2 -2.1 -2.5 -2.6 -2.8 -3.1


Chile


GDP at market prices (% annual growth) b 3.3 6.1 6.0 5.8 5.1 4.5 4.7


Current account bal/GDP (%) 0.7 1.5 -1.3 -2.9 -2.8 -2.8 -2.7


Colombia


GDP at market prices (% annual growth) b 3.7 4.0 5.9 3.5 3.8 4.1 4.2


Current account bal/GDP (%) -1.4 -3.1 -2.9 -4.2 -4.4 -4.1 -3.0


Costa Rica


GDP at market prices (% annual growth) b 3.8 4.7 4.2 4.6 4.0 4.3 4.4


Current account bal/GDP (%) -5.0 -3.5 -5.3 -5.5 -5.3 -5.2 -5.4


Dominica


GDP at market prices (% annual growth) b 2.4 0.1 0.9 0.4 1.2 1.5 1.7


Current account bal/GDP (%) -18.2 -20.8 -16.0 -13.3 -13.7 -13.8 -14.1


Dominican Republic


GDP at market prices (% annual growth) b 4.5 7.8 4.5 3.0 4.3 4.5 4.8


Current account bal/GDP (%) -2.6 -8.6 -8.1 -7.2 -6.5 -5.9 -5.9


Ecuador


GDP at market prices (% annual growth) b 4.2 3.3 8.0 4.5 3.9 3.3 3.3


Current account bal/GDP (%) 1.0 -2.4 -0.3 -0.4 2.6 -0.6 -2.9


El Salvador


GDP at market prices (% annual growth) b 1.7 1.4 1.5 1.8 2.3 2.9 2.8


Current account bal/GDP (%) -3.8 -3.1 -5.4 -5.0 -4.4 -3.7 -3.4


Guatemala


GDP at market prices (% annual growth) b 3.0 2.8 3.9 3.3 3.5 3.4 3.6


Current account bal/GDP (%) -4.8 -1.5 -3.2 -3.5 -3.6 -3.8 -3.8


Guyana


GDP at market prices (% annual growth) b 2.1 3.6 5.2 4.2 4.8 4.6 4.5


Current account bal/GDP (%) -9.0 -7.2 -8.6 -14.0 -15.8 -17.1 -18.2


Honduras


GDP at market prices (% annual growth) b 3.8 2.8 3.4 3.3 3.7 3.9 3.7


Current account bal/GDP (%) -6.4 -6.2 -8.7 -9.4 -9.3 -8.9 -8.5


Haiti


GDP at market prices (% annual growth) b 0.6 -5.4 5.6 2.2 6.0 4.2 4.2


Current account bal/GDP (%) -20.7 -2.5 -4.6 -4.2 -5.2 -5.0 -4.7


122





Global Economic Prospects January 2013 Latin America and the Caribbean Annex


Source: World Bank.


Est. Forecast


00-09
a


2010 2011 2012 2013 2014 2015


Jamaica


GDP at market prices (% annual growth) b 1.0 -1.5 1.3 -0.3 1.0 1.6 1.6


Current account bal/GDP (%) -10.3 -6.9 -14.1 -12.0 -11.6 -12.1 -10.2


Mexico


GDP at market prices (% annual growth) b 1.2 5.6 3.9 4.0 3.3 3.6 3.6


Current account bal/GDP (%) -1.5 -0.4 -1.0 -1.3 -1.0 -0.6 -0.6


Nicaragua


GDP at market prices (% annual growth) b 2.8 3.1 5.1 4.0 4.2 4.4 4.6


Current account bal/GDP (%) -17.5 -10.5 -14.2 -17.6 -15.7 -13.7 -11.8


Panama


GDP at market prices (% annual growth) b 5.6 7.5 10.6 10.0 7.5 7.0 6.5


Current account bal/GDP (%) -4.8 -10.8 -11.3 -9.8 -10.6 -10.7 -10.5


Peru


GDP at market prices (% annual growth) b 4.8 8.8 6.9 6.3 5.8 6.0 6.0


Current account bal/GDP (%) -0.7 -2.5 -1.9 -3.9 -4.1 -3.8 -4.0


Paraguay


GDP at market prices (% annual growth) b 2.5 15.0 4.0 -1.0 8.5 4.6 4.7


Current account bal/GDP (%) 0.2 -3.6 -1.2 -2.5 -1.3 -1.6 -1.4


St. Lucia


GDP at market prices (% annual growth) b 2.1 3.4 1.2 0.7 1.2 1.7 2.0


Current account bal/GDP (%) -19.6 -13.7 -23.2 -24.1 -20.8 -19.2 -18.7


St. Vincent and the Grenadines


GDP at market prices (% annual growth) b 2.8 -1.8 0.0 1.2 1.5 2.5 3.0


Current account bal/GDP (%) -18.9 -31.6 -30.1 -27.2 -25.9 -23.8 -20.5


Suriname


GDP at market prices (% annual growth) b 4.2 4.1 4.7 4.0 4.5 4.5 5.0


Current account bal/GDP (%) 9.9 6.4 5.5 -0.1 -2.1 -4.1 -1.3


Uruguay


GDP at market prices (% annual growth) b 2.1 8.9 5.7 4.0 4.0 4.0 4.0


Current account bal/GDP (%) -1.3 -1.9 -2.8 -4.5 -4.7 -2.7 -2.6


Venezuela, RB


GDP at market prices (% annual growth) b 3.3 -1.5 4.2 5.2 1.8 2.0 2.0


Current account bal/GDP (%) 10.0 3.1 8.7 5.3 6.4 6.1 6.0


World Bank forecasts are frequently updated based on new information and changing (global) circumstances.


Consequently, projections presented here may differ from those contained in other Bank documents, even if basic


assessments of countries’ prospects do not significantly differ at any given moment in time.


Cuba, Grenada, St. Kitts and Nevis, are not forecast owing to data limitations.


a. GDP growth rates over intervals are compound average; current account balance shares are simple averages over


the period.


b. GDP measured in constant 2005 U.S. dollars.


123





Global Economic Prospects January 2013 Middle East and North Africa Annex


Middle East and North Africa Region
1


Overview: Political uncertainty continued to


weigh on economic activity in many countries in


the Middle East and North Africa region


during 2012. Nonetheless, growth in 2012


recovered to above 2010 levels, with aggregate


GDP estimated to have grown by 3.8 percent in


2012, compared with a 2.4 percent contraction in


2011. The rebound was largely driven by a


recovery in oil exporter Libya, where GDP grew


an estimated 108 percent, and continued robust


expansion in Iraq (11 percent growth). However,


GDP in Syria, in the throes of internal conflict, is


estimated to have contracted by a fifth, but there


is significant uncertainty about these estimates.


Algeria’s economy grew an estimated 3 percent,
while Iran experienced a modest recession.


Growth among oil importers remained sluggish


at an estimated 2.5 percent in 2012 due to the


impact of the Euro Area debt crisis on regional


exports, together with domestic problems,


including a poor harvest in Morocco (3.0 percent


growth in 2012), fiscal difficulties in Jordan (3.0


percent growth in 2012), and continuing


uncertainty and weak reserves position in Egypt


(2.6 percent growth projected for the 2012-13


fiscal year). Tunisia’s GDP rose an estimated 2.4
percent in 2012, but in Lebanon, spillover effects


from the conflict in Syria caused growth to


decelerate to an estimated 1.7 percent in 2012.


Production in crude oil exporters continued to


expand in 2012. But among oil importers,


industrial production and manufactured exports


remained weak amid domestic tensions and the


Euro Area debt crisis. Inflation rose sharply in


Iran and Syria. In other countries, despite


international food price increases during 2012,


inflation rates remained subdued, in part owing


to subsidy regimes. Private capital flows to the


region continued to decline in 2012, falling by


an estimated 16 percent, to $12.5 billion. FDI


flows to the region also fell, by a more modest 7


percent. Good news came in the form of tourist


arrivals, with Egypt, Jordan and Tunisia posting


stronger gains in attracting tourists, but tourism


to the region was still below 2010 levels.


Outlook: Regional GDP growth is projected to


slow to 3.4 percent in 2013 as growth in Libya


returns to a more sustainable pace; and then to


rise to 3.9 percent in 2014 and 4.3 percent in


2015. In Egypt, GDP growth is projected to rise


to 3.8 percent in the 2013-14 fiscal year and to


4.7 percent in 2014-15. GDP in Jordan and


Morocco is projected to expand 3.3 and 4.4


percent in 2013, firming to 4.5 and 5.1 percent


by 2015. Iraq’s economy will remain buoyant
with growth projected at 13.5 percent in 2013


before moderating to 8.5 percent in 2015;


Libya’s growth is forecast to moderate to 7.6
percent in 2013, easing to 5.1 percent in 2015;


while Algeria’s growth is projected to firm to 4.3
percent by 2015. Iran’s growth is forecast at 0.6
percent in 2013, rising to a modest 2.8 percent in


2015, while growth in Lebanon is forecast at 2.8


percent in 2013, firming to 4.0 percent in 2015.


Risks and vulnerabilities:
Political uncertainty. Protracted political


uncertainties and domestic unrest pose a key risk


to the region’s growth outlook. The ongoing
conflict in Syria is a notable source of instability


in the region: economic spillovers from Syria to


Lebanon, Jordan, and other countries may


intensify if the political crisis in Syria worsens.


Euro Area or US debt turmoil. A resumption


of Euro Area tensions would particularly affect


the region’s oil importers, due to Europe’s
importance as a trade partner and source of


investment, tourism, and remittances. A flare up


of debt tensions in the United States would also


harm this region through trade ties and from


negative effects on global economic growth.


Fiscal challenges. Despite recent efforts and


plans in several countries to improve fiscal


sustainability by undertaking significant subsidy


reforms, further reforms could prove challenging


in the face of popular resistance.


1 Due to data limitations, Djibouti and West Bank


and Gaza which are part of the MENA region are


not included in these regional forecasts. The


MENA region classification excludes the six coun-


tries of the Gulf Cooperation Council.


125





Global Economic Prospects January 2013 Middle East and North Africa Annex


Recent economic developments


Gross domestic product (GDP) in the developing


Middle East and North Africa (MENA) region


contracted in 2011 due to disruptions to


economic activity following the “Arab Spring”
popular movements in early 2011.FN1 But in


2012, regional GDP recovered to about 1 percent


higher than its level in 2010, as an estimated 3.8


percent growth in 2012 reversed the 2.4 percent


decline recorded in 2011. The regional upturn in


2012 was mainly due to a partial recovery of


Libya’s GDP following a steep contraction the
previous year. But in many countries across the


region, continuing domestic tensions and


political uncertainty held back investment and


weighed on economic activity during 2012.


External headwinds from a slowing global


economy and economic contraction in the Euro


Area, the developing MENA region’s largest
trade partner, also contributed to weak non-oil


exports. Within the overall context of relatively


sluggish growth across the region in 2012


(barring a few notable exceptions), economic


performance across developing crude oil


exporters and oil importers exhibited substantial


variation.


Output in developing MENA oil exporters


recovered close to the level of 2010


A sharp recovery of Libya’s output resulted in


developing MENA oil exporters’ GDP growing
by an estimated 4.6 percent in 2012 (figure


MNA.1, left panel and table MNA.2). However,


because of the contraction in 2011, GDP for oil


exporters is still about 1 percent lower than its


2010 level. Libya’s output contraction in 2011
was especially deep, with crude oil production


dropping precipitously from 1.7 million barrels


per day (mb/d) in early 2011 to less than 10,000


b/d in August 2011; but by November 2012,


crude oil production had risen to 1.5 mb/d,


according to data compiled by the Organization


of Petroleum Exporting Countries (OPEC).


Iraq’s GDP expanded an estimated 11 percent in
2012, similar to the pace in 2011, led by rapidly


rising crude oil production and investment in


capacity expansion. Algeria’s GDP growth
accelerated modestly to an estimated 3 percent in


2012, from 2.5 percent in 2011, with demand


supported in part by oil revenues and


government expenditure, although crude oil


production remained broadly stable during the


year.


In several other developing oil exporters,


however, GDP declined or remained flat during


2012. The escalation of internal conflict in Syria


resulted in GDP falling by about a fifth,


according to preliminary estimates, but lack of


reliable aggregate or sector-level data implies


that GDP estimates for Syria are subject to


significant uncertainty. Iran’s GDP contracted


Figure MNA.1 Among MENA developing oil exporters, a sharp recovery of Libya’s GDP in 2012 offset weaker
outturns in Syria and Iran, while oil importers experienced a modest growth pick-up in 2012




Source: World Bank.
Note: 2012 GDP data are estimates.


-8.0


-6.0


-4.0


-2.0


0.0


2.0


4.0


6.0


2009 2010 2011 2012e


Yemen


Syria


Libya


Iraq


Iran


Algeria


MENA oil exporters


Percent contribution to developing MENA oil exporters' GDP growth


-2.0


-1.0


0.0


1.0


2.0


3.0


4.0


5.0


2009 2010 2011 2012e


Tunisia Morocco


Lebanon Jordan


Egypt MENA oil importers


Percent contribution to developing MENA oil importers' GDP growth


126





Global Economic Prospects January 2013 Middle East and North Africa Annex


modestly by an estimated 1 percent in 2012 as


tightening of international sanctions—including
a ban by the EU on oil purchases in mid-2012


and the freezing of Iran’s financial assets and
transactions by the US and UK earlier—cut into
crude oil production, exacerbating existing


macroeconomic imbalances including already


high inflation.FN2 By November, Iran’s crude oil
production had fallen to 2.7 mb/d, one quarter


less than the 3.6 mb/d average in 2011,


according to OPEC data. Yemen’s GDP
remained flat in 2012, as production continued to


be disrupted by domestic tensions.


Growth of crude oil production in developing


MENA oil exporters slowed in the third quarter


of 2012 (figure MNA.2, first panel). In line with


weaker production growth, developing MENA


oil producers also recorded weaker export


volume growth in the third quarter, as


strengthening exports in Libya and Iraq were


offset by a decline in Iran, and, to a smaller


extent, in Algeria (figure MNA.2, second panel).


While the drop in Iran’s exports can be attributed
to tighter sanctions, a smaller annualized decline


in Algeria’s export growth appears to be partly
related to rising domestic demand for gasoline,


caused by a rise in vehicle ownership. In Yemen,


a fragile security situation and attacks on oil and


gas pipelines during 2012 caused considerable


volatility in exports.


Oil importers’ economic performance remained
sluggish in 2012 mainly due to domestic


uncertainty


GDP growth in developing MENA oil importers


remained sluggish in 2012, broadly unchanged at


an estimated 2.5 percent in 2012 compared with


2.4 percent in 2011 (figure MNA.1, right panel,


and table MNA.2), as these countries continued


to grapple with domestic tensions amid an


adverse external environment. While domestic


difficulties played a more significant role in the


relatively weak economic performance of oil


importers, external headwinds from the debt


crisis in the Euro Area (the region’s largest trade
partner) contributed to subdued exports and


investment inflows.


In Egypt, which has the largest economy among


oil importers, GDP growth picked up modestly


to 2.2 percent in the fiscal year ending in June


2012 from 1.8 percent in the previous fiscal year.


But continuing domestic uncertainty and unrest


into the final months of 2012 resulted in a weak


calendar year performance. Tunisia returned to


growth in 2012 after experiencing an output


contraction in 2011. But Morocco’s growth
moderated to an estimated 3 percent in 2012,


from 5 percent the previous year, partly because


of a weaker than expected agricultural harvest.


Despite problems with a gas pipeline that also


contributed to fiscal difficulties in 2012, GDP


Figure MNA.2 Crude oil production and export volume growth in developing MENA oil exporters weakened dur-
ing the third quarter of 2012


Source: US Energy Information Administration for monthly crude oil production data (accessed via Thomson Reuters),
Haver Analytics and World Bank


0


20


40


60


80


100


-100


-80


-60


-40


-20


0


20


40


60


80


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


Algeria Iran


Iraq Syria


Developing MENA oil exporters Libya [Right]


Crude oil production, 3m/3m seasonally adjusted
annualized rate (Percent)


Crude oil production index
(January 2011=100)


0


40


80


120


160


-80


-40


0


40


80


120


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


Algeria Iran


Iraq Developing MENA Oil exporters


Libya [Right]


Export volumes, 3m/3m seasonally adjusted
annualized rate (Percent)


Export volume index
(January 2011=100)


127





Global Economic Prospects January 2013 Middle East and North Africa Annex


growth in Jordan accelerated modestly to an
estimated 3 percent in 2012, up from 2.6 percent
in 2011. Lebanese GDP growth weakened to an
estimated 1.7 percent in 2012, as economic
spillovers from Syria’s conflict intensified
during the course of the year.


Reflecting country-specific drags on growth in
oil importers, and to an extent, the impact of the
European debt crisis on demand for the region’s
exports, industrial production for the group of oil
importers declined at a 9.8 percent annualized
pace in the three months to September 2012
(figure MNA.3, first panel). Despite the
sequential decline in production, oil importers’
industrial output was 4.5 percent higher in the
first three quarters of 2012 compared with the
same period of 2011, and close to the level in the
like period of 2010. Industrial output in Egypt
continued to decline in the second half of 2012
on an annualized basis, by 17.9 percent in the
three months to October compared to the
previous quarter. But industrial production in
Jordan and Morocco started to pick up in the
third quarter, by an annualized 3 percent in both
countries. In Tunisia, with a reduction of
domestic tensions, industrial output growth
accelerated to an annualized 14.1 percent pace in
the third quarter compared with the second
quarter, but industrial output was only 1.6
percent higher in the first three quarters of 2012
than the same period in 2011.


The extended downturn in Europe adversely
affected the export performance of the
developing MENA region, but exports appear to
be picking up in some countries (figure MNA.3,
second panel). Merchandise export volumes of
oil importing MENA countries fell at a 14
percent annualized pace in the three months to
July 2012 during resurgence of Euro Area debt
tensions, but rose 9.9 percent in the third quarter.
Egypt experienced an export volume decline of
10 percent (annualized) in the three months to
July; but in Jordan, Morocco, and Tunisia,
export volume growth picked up strongly
between September and November.


Inflation experiences in the developing MENA
countries are diverse


Inflation experiences in developing MENA
countries have been relatively diverse, reflecting
several factors: supply disruptions from ongoing
domestic unrest or conflict, a relatively high
dependence on imports of food (and among oil
importers, of crude oil), subsidy regimes for fuel
and food, and weak purchasing power due to
erosion of incomes in countries experiencing
economic instability.


Iran and Syria experienced steep increases in
annual inflation though the course of 2012
(figure MNA.4, first panel). In Iran, officially
reported inflation rose to 37 percent in December


Figure MNA.3 In developing MENA oil importers, industrial production has remained sluggish, but exports are
picking up


Source: World Bank.


-80


-60


-40


-20


0


20


40


60


80


100


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


Egypt Jordan
Morocco Tunisia
Developing MENA oil importers


Industrial production, 3m/3m seasonally adjusted annualized rate (Percent)


-60


-30


0


30


60


90


Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12


Egypt Jordan
Morocco Tunisia
Developing MENA oil importers


Export volumes, 3m/3m seasonally adjusted annualized rate (Percent)


128





Global Economic Prospects January 2013 Middle East and North Africa Annex


2012 (27.4 percent for the 12-month period), as


international sanctions exacerbated the effect of


earlier subsidy reforms on domestic prices.


Sanctions also caused the black market value of


the Iranian rial to decline precipitously, from


12,500 per U.S. dollar at the beginning of 2012


to around 35,000 in October. Inflation rose


sharply in conflict-affected Syria, from 15.4


percent in January to nearly 50 percent by


September 2012. Syria’s conflict had spillover
effects on inflation in Lebanon, in part from a


increase in rental prices for residential properties


from Syrians fleeing the conflict.


Notwithstanding an increase in international


food prices during the summer of 2012 (caused


by drought in the US and heat wave in Russia),


and the MENA region’s relatively higher
dependence on food imports (figure MNA.5),


year-on-year inflation rates in other developing


MENA countries did not rise in a significant


manner, in part owing to subsidy regimes and


administered prices. A forthcoming World Bank


study estimates that even with the high import


dependence in the developing MENA region, the


pass through of international prices to domestic


prices in MENA countries is, on average, similar


to that in other regions. Inflation momentum and


annual inflation have been relatively subdued in


Iraq. In Algeria, inflation rose in the months to


October mainly because of food price increases,


but moderated in November. In Egypt, fuel and


food subsidies, together with weak growth and


subdued domestic demand, caused inflation to


fall to 4.3 percent in November, but inflation


rose again to 5.6 percent in December (figure


MNA.4, second panel). In Morocco, a poor


agricultural harvest and a rise in food grain


imports have added mostly to the subsidy


burden, rather than being manifested in higher


inflation, with annual inflation at only 1.6


percent in November. Similarly, a disruption to


Jordan’s natural gas supplies from Egypt and a
substitution to costlier imported fuels caused


Jordan’s subsidy burden, rather than domestic
prices, to rise—although inflation increased to
6.7 percent in November from under 5 percent in


previous months, in part due to a rise in fuel


price undertaken as part of fiscal reforms.


Governments in developing MENA countries are


attempting to rein in fuel subsidies to improve


fiscal sustainability


The high burden of fuel subsidies in the


developing MENA countries (figure MNA.6)


and their adverse implications for public


finances have resulted in several governments in


the region, particularly among crude oil


importers, undertaking significant subsidy


reforms to improve fiscal sustainability. Jordan


and Tunisia raised fuel prices in the second half


of 2012 in an effort to bring down their fuel


subsidy burden and reduce fiscal deficits. Such


Figure MNA.4 Annual inflation has spiked in a few developing MENA countries


Source: World Bank.


0


10


20


30


40


50


Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12


Algeria


Iran


Iraq


Syria


Yemen


Inflation, year-on-year (Percent)


-5


0


5


10


15


20


Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12


Egypt Jordan


Lebanon Morocco


Tunisia


Inflation, year-on-year (Percent)


129





Global Economic Prospects January 2013 Middle East and North Africa Annex


reforms may cause a one-time increase in prices


and possibly temporarily raise inflation, but their


positive impact on fiscal positions would result


in reduced crowding out of private investment,


which in turn would ease supply constraints and


weaken price pressures over time. Given the


importance of fuel subsidies in the overall


subsidy burden in developing MENA countries,


reducing fiscal deficits will require a forceful


attack on fuel subsidies and greater transparency


in pricing. However, reducing fiscal pressures


without causing social turmoil could prove


challenging, and will require efforts to


communicate the longer term benefits of subsidy


reforms and better targeting of subsidies to reach


the most vulnerable.


External balances in some developing MENA oil


importers have deteriorated


Several oil importing developing MENA


countries experienced deteriorating current


account positions due to elevated international


prices of crude oil and food imports, together


with weakening European demand for their


exports. As a result of balance of payments


pressures, Egypt drew down its international


reserves substantially during the course of 2011


and 2012, such that by November of 2012,


reserves represented only three months of


imports (figure MNA.7). Financial assistance


from Gulf Cooperation Council (GCC) countries


and other donors have allowed reserve levels to


rise in more recent months, but reserves fell by


about half a billion dollars in November.


Moreover, the final approval of a $4.8 billion


IMF program has been delayed until January


2013 or later. If approved, IMF assistance would


unlock substantial additional aid flows from


other multilateral and bilateral donors and


improve Egypt’s reserve position significantly in
2013, while reforms undertaken as part of the


program would contribute towards enhancing


fiscal and external sustainability. However,


domestic tensions could pose implementation


difficulties, deter private investment, and


dampen growth in the near term. In Jordan,


Morocco, and Tunisia, current account deficits


have widened, mostly as a result of weak export


performance together with a high burden of


crude oil imports. In contrast, Libya’s current
account position has improved, buoyed by


recovery in crude oil production and continued


elevated international prices, but current account


positions have deteriorated in Syria and Iran.


Migrant remittances grew and tourism rose


modestly in 2012


Figure MNA.5 Dependence on food imports is higher
in MENA than in other developing regions


Source: World Bank based on US Department of Agricul-
ture (accessed October 2012).
Note: US Department of Agriculture (USDA) sub-regions
are aggregated into broader geographical categories but
may not fully correspond with the World Bank’s regional
classification. See www.usda.gov for details.


-40


-30


-20


-10


0


10


20


30


40


50


Middle East
& N. Africa


Latin
America &
Caribbean


Sub-Saharan
Africa


East Asia &
Pacific


Former
Soviet Union


(12)


South Asia


Foodgrain imports as share of domestic foodgrain consumption,
(average of 2009/10, 2010/11 and 2011/12 crop years, Percent)


Gross imports


Net imports


Figure MNA.6 Fuel subsidies comprise a large share
of GDP in several MENA countries


Source: “Inclusion, Dignity, and Resilience: The Way For-
ward for Social Safety Net Reform in the Middle East and
North Africa Region", J. Silva, V. Levin, and M. Morgandi,
World Bank June 2012.
Note: Data are for different years: Lebanon (2008), Tunisia
(2011), Jordan (2011), Morocco (2008/9), Egypt (2009),
Iraq (2009), Yemen (2008).


0


2


4


6


8


10


12


14


Lebanon Tunisia Jordan Morocco Egypt Iraq Yemen


Food subsidies


Fuel subsidies


Subsidies as percent of GDP


130





Global Economic Prospects January 2013 Middle East and North Africa Annex


Migrant remittances to the region rose as


migrants sent money to help their families and


friends in need during this period of domestic


turbulence. Remittance flows to the developing


MENA region rose 8.4 percent in 2012,


accelerating from a 6.3 percent increase in 2011,


according to World Bank estimates. This rise


was led by strong increase in flows to Egypt,


where inflows rose 26 percent in 2012, to $18


billion. The experience for other countries was


uneven, however. Remittance inflows to Jordan,


for example, rose by 2.2 percent, while inflows


to Tunisia rose 9.8 percent, and those to


Morocco fell 3.3 percent.


The year 2012 also saw a return of tourists to the


MENA region, although tourism has yet to


recover to 2010’s level. According World
Tourism Organization statistics, tourism arrivals


in the Middle East and North Africa region fell


7.5 percent in 2011. But arrivals in 2012 rose 3.5


percent in the first half of the year compared to


the like period in the previous year.FN3 Tourist


arrivals in the Middle East rose by less than 1


percent in the first half of 2012, as several


countries continue to face domestic tensions. In


North Africa, however, tourist arrivals


rebounded at a faster 10.5 percent pace in the


first half of 2012, led by strong gains in arrivals


in Egypt, Tunisia and Jordan.


Financial flows to the developing MENA region


slowed in 2012 and remain weak compared with


2010 levels


Private capital flows to developing MENA


countries halved in 2011 due to domestic turmoil


in several countries, with private debt and equity


flows experiencing steep falls as portfolio


investors retreated from the region. The decline


continued into 2012, when private capital


inflows are estimated to have fallen a further 16


percent, to $12.5 billion, mainly due to


continuing domestic uncertainties in several


countries (table MNA.1). FDI flows to the


region, however, fell a smaller 7 percent in 2012,


as a decline in flows to Iran offset rising foreign


investment in crude oil exploration and


extraction in other oil exporters. In oil importing


countries, in particular in Egypt and Lebanon,


foreign investment inflows remained subdued.


Some projects in the non-oil sector (for instance,


the reopening of an Isuzu auto plant in Tunisia in


2012) suggest that foreign firms are anticipating


expanded market opportunities, but many more


investment projects remain on hold due to


continuing political uncertainty and domestic


unrest.


Outlook


GDP growth in the developing MENA


region is forecast to slow from 3.8 percent in


2012 to 3.4 percent in 2013 (see table


MNA.2 for regional forecasts and table


MNA.3 for country-specific forecasts).


Growth in oil producers is projected to


return to a more sustainable pace in 2013


after a sharp recovery in 2012, in line with


further increases in crude oil production in


Iraq and in Libya, and to a smaller extent in


Algeria, while output in Iran and Syria


remains subdued. In oil importers, GDP


growth is forecast to pick up modestly in


2013, as continuing domestic uncertainty in


several countries, together with a projected


near-stagnant output in the Euro Area in


2013 and weak demand for the MENA


region’s exports, hold back a more robust


Figure MNA.7 Egypt’s international reserves have
stabilized at a low level


Source: World Bank


0


5


10


15


20


25


30


35


40


0


1


2


3


4


5


6


7


8


9


Nov-10 May-11 Nov-11 May-12 Nov-12


egyImport_cover


egyIntl_reserves


Import cover
(International reserves in months of imports)


International reserves
(US $ billions)


131





Global Economic Prospects January 2013 Middle East and North Africa Annex


rebound in economic activity.


Regional GDP growth is forecast to rise


gradually to about 4.3 percent by 2015 —
assuming that the negative influences on


growth of domestic uncertainty and unrest


fade during the forecast period, and ongoing


political transitions lead to more accountable


and transparent institutions over time. As


regional uncertainty ebbs and global growth


accelerates in 2014 and 2015, rebuilding of


infrastructure, private investment, industrial


activity, and economic diversification can be


expected to support growth in both


developing oil exporters and oil importers in


the MENA region. Forecasts for all MENA


countries are subject to the baseline


assumptions that the adverse effects of the


Euro Area debt crisis on the MENA region’s
trade and investment flows start to wane


over time, and that domestic tensions within


the region do not flare up in a significant


manner.


The outlook for developing oil importers is


clouded by domestic uncertainty and


weakness in Europe


GDP growth for the group of developing oil


importers is forecast to pick up modestly to


3.5 percent in 2013. Economic conditions in


this group are expected to improve


marginally in 2013. But continuing


uncertainty will hold back private


investment and growth, while weak


conditions in high-income Europe in 2013


imply subdued demand for the region’s
exports. In Egypt, GDP growth is projected


to rise to a modest 2.6 percent pace in the


2012-13 fiscal year ending in June 2013, as


policy uncertainties, a deteriorating reserve


position, and domestic unrest negatively


impact economic activity.


Jordan’s GDP growth is forecast to rise
modestly to 3.3 percent in 2013, as weak


domestic and external demand acts as a drag


on growth. Growth in Morocco is forecast to


bounce back to 4.4 percent in 2013, buoyed


by an expected return to normal agricultural


harvests and strengthening domestic


demand. Lebanon’s GDP growth forecast for
2013, at 2.8 percent, is weaker than that of


all other developing MENA oil importing


countries, partly due to the negative


Table MNA.1 Net capital flows to Middle East and North Africa ($ billions)


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


2008 2009 2010 2011 2012e 2013f 2014f 2015f


Capital inflows 23.7 30.9 31.4 15.8 13.1 19.0 24.4 32.4


Private inflows, net 25.4 28.4 30.2 14.8 12.5 17.3 22.0 29.5


Equity Inflows, net 30.0 27.5 24.2 15.2 13.3 16.0 19.2 24.9


Net FDI inflows 29.6 26.3 22.3 15.4 14.3 15.5 17.9 23.0


Net portfolio equity inflows 0.4 1.2 2.0 -0.2 -1.0 0.5 1.3 1.9


Private creditors, net -4.6 0.9 5.9 -0.4 -0.8 1.3 2.8 4.6


Bonds -0.8 0.1 3.2 -0.6 -1.1 -0.7 0.5 1.8


Banks -0.6 -1.3 -0.9 -0.02 -2.0 -0.8 0.8 1.4


Short-term debt flows -1.9 3.0 4.5 0.9 2.3 2.8 1.5 0.9


Other private -1.3 -1.0 -0.8 -0.6 0.0 0.0 0.0 0.5


Official inflows, net -1.7 2.4 1.3 0.9 0.6 1.7 2.4 2.9


World Bank -0.3 0.9 0.8 0.9 -0.2


IMF -0.1 -0.1 0.0 -0.1 0.1


Other official -1.3 1.6 0.4 0.1 0.7


132





Global Economic Prospects January 2013 Middle East and North Africa Annex


spillovers from unrest in neighboring Syria


on tourism and other services exports.


Nevertheless, Lebanon’s growth is forecast
to rise gradually over time, to around 4


percent by 2015. Even after a return to


growth in 2012, Tunisia continues to face


domestic tensions and structural challenges


to generating sustained and inclusive growth


over the medium term. Tunisia’s GDP
growth is forecast to rise modestly to 3.2


percent in 2013.


As domestic tensions are resolved over time,


GDP growth among oil importers is forecast


to rise to about 4.7 percent by 2015. In


Egypt, the expected approval of a substantial


IMF program in 2013, together with the


release of other multilateral and bilateral


assistance contingent on the IMF program,


would arrest the deterioration in external


balances, while significant cuts to fuel


subsidies and tax reforms, if implemented as


planned, will bring the fiscal position to a


sounder footing and free up resources for the


private sector. Egypt’s growth is expected to
firm to 3.8 percent in the 2013-14 fiscal


year, and rise to 4.7 percent by 2014-15.


Steps towards sound macroeconomic


policies in oil importers are also likely to


result in a decline in investors’ risk aversion
and result in higher private investment


inflows over the medium term (see below).


GDP in developing oil exporters is projected


Table MNA.2 Middle East and North Africa regional forecast summary


Source: World Bank


Est. Forecast


00-09
a


2010 2011 2012 2013 2014 2015


GDP at market prices b 3.9 2.8 -2.4 3.8 3.4 3.9 4.3


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


GDP at market prices c 4.3 2.8 1.5 0.2 2.4 3.3 4.0


GDP per capita (units in US$) 2.8 1.2 0.0 -1.3 0.9 1.8 2.5


PPP GDP d 4.3 2.6 1.4 0.0 2.2 3.1 3.8


Private consumption 4.3 1.4 2.4 1.3 3.0 3.5 3.8


Public consumption 3.6 3.9 5.5 3.8 4.3 4.1 3.9


Fixed investment 6.4 0.6 3.4 1.1 3.8 4.8 5.6


Exports, GNFS e 4.2 2.2 0.0 -4.6 4.6 5.6 6.9


Imports, GNFS e 7.2 1.0 1.7 4.1 4.7 6.2 7.0


Net exports, contribution to growth -0.6 0.4 -0.6 -3.0 -0.1 -0.3 -0.2


Current account bal/GDP (%) 5.3 1.3 3.7 1.0 0.6 0.4 0.3


GDP deflator (median, LCU) 5.9 8.4 10.5 7.5 6.2 5.4 5.1


Fiscal balance/GDP (%) -1.0 -3.0 -0.8 -7.0 -4.9 -2.6 -1.7


Memo items: GDP


MENA Geographic Region f 3.8 3.1 1.8 4.4 3.6 3.9 4.1


Selected GCC Countries g 3.6 3.5 6.3 5.1 3.8 3.9 3.8


Developing Oil Exporters 3.6 2.2 -5.2 4.6 3.3 3.7 4.1


Developing Oil Importers 4.5 3.7 2.4 2.5 3.5 4.4 4.7


Egypt 4.4 3.5 2.0 2.4 3.2 4.3 4.7


Fiscal Year Basis 4.3 5.1 1.8 2.2 2.6 3.8 4.7


Iran 4.6 1.0 1.7 -1.0 0.6 1.6 2.8


Algeria 3.4 3.3 2.5 3.0 3.4 3.8 4.3


(annual percent change unless indicated otherwise)


a. Growth rates over intervals are compound weighted averages; average growth contributions, ratios


and deflators are calculated as simple averages of the annual weighted averages for the region.


b. GDP at market prices and expenditure components are measured in constant 2005 U.S. dollars.


c. Sub-region aggregate excludes Iraq and Libya, for which data limitations prevent the forecasting of


GDP components or Balance of Payments details.


d. GDP measured at PPP exchange rates.


e. Exports and imports of goods and non-factor services (GNFS).


f. Geographic region includes high-income countries: Bahrain, Kuwait, Oman, United Arab Emirates


and Saudi Arabia.


g. Selected GCC Countries: Bahrain, Kuwait, United Arab Emirates, Oman and Saudi Arabia.


133





Global Economic Prospects January 2013 Middle East and North Africa Annex


to rise at a slower but more sustainable pace


in 2013-15


For the group of regional oil exporters, GDP


growth is projected to slow to 3.3 percent in


2013, as the pace of increase in crude oil


production in Libya slows and production in


Iran and Syria remains subdued. After a


dramatic expansion of Libya’s GDP in 2012,
supported by a recovery of crude oil


production to close to the level of early


2011, economic output is expected to grow


at a slower but still robust 7.6 percent pace


in 2013. Continuing security uncertainties,


however, pose risks to Libya’s growth
outlook. GDP growth in Iraq is forecast to


accelerate to 13.5 percent in 2013, as further


investments in developing additional


capacity are made and crude oil production


continues to rise. But infrastructure


bottlenecks, disputes over revenue sharing


arrangements with the Kurdish province and


security concerns may post obstacles to


bringing new production capacity on stream.


Over the medium term, Iraq’s crude oil
production is expected rise from over 3 mb/d


in late 2012 to more than 4 mb/d by 2015,


and further to 6 mb/d by 2020, according to


International Energy Agency (IEA)


forecasts. Revenues are also likely to


increase as oil prices are expected to


continue to remain buoyant in US dollar


terms over the forecast horizon in step with a


gradual acceleration of global demand.


GDP in Iran, however, is projected to remain


broadly flat in 2013, rising a modest 0.6


percent, as international sanctions dampen


crude oil production and economic activity.


Despite a slow pace of growth, space for


policy stimulus is limited following a large


currency depreciation in 2012 and high


inflation. Iran’s GDP growth is forecast to
pick up to a modest 3 percent pace by 2015


as the impact of domestic and external


factors that are acting as a drag on current


economic performance wane over time.


After GDP declined in 2012, growth in Syria


is also expected to remain subdued, as the


civil conflict continues into 2013. In Yemen,


crude oil and gas production has been


constrained by an uncertain domestic


security situation. Following a large GDP


decline in 2011 and flat growth in 2012,


Yemen’s economy is projected to grow by
about 4.0 percent in 2013—but GDP in 2013
would still be below its 2010 level. GDP


growth in Algeria is projected to rise to 3.4


percent in 2013, and further strengthen to


around 4.3 percent by 2015, as government


plans to promote oil and gas extraction and


non-oil economic activities bear fruit. As a


result of the above country-specific factors,


GDP growth among MENA oil producers is


expected to rise gradually over the forecast


horizon, reaching about 4.1 percent by 2015.


Private capital flows are expected to remain


subdued in the near term as continuing


uncertainty discourages foreign investors,


but flows are projected to rise over time


Private capital flows to developing countries


in the MENA region are projected to


increase to about $17 billion in 2013, from


the low base of 2012 (table MNA.1). But


flows would be significantly smaller than


that received in 2009 and 2010, as


continuing uncertainty and domestic


tensions in several large oil importers and in


some developing oil exporters discourages


foreign investors. Over the medium term,


private capital flows are forecast to rise to


$30 billion by 2015, close to their 2010


level, as international investors are attracted


by opportunities in non-oil activities,


especially in tourism and manufacturing, as


well by continuing expansion of the oil and


gas sectors. Private capital flows to Egypt


are likely to remain weak in the near term


given unresolved domestic tensions,


although in the later years of the forecast


134





Global Economic Prospects January 2013 Middle East and North Africa Annex


horizon, flows into non-oil economic


activities should rebound as these tensions


are gradually resolved. In other oil


importers, including Jordan, Morocco and


Tunisia, further improvement in the


macroeconomic and policy environment


over time will attract foreign investment.


Spillovers effects from civil conflict in Syria


could, however, result in temporarily weaker


foreign investment inflows to Lebanon.


Foreign investment in developing MENA oil


exporters is expected to rise over the forecast


horizon, as producers continue to expand


capacity, while foreign investment inflows


into non-oil sectors of these countries will


increase as they attempt to reduce


dependence on oil revenues and diversify


their industrial base. Iraq is expected to


allow significant foreign investments to meet


its ambitious crude oil production targets.


Algeria, faced with a rising domestic


Table MNA.3 Middle East and North Africa country forecasts


Source: World Bank.


Est. Forecast


00-09
a


2010 2011 2012 2013 2014 2015


Algeria


GDP at market prices (% annual growth) b 3.4 3.3 2.5 3.0 3.4 3.8 4.3


Current account bal/GDP (%) 22.3 7.3 10.3 7.0 4.7 4.1 3.8


Egypt, Arab Rep.


GDP at market prices (% annual growth) b 4.4 3.5 2.0 2.4 3.2 4.3 4.7


Fiscal Year Basis 4.3 5.1 1.8 2.2 2.6 3.8 4.7


Current account bal/GDP (%) 1.1 -2.0 -2.3 -3.1 -3.6 -3.5 -3.2


Iran, Islamic Rep.


GDP at market prices (% annual growth) b 4.6 1.0 1.7 -1.0 0.6 1.6 2.8


Current account bal/GDP (%) 6.6 6.7 12.0 8.3 7.6 6.3 5.4


Iraq


GDP at market prices (% annual growth) b -1.0 0.8 9.9 11.1 13.5 11.0 8.5


Current account bal/GDP (%) -1.8 7.9 0.1 5.8 6.8 8.2


Jordan


GDP at market prices (% annual growth) b 6.1 2.3 2.6 3.0 3.3 4.0 4.5


Current account bal/GDP (%) -4.4 -7.1 -12.0 -14.7 -13.3 -12.7 -12.1


Lebanon


GDP at market prices (% annual growth) b 4.4 7.0 3.0 1.7 2.8 3.8 4.0


Current account bal/GDP (%) -16.8 -20.4 -21.4 -20.1 -19.4 -18.5 -17.9


Libya


GDP at market prices (% annual growth) b 3.8 3.5 -61.1 108.0 7.6 5.8 5.1


Current account bal/GDP (%) 22.6 -11.8 16.9 8.5 7.8 7.3


Morocco


GDP at market prices (% annual growth) b 4.6 3.7 5.0 3.0 4.4 4.8 5.1


Current account bal/GDP (%) 0.2 -4.6 -8.3 -9.0 -8.1 -7.4 -6.7


Syrian Arab Republic


GDP at market prices (% annual growth) b,c 4.6 3.2 -3.0 -20.0 1.0 2.3 2.8


Current account bal/GDP (%) 2.7 -0.6 1.5 -7.1 -6.3 -5.4 -4.8


Tunisia


GDP at market prices (% annual growth) b 4.1 3.0 -1.8 2.4 3.2 4.5 4.8


Current account bal/GDP (%) -2.7 -4.8 -7.4 -9.0 -8.4 -8.1 -8.0


Yemen, Rep.


GDP at market prices (% annual growth) b 3.5 7.7 -10.5 0.1 4.0 4.1 4.3


Current account bal/GDP (%) 1.2 -5.6 -5.0 -5.0 -6.3 -6.1 -5.6


World Bank forecasts are frequently updated based on new information and changing (global)


circumstances. Consequently, projections presented here may differ from those contained in other


Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any


given moment in time.


Djibouti, West Bank and Gaza are not forecast owing to data limitations.


a. GDP growth rates over intervals are compound average; current account balance shares are simple


averages over the period.


b. GDP measured in constant 2005 U.S. dollars.


c. The estimate for GDP decline in Syria in 2012 is subject to significant uncertainty.


135





Global Economic Prospects January 2013 Middle East and North Africa Annex


demand for energy, is expected to encourage


greater foreign investment in exploration and


refining in the oil and gas sectors, as well as


continue efforts to attract investment in non-


oil sectors as it attempts to further diversify


its economy.


Risks and vulnerabilities


The growth outlook for the MENA region is


vulnerable to a combination of domestic and


global risks. A key domestic risk to the


outlook is that of protracted political


uncertainty and continuation of domestic


tensions, which could have negative effects


on economic performance. Other risks


include the possibility of reforms aimed at


improving fiscal sustainability, in particular


those involving reduction of subsidies and


fuel price increases, going off track or being


reversed. In Egypt, a delay or halt in future


aid disbursements could spiral into serious


balance of payments difficulties given its


already low level of reserves. In Iraq, a still-


uncertain security situation poses downside


risks. The ongoing conflict in Syria and the


sanction-fueled downturn in Iran are notable


sources of instability and weakness in the


region.


As for external risks, a protracted fiscal


impasse in the United States represents an


immediate threat to global growth, and in


turn, for the economic performance of


developing MENA countries. The baseline


assumes that a credible medium-term plan to


restore fiscal sustainability in the US and


authorize government borrowing is agreed to


by the end of February 2013 (see the main


text of the Global Economic Prospects


January 2013 report). An alternative


scenario where only a short-term relief from


the debt ceiling legislation is agreed upon


and considerable uncertainty remains


regarding future tax and fiscal policy, could


shave off 2.3 percent from US GDP growth


relative to the baseline, and reduce global


growth by 1.4 percent. The developing


MENA region’s growth would be 0.8
percent lower in 2013 compared with the


baseline. A resumption of Euro Area debt


tensions during the forecast horizon would


also adversely affect MENA oil importers,


since Europe is the largest trade partner and


the most important source of investment and


remittances for the developing MENA


region.


Another external risk stems from the


possibility of a sharp fall (or spike) in crude


oil prices compared with that projected in


the baseline. A sharp fall in international


crude oil prices resulting from weaker than


projected global economic growth, a


protracted fiscal impasse in the US, or other


unforeseen events, would benefit the fiscal


and current account positions of oil


importers, while hurting oil exporters, in


particular those with relatively weak fiscal


and reserve buffers. Conversely, a rise in


crude oil prices, for instance resulting from


intensification of geopolitical tensions along


the Strait of Hormuz, would put pressure on


the fiscal and external balances of MENA oil


importers.


The risk of a further spike in international


food prices in 2013, following sharp


increases in 2012, also presents a significant


source of external risk for this net food


importing region (see figure MNA.5). The


global stock-to-consumption ratio for maize,


and to a lesser extent for wheat, are expected


to remain very low for the 2012-13 crop


year, according to the US Department of


Agriculture forecasts. Such tight supplies


suggest that international prices could rise


sharply even in the event of a relatively


small supply shock. The high import


dependence of MENA countries and still-


high subsidies—despite expectations that
these will be gradually reduced as part of


136





Global Economic Prospects January 2013 Middle East and North Africa Annex


ongoing economic reforms—imply that
fiscal positions could deteriorate, and


domestic prices surge (to the extent that


these are market determined) in response to


an upward shock to international food prices.


Increasing domestic food supplies in the


region and reducing dependence on imported


food remains key to reducing the region’s
vulnerability over the longer term. In the


short term, however, the fiscal impacts and


the adverse implications for the poorest and


most vulnerable could be mitigated through


better targeting of subsidies.




Notes:


1 Crude oil exporting countries in the


developing Middle East and North Africa


(MENA) region for which GDP estimates


and forecasts are available include Algeria,


Iran, Iraq, Libya, Syria, and Yemen.


Developing MENA oil importers include


Egypt, Jordan, Lebanon, Morocco and


Tunisia. The addition of Libya and Iraq to


the MENA regional aggregate in this report


has resulted in a significant adjustment in


region’s growth performance in recent,
current and future years vis-à-vis the


estimates published in the June 2012 Global


Economic Prospects report.


2 As a result of falling Iranian oil production


and rising Iraqi output, Iraq has become the


second largest producer (behind Saudi


Arabia) in the group of Organization of


Petroleum Exporting Countries (OPEC).


3 The UN World Tourism Organization’s
country classification for the Middle East


and North Africa sub-regions (see


www.unwto.org) does not correspond with


the World Bank’s regional classification for
d e v e l o p i n g c o u n t r i e s ( h t t p : / /


d a t a . wo r l d ba n k . o r g / ab o u t / c ou n t r y -


classifications/country-and-lending-groups).




137





Global Economic Prospects January 2013 South Asia Annex


South Asia Region


Overview: Economic growth in South Asia


weakened considerably in 2012 to an estimated


5.4 percent, from 7.4 percent the previous year.


Delayed monsoon rains, electricity shortages,


macroeconomic imbalances including large


fiscal deficits and high inflation, and policy and


security uncertainties contributed to subdued


economic activity in the region, which also faced


negative impacts from the Euro Area debt crisis


and a weak global economy. In India, the


region’s largest economy, growth measured in
factor cost terms is projected to decelerate to 5.4


percent in the 2012 fiscal year (ending in March


2013) from 6.5 percent in the 2011 fiscal year.


Growth in Pakistan, the second largest economy


in the region, remained broadly stable at a


projected 3.8 percent in the 2012-13 fiscal year


compared with 3.7 percent in 2011-12.


Bangladesh’s growth is projected to slow to 5.8
percent in 2012-13 (6.3 percent in 2011-12); and


Nepal’s growth to 3.8 percent in 2012-13 (4.6
percent in 2011-12). Sri Lanka’s GDP growth
slowed to an estimated 6.1 percent in 2012 (8.3


percent in 2011). In contrast, Afghanistan’s
economy grew robustly by about 11 percent


mostly due to a good harvest.


Industrial production in South Asia was sluggish


until the third quarter of 2012, due to domestic


difficulties as well as weak external demand, but


picked up in the fourth quarter. The debt crisis in


the Euro Area, South Asia’s largest export
market, had severe knock on effects on the


export performance of South Asian countries,


but exports in some countries appear to be


turning a corner. Agriculture, which accounts for


half of South Asia’s employment and just under
a fifth of its GDP, was hit by weak monsoon


rains. Remittances rose 12.5 percent to $109


billion, buoyed by flows from Arabian Gulf


countries that benefited from elevated oil prices.


Net private capital flows to the region remained


stable at $72.6 billion in 2012 ($72.5 billion in


2011), as an increase in portfolio equity inflows


offset declines in bank lending and foreign direct


investment (FDI). Portfolio equity inflows to


India surged after a number of reforms were


announced in September-October 2012.


Outlook: Regional GDP growth is projected to


rise to 5.7 percent in 2013, firming to 6.7 percent


in 2015, supported by a gradual improvement in


global demand for South Asia’s exports, policy
reforms in India, stronger investment activity,


and a return to normal agricultural production.


India’s GDP growth is forecast to strengthen
modestly to 6.4 percent in the 2013 fiscal year,


rising to 7.3 percent in 2015. Pakistan’s GDP
growth is projected to strengthen to 4.0 and 4.2


percent in 2013-14 and 2014-15, respectively.


Bangladesh’s GDP growth is projected to pick
up to 6.2 and 6.5 percent in 2013-14 and 2014-


15, while Sri Lanka’s growth is forecast to rise
in 2013 to 6.8 percent, strengthening to 7.2


percent in 2015. Net private capital flows to the


region are expected to rise by 20 percent to $87


billion in 2013 and to $117 billion by 2015.


Risks and vulnerabilities: Growth in the region


remains vulnerable to an uncertain external


environment and country-specific factors.


Euro Area or US debt turmoil. A resumption


of financial market tensions in the Euro Area or


protracted debt uncertainty in the United States


would affect the South Asia region through both


trade and financial channels. Moreover, greater


volatility in international financial markets could


make it difficult for India to finance its widening


current account deficit.


Fiscal challenges. Although governments across


the region have committed to tackling their large


subsidy burdens and fiscal deficits, such efforts


could get side-tracked by spending pressures,


especially with elections scheduled in several


countries in the next two years. In particular, if


coupled with weak growth, continuing high


budget deficits may have potentially adverse


implications for sovereign creditworthiness.


Agriculture. Another poor harvest could have


adverse implications for rural incomes and


employment, food prices, inflation, the fiscal


burden of subsidies, and overall growth.


139





Global Economic Prospects January 2013 South Asia Annex


Recent economic developments


South Asia’s economic performance weakened
in 2012 in the face of external and domestic


headwinds. Regional gross domestic product


(GDP) growth slowed to an estimated 5.4


percent in 2012 from 7.4 percent in 2011, as


headwinds from the Euro Area debt crisis and


weakening global growth exacerbated the impact


of adverse domestic factors in South Asia.FN1


Delayed monsoon rains resulted in a subpar


agricultural outcome, while electricity shortages,


macroeconomic imbalances including large


fiscal deficits and high inflation, and policy and


security uncertainties contributed to weaker


investment and subdued economic activity. A


decline in regional export revenues during the


second and third quarters of 2012 and elevated


international prices of crude oil imports


maintained pressures on current account


positions of South Asian countries, partially


alleviated by a steady increase in migrant


remittances. And although inflation momentum


eased across South Asia in the second half of


2012, headline annual inflation remains


significantly higher than the average for other


developing regions, reflecting structural capacity


constraints and, to some extent, expansionary


fiscal policies in recent years.


The already large fiscal deficits and persistently


high inflation in South Asian countries have


limited the scope for policy easing or demand


stimulus measures to support growth. Given a


projected weak global economy in 2013 and


downside risks to the outlook, including the


possibility of a protracted fiscal impasse in the


United States or a resumption of Euro Area debt


turmoil (see the main text of the Global


Economic Prospects January 2013 report), South


Asian countries urgently need to strengthen their


macroeconomic fundamentals and rebuild their


policy buffers to withstand external shocks, as


well as enhance their longer-term domestic


growth drivers. These can be achieved, in


particular, through sustained efforts at fiscal


consolidation over the medium term,


maintaining prudent macroeconomic policies,


deepening structural reforms to ease capacity


constraints, and improving the business


environment for the private sector.


Industrial production and exports have


stabilized and are turning a corner towards


growth


After a strong decline during the second quarter


of 2012, industrial production in South Asia has


stabilized and is picking up, with output rising at


a 2.4 percent annualized pace in the three months


to October. In India, industrial production surged


8.3 percent in October 2012 from a year earlier


and then fell 0.1 percent in November, partly due


to a difference in timing of the Diwali festival


across the years. On a seasonally adjusted


annualized basis, India’s industrial output grew
2.1 percent in the three months to November


compared with the previous quarter (figure


SAR.1). Industrial activity has picked more


decidedly in Pakistan, rising at a 12 percent


annualized pace in the three months to


November from the previous quarter, and was


6.5 percent higher in November than a year


earlier. However, inadequate supply of


electricity, and of gas for firms with captive


power plants, continues to hobble Pakistan’s
industrial sector. In Sri Lanka, weak external


demand and slowing economic growth weighed


negatively on industrial production. But the pace


of deterioration eased slightly in October, with


production volume 7.1 percent lower than a year


earlier compared with -8.0 percent in September.


Figure SAR.1 Industrial production is picking up in
South Asia


Sources: Haver Analytics and World Bank.


-30


-20


-10


0


10


20


30


40


Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12


India


Pakistan


Developing excl. South Asia


Industrial production, 3m/3m seasonally-adjusted annualized rate (Percent)


140





Global Economic Prospects January 2013 South Asia Annex


The debt crisis in the Euro Area, South Asia’s
largest export market, had significant knock on


effects on the export performance of South Asian


countries. The slowing of South Asia’s exports
during the summer of 2012 was particularly


severe in US dollar terms, especially when


contrasted with the double-digit rates of


expansion in 2010 and in the first half of 2011


(figure SAR.2 first panel). But with an


improvement in the pace of demand growth in


the United States and China in the third quarter


of 2012, and a slowing pace of deterioration in


Euro Area output, South Asia’s export volumes
appear to have turned a corner towards growth in


the final months of 2012 (figure SAR.2 second


panel). In India, the pace of decline in monthly


export revenues slowed in October and


November compared with the steep year-on-year


declines experienced during the second and third


quarters of 2012 after the Euro Area debt turmoil


intensified in early May, and export volume


growth has stabilized. Pakistan’s export growth
picked up in the months leading to November,


mostly reflecting an increase in exports of


garments and processed cotton products.


However, electricity shortages during the second


half of December adversely affected textile


production and may dampen export growth in


subsequent months. After experiencing declines


during the June-September period, Bangladesh’s
export volume growth was flat in the three


months to October compared with the previous


quarter, as a pick-up in US garment demand


(fueled in part by an acceleration of US


economic growth in the third quarter of 2012)


offset to some extent weak European demand.


Similarly in Sri Lanka, with a pick up in garment


exports, the pace of year-on-year declines in


overall exports slowed in recent months, but


export revenues in US dollar terms were still 6.6


percent lower in November than a year earlier.


Inflation momentum has slowed across the


region, but headline inflation remains


persistently high


Reflecting the weakening of activity since the


second quarter of 2012 and the opening up of


output gaps, and a moderation in food inflation,


inflation momentum slowed sharply in the South


Asia countries in the second half of 2012.


Regional inflation moderated to a 6.2 percent


annualized pace in the three months to October


(3m/3m saar), from 8.4 percent in August (figure


SAR.3 first panel). An easing of food inflation as


agricultural harvests came to the market helped


to moderate overall consumer price inflation


across the region, except in the case of India


where food inflation remained sticky at a high


level (figure SAR.4). However, annual (year-on-


year) inflation picked up again in December in


Pakistan, caused partly by an acceleration in the


pace of food price increases. Inflation also


picked in Bangladesh, but to a smaller extent,


Figure SAR.2 South Asia’s export revenue and volume growth slowed sharply in 2012, but are turning a corner


Sources: Haver Analytics and World Bank.


-80


-20


40


100


160


Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12


India


Pakistan


Bangladesh


Developing excl. South Asia


Export volumes, 3m/3m seasonally-adjusted annualized rate (Percent)


-40


-20


0


20


40


60


80


100


Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12


India


Pakistan


Bangladesh


Sri Lanka


Developing excl. South Asia


US$ exports, year-on-year growth (Percent)


141





Global Economic Prospects January 2013 South Asia Annex


reflecting recent fuel price increases as well as


higher food price inflation. Despite the


moderation in regional inflation since the second


quarter of 2012, annual consumer price inflation


exceeds 7.5 percent in Pakistan and Bangladesh,


and remains at around 9-10 percent in India,


Nepal, and Sri Lanka—significantly higher than
the average for developing countries (figure


SAR.3 second panel).


The persistence of inflation in South Asia


reflects structural capacity constraints in


production (partly the result of a weak business


environment – see Box 1), as well as entrenched
inflationary expectations. Despite a deceleration


in headline inflation in Pakistan since May, core


inflation (i.e. excluding food and energy items)


has continued to remain close to 10 percent. One


-year ahead inflation expectations in India rose


from 5.6 percent in the third quarter of 2006 to


9.2 percent in the last quarter of 2009, and


reached 12.7 percent by the third quarter of 2012


(figure SAR.5). Moreover, food inflation in


India has remained high on a year-on-year basis,


as rising urban and rural incomes in recent years


have resulted in increased demand for proteins,


fruits and vegetables, while supply has not kept


pace, in part due to structural bottlenecks in food


production, storage, and logistics (figure


SAR.4). In Nepal, the continuing political crisis


and infrastructure constraints have resulted in


domestic supplies not keeping pace with robust


demand that is partly fueled by remittances,


resulting in persistent inflationary pressures; the


currency peg of the Nepali rupee to the Indian


rupee has further raised inflationary pressures


during periods of depreciation of the Indian


rupee. In Sri Lanka, a depreciation of the


currency, drought, and earlier increases in


administered fuel prices caused inflation to surge


to 10 percent by July; inflation remained close to


that level moderating slightly to 9.1 percent in


December.


Figure SAR.3 Inflation momentum fell sharply but annual inflation remains high compared with the average for
developing countries


Source: Haver Analytics and World Bank.
Note: Inflation for India based on the consumer price index for industrial workers (CPI-IW). For annual inflation in the sec-
ond chart, the new All-India CPI inflation series is used from December 2011 onwards.


-5


0


5


10


15


20


Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12


India Pakistan


Bangladesh Nepal


Sri Lanka Developing Countries


Inflation, 3m/3m seasonally adjusted annualized rate (Percent)


0


2


4


6


8


10


12


14


Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12


India Pakistan


Bangladesh Nepal


Sri Lanka Developing Countries


Inflation, year-on-year (Percent)


Figure SAR.4 Food inflation moderated in countries
other than India, but has started to pick up in Bangla-
desh and Pakistan


Source: Haver Analytics and World Bank


-5


0


5


10


15


20


Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12


India Pakistan


Bangladesh Nepal


Sri Lanka Developing Countries


Food inflation, year-on-year (Percent)


142





Global Economic Prospects January 2013 South Asia Annex


Persistent inflation and large fiscal deficits in


South Asia (see below) have, in general, limited


available space for monetary easing to support


growth or to respond to external and domestic


shocks. In India despite a deceleration in GDP


growth to 5.3 percent in the third calendar


quarter of 2012 from more than 8 percent in the


2009 and 2010 fiscal years, persistently high


inflation has limited the scope for interest rate


cuts, with the benchmark policy rate kept stable


at 8 percent for most of 2012. India’s central
bank, however, has used other instruments,


including cuts to commercial banks’ cash reserve
requirements to inject liquidity into the system.


Similarly, despite a sharp slowdown in GDP


growth in the second quarter of 2012, Sri


Lanka’s central bank kept its benchmark policy
rate at 7.75 percent for most of the year. But the


bank cut its policy rate by 25 basis points in mid-


December after growth slowed even further in


the third quarter of 2012, expecting inflation to


moderate in the first half of 2013 as a result of


previously introduced policies to curb domestic


demand. In contrast, a moderation in inflation


allowed Pakistan’s central bank to reduce its key
policy rate by a cumulative 250 basis points


between August and December of 2012.


Fiscal deficits remain high indicating need for


continued efforts at consolidation


Large fiscal deficits in South Asia compared


Figure SAR.5 Inflationary expectations in India have
risen since 2006


Source: Reserve Bank of India and World Bank
Note: Consumer price index inflation for industrial workers
(CPI-IW)


0


2


4


6


8


10


12


14


16


Q3-
2006


Q2-
2007


Q1-
2008


Q4-
2008


Q3-
2009


Q2-
2010


Q1-
2011


Q4-
2011


Q3-
2012


Current perceived


1-year Ahead


Actual


Linear (Current perceived)


Linear (1-year Ahead)


Linear (Actual)


Mean inflation rates for given survey quarter


Box SAR.1 Doing Business in South Asia


South Asian countries score relatively low in terms of


their position in the World Bank’s Doing Business index
with an average rank of 111 among 185 countries in the


latest round, which suggests that firms in the region face


a difficult business environment. The sub-indices suggest


that South Asian firms encounter serious obstacles in


getting reliable access to electricity, in paying taxes, and


in enforcing contracts. The finding on difficult access to


electricity is consistent with the shortages and demand-


supply gaps that have characterized this sector. The ob-


stacles in paying taxes are also reflected in the relatively


narrower tax bases and lower tax revenue-to-GDP ratios


in South Asian countries compared with the average for


other developing countries (see South Asia Annex of the


Global Economic Prospects June 2012 report). South


Asian countries, however, score better in terms of access


to credit and protecting investors than their overall rank


suggests, reflecting strength of domestic financial mar-


kets.


In terms of changes in ranks between the 2011 and 2012


rounds, Nepal, Pakistan, and Bangladesh fell by one,


three and five notches, respectively, while India’s rank held steady. Sri Lanka’s rank improved from 96 to 81—
making it one of the top ten countries in the world that have improved the most, in part due to improvements in the


process of starting a business and getting access to credit.


Box figure SAR.1 South Asia is a difficult place for
doing business


Source: Doing Business 2013 report, World Bank
Note: South Asia average includes Bangladesh, India,
Nepal, Pakistan and Sri Lanka. See
www.doingbusiness.org for more details.


0


20


40


60


80


100


120


South Asia
average*


South Africa Chile Thailand United States


2012 2011


"East of doing business" rank among 185 countries
(Lower values indicate better rank)


143





Global Economic Prospects January 2013 South Asia Annex


with other developing regions remain a source of


concern, as government borrowing requirements


may be crowding out private investment, while


associated spending may be contributing to


inflationary pressures. India’s general
government deficit is estimated at over 9 percent


of GDP, significantly higher than the 1.7 percent


average deficit for the emerging market


economies belonging to the Group of 20,


according to the IMF’s Fiscal Monitor (figure
SAR.6).FN2 A target of 5.3 percent of GDP has


been set for the central government budget


deficit for the 2012 fiscal year ending in March


2013, with plans to gradually reduce the deficit


to 3 percent by the 2016 fiscal year. But the


deficit could overshoot the target if growth


remains weak, tax and non-tax revenues do not


materialize to the extent expected, or if spending


pressures remain strong. Despite efforts at


consolidation, fiscal deficits are 6 percent or


higher in Pakistan and Sri Lanka, and above 4


percent in Bangladesh. Subsidies, mainly for fuel


and to a lesser extent for food, contribute to the


overall deficits—subsidies account for over 2
percent of GDP in India and Pakistan, and over


3.5 percent of GDP in Bangladesh, according to


recent World Bank and IMF estimates.


Moreover, losses of public sector firms in the


petroleum and electricity sectors have been


substantial in South Asian countries, implying a


―quasi-fiscal‖ burden for governments.


Governments across South Asia have taken steps


to redress these subsidies, in particular by raising


administered prices for fuel, and in some cases,


of electricity. For instance, Sri Lanka raised


administered fuel prices in early 2012 as a part


of fiscal reforms, and again later in the year.


Bangladesh has recently raised fuel prices to


reduce the burden of subsidies. The Indian


government raised regulated diesel prices by 14


percent in September 2012, but local prices are


still well below international prices. Plans in


India to move towards direct cash transfers in


2013 (based on the ―Aadhar‖ national identity
card) would eventually replace existing fuel


subsidies and welfare payments, and is expected


to result in lower leakages and improved


targeting to the neediest. Reducing deficits in


South Asian countries will require a more


forceful attack on fuel subsidies, which even


after successive measures to bring them under


control still account for the bulk of the overall


subsidy burden. Moving towards pricing


mechanisms that better reflect the level and


variability of input costs will help to improve the


financial sustainability of public and private


firms in this sector. Efforts to bring deficits


under control will also need to involve efforts to


broaden the tax base, which is extremely narrow


in some countries, and to improve compliance—
in particular, in Pakistan where a very small


percentage of citizens pay income tax—as well
as to simplify the tax code (see also South Asia


Annex of the Global Economic Prospects June


2012 report). Bangladesh has undertaken


significant tax policy and public financial


management reforms in 2012 towards similar


objectives.


Agriculture in South Asian countries was


affected to varying extents by delayed monsoon


rains


Agriculture, which accounts for half of South


Asia’s employment and just under a fifth of its
GDP, was affected to varying extents by a


delayed monsoon season (late arrival and late


departure) in 2012, following good harvests in


previous years. Although the share of agriculture


Figure SAR.6 Fiscal deficits are significantly higher
in several South Asian country compared with the
average for the G-20 emerging market countries


Source: IMF Fiscal Monitor October 2012, IMF Article IV
consultations; and World Bank


0


2


4


6


8


10


India Sri Lanka Pakistan Bangladesh Low income
countries


G-20
emerging
markets


General government deficit as percent of GDP


144





Global Economic Prospects January 2013 South Asia Annex


in South Asia’s GDP has been declining steadily
in recent decades, the weak monsoon rains in


2012 slowed regional agricultural activity and


exacerbated the economic downturn. As a result,


food grain production for the region is expected


to decline modestly by about 1 percent in the


2012/13 crop year after two consecutive years of


more than 5 percent increases, according to US


Department of Agriculture (USDA) estimates


(table SAR.1).FN3 In India, the delayed monsoon


season resulted in ―below normal‖ rather than
―deficient‖ rains, according to India’s
Meteorological Department, thereby avoiding a


serious adverse impact on food grain production.


Accumulated food grain stocks from good


harvests in previous years have helped to avert a


threat to food security in India and enabled it to


continue to export rice. In Pakistan, the late


monsoon arrival during the secondary Kharif


crop only marginally affected rice and cotton


production. Despite limited water availability


earlier in the year and floods later, rice output is


expected to rise modestly, according to UN Food


and Agriculture Organization (FAO) estimates.


In Bangladesh, the delayed monsoon rains


affected the Aman rice crop in a few areas (the


Aman crop accounts for more than a third of the


country’s rice production), but it does not appear
to have had a major effect on the aggregate


Aman harvest. Sri Lanka, however, experienced


a drought in 2012 due to the delayed monsoons,


which is estimated to have resulted in a more


than 30 percent decline in the secondary Yala


rice harvest in 2012 (following a good main


Maha rice harvest earlier in the year) according


to the FAO. In Nepal, the delayed monsoon rains


and fertilizer shortages reduced rice production


in parts of the country in 2012, following a good


harvest the previous crop year.


Stabilization of international crude oil prices in


2012 resulted in easing of terms of trade shocks


Rapid increases in international crude oil prices


in 2010 and 2011 had contributed to


deteriorating terms of trade for South Asian


countries. Brent crude oil prices rose 29 percent


in 2010, and by 39 percent in 2011, but prices


stabilized in 2012 (figure SAR.7), resulting in an


easing of the earlier terms of trade shocks.


Current account positions in South Asia,


however, continued to deteriorate as export


revenue growth slowed rapidly, or even


declined, due to the Euro Area debt crisis and a


slowing global economy, but import growth


slowed to a smaller extent. India’s current
account deficit rose sharply to 5.4 percent of


GDP in the third calendar quarter of 2012 from


3.9 percent in the second quarter, as export


earnings continued their decline while import


costs remained relatively strong, in part


reflecting robust domestic demand for gold and


still elevated crude oil prices. Partly as a result of


earlier crude oil price increases, Pakistan’s
current account deficit had widened to 2 percent


of GDP in the 2011-12 fiscal year, but the


release of coalition support funds and continued


robust pace of increase in migrant remittances


helped to reduce Pakistan’s current account
deficit to 0.4 percent of GDP in the first five


months of the 2012-13 fiscal year (July-


November period).


Migrant remittances have remained a stable


resource flow for the South Asia region, but


tourism to Sri Lanka slowed


Table SAR.1 South Asia’s food grain balances (millions metric tons)


Source: US Department of Agriculture (USDA) and World Bank.
Note: Crop marketing years vary across countries.


2008/2009 2009/2010 2010/2011 2011/2012 2012/2013 (f)


Production 292.1 284.2 298.8 315.8 313.7


% change 1.2 -2.7 5.1 5.7 -0.7


Consumption 279.4 278.4 292.9 296.2 303.1


% change -0.8 -0.3 5.2 1.1 2.3


Net exports -2.1 1.0 2.3 13.7 13.7


Ending stock 41.0 45.8 49.4 55.2 52.1


145





Global Economic Prospects January 2013 South Asia Annex


Migrant remittance inflows to South Asia were


buoyed by flows from the oil-rich Gulf


Cooperation Council (GCC) countries that


benefited from elevated crude oil prices in 2011


and 2012, compared with the levels in previous


years. Remittances to South Asia are estimated


to have totaled $109 billion in 2012, an increase


of 12.5 percent over 2011—the largest
percentage increase among all developing


regions (table SAR.2). South Asia’s share in
overall remittances received by developing


countries rose from 17 percent in 2005 to 27


percent in 2012. In addition to the continued


demand for migrant labor from the GCC


countries, the increase in remittances to India


was also partly a result of incentives created by


the more than 12 percent depreciation of the


Indian rupee against the US dollar in 2012,


compared with the average rupee-dollar rate in


2011. Nepal likely experienced a similar effect


given the Nepali rupee’s peg to the Indian rupee.
The more-or-less steady increase in remittances


to South Asian countries has supported current


account positions, particularly when demand for


exports weakened. And, migrant remittances


represent an important source of incomes and


domestic demand in Nepal (22% of GDP),


Bangladesh (11%), Sri Lanka (7.9%), and


Pakistan (5.7%).


Tourism, a significant source of revenue for Sri


Lanka, boomed in the aftermath of the civil


conflict, with tourist arrivals growing by 46


percent in 2010 and 31 percent in 2011.


However, the pace of increase in tourism arrivals


slowed to 11 percent by September 2012 (figure


SAR.8), as arrivals from Western Europe (37


percent of the total) slowed and tourism from


other South Asian countries (26 percent of the


total) virtually stalled, mainly due to slowing


economic growth in India. However, tourist


arrivals from the United States and East Asian


countries have picked up strongly in recent


months, reflecting rising disposable incomes in


the countries of origin. As a result, the year-on-


year growth of tourist arrivals to Sri Lanka


picked up again to 18 percent in November.


Capital flows to South Asia remained stable in


2012, due to strong equity flows to India


Private capital flows play a critical role for


stability of the region’s balance of payments
position given the size of South Asia’s (in
particular India’s) current account deficit. Net
private capital flows to the region remained


stable at $72.6 billion in 2012 ($72.5 billion in


2011), as an increase in portfolio equity inflows


offset declines in bank lending and foreign direct


Figure SAR.7 Deterioration in South Asia’s terms of
trade eased in 2012 with stabilization of crude oil
prices


Source: World Bank
Notes: Terms of trade based on changes in country-
specific commodity-weighted export and import price indi-
ces.


60


70


80


90


100


110


120


-10


-5


0


5


10


15


2009 2010 2011 2012


Bangladesh India


Pakistan Sri Lanka


Brent crude price [Right]


Terms of trade change (Percent) Brent crude oil price per barrel
(annual average, US$)


Table SAR.2 Migrant remittances inflows to South Asia grew robustly in 2012 (US$ billions)


Source: Migration and Development Brief 19, World Bank


2005 2006 2007 2008 2009 2010 2011 2012e


Bangladesh 4.3 5.4 6.6 8.9 10.5 10.9 12.1 13.7


India 22.1 28.3 37.2 50.0 49.5 54.0 63.0 69.8


Nepal 1.2 1.5 1.7 2.7 3.0 3.5 4.2 5.1


Pakistan 4.3 5.1 6.0 7.0 8.7 9.7 12.3 13.9


Sri Lanka 2.0 2.2 2.5 2.9 3.4 4.2 5.2 6.3


South Asia 34 43 54 72 75 82 97 109


Share of South Asia in


developing countries (%) 17.1 18.3 18.9 21.6 23.8 24.1 25.4 26.8


146





Global Economic Prospects January 2013 South Asia Annex


investment (table SAR.3). FDI inflows to South
Asia fell 17 percent in 2012, while international
bank lending slumped a larger 34 percent amid
European banking sector deleveraging. In
contrast, net equity flows to South Asia rose to
an estimated $11.5 billion in 2012, reversing a
net $4.8 billion outflow in 2011. Despite
weakening growth and a deteriorating current
account position, equity inflows to India surged
and the domestic equity market rebounded after
a number of reforms were announced in
September-October 2012 (figure SAR.9). FDI
inflows to India also picked up strongly in the


third quarter, according to Reserve Bank of India
data. FDI to Pakistan, however, has continued to
decline over a longer period (since 2008)
reflecting the uncertain security situation, weak
growth prospects, and widespread electricity
shortages, while portfolio equity flows remain
subdued (figure SAR.10).


Outlook


South Asia’s growth is projected to strengthen
over the forecast horizon


South Asia’s GDP growth is projected to rise to
5.7 percent in the 2013 calendar year from 5.4
percent in 2012 (tables SAR.4 and SAR.5). The
modest recovery in growth is in line with
projections of a weak global economy and near-
stagnant output in the Euro Area, South Asia’s
largest trade partner. Regional growth will be
constrained by an uncertain external
environment, amid risks of a protracted fiscal
impasse in the United States and possible
resurgence of Euro Area turmoil. Electricity
shortages are expected to ease gradually over
time as South Asian countries continue structural
reforms to expand capacity and improve
financial sustainability of this sector, but this
constraint is likely to remain binding in the near
term. Together with a gradual pick up in the
global economy, South Asia’s regional GDP
growth is projected to accelerate to 6.4 percent


Figure SAR.8 Tourism arrivals to Sri Lanka
(especially from India) slowed in 2012


Sources: Haver Analytics and World Bank


-20


0


20


40


60


80


100


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


All countries Western Europe
North America East Asia
South Asia


Tourism arrivals, year-on-year change (Percent)


Table SAR.3 Net capital flows to South Asia ($ billions)


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


2008 2009 2010 2011 2012e 2013f 2014f 2015f


Capital inflows 64.7 89.8 100.4 78.3 75.2 89.1 105.9 117.9


Private inflows, net 55.9 78.9 90.7 72.5 72.6 87.3 104.7 117.3
Equity Inflows, net 35.0 63.4 60.3 30.9 41.1 53.3 63.5 76.4
Net FDI inflows 50.8 39.3 30.4 35.7 29.7 36.9 42.9 51.8
Net portfolio equity inflows -15.8 24.1 29.9 -4.8 11.5 16.4 20.6 24.6
Private creditors, net 20.8 15.5 30.4 41.6 31.5 34.0 41.2 40.9
Bonds 1.7 1.9 10.1 0.7 0.2 0.9 1.5 2.9
Banks 11.2 10.9 8.6 18.4 12.1 15.4 16.5 19.6
Short-term debt flows 8.0 2.7 11.8 22.5 19.4 17.8 23.1 18.3
Other private -0.05 -0.1 -0.05 -0.03 -0.2 -0.1 0.1 0.1
Official inflows, net 8.8 11.0 9.6 5.8 2.6 1.8 1.2 0.6
World Bank 1.4 2.4 3.3 2.0 0.9
IMF 3.2 3.6 2.0 0.0 -0.2
Other official 4.2 4.9 4.4 3.7 1.9


147





Global Economic Prospects January 2013 South Asia Annex


and 6.7 percent in 2014 and 2015, respectively,


supported by a gradual improvement in global


demand for South Asia’s exports, continued
policy reforms, stronger investment activity, and


a return to normal agricultural production.


India’s GDP growth measured in factor cost
terms slipped to 5.3 percent in the third quarter


of 2012, as a subpar agricultural outcome


exacerbated relatively weak performance in


manufacturing, mining and services. Growth in


the 2012 fiscal year ending in March 2013 is


forecast at 5.4 percent, the weakest in nearly a


decade.FN4 India’s GDP growth is projected to
strengthen to 6.4 percent in the 2013 fiscal year,


with a stronger rebound held back in part by


difficult global economic conditions. A range of


policy reforms were initiated in the second half


of 2012, including liberalization of regulations


for foreign direct investment in the retail,


aviation and broadcasting sectors; an increase in


administered diesel prices and rationing of


subsidized liquefied petroleum gas (LPG)


cylinders in an effort to curb fuel subsidies;


passage of banking sector reforms in Parliament;


the creation of a high-level cabinet committee to


fast-track clearances for infrastructure projects;


and a move towards direct cash transfers to


reduce leakages and improve targeting of


subsidies and welfare payments. As discussed,


the spurt of reforms temporarily restored


investor confidence and led to an increase in


equity inflows. Several reforms still remain


pending, however, including (among others) on


land acquisition, insurance, pensions, mining,


and direct taxes, that require parliamentary


approval. Moreover, investment growth has been


relatively weak in recent quarters (figure SAR.11


first panel), the fuel subsidy burden and fiscal


deficit remain high, and the country needs to


attract substantial foreign investment inflows to


finance a larger current account deficit. Given a


projected weak, albeit gradually strengthening,


global economy and a potentially volatile


external environment, it will be essential to


maintain sound macroeconomic policies, sustain


efforts at fiscal consolidation over the medium


term, deepen structural reforms, and improve the


investment climate for the private sector.


Reflecting a projected gradual improvement in


global demand and expectations of continued


policy reforms, India’s GDP growth in factor
cost terms is forecast to rise to 7.1 percent in the


2014 fiscal year and to 7.3 percent by 2015. A


return to normal agricultural production during


2013-15 and an expected revival of mining


activity as hold-ups to production in key natural


resource-rich states are gradually resolved


should boost output in these sectors, providing a


tailwind to growth over the forecast horizon.


Pakistan’s GDP growth is projected to remain


Figure SAR.10 Foreign investment in Pakistan


Source: Haver Analytics and World Bank


-200


-100


0


100


200


300


400


500


Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Nov-12


FDI inflows


Portfolio investment inflows


Private investment inflows, 3 month moving average (US$ millions)


Figure SAR.9 Gross capital flows to South Asia


Source: Dealogic and World Bank


0


2


4


6


8


10


12


14


Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12


Equity Issuance


Bond issuance


Bank Lending


Total flows


Gross capital inflows (US$ billions)


148





Global Economic Prospects January 2013 South Asia Annex


broadly stable at 3.8 percent in the 2012-13


fiscal year compared with 3.7 percent growth


recorded in 2011-12. Growth is projected to


remain close to 4 percent during 2014 and 2015,


a relatively sluggish pace compared to regional


peers. A weak investment climate, infrastructure


gaps, sovereign creditworthiness concerns, and


large fiscal deficits continue to pose obstacles to


a sustained improvement in investment activity


and economic performance. Electricity and gas


shortages for the industrial and agricultural


sectors, macroeconomic challenges including


fiscal deficits and high inflation, and security


uncertainties, have hampered productive


business activities. Mainly as a result of adverse


domestic factors, investment as a share of GDP


fell by nearly a third between the 2007-08 and


2011-12 fiscal years (figure SAR.11 second


panel), contributing to Pakistan’s current
lackluster growth potential, especially compared


with the more than 6 percent average annual


GDP growth recorded between 2003 and 2007.


This secular decline in investment, unless


reversed through sustained improvements in


macroeconomic performance and policy


credibility as well as addressing infrastructure


gaps, has negative implications for productive


capacity and potential output growth during the


forecast horizon. Concerted efforts to address


electricity shortages, a major constraint to


growth, would also help to raise the sustainable


pace of growth.


Bangladesh’s GDP growth is projected to
decline to 5.8 percent in the 2012-13 fiscal year


from 6.3 percent in 2011-12, in part due to a


moderation in exports resulting from an adverse


global environment. Although Bangladesh’s
export performance weakened in 2012, domestic


demand was supported by steady inflows of


migrant remittances and a relatively stable


agricultural performance. External constraints


have been exacerbated by supply side


bottlenecks including inadequate infrastructure,


and by political uncertainty. A further


diversification of export markets and gains in


market share will benefit Bangladesh, as growth


is expected to pick up faster in North America


and Asia compared with near-stagnant growth


projected for the Euro Area in 2013.


Infrastructure and energy constraints could,


however, slow further gains in competitiveness.


Bangladesh’s GDP growth is forecast to rise to
6.2 percent in the 2013-14 fiscal year, as the


global economy continues its slow path to a


recovery, and pick up to 6.5 percent in 2014-15.


GDP growth in Sri Lanka slowed to an estimated


6.1 percent in 2012, in part from policy efforts


designed to limit excessive credit growth and


contain overheating, exacerbated by weakening


demand for exports and a drought. Sri Lanka’s
imports also slowed due to weaker domestic


demand, policy measures to curb imports, and


currency depreciation. Electricity cuts resulting


Figure SAR.11 Weaker investment growth in India and Pakistan


Sources: Haver Analytics and World Bank.


30


31


32


33


34


35


36


37


38


-15


-10


-5


0


5


10


15


20


25


Q3-2006 Q3-2007 Q3-2008 Q3-2009 Q3-2010 Q3-2011 Q3-2012


Investment growth Investment/GDP ratio [Right]


Investment, year-on-year change
(Percent)


Investment as share of GDP
(Percent)


India


-20


-15


-10


-5


0


5


10


15


20


25


-20


-15


-10


-5


0


5


10


15


20


25


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


Investment growth


Investment/GDP ratio [Right]


Investment, year-on-year change
(Percent)


Investment as share of GDP
(Percent)


Pakistan


149





Global Economic Prospects January 2013 South Asia Annex


from the effect of drought on hydropower


generation capacity also adversely affected


economic activity. Although policy reforms in


Sri Lanka acted as a drag on growth in 2012,


they are also likely to boost growth outturns


during the forecast horizon. A pick up of tourism


during the forecast horizon will also contribute


to economic activity in the island. Sri Lanka’s
growth is forecast to rise to 6.8 percent in 2013


as external demand continues to improve


gradually and agricultural production growth


returns to normal rates. Growth is expected to


increase further to 7.2 percent by 2015 (a weaker


pace compared with the more than 8 percent


growth in 2010 and 2011), as the earlier boom in


investment and reconstruction following


stabilization after political conflict tapers off,


implying a more sustainable pace of growth in


line with underlying macroeconomic


fundamentals.


Nepal’s economic performance has remained
relatively sluggish, as the ongoing constitutional


crisis, a weak investment climate, and


infrastructure bottlenecks have eroded business


confidence and adversely affected investment


and industrial activity. Following a surge in


growth to 4.6 percent in the 2011-12 fiscal year


mainly from a robust agricultural harvest and


services growth (in part supported by migrant


remittances), GDP growth is projected to


weaken to around 3.8 percent in the 2012-13


fiscal year, as agricultural output growth returns


to its longer-term trend, while industrial


performance continues to remain weak. GDP


growth is then forecast rise to about 4.3 percent


by the 2014-15 fiscal year as the political and


economic situation start to normalize. Migrant


remittances are expected to remain a relatively


stable and significant source of financing and,


together with tourism revenues, support


consumption demand during this period of


Table SAR.4 South Asia regional forecasts


Source: World Bank.


Est. Forecast


00-09
a


2010 2011 2012 2013 2014 2015


GDP at market prices b,f 5.9 9.3 7.4 5.4 5.7 6.4 6.7


GDP per capita (units in US$) 4.4 7.8 5.9 4.0 4.3 5.0 5.3


PPP GDP d 5.9 9.4 7.4 5.4 5.7 6.4 6.7


Private consumption 5.4 6.6 5.9 5.8 6.0 6.5 6.8


Public consumption 5.8 11.1 6.3 5.8 5.7 5.8 5.9


Fixed investment 8.8 12.3 5.8 5.2 6.2 7.2 7.5


Exports, GNFS e 11.3 16.9 16.5 4.4 6.1 8.3 8.9


Imports, GNFS e 9.6 14.8 21.1 7.7 6.6 8.0 8.6


Net exports, contribution to growth -0.3 -0.6 -2.5 -1.5 -0.8 -0.7 -0.8


Current account bal/GDP (%) -0.6 -2.7 -3.2 -3.8 -3.2 -2.6 -2.0


GDP deflator (median, LCU) 6.5 9.3 8.3 8.9 9.3 8.6 8.4


Fiscal balance/GDP (%) -7.1 -8.7 -7.6 -9.0 -8.3 -7.7 -7.0


Memo items: GDP at market prices f


South Asia excluding India 4.6 5.1 5.1 4.8 4.9 5.3 5.5


India 6.6 9.6 6.9 5.1 6.1 6.8 7.0


at factor cost - 8.4 6.5 5.4 6.4 7.1 7.3


Pakistan 4.2 3.1 3.0 3.7 3.8 4.0 4.2


Bangladesh 5.2 6.1 6.7 6.3 5.8 6.2 6.5


(annual percent change unless indicated otherwise)


a. Growth rates over intervals are compound weighted averages; average growth contributions, ratios


and deflators are calculated as simple averages of the annual weighted averages for the region.


b. GDP at market prices and expenditure components are measured in constant 2005 U.S. dollars.


c. GDP figures are presented in calendar years (CY) based on quarterly history for India. For


Bangladesh, Nepal and Pakistan, CY data is calculated taking the average growth over the two fiscal


year periods to provide an approximation of CY activity.


d. GDP measured at PPP exchange rates.


e. Exports and imports of goods and non-factor services (GNFS).


f. National income and product account data refer to fiscal years (FY) for the South Asian countries,


while aggregates are presented in calendar year (CY) terms. The fiscal year runs from July 1 through


June 30 in Bangladesh and Pakistan, from July 16 through July 15 in Nepal, and April 1 through


March 31 in India. Due to reporting practices, Bangladesh, Nepal, and Pakistan report FY2009/10


data in CY2010, while India reports FY2009/10 in CY2009.


150





Global Economic Prospects January 2013 South Asia Annex


uncertainty; as well as finance imports of


petroleum products and cover the trade deficit


with India. However, after a surge in remittance


inflows during 2011-12, helped partly by the


incentives created by a depreciation of the


Nepali rupee in line with its peg to the Indian


rupee, remittances are likely to grow at a more


sustainable rate over the forecast period.


Afghanistan is in a state of transition which


involves the handover of security responsibilities


from international forces to the Afghan


government. This process is characterized by


considerable political and security uncertainty.


However, in 2012, Afghanistan’s economy grew
strongly as a result of an exceptionally good


harvest. Real GDP growth is estimated at around


11 percent, a significant increase from 7.3


percent in 2011. The good harvest has also


brought Afghanistan to near food self-


sufficiency and slowed inflation to 4.6 percent in


July 2012 on a year-on-year basis, although


inflation edged up to 5.4 percent in September.


The medium-term outlook for Afghanistan


remains cautiously optimistic. At the Tokyo


conference in July 2012, donors pledged


Table SAR.5 South Asia country forecasts


Source: World Bank.


Est. Forecast


00-09
a


2010 2011 2012 2013 2014 2015


Calendar year basis b


Bangladesh


GDP at market prices (% annual growth) c 5.2 6.4 6.5 6.1 6.0 6.3 6.5


Current account bal/GDP (%) 0.6 1.8 0.2 0.8 0.8 1.0 0.9


India


GDP at market prices (% annual growth) c 6.2 10.4 7.9 5.5 5.8 6.6 6.9


Current account bal/GDP (%) -0.5 -3.2 -3.6 -4.5 -3.8 -3.0 -2.4


Nepal


GDP at market prices (% annual growth) c 3.4 4.4 4.2 4.2 4.0 4.2 4.3


Current account bal/GDP (%) -0.9 -2.6 0.2 0.7 0.7 0.8 1.0


Pakistan


GDP at market prices (% annual growth) c 4.2 3.0 3.4 3.8 3.9 4.1 4.2


Current account bal/GDP (%) -1.4 -0.7 -1.0 -1.0 -0.8 -0.7 -0.5


Sri Lanka


GDP at market prices (% annual growth) c 4.4 8.0 8.3 6.1 6.8 7.1 7.2


Current account bal/GDP (%) -3.7 -2.3 -7.9 -7.1 -5.8 -5.0 -4.3


Fiscal year basis b


Bangladesh


GDP at market prices (% annual growth) c 5.2 6.1 6.7 6.3 5.8 6.2 6.5


India


GDP at market prices (% annual growth) c 6.6 9.6 6.9 5.1 6.1 6.8 7.0


Memo: Real GDP at factor cost - 8.4 6.5 5.4 6.4 7.1 7.3


Nepal


GDP at market prices (% annual growth) c 3.4 4.8 3.9 4.6 3.8 4.1 4.3


Pakistan


GDP at market prices (% annual growth) c 4.2 3.1 3.0 3.7 3.8 4.0 4.2


World Bank forecasts are frequently updated based on new information and changing (global)


circumstances. Consequently, projections presented here may differ from those contained in other


Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any


given moment in time.


Afghanistan, Bhutan, Maldives are not forecast owing to data limitations.


a. GDP growth rates over intervals are compound average; current account balance shares are simple


averages over the period.


b. National income and product account data refer to fiscal years (FY) for the South Asian countries


with the exception of Sri Lanka, which reports in calendar year (CY). The fiscal year runs from July 1


through June 30 in Bangladesh and Pakistan, from July 16 through July 15 in Nepal, and April 1


through March 31 in India. Due to reporting practices, Bangladesh, Nepal, and Pakistan report


FY2009/10 data in CY2010, while India reports FY2009/10 in CY2009. GDP figures are presented in


calendar years (CY) based on quarterly history for India. For Bangladesh, Nepal and Pakistan, CY


data is calculated taking the average growth over the two fiscal year periods to provide an


approximation of CY activity.


c. GDP measured in constant 2005 U.S. dollars.


151





Global Economic Prospects January 2013 South Asia Annex


sufficient funds to fill Afghanistan’s (civilian)
financing gap (estimated at $4 billion per year on


average over the next years), and this should


allow the government to sustain service delivery


and development gains. Nevertheless, the


transition process, which is associated with a


decline in military and civilian aid, and the


upcoming presidential elections could further


increase uncertainty in the medium term and take


a toll on investor confidence. Projections suggest


that even with favorable assumptions, real GDP


growth may fall from the average of 10 percent


per year experienced over the past decade to 4-6


percent for 2013-2015.


Private capital flows are projected to rise


reflecting a favorable medium-term growth


outlook


Private capital flows to South Asia are expected


to rise by 20 percent to $87 billion in 2013, and


to increase further to $117 billion by 2015, as


regional growth picks up over the course of 2013


-15 (table SAR.3). Improved growth outturns,


together with an extended period of low-interest


rates in high income countries and abundant


liquidity in global financial markets will buoy


capital flows to South Asia during the forecast


horizon. Foreign direct investment is expected to


increase in 2013 to $37 billion, while net


portfolio equity flows are forecast to rise further


to around $16 billion. As issues relating to hold-


ups in mining activity in India are resolved,


investment flows are expected to recover in this


sector as well. Even with a modest pick-up of


growth in 2013, India’s growth will remain
relatively high by global standards, and thus the


country is likely to remain an attractive


destination for international investors looking to


longer term returns.


Migrant remittances to South Asia are expected


to increase by around 9-11 percent annually over


2013-15 to reach $144 billion in 2015, according


to forecasts by the World Bank’s Migration and
Development Brief 19. These resilient resource


flows, notably from the oil-rich Gulf


Cooperation Council (GCC) countries, are


expected to continue to support domestic


demand in the region, especially in Nepal and


Bangladesh, and to provide a relatively stable


source of hard currency earning for South Asian


countries, particularly for Pakistan where FDI


flows have dried up in recent years.


Risks and vulnerabilities


The economic outlook for the South Asia region


is subject to several risks. A key domestic risk is


that of fiscal consolidation not proceeding as


planned. Although governments across the


region have committed to fiscal consolidation


measures, with elections coming up in several


South Asian countries within the next two years,


the pressures for populist spending measures


could increase and cutting subsides may prove


difficult. If in addition, growth outturns turn out


weaker than anticipated or planned revenue-


raising measures (e.g., disinvestment plans for


public enterprises) do not materialize, it could


lead to higher than planned budget deficits and


rising government debt, with potentially adverse


consequences for sovereign creditworthiness.


Another domestic risk is that agricultural


outturns are weaker than expected due to rainfall


shortages or drought during the forecast horizon,


which would have adverse implications for rural


incomes and employment, food prices, inflation,


the fiscal burden of subsidies, and overall


growth.


In terms of external risks, a protracted fiscal


impasse in the United States is an immediate


risk to the global economy, and in turn for South


Asia’s economic outlook. The baseline assumes
that a credible medium-term plan to restore fiscal


sustainability in the US and authorize


government borrowing is agreed to by the end of


February 2013 (see the main text of the Global


Economic Prospects January 2013 report). An


alternative scenario where only a short-term


relief from the debt ceiling legislation is agreed


upon and considerable uncertainty remains


regarding future tax and fiscal policy could


shave off 2.3 percent from US GDP growth


relative to the baseline, and reduce global growth


by 1.4 percent in 2013. Such a scenario would


reduce demand for South Asia’s exports and cut
into financial flows to the region. Overall, South


Asia’s growth would be 0.4 percent lower than


152





Global Economic Prospects January 2013 South Asia Annex


under the baseline. Another source of external


risk for South Asia is the possibility of


resurgence of Euro Area tensions during the


forecast horizon. The Euro Area accounts for the


largest share of South Asia’s exports and a
resumption of financial market tensions in the


Euro Area would affect South Asia through trade


and financial channels.


A fall in crude oil prices due to weaker than


projected global growth—caused by either of the
above two scenarios or other unforeseen


events—would benefit current account positions
of South Asian countries and reduce the fiscal


burden of fuel subsidies. But lower crude oil


prices would also cut into migrant remittances if


economic activity in the migrant-destinations in


the oil-exporting Arabian Gulf region were to


slow and demand for migrant labor were to


decline. Conversely, a spike in crude oil prices


due to geopolitical tensions would worsen


current account and fiscal positions in this net oil


importing region.


A further increase in international food prices


represents yet another source of external risk for


South Asia. Drought in the US and heat


conditions in Eastern Europe and Central Asian


grain exporters cut into international grain


supplies and caused international food prices to


rise during the course of 2012, although


international food prices moderated somewhat


towards the end of the year. The overall


dependence of the South Asia region on


imported food grains is small compared with


other regions (figure SAR.12). However,


structural capacity constraints in food


production, especially as consumption of


proteins and edible oils continues to increase


with rising incomes, are likely to imply tight


domestic supplies (relative to demand) going


forward, which can increase the vulnerability of


the region to shocks to international food prices.


Policy reforms need to address fiscal and


structural constraints


Domestic uncertainties, an adverse external


environment, and a relatively poor business


climate in the South Asia region have deterred


both domestic and foreign investors, resulting in


weakening investment growth in recent years.


Moreover, South Asia’s high fiscal deficits have
adverse economic consequences in terms of


contributing to persistence of inflation and


crowding out of productive business investment.


Sustained efforts at fiscal consolidation are


therefore necessary to free up resources for the


private sector, reduce inflation, and generate


policy space to respond to external and domestic


shocks.


Policies also needed to address structural


challenges to growth, including, among others,


in electricity generation and agricultural


production. Firms and consumers in South Asian


countries have been faced with widespread


power outages, as rising demand has outstripped


capacity. Both electricity generation companies


and firms with captive power plants face


rationed supply of inputs, which have adversely


affected industrial activity. Expanding capacity


and ensuring financial sustainability of both


public and private enterprises in the energy


sector are critical for future growth outcomes.


Similarly, agricultural supply has fallen short of


demand as incomes have risen and food


preferences have shifted, contributing to


persistence of food inflation, and in turn overall


inflation. Raising agricultural productivity and


Figure SAR.12 South Asia is relatively less depend-
ent on food grain imports than other regions


Source: US Department of Agriculture and World Bank
Note: US Department of Agriculture (USDA) sub-regions
differ from the World Bank’s regional classification. See
www.usda.gov for details.


-40


-30


-20


-10


0


10


20


30


40


50


Middle East
& N. Africa


Latin
America &
Caribbean


Sub-Saharan
Africa


East Asia &
Pacific


Former
Soviet Union


(12)


South Asia


Foodgrain imports as share of domestic foodgrain consumption
(average of 2009/10, 2010/11 and 2011/12 crop years, Percent)


Gross
imports


Net
imports


153





Global Economic Prospects January 2013 South Asia Annex


output, as well as improving storage and


transport infrastructure both to reduce spoilage


and to enable improved access to foreign


markets, are necessary steps towards easing


shortages, improving food security, and reducing


inflationary pressures.




Notes:


1 The South Asian countries included in the


regional estimates and forecasts include


Bangladesh, India, Nepal, Pakistan, and Sri


Lanka. The text also discuses recent


developments and economic prospects for


Afghanistan. However, Afghanistan, Bhutan


and Maldives were not included in the South


Asia regional aggregates due to insufficient


reliable historical data on national income


accounts and balance of payments


components.


2 The World Bank follows the IMF’s
methodology for the estimates of the general


government deficit for India. IMF and Indian


presentations differ, particularly regarding


divestment and license auction proceeds, net


versus gross recording of revenues in certain


minor categories, and some public sector


lending (IMF Fiscal Monitor October 2012).


3 USDA crop marketing years vary across


countries in South Asia (and across rice and


wheat harvests in India): the 2012/13 crop


marketing year corresponds to April 2012-


March 2013 for wheat and October 2012-


September 2013 for rice in India; May 2012-


April 2013 in Pakistan; July 2012-June 2013


in Bangladesh and Nepal; and October 2012-


September 2013 for Sri Lanka. Therefore,


changes in weather patterns during the


course of 2012 influence harvests to a


significantly greater extent in the current


(2012-13) crop year than output in the


previous (2011-12) crop year.


4 Preliminary estimates suggest that weak


agricultural performance due to delayed


monsoon rains may have subtracted almost


half a percentage point from India’s GDP
growth in the 2012 fiscal year compared


with a normal agricultural season.




154





Global Economic Prospects January 2013 Sub-Saharan Africa Annex


Overview: GDP growth in Sub-Saharan


African remained robust at 4.6% in 2012,


notwithstanding the slowdown in the global


economy. Indeed, excluding the region’s largest
and most globally integrated economy, South


Africa, GDP growth in the region was at strong


5.8% in 2012, with a third of countries in the


region growing by at least 6%. Robust domestic


demand, steady remittance flows, still high


commodity prices, and increased export volumes


(thanks to increased investment flows to the


natural resource sector in recent years) were


supportive of the region’s growth in 2012.
Nonetheless, besides the drag from a weaker


global economy, domestic factors, including


earlier monetary policy tightening (Kenya and


Uganda), protracted labor disputes (South


Africa), and political unrests (Mali and Guinea


Bissau) weakened growth in a number of


countries in the region.


Economic activity was similarly diverse in the


region. Reflecting still high commodity prices


and relatively robust growth prospects in the


region, net private capital flows to the region


increased by 3.3 percent to a record high $54.5


billion in 2012. Much of the increase in net


capital flows came in the form of increased


foreign direct investment flows to the region,


which increased to $37.7 billion in 2012 from


$35.7 billion in 2011, notwithstanding the 6.6


percent decline in foreign direct investment


flows to developing countries in 2012. Exports
grew strongly in the first half of the year;


however, a sharp deceleration of industrial


commodities and oil exports occurred in the


third quarter. Tourism, an important driver of


growth in the region, remained robust, with


strong tourist arrivals in many of the popular


destinations, including South Africa, Mauritius,


Sierra Leone, Madagascar and Cape Verde.


Outlook: Medium-term growth prospects


remain strong and should be supported by a pick


-up in the global economy, still high commodity


prices, and increased investment. Since 2000,


investment in the region has increased steadily


from 15.9 percent of GDP to over 22 percent of


GDP in 2012. This is expected to continue,


particularly so as an increasing number of the


region’s economies are able to tap into
international capital markets to help address


binding infrastructural constraints (in 2012


Zambia issued its debut international bond, a


$750 million Euro bond, which was


oversubscribed by 15 times). Further, the


ongoing increase in export volumes from several


countries that have discovered mineral deposits


in recent years (Ghana, Kenya, Mozambique,


Niger, Sierra Leone, Tanzania, and Uganda)


should boost growth prospects. Overall, the


region is projected to grow at its pre-crisis


average rate of 5 percent over the 2013-15


period (4.9 percent in 2013, gradually


strengthening to 5.2 percent in 2015). Excluding,


South Africa, the region’s growth will average
6% over the 2013-15 period.


Risks and vulnerabilities: Risks to the outlook


remain tilted to the downside, as weaker growth


in China, ongoing fiscal consolidation in the


Euro Area and the United States could


potentially derail the region’s growth prospects.
Further, a number of domestic concerns could be


a drag on growth in the region.


Euro Area debt crisis. Although the worst


appears to be over, should a credit crunch hit


some of the larger troubled Euro Area


economies, GDP growth in the region could


decline by one percentage point.


Weak US economy. Fiscal policy paralysis in


the US could curtail growth in the region by at


least 0.9 percentage points in the 2013.


China investment. With Chinese demand


accounting for some 50 percent of many


industrial metals exported from Africa, a


disorderly unwinding of China’s high investment
rate could lead to deteriorating current account


and fiscal balances, and cut into the region’s
growth prospects.


Domestic factors. Political instability,


protracted industrial disputes and adverse


weather conditions could also undermine growth


in a few countries in the region.


Sub-Saharan Africa Region


155





Global Economic Prospects January 2013 Sub-Saharan Africa Annex


Introduction


Despite the global economic slowdown in 2012,


growth in Sub-Saharan Africa has remained


robust, supported by resilient domestic demand


and still relatively high commodity prices. In


2012 the region’s growth is estimated at 4.6
percent (figure SSA.1). About a third of


countries in the region grew by at least 6%


(figure SSA.2). Excluding South Africa, the


region’s largest economy, the remaining
economies grew at a robust 5.8 percent – higher
than the developing country average of 5.1


percent. Medium-term growth prospects remain


strong and should be supported by a pick-up in


the global economy, still high commodity prices,


and investment in the productive capacity of the


region’s economies. The ongoing increase in
export volumes from several countries in the


region (Mozambique, Niger, Sierra Leone, etc.)


that have discovered mineral deposits in recent


years should boost growth prospects.


Overall, the region is projected to grow at it’s
pre-crisis average rate of 5.0 percent over the


2013-15 period: 4.9 percent in 2013, and


gradually strengthening to 5.2 percent by 2015.


Risks to the outlook remain tilted to the


downside, as the global economy remains


fragile, and weaker growth in China, ongoing


fiscal consolidation in the Euro Area and the


United States could potentially derail the


region’s growth prospects. Besides external
risks, domestic concerns such as political


instability, protracted industrial disputes and


adverse weather conditions could undermine


growth in a few countries in the region.


Recent developments


Capital flows to Sub Saharan Africa held up in


2012, despite slowdown in global economy.


Uncertainty in financial markets, banking sector


deleveraging in the Euro Area and a subdued


global economy weakened capital flows to


developing countries by an estimated 8.6 percent


in 2012. Reflecting still high commodity prices


and relatively robust growth prospects in the


region, net private capital flows to the region


increased by 3.3 percent to a record high $54.5


billion in 2012 (table SSA.1). Much of the


increase in net capital flows came in the form of


increased foreign direct investment, however, the


de-escalation of market tensions following


policy interventions by European authorities and


ultra-loose monetary policy in other high-income


countries also supported an increase in bond


flows to the region with the bulk of the increase


coming from two new international sovereign


bond issuers – Angola and Zambia.


Aggregate foreign direct investment inflows


increased by 5.5 percent in 2012, although for


developing countries as an aggregate it fell by


Figure SSA.1 Sub-Saharan Africa continues robust
growth


Source: World Bank


-3.0


-1.0


1.0


3.0


5.0


7.0


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


Developing (ex. China)


Sub Saharan Africa


Sub Saharan Africa (ex. South Africa)


(real GDP growth, % ch)


Figure SSA.2 Fastest growing Sub-Saharan Africa
economies in 2012


Source: World Bank


-1.0 1.0 3.0 5.0 7.0 9.0 11.0 13.0 15.0


Brazil


India


Zambia


Eritrea


Mozambique


Ghana


Rwanda


Ethiopia


China


Angola


Cote d'Ivoire


Niger


Sierra Leone 25%


156





Global Economic Prospects January 2013 Sub-Saharan Africa Annex


6.6 percent. Foreign direct investment flows to


the region increased to $37.7 billion in 2012


from $35.7 billion in 2011 (figure SSA.3). The


resilience of foreign direct investment flows in


the region in 2012 reflects, inter alia, the longer


time horizon of investment decisions in the


extractive industries sector (which in value terms


accounts for the bulk of investment to the


region), and is therefore less sensitive to short-


term shifts in market sentiment. Investment


incentives remain elevated due to still high level


of commodity prices in 2012 (even if lower than


2011), the wealth of natural resources across the


region, and the relatively high rates of returns on


investment in sub Saharan Africa.FN1 In 2012,


several mines were expanded or new ones built


across countries in the region, prospecting


yielded major gas discoveries along the east


coast of Africa, new commercially viable oil


wells were drilled in West Africa and East


Africa and a number of countries across West,


Central and Southern Africa found new mineral


deposits.FN2


While the extractive industry sector dominates in


terms of the value of overall foreign direct


investment flows, the relative importance of the


primary sector in greenfield investments is


declining (although project numbers are stable),


reflecting increasing investments in the services


sector, notably among infrastructure related


projects in construction, transportation,


electricity, telecommunication and water.FN3


This should help alleviate some of the binding


constraints to growth that many countries in the


region face. In addition, some of the larger


economies with a growing middle-class such as


Nigeria, South Africa, Angola, Kenya, and


Ghana, are increasingly attracting investment


flows to their rapidly expanding consumer sector


(e.g. retail, consumer banking etc).


Consumer spending most likely held up in 2012.


Consumer spending accounting for over 60


percent of GDP in the region and is, therefore, an


important determinant of overall growth.


Consumer demand has grown relatively rapidly


in recent years, supported by solid real incomes


growth. Indeed, over the past decade real per


capita incomes rose by an average of 2.3 percent


annually. As a result, as of 2012 some 21 Sub


Saharan African countries (almost half) are


classified as middle-income economies


compared to only nine a decade ago.


Unfortunately comprehensive data on retail


spending, consumer demand and sentiment is


unavailable in most countries in the region.


Where data do exist, they suggest that consumer


demand was robust in 2012. In South Africa,


Table SSA.1 Net capital flows to Sub-Saharan Africa ($ billions)


Source: World Bank


2008 2009 2010 2011 2012e 2013f 2014f 2015f


Capital Inflows 43.4 47.0 61.1 64.2 65.0 68.3 76.2 86.1


Private inflows, net 38.4 37.1 47.8 52.7 54.5 58.8 68.9 81.0


Equity Inflows, net 33.4 43.2 42.7 44.1 47.4 53.7 61.3 69.0


Net FDI inflows 39.1 32.5 26.7 35.7 37.7 42.4 48.7 55.6


Net portfolio equity inflows -5.7 10.7 16.0 8.4 9.7 11.3 12.6 13.4


Private creditors. Net 5.0 -6.2 5.1 8.6 7.1 5.1 7.6 12.0


Bonds -1.6 2.0 1.4 6.0 7.0 5.0 5.0 7.0


Banks 2.3 0.5 0.5 3.1 0.9 1.2 1.8 2.9


Short-term debt flows 4.4 -9.5 2.8 -0.5 -0.9 -1.2 0.6 1.2


Other private -0.1 0.8 0.5 -0.05 0.1 0.1 0.2 0.9


Official inflows, net 5.0 9.9 13.3 11.4 10.5 9.5 7.3 5.1


World Bank 1.9 3.1 4.0 3.2 3.3


IMF 0.7 2.2 1.2 1.4 1.3


Other official 2.4 4.6 8.2 6.8 5.9


Note : e = estimate, f = forecast


e = estimate, f = forecast


/a Combination of errors and omissions, unidentifed capital inflows to and outflows from developing countries.


157





Global Economic Prospects January 2013 Sub-Saharan Africa Annex


record low interest rates and solid wage hikes


contributed to a 4.9 percent (y/y) increase in


retail sales volumes during the first eight months


of 2012. Similarly, in the region’s second largest
economy, Nigeria, wholesale and retail sales


volume were up 8.5 percent for the first half of


2012.


For countries where high-frequency retail sales


data does not exist, data on specific products can


be used to gauge the strength of consumer


spending. In Kenya, a 14 percent decline in


motor vehicle registration in the first eight


months of 2012 suggests that consumer spending


on durables was weak. However, passenger car


imports for the broader region suggest some


strength, with car imports up 6.1 percent (y/y,


values) for H1 2012 compared with a 1.2 percent


rise globally (figure SSA.4).


Stronger consumer spending was supported by


improved access to credit (e.g. South Africa,


Angola, Ghana, Mozambique, and Zambia),


declining inflation rates and lower interest rates,


a rebound in agricultural sector incomes thanks


to more favorable weather conditions (Niger,


Guinea and Mauritania all experienced better


rains compared with the 2010/2011 crop year),


and the steadiness of remittance flows (estimated


at $31bn in 2012 and 2011). In contrast, higher


interest rates earlier in the year for Uganda and


Kenya and political unrest in Guinea Bissau


contributed to the decline in passenger car


imports there.


Overall, although data are sparse available


indicators suggest that consumer strength held


up in most countries, except where monetary


stance was tight, political instability disrupted


economic activity and adverse weather cut into


agricultural sector incomes.


With a few notable exceptions, central banks in


the region reacted to weakening inflation


pressures and slower growth by easing monetary


policy. Inflation rates declined in the region,


from a GDP-weighted average of 9.5 percent in


January to 7.7 percent in September. This in


addition to the weak global environment sparked


many central banks in the region to cut policy


rates, supporting credit flow to the real economy


(particularly business spending as firms account


for a higher share of private credit demand in


most Sub Saharan African countries). Interest


rate cuts outnumbered hikes by 3:1 in in 2012


(figure SSA.5). Kenya and Uganda were among


the most aggressive to cut policy rates. However


credit growth in these two economies remained


constrained for the greater part of 2012 – partly
because of lags in the transmission of monetary


policy and because interest rates though


declining remained high (between 11-23


percentage points). Interest rates were however


hiked in economies where inflation was creeping


Figure SSA.4 Growth in passenger car imports in
selected Sub-Saharan Africa economies (1st half
2012)


Sources: UNITC , Comtrade and World Bank.


-20 -10 0 10 20 30 40


Angola


Liberia


South Africa


Cape Verde


Mali


SSA


Mauritius


Côte d'Ivoire


Uganda


World


Mauritania


Zimbabwe


Ethiopia


Kenya


(values, percent year-on-year)


Figure SSA.3 Foreign direct investment flows to Sub
Saharan Africa held-up in 2012, despite weaker global
economic environment


Source: World Bank.


0


5


10


15


20


25


30


35


40


45


2008 2009 2010 2011 2012e


(Net inflows, $billions)


158





Global Economic Prospects January 2013 Sub-Saharan Africa Annex


up (Ghana) and or faced some current account


challenges (Cape-Verde).


Fiscal balances deteriorated in 2012. Although


very difficult to evaluate with precision, World


Bank estimates of the level of potential output in


Sub-Saharan economies suggests that demand


levels in more than half were close to or above


potential in 2012 – despite the slowing of growth
(figure SSA.6). In other countries, estimated


output gaps (the difference between demand


levels and actual output) are relatively small –
exceeding 2 percent in only 9 countries in the


region (figure).


Overall real government spending is projected to


grow about 0.6 percentage points higher than


GDP in 2012 and the region’s general
government balance is projected to deteriorate in


2012. Debt-to-GDP ratios in the region are


relatively low in historical comparisons or as


compared with high-income countries,


nonetheless they have increased from 28.9


percent in 2008 to 33.1 percent in 2012.


While government spending has been


appropriately prioritizing infrastructure projects


that are likely to contribute to the countries


future growth potential, care must be exercised


to ensure the long-term sustainability of


spending programs. In particular, in so far as


high commodity prices have boosted


government revenues in many Sub-Saharan


African countries, spending needs to be


sufficiently flexible as to be able to absorb what


could be a significant revenue loss if commodity


prices were to fall. World Bank simulations


suggest a 20 percent fall in industrial commodity


prices would lead to a further 1.6 percentage


point decline in government balances over a


three year period.


That said, markets appear to be confident in the


ability of countries and of firms operating in the


region to repay loans. Increasingly, countries in


the region are issuing longer-term bonds (both


domestic and foreign) and attracting financing


from larger developing countries, notably China.


And this borrowing is helping to bridge what the


World Bank estimates to be a $31 billion annual


infrastructure financing deficit. For the more


fragile economies in the region, public capital


investments rely heavily on official development


assistance (ODA)


While only a few countries are active in


international bond markets, more are gaining


Figure SSA.6 Estimated output GAP for 2012


Source: World Bank.


-10.0 -5.0 0.0 5.0


Mali


Guinea-Bissau


Guinea


Congo, Rep.


Angola


Burundi


Seychelles


Senegal


Cape Verde


Uganda


Swaziland


Congo, Dem. Rep.


South Africa


Cameroon


Mauritius


Benin


Mozambique


Namibia


Mauritania


Madagascar


Tanzania, United Rep.


Sierra Leone


Kenya


Niger


Comoros


Cote d'Ivoire


Malawi


Gambia, The


Botswana


Lesotho


Ethiopia


Burkina Faso


Togo


Nigeria


Ghana


Sudan


Central African Republic


Rwanda


Zambia


Eritrea


Gabon


Zimbabwe


Figure SSA.5 Year-to-date changes to policy rates in
Sub-Saharan Africa countries


Source: World Bank and Central Bank news info


-1,200 -800 -400 0 400 800


Uganda


Kenya


Mozambique


Congo Dem. Rep


Gambia


Mauritius


Namibia


South Africa


Angola


West African States


Botswana


Nigeria


Sierra Leone


Zambia


Rwanda


Cape Verde


Ghana


Malawi


(%)


159





Global Economic Prospects January 2013 Sub-Saharan Africa Annex


access. For example Zambia issued a maiden 10-


year $750 million Euro bond at a 5,625 percent


yield - - lower than yields in some high-spread


Euro Area economies at the time - that was


oversubscribed. As such it joined Ghana,


Senegal, Nigeria, Namibia -- all of which


accessed global bond markets for the first time in


recent years. Further, the inclusion of South


Africa to the Citi World Government Bond


Index (WGBI) and Nigeria to the JP Morgan


Emerging Market Global Bond Index is


supporting an increase in foreign investor


participation in their domestic bond markets.


Export growth in Sub Saharan Africa was


relatively robust in 2012. Export volumes in the


region increased by 4.5 percent between January


and July 2012, versus a global average of 3.6


percent during that period. Excluding South


Africa, the region’s largest economy, exports
from the rest of the region were up 6.0 percent


(figure SSA.7). The good performance was


supported by earlier investments in the export


sector, and a diversification of trading partners


(particularly to Asia). The region’s oil exporters
increased their exports by some 5 percent


(mostly due to increased output from Angola, as


output in Nigeria declined slightly). Metal and


other industrial raw material producers


(excluding South Africa), several of whom have


benefited from the coming onstream of new


mineral exports (Sierra Leone, Mozambique,


Niger etc.) increased their export volumes by


13.9 percent (y/y) during the first seven months


of 2012. Export volume growth was strongest for


the predominantly agricultural exporters (17.1


percent, y/y), in part due to weaker base effects


but also due to the lower cyclical sensitivity of


agricultural commodities.


Overall, however, regional exports were


sensitive to the slowdown of the global economy


in the second quarter of 2012. As with other


developing economies, following a strong


rebound in the first half of the year, exports


slowed in the third quarter. The sharpest


deceleration occurred among the industrial


commodity exporters, whose exports had been


growing at a 52.1 percent annualized pace in the


three months ending in June, but who saw export


volumes decline at a 2.1 percent pace in July


(42.1 and 5.9 percent for oil exporters).


Reflecting the preponderance of commodities in


their export baskets and the decline in


commodity prices, the deceleration in exports


values was even steeper. Indeed, excluding


South Africa export values contracted at a -30.5


percent pace (3m/3m) in July; with sharpest


declines occurring among oil (-39.4 percent) and


industrial raw material exporters (-10.3 percent)


reflecting the greater sensitivity of their export


prices to global demand changes compared to


agricultural commodities.


While the global cycle was an important factor


here, local disruptions to production from labor


unrest (South Africa) and military confrontations


(Guinea Bissau) were also at play.


Trends in services trade, particularly tourism, are


increasingly becoming an important driver of


growth in several Sub Saharan African countries


(including traditional destinations such as Cape-


Verde, Kenya, Mauritius, Seychelles and newer


destinations such as Rwanda. Data from the UN


World Tourism Organization shows that the


growth in tourist arrivals to the region picked up


by some 5.7 percent in the first half of 2012,


compared with a global average of 4.9 percent


during the same period (figure SSA.8). Sub


Saharan African countries that recorded strong


Figure SSA.7 Growth in Sub-Saharan Africa exports
were impacted by developments in the global econ-
omy


Source: World Bank and Datastream.


-40


-30


-20


-10


0


10


20


30


40


50


60


2010M01 2010M07 2011M01 2011M07 2012M01 2012M07


Sub Saharan Africa (SSA) SSA (ex. South Africa)


(volumes, %ch 3m/3m saar)


160





Global Economic Prospects January 2013 Sub-Saharan Africa Annex


growth in tourist arrivals included South Africa
(11 percent), Sierra Leone (17 percent),
Madagascar (13 percent) and Cape Verde where
tourist arrivals jumped 15 percent, supported in
part by a diversion of tourists from troubled
North African countries.


The growth of tourist arrivals to destinations in
the region notwithstanding the economic
weakness in Europe is encouraging and reflects a
diversification of source countries. For instance,
in Mauritius, arrivals from Europe (largest
source market) fell by 7.7 percent for the January
– September period, but arrivals from China rose
38.3 percent, and those from Russia by 91.2
percent. Further arrivals were up from elsewhere
in Africa (13.2 percent), Australia (13.5 percent),
Canada (18 percent) and South America (55.3
percent). Other countries have fared much less
well, for instance the cancellation of major
charter flights to Mombasa following terrorism
and piracy concerns there contributed to the 2
percent (y/y) fall in tourist arrivals to Kenya
between January and August 2012. Similarly the
conflict in Mali led to a sharp decline in tourist
arrivals there.


Medium-term outlook


Medium term GDP growth prospects for Sub
Saharan Africa remain strong with the same
driving forces that have underpinned the region’s


robust performance in recent years expected to
be sustained over the projection horizon (table
SSA.2). On aggregate the region’s GDP growth
is expected to average 5 percent over 2013-2015
(4.9, 5.1, and 5.2 percent for 2013, 2014 and
2015 respectively). Excluding, the region’s
largest economy, South Africa, GDP growth for
the rest of the region is expected to pick-up to
about 6.1 percent in 2013 and maintain that
growth through 2015 (6.0 percent and 6.1
percent in 2014 and 2015 respectively).


Increased investment will be a major driving
force of growth over the medium term. Increased
investment is to be a main driving force in the
region. Since 2000, investment in Sub-Saharan
Africa has steadily increased from 15.9 percent
of GDP to over 22 percent of GDP in 2012. In
addition to growing foreign sources of
investment finance, domestic investment is also
expected to benefit from the ongoing financial
sector deepening in the region, albeit from a very
weak base. Over the past decade, bank deposits
as a share of GDP have increased by some eight
percentage points, supporting a ten percentage
point increase in the private sector credit to GDP
ratio during this period (figure SSA.9). With the
lag in monetary policy transmission, the
widespread cuts in policy rates in 2012, is
expected to provide some stimulus to economic
activity through 2014.


Foreign direct investment to the region is
expected to remain strong over the medium term.
The World Bank projects FDI to the region to
increase to new record levels each year reaching
$55.6 billion in 2015. FDI inflows to the
extractive industries sector and to the agriculture
sector (to a lesser extent) should be supported by
persistently high (if somewhat softening)
commodity prices over the next 2-3 years (see
commodity annex). Strong exploration efforts in
East Africa during recent years have led to the
striking of several oil and gas wells and further
exploration and discoveries are expected over
the forecast horizon. In Southern Africa,
Mozambique expects to attract some $50bn in
foreign investment over the next decade thanks
to its huge coal deposits and offshore gas
discoveries. Similar investments in the minerals


Figure SSA.8 Growth in tourist arrivals in Sub-
Saharan Africa has been above average in recent
years, albeit from a low base


Sources: UN World Tourism Organization


-6.0


-4.0


-2.0


0.0


2.0


4.0


6.0


8.0


10.0


12.0


2009 2010 2011 2012


World High-income


Developing Sub Saharan Africa


Percent


161





Global Economic Prospects January 2013 Sub-Saharan Africa Annex


sector in West Africa (Ghana, Liberia, Sierra


Leone, Guinea, Niger etc.) are also expected.


Sixty percent of firms not currently present in


the region, indicated in a recent survey their


intention to expand into the region over the next


3-5 years (EIU, 2012). For instance, the Carlyle


group and two other partners recently announced


plans to invest some $210 million in a Tanzanian


agribusiness entity (the private-equity group’s
first foray into Sub-Saharan Africa).


Continued investment in infrastructure will be


critical to maintaining and strengthening growth


over the medium term– potentially boosting
growth rates in the region by 2 percentage


points. Indeed, infrastructural shortcomings may


be depressing firm-level productivity by as much


as 40 percent in some countries in the region


(Escribano, Guasch, and Pena, 2008).


As discussed above, countries will need to


continue giving priority to such investments,


while at the same time taking care to safeguard


fiscal flexibility should commodity prices and


government revenues decline. If appears likely,


official development assistance continues to


come under budgetary pressure in high-income


countries, poor and more fragile economies that


depend on aid for infrastructure spending may


find themselves falling behind. Other countries


Figure SSA.9 Financial deepening across Sub-
Saharan Africa, 2001-2011


Source: World Bank, Datastream.


22


24


26


28


30


32


34


2001 2003 2005 2007 2009 2011


(Bank deposit to GDP


Table SSA.2 Sub-Saharan Africa forecast summary


Source: World Bank.


Est. Forecast


00-09
a


2010 2011 2012 2013 2014 2015


GDP at market prices b 4.3 5.0 4.5 4.6 4.9 5.1 5.2


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


GDP at market prices c 4.3 4.9 4.5 4.6 4.9 5.1 5.2


GDP per capita (units in US$) 2.0 2.4 2.0 2.1 2.4 2.5 2.7


PPP GDP c 4.5 5.2 4.7 4.6 5.4 5.4 5.5


Private consumption 4.7 5.6 5.5 5.2 4.8 4.4 4.4


Public consumption 5.6 13.6 3.3 5.3 4.9 4.1 2.8


Fixed investment 8.9 -0.1 14.7 3.2 8.6 6.4 6.3


Exports, GNFS d 4.5 6.4 2.9 4.5 6.4 8.1 9.0


Imports, GNFS d 5.3 2.5 11.2 6.6 6.9 7.3 7.1


Net exports, contribution to growth -0.3 1.3 -2.9 -0.9 -0.4 0.0 0.4


Current account bal/GDP (%) 0.1 -1.2 -1.2 -2.9 -3.1 -3.3 -3.0


GDP deflator (median, LCU) 6.7 6.1 8.0 4.1 6.7 5.9 6.0


Fiscal balance/GDP (%) -0.4 -3.9 -1.0 -2.8 -2.4 -2.1 -1.7


Memo items: GDP


SSA excluding South Africa 4.9 6.2 5.3 5.8 6.1 6.0 6.1


Oil exporters e 5.5 6.1 4.9 6.0 6.2 6.0 6.2


CFA countries f 3.8 4.5 2.7 5.2 5.2 4.7 4.3


South Africa 3.2 2.9 3.1 2.4 2.7 3.2 3.3


Nigeria 5.6 7.8 6.7 6.5 6.6 6.4 6.3


Angola 10.7 3.4 3.4 8.1 7.2 7.5 7.8


(annual percent change unless indicated otherwise)


a. Growth rates over intervals are compound weighted averages; average growth contributions, ratios and deflators


are calculated as simple averages of the annual weighted averages for the region.


b. GDP at market prices and expenditure components are measured in constant 2005 U.S. dollars.


c. Sub-region aggregate excludes Liberia, Chad, Somalia and São Tomé and Principe. Data limitations prevent the


forecasting of GDP components or Balance of Payments details for these countries.


d. Exports and imports of goods and non-factor services (GNFS).


e. Oil Exporters: Angola, Cote d Ivoire, Cameroon, Congo, Rep., Gabon, Nigeria, Sudan, Chad, Congo, Dem. Rep.


f. CFA Countries: Benin, Burkina Faso, Central African Republic, Cote d Ivoire, Cameroon, Congo, Rep., Gabon,


Equatorial Guinea, Mali, Niger, Senegal, Chad, Togo.


162





Global Economic Prospects January 2013 Sub-Saharan Africa Annex


in the region are likely to tap into international


capital markets to support their infrastructural


programs, including perhaps first-time entries by


countries like Rwanda, Uganda, Kenya, and


Mozambique. Bilateral funding sources,


particularly from other developing countries will


also be critical for some countries. Indeed, the


Forum on China-Africa Cooperation (FOCAC)


recently announced that China will provide


$20bn of credit lines to African countries to


assist in developing infrastructure, agriculture,


manufacturing and small and medium-sized


enterprises (figure SSA.10).


The modest pick-up in the global economy


projected in 2013 and beyond should provide


some support to Sub-Saharan African export


growth. Sub-Saharan Africa exports are


projected to continue increasing rapidly over the


forecast horizon, partly due to an expected


strengthening of global demand, but mainly


reflecting further increases in the region’s share
of global markets – itself partly a reflection of
productivity growth, but also the coming on


stream of new mineral exports in several


countries (e.g. Burkina Faso, Mozambique,


Niger, Cameroon, Gabon, Sierra Leone etc.). A


stronger global economy should also see a


further strengthening of the region’s tourism
sector.


The increased demand for capital goods to meet


infrastructure and other investment needs,


growing demand for oil among oil importers,


and rising per capita incomes, should boost


demand for consumer durables and other


imports. As a result, the regional current account


deficit is projected to about 2.8 percent of


regional GDP in 2014 from 2.4 percent in 2012


before improving to 2.5 percent in 2015, and net


exports are expected to be a modest drag (figure


SSA.11). However, for some of the less


diversified oil exporters (Angola, Congo), net


exports will be positive.


These expected medium term positive


developments will however not be universal


across the region. Indeed, labor market


challenges (South Africa) and political


instability (Mali) is expected to cut into


economic activity in some countries in the


region over the forecast horizon.


Risks


Notwithstanding the robust growth expected for


the region over the forecast horizon, the risks


remain tilted on the downside.


Fragile global recovery. While the tepid


recovery of global economic activity is our


baseline scenario, the many tension points in the


global economy could result in a much weaker


global outcome. Financial markets tensions in


Figure SSA.11 Domestic demand remains a robust
pillar of growth in Sub-Saharan Africa


Source: World Bank.


-6


-4


-2


0


2


4


6


8


10


12


2006 2007 2008 2009 2010 2011 2012


Net exports Domestic demand Real GDP growth


(percentage contribution)


Figure SSA.10 Net official flows to Sub-Saharan
Africa


Source: World Bank.


-6


-4


-2


0


2


4


6


8


10


12


14


16


2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


Other official (incl. China thru 2008)


Offical excluding China


China


IMF


World Bank


$ billion


163





Global Economic Prospects January 2013 Sub-Saharan Africa Annex


the Euro Area have eased since 2012Q2 and the


likelihood of a serious deterioration in conditions


decreased, nonetheless conditions still remain


fragile and sentiment is vulnerable to bad news.


Should they deteriorate markedly, with a credit


freeze to some of the larger high-spread troubled


Euro Area economies, global economy activity


could return to recession-like conditions and


GDP in Sub-Saharan Africa could fall by up to


1.0 percentage points relative to the baseline


forecasts, although results will differ by country


(figure SSA.12).


The fiscal consolidation in the United States is


already sapping growth there. In our baseline, a


credible medium-term plan to restore fiscal


sustainability is assumed to be arrived at by


February 2013—implying a 1.6 percent of fiscal
compression. However, were this not to occur


and a deeper fiscal contraction to take place, this


would serve as a larger drag to US growth. In an


alternate scenario we assume no such agreement


is arrived at and that authorities agree on a


partial deal that provides for $110bn additional


fiscal contraction but only short-term relief from


debt ceiling legislation, creating further


uncertainty on future tax and fiscal policy.


Should that arise, the trade channel alone could


cause Sub Saharan African GDP to decline by


0.9 percentage points relative to baseline.


Further, current account and fiscal balances


could deteriorate by 1.3 and 0.8 percentage


points from their baseline projections. However,


given the importance of the US economy in


global markets, the indirect impacts through


weaker confidence and the potential rattling of


global financial and commodity markets would


likely have a stronger impact on the region.


A third tension point surrounds the possibility of


a disorderly unwinding of China’s unusually
high investment rate. With Chinese demand


accounting for some 50 percent of many


industrial metals exported from Africa, a sharper


than envisaged down turn there could lead to a


slump in commodity prices which would impact


the non-diversified metal and mineral exporters


in the region (e.g. Zambia, Botswana, Namibia,


Democratic Republic of Congo) as well as oil


exporters in the region that trade predominantly


with China (e.g. Angola, Sudan etc.). Indeed, an


abrupt slowing in Chinese investment would


slow the regions GDP by 0.3 percent, with


current account and fiscal balances deteriorating


by 0.6 and 0.3 percentage points of GDP


respectively.


Indeed, the above discussed tension points in the


global economy are not necessarily mutually


exclusive as one event could trigger another


event. Hence in this environment of increased


fragility in the global economy, developing


countries, including in Sub Saharan African


countries will benefit from building the relevant


short-term policy buffers and undertaking


policies that will support the competitiveness of


their economies in the long-run (including


physical and human capital development, access


to finance, and removing cumbersome regulatory


Figure SSA.12 Potential GDP impacts on selected
Sub Saharan African economies from an escalation in
Euro Area Crisis


Source: World Bank.


-1.8 -1.6 -1.4 -1.2 -1.0 -0.8 -0.6 -0.4 -0.2 0.0


Rwanda


Uganda


Ethiopia


Malawi


Namibia


Benin


Mauritius


Kenya


Mauritania


Cape-Verde


Togo


Sierra Leone


Central African Republic


South Africa


Ghana


Sub Saharan Africa


Botswana


Mozambique


Senegal


Nigeria


Mali


Cote d'Ivoire


(Percentage deviation from baseline GDP growth projections)


164





Global Economic Prospects January 2013 Sub-Saharan Africa Annex


requirements that impede investment activity).
However, compared to the pre-crisis period
policy buffers for most economies in the region
remain weaker. For instance, while in 2007
fiscal balances were in a surplus of some 0.4
percent of GDP, in 2012 fiscal balances have
deteriorated to above 2 percent of GDP for the
region. And though in 2012, headline inflation
has come down for the region, it still remains
high in a number of countries, hence limiting
options for monetary policy stimulus in these
economies. Hence, were there to be another
significant down turn in the global economy,
unlike the recent episode where the fiscal policy
space existed to embark on countercyclical
policy, the capacity to do so now remains more
limited, unless buffers are quickly rebuilt. The
importance of having adequate buffers is
observed in a simulation carried out of an
arbitrary high-income country shock - equivalent
to a 5% decline in GDP. The results of the
simulation show that while GDP growth for Sub
Saharan African countries with adequate policy
buffers suffer a 0.3 percentage point decline in
GDP, their counterparts without the policy
buffers, and thus unable to engage in
countercyclical fiscal policies, suffer a more
marked decline of 0.8 percentage point reduction
in their GDP growth relative to the baseline.


Domestic risks. Besides these external risks,
downturns from domestic challenges are equally
important. Disruptions to productive activity
from unrest (political, civil and labor) are
important potential downside risks, as
investment, trade and tourism activity, all
important growth drivers, are likely to suffer.
Indeed, in 2012, labor unrest in South Africa,
terrorists activity in parts of Nigeria, coup d’etats
in both Mali and Guinea Bissau, and political
stalemate in Guinea and Madagascar curtailed
economic activity to varying degrees in these
economies. Though most economies in the
region remain stable, simmering concerns,
particularly in the fragile economies continue to
pose an important downside risk to economic
activity there over the medium term.


With the agricultural sector being the largest
employer for almost all economies in the region,


and with much of activity in the sector being of a
subsistence nature and dependent on good rain
fall patterns, adverse weather conditions remain
an important risk factor. Rain patterns in the
latter half of 2012 in the Sahel region of West
Africa and in East Africa suggest normal first
harvests for 2013, however the situation
thereafter remains unknown.


Notes:


1. The United Nations World Investment
Report, 2012 reports that data on the
profitability of United States FDI (FDI
income as a share of FDI stock) show a 20
per cent return in Africa in 2010, compared
with 14 per cent in Latin America and the
Caribbean and 15 per cent in Asia
(UNCTAD, 2012).


2. Until these recent findings East Africa was
considered to be less endowed compared to
the rest of the region


3. World Investment Report, 2012.


References:


Economist Intelligence Unit, 2012. Africa cities
rising. EIU, London.


Escribano, Alvaro, J.Luis Guasch, Jorge Pena
(2008). Impact of Infrastructure Constraints
on Firm Productivity in Africa. Working
Paper 9, Africa Infrastructure Sector
Diagnostic, World Bank, Washington, DC.




165





Global Economic Prospects January 2013 Sub-Saharan Africa Annex




Table SSA.3 Sub-Saharan Africa country forecasts


Est. Forecast


00-09
a


2010 2011 2012 2013 2014 2015


Angola


GDP at market prices (% annual growth) b 10.7 3.4 3.4 8.1 7.2 7.5 7.8


Current account bal/GDP (%) 4.9 9.1 13.0 8.5 5.9 4.7 4.8


Benin


GDP at market prices (% annual growth) b 3.7 3.0 3.1 3.5 3.8 4.5 5.0


Current account bal/GDP (%) -8.4 -9.4 -9.8 -9.8 -9.0 -7.6 -6.4


Botswana


GDP at market prices (% annual growth) b 3.4 7.0 8.1 5.8 5.1 4.9 4.8


Current account bal/GDP (%) 8.3 0.5 8.7 8.9 8.7 8.9 8.6


Burkina Faso


GDP at market prices (% annual growth) b 5.2 7.9 4.2 6.4 6.7 7.0 6.3


Current account bal/GDP (%) -13.1 -7.0 -0.7 -8.9 -8.3 -7.7 -7.1


Burundi


GDP at market prices (% annual growth) b 2.9 3.8 4.2 4.1 4.3 4.6 4.9


Current account bal/GDP (%) -17.8 -15.9 -16.0 -18.2 -17.4 -16.6 -15.8


Cape Verde


GDP at market prices (% annual growth) b 5.5 5.2 5.0 4.8 4.9 5.0 5.1


Current account bal/GDP (%) -11.3 -12.8 -11.1 -9.9 -8.3 -6.4 -6.4


Cameroon


GDP at market prices (% annual growth) b 3.0 3.2 3.8 4.6 4.8 5.0 5.1


Current account bal/GDP (%) -2.4 -3.8 -6.6 -5.8 -4.3 -4.1 -3.7


Central African Republic


GDP at market prices (% annual growth) b 0.6 3.3 3.1 3.8 4.0 4.1 4.2


Current account bal/GDP (%) -8.5 -12.6 -7.2 -6.1 -5.4 -5.1 -4.9


Comoros


GDP at market prices (% annual growth) b 1.8 2.1 2.2 2.5 3.5 4.0 4.0


Current account bal/GDP (%) -12.2 -28.2 -9.6 -7.0 -6.1 -6.9 -7.6


Congo, Dem. Rep.


GDP at market prices (% annual growth) b 4.2 7.2 6.9 6.6 8.2 6.4 7.5


Current account bal/GDP (%) 0.6 -16.6 -11.5 -12.7 -14.6 -15.1 -12.2


Congo, Rep.


GDP at market prices (% annual growth) b 3.8 8.8 3.4 4.7 5.6 5.4 4.7


Current account bal/GDP (%) -2.0 -21.4 5.4 0.5 2.6 1.4 0.5


Cote d Ivoire


GDP at market prices (% annual growth) b 0.8 2.4 -4.7 8.2 7.0 6.0 5.5


Current account bal/GDP (%) 1.9 2.0 0.3 -3.7 -3.9 -4.5 -4.7


Equatorial Guinea


GDP at market prices (% annual growth) b 17.0 -0.8 7.8 5.7 6.1 1.4 -1.3


Current account bal/GDP (%) 15.4 -32.3 -7.9 -14.1 -10.0 -11.8 -12.3


Eritrea


GDP at market prices (% annual growth) b 1.8 2.2 8.7 7.5 6.0 3.5 3.0


Current account bal/GDP (%) -21.5 -5.6 -0.9 -0.8 1.3 2.7 4.1


Ethiopia


GDP at market prices (% annual growth) b 7.4 9.9 7.3 7.8 7.5 7.2 7.5


Current account bal/GDP (%) -5.7 -1.4 -2.5 -6.3 -6.3 -6.7 -6.7


Gabon


GDP at market prices (% annual growth) b 1.6 6.6 5.7 4.7 3.5 3.3 3.5


Current account bal/GDP (%) 14.9 7.2 23.8 22.0 16.5 12.2 7.3


Gambia, The


GDP at market prices (% annual growth) b 3.8 6.1 -4.3 3.9 10.7 5.5 5.8


Current account bal/GDP (%) -3.5 2.0 -16.8 -17.9 -17.1 -15.0 -13.2


166





Global Economic Prospects January 2013 Sub-Saharan Africa Annex


Est. Forecast


00-09
a


2010 2011 2012 2013 2014 2015


Ghana


GDP at market prices (% annual growth) b 5.0 8.0 14.4 7.5 7.8 7.4 7.5


Current account bal/GDP (%) -6.5 -7.5 -9.9 -11.8 -9.7 -9.7 -8.1


Guinea


GDP at market prices (% annual growth) b 2.6 1.9 3.9 4.8 5.0 6.0 6.5


Current account bal/GDP (%) -7.1 -7.0 -23.8 -39.6 -46.7 -52.5 -53.9


Guinea-Bissau


GDP at market prices (% annual growth) b 0.9 3.5 5.3 -2.8 3.0 4.6 5.1


Current account bal/GDP (%) -14.9 -23.8 -7.2 -6.5 -6.5 -6.7 -6.6


Kenya


GDP at market prices (% annual growth) b 3.6 5.6 4.5 4.3 4.9 5.1 4.8


Current account bal/GDP (%) -2.4 -7.4 -9.3 -8.9 -8.7 -8.2 -7.7


Lesotho


GDP at market prices (% annual growth) b 3.2 5.6 5.8 4.3 5.2 5.3 5.0


Current account bal/GDP (%) 2.9 -20.2 -21.4 -23.6 -13.4 -9.2 -6.9


Madagascar


GDP at market prices (% annual growth) b 2.5 1.6 1.0 2.2 4.5 4.8 5.4


Current account bal/GDP (%) -12.3 -15.0 -7.6 -8.1 -7.9 -8.2 -7.6


Malawi


GDP at market prices (% annual growth) b 4.0 6.5 4.3 4.1 5.4 5.6 6.0


Current account bal/GDP (%) -10.9 -17.9 -12.2 -12.7 -12.9 -12.6 -12.0


Mali


GDP at market prices (% annual growth) b 5.1 5.8 2.7 -1.5 3.5 5.9 6.0


Current account bal/GDP (%) -8.1 -12.6 -4.9 -5.1 -4.8 -7.6 -7.2


Mauritania


GDP at market prices (% annual growth) b 4.5 5.2 3.9 4.8 5.2 4.9 4.9


Current account bal/GDP (%) -11.2 -2.9 2.9 -18.4 -15.4 -15.3 -13.2


Mauritius


GDP at market prices (% annual growth) b 3.4 4.1 3.8 3.3 3.6 4.0 4.4


Current account bal/GDP (%) -2.7 -10.4 -12.6 -10.8 -9.7 -8.8 -7.8


Mozambique


GDP at market prices (% annual growth) b 7.1 6.8 7.3 7.5 8.0 8.2 8.0


Current account bal/GDP (%) -14.0 -18.1 -25.7 -27.7 -27.0 -41.7 -41.6


Namibia


GDP at market prices (% annual growth) b 4.0 6.6 3.8 4.2 4.3 4.4 5.0


Current account bal/GDP (%) 3.5 -2.1 -0.9 -0.3 -0.9 -1.3 -1.7


Niger


GDP at market prices (% annual growth) b 3.7 8.0 2.3 12.0 6.8 6.1 5.0


Current account bal/GDP (%) -9.7 -32.5 -21.6 -22.6 -18.9 -18.6 -19.1


Nigeria


GDP at market prices (% annual growth) b 5.6 7.8 6.7 6.5 6.6 6.4 6.3


Current account bal/GDP (%) 14.4 6.8 3.6 3.5 2.0 1.2 0.4


Rwanda


GDP at market prices (% annual growth) b 6.8 7.2 8.6 7.7 7.5 7.3 7.2


Current account bal/GDP (%) -6.2 -7.7 -7.3 -9.9 -9.7 -9.8 -9.6


Senegal


GDP at market prices (% annual growth) b 3.6 4.1 2.6 3.7 4.8 4.8 5.0


Current account bal/GDP (%) -8.0 -4.7 -6.9 -8.6 -8.2 -7.8 -7.5


167





Global Economic Prospects January 2013 Sub-Saharan Africa Annex


Source: World Bank.


Est. Forecast


00-09
a


2010 2011 2012 2013 2014 2015


Seychelles


GDP at market prices (% annual growth) b 1.5 6.7 5.0 3.3 4.2 3.9 3.7


Current account bal/GDP (%) -14.1 -19.7 -21.0 -19.5 -19.1 -15.4 -12.1


Sierra Leone


GDP at market prices (% annual growth) b 9.0 4.9 6.0 25.0 11.1 7.6 7.6


Current account bal/GDP (%) -14.1 -34.2 -55.4 -15.6 -8.8 -7.5 -6.3


South Africa


GDP at market prices (% annual growth) b 3.2 2.9 3.1 2.4 2.7 3.2 3.3


Current account bal/GDP (%) -3.0 -2.8 -3.4 -6.9 -6.4 -6.3 -5.9


Sudan


GDP at market prices (% annual growth) b 5.9 4.5 5.0 3.0 3.2 3.3 5.0


Current account bal/GDP (%) -6.3 -0.5 2.9 3.5 3.0 2.6 2.2


Swaziland


GDP at market prices (% annual growth) b 2.1 2.0 1.3 -2.0 1.0 1.9 1.9


Current account bal/GDP (%) -2.6 -10.4 -14.5 -14.2 -12.2 -14.1 -15.7


Tanzania


GDP at market prices (% annual growth) b 6.2 7.0 6.3 6.5 6.8 7.0 7.0


Current account bal/GDP (%) -9.2 -11.9 -12.9 -16.2 -14.3 -12.8 -11.9


Togo


GDP at market prices (% annual growth) b 1.7 3.7 3.9 4.0 4.4 4.6 4.6


Current account bal/GDP (%) -9.2 -6.3 -6.5 -8.9 -8.7 -8.8 -9.3


Uganda


GDP at market prices (% annual growth) b 6.8 5.9 6.7 3.4 6.2 6.9 7.3


Current account bal/GDP (%) -5.2 -10.8 -13.3 -11.5 -11.3 -11.4 -10.7


Zambia


GDP at market prices (% annual growth) b 4.8 7.6 6.6 6.7 7.1 7.8 6.0


Current account bal/GDP (%) -10.9 5.7 -1.2 -3.9 -2.4 -2.6 -1.8


Zimbabwe


GDP at market prices (% annual growth) b -5.9 9.0 9.3 5.0 6.0 5.5 5.0


Current account bal/GDP (%) -11.4 -13.4 -20.7 -19.5 -20.3 -22.5 -24.0


World Bank forecasts are frequently updated based on new information and changing (global) circumstances.


Consequently, projections presented here may differ from those contained in other Bank documents, even if


basic assessments of countries’ prospects do not significantly differ at any given moment in time.


Liberia, Somalia, Sao Tome and Principe are not forecast owing to data limitations.


a. GDP growth rates over intervals are compound average; current account balance shares are simple averages


over the period.


b. GDP measured in constant 2005 U.S. dollars.


168




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