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Global Economic Prospects: Less volatile, but slower growth

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The book is organized by topics such as industrial production, inflation, financial markets, trade, and others that give an overview of the world's economy and its main conclusion is that global economy appears to be transitioning toward a period of more stable, but slower growth. It also contains detailed information and figures by region where the figures show that growth is firming in developing countries, but conditions vary widely across economies.

A World Bank Group Flagship Report


Global
Economic
Prospects


Volume 7 | June 2013


The World Bank


Less volatile,
but slower growth




Less volatile,


but slower growth


Volume


7


GLOBAL
ECONOMIC
PROSPECTS June


2013




© 2013 International Bank for Reconstruction and Development / The World Bank
1818 H Street NW, Washington DC 20433
Telephone: 202-473-1000; Internet: www.worldbank.org

Some rights reserved
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The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its
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Attribution—Please cite the work as follows: The World Bank. 2013. Global Economic Prospects, Volume 7, June 2013, World Bank,
Washington, DC. doi:10.1596/978-1-4648-0036-8 License: Creative Commons Attribution CC BY 3.0

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ISBN (electronic): 978-1-4648-0036-8
DOI: 10.1596/978-1-4648-0036-8

Cover photo: Neil Thomas
Cover design: Roula Yargizi



















The cutoff date for the data used in the report was June 7, 2013.




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, Muham-


mad Adil Islam and Irina Magyer. The projections, re-


gional write-ups and subject annexes were produced


by Dilek Aykut (Finance, Europe & Central Asia), John


Baffes (Commodities), Damir Ćosić (Commodities),


Allen Dennis (Sub-Saharan Africa and International


Trade), Tehmina Shaukat Khan (Middle East & North


Africa), Eung Ju Kim (Finance), Sanket Mohapatra


(South Asia and Exchange Rates), Theo Janse van


Rensburg (High-Income Countries), Cristina Savescu


(Latin America & Caribbean and Industrial Production)


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 and Damir Ćosić. The


remittances forecasts were produced by Gemechu


Ayana Aga, Christian Eigen-Zucchi and Dilip K. Ratha.


Simulations were performed by Trung Thanh Bui and


Theo Janse van Rensburg.




The accompanying online publication, Prospects for


the Global Economy, was produced by a team com-


prised of Marie-Anne Chambonnier, Muhammad Adil


Islam, Vamsee Krishna Kanchi, Katherine Rollins, and


Dana Vorisek, with technical support from David Horo-


witz, Ugendran Machakkalai, and Malarvishi Veerap-


pan.




Cynthia Case-McMahon, Indira Chand, and Merrell


Tuck-Primdahl managed media relations and the dis-


semination. Kristina Cathrine Mercado managed the


publication process.








Several reviewers offered extensive advice and com-


ments. These included Abdul de Guia Abiad, Ahmad


Ahsan, Sara B. Alnashar, Jorge Araujo, Merli Baroudi,


Roshan D. Bajracharya, Andrew Beath, Kirida


Bhaopichitr, Parminder P.S. Brar, Penelope J. Brook,


Timothy John Bulman, Kevin Carey, Young Hwan Cha,


Shubham Chaudhuri, Rodrigo A. Chaves, Nada


Choueri, Karl Kendrick Tiu Chua, Punam Chuhan-


Pole, Francoise Clottes, Tito Cordella, Augusto de la


Torre, Shantayanan Devarajan, Tatiana Didier, Hinh


Truong Dinh, Sebastian Eckardt, Khalid El Massnaoui,


Philip English, Pablo Fajnzylber, Manuela V. Ferro,


Daminda Eynard Fonseka, Bernard G. Funck, Marcelo


Giugale, Chorching Goh, Susan G. Goldmark, David


Michael Gould, Gloria M. Grandolini, Kiryl Haiduk, Bert


Hofman, Zahid Hussain, Elena Ianchovichina, Fernan-


do Gabriel Im, Roumeen Islam, Ivailo V. Izvorski, Car-


los Felipe Jaramillo, Markus Kitzmuller, Auguste Tano


Kouame, Thomas Blatt Laursen, Xiaofan Liu, Sandeep


Mahajan, Ernesto May, Deepak Mishra, Denis


Medvedev, Lars Christian Moller, Lalita M. Moorty,


Claudia Nassif, Antonio Nucifora, Antonio M. Ollero,


Kwang Park, Catalin Pauna, Keomanivone Phimmaha-


say, Miria Pigato, Mohammad Zia Qureshi, Martin


Raiser, Susan R. Razzaz, Christine M. Richaud, David


Rosenblatt, Frederico Gil Sander, Philip Schuler,


Sudhir Shetty, Maryna Sidarenka, Alexis Sienaert,


Carlos Silva-Jauregui, Karlis Smits, Vinaya Swaroop,


Mark Roland Thomas, Volker Treichel, Nattaporn Tri-


ratanasirikul, Cevdet Cagdas Unal, M. Willem van Ee-


ghen, Axel van Tortsenberg, R. Gregory Toulmin, Ser-


gei Ulatov, Aristomene Varoudakis, Mathew A.


Verghis, Gallina Andronova Vincelette, Ekaterina


Vostroknutova, Muhammad Waheed, Marina Wes,


Deborah L. Wetzel, Kirthisri Rajatha Wijeweera,


Hernan Jorge Winkler, Soonhwa Yi, Salman Zaidi, and


Albert Zeufack.




ACRONYMS






ASEAN Association of South East Asian Nations




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




CDS Credit Default Swap




ECB European Central Bank




FDI Foreign Direct Investment




GDP Gross Domestic Product




IMF International Monetary Fund




ODA Official Development Assistance




OECD Organization for Economic Cooperation and Development




OMT Outright Monetary Transactions




OPEC Organization of Petroleum Exporting Countries




PMI Purchasing Manager’s Index




QE Quantitative Easing




SAAR Seasonally adjusted annualized rate




TFP Total Factor Productivity







TABLE OF CONTENTS




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


Topical Annexes


Industrial production …………………. …………………………………………………....... 31


Inflation. …………………………………………………………………..…………….......... 41


Financial markets ……………………………………………..…………...…………….......... 53


Trade ……………………………………………………………………..……….…….......... 67


Exchange rates ………………………………………………………………..……..……..… 77


Commodity markets …………………….……………………………………..….….………. 91


Regional Annexes


East Asia & the Pacific ………………………………………………...…...…..……….…… 117


Europe & Central Asia …………………………………………………..……...…..….……. 133


Latin America & the Caribbean ……………………………………...………………….….... 149


Middle East & North Africa ……………………………………………………………..….. 163


South Asia ………………………………………………………….………………................ 181


Sub-Saharan Africa ……………………………………………….…………………...…….. 199























GLOBAL ECONOMIC PROSPECTS | June 2013




1


Overview and
main messages


The global economy appears to be transitioning
toward a period of more stable, but slower growth.
Global gross domestic product (GDP), which
slowed in mid-2012 is recovering, and a modest
acceleration in quarterly GDP is expected during
the course of 2013. That progress will be masked in
the annual data, however, with whole-year growth
for 2013 projected at 2.2 percent, a touch slower
than in 2012. The strengthening of quarterly
growth will show up in whole-year global GDP
growth of 3.0 percent for 2014 and 3.3 percent in 2015
(table 1).


Financial conditions in high-income countries
have improved and risks are down, but growth
remains subdued, especially in Europe
High-income countries continue to face challenges
to restore financial sector health, reform
institutions, and get fiscal policy onto a sustainable
path. However, the likelihood that these challenges
provoke a major crisis has declined.

Although acute risks have diminished, real-side
activity remains sluggish. Among high-income
countries, the challenges are especially difficult in
high-income Europe, where growth is being held
back by weak confidence and continued banking-
sector and fiscal restructuring. The recovery is on
more solid ground in the United States, where a
fairly robust private sector recovery is being held
back, but not extinguished, by fiscal tightening.
Meanwhile, in Japan, a dramatic relaxation of
macroeconomic policy has sparked an uptick in
activity, at least over the short term. Overall,
growth in high-income countries is projected to
accelerate slowly, with GDP expanding a modest
1.2 percent this year, but firming to 2.0 and 2.3
percent in 2014 and 2015, respectively.


Growth is firming in developing countries, but
conditions vary widely across economies


In developing countries, GDP is expected to firm
somewhat. Less volatile external conditions, a
recovery of capital flows to levels that support


growth, the relaxation of capacity constraints in
some middle-income countries, and stronger
growth in high-income countries are expected to
yield a gradual acceleration of developing-country
growth to 5.1 percent this year, and to 5.6 and 5.7
percent in 2014 and 2015, respectively.


Most developing countries have recovered from
the crisis, so room for additional acceleration is
limited
The overall acceleration is not stronger because the
majority of developing countries have more-or-less
fully recovered from the 2008 financial crisis. For
many of these countries, current and projected
growth is broadly in line with underlying potential
growth—leaving little room for acceleration. Thus,
GDP in the East Asia & Pacific region is projected
to increase 7.3 percent in 2013, but then expand at
a broadly stable 7½ percent rate in each of 2014,
and 2015. In Latin America, growth is expected to
pick up in 2013 to about 3.3 percent, but then to
stabilize at just below 4 percent in each of 2014 and
2015. Already, growth in several countries in both
regions is being held back by supply-side
constraints that are manifesting themselves in
inflation, asset-price bubbles, and deteriorating current
account balances.

Many countries in Sub-Saharan Africa are also
running at, close to, or above potential output, and
risk building up inflationary pressures. Growth in
the region is projected to firm over the projection
period to 4.9, 5.2, and 5.4 percent in 2013, 2014,
and 2015, respectively. Growth in South Asia is
projected to pick up to 5.2 percent this year,
following a very weak 2012 and then to firm only
gradually to 6.0 and 6.4 percent in 2014 and 2015
as spare capacity is reabsorbed.


In developing Europe and the Middle East &
North Africa, output gaps remain and growth
is projected to strengthen
Many countries in developing Europe have still not
recovered from the crisis. Unemployment and
spare capacity remain high, because activity has
been weighed down by banking-sector, household,
and fiscal restructuring (much like high-income
Europe). As adjustments are completed, growth in
the region is projected to strengthen progressively
from 2.7 percent last year to 4.2 percent by 2015.
Growth in the Middle East & North Africa has




GLOBAL ECONOMIC PROSPECTS | June 2013




2



The global outlook in summary


(percentage change from previous year, except interest rates and oil price)




Table 1.


2011 2012 2013e 2014f 2015f


Global Conditions


World Trade Volume (GNFS) 6.2 2.7 4.0 5.0 5.4


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 -4.7 -1.1 -1.5


Oil Price (US$ per barrel)
3 104.0 105.0 102.4 101.0 101.0


Oil price (percent change) 31.6 1.0 -2.5 -1.3 -0.1


Manufactures unit export value
4 8.5 -2.1 2.4 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 5.2 5.0 4.7 4.4 4.3


Net private inflows (equity + debt) 5.0 4.9 4.7 4.4 4.3


East Asia and Pacific 5.7 4.6 4.2 3.9 3.8


Europe and Central Asia 5.5 5.7 6.5 6.1 6.0


Latin America and Caribbean 5.4 6.4 5.9 5.5 5.3


Middle East and N. Africa 1.3 1.4 1.1 1.4 1.7


South Asia 3.3 4.0 3.6 3.4 3.3


Sub-Saharan Africa 4.2 3.5 3.8 3.9 4.2


Real GDP growth
5


World 2.8 2.3 2.2 3.0 3.3


Memo item: World (PPP weights) 3.8 2.9 3.1 3.8 4.1


High income 1.7 1.3 1.2 2.0 2.3


OECD Countries 1.5 1.2 1.1 1.9 2.2


Euro Area 1.5 -0.5 -0.6 0.9 1.5


Japan -0.5 2.0 1.4 1.4 1.3


United States 1.8 2.2 2.0 2.8 3.0


Non-OECD countries 4.9 2.8 3.1 3.7 3.9


Developing countries 6.0 5.0 5.1 5.6 5.7


East Asia and Pacific 8.3 7.5 7.3 7.5 7.5


China 9.3 7.8 7.7 8.0 7.9


Indonesia 6.5 6.2 6.2 6.5 6.2


Thailand 0.1 6.5 5.0 5.0 5.5


Europe and Central Asia 5.7 2.7 2.8 3.8 4.2


Russia 4.3 3.4 2.3 3.5 3.9


Turkey 8.8 2.2 3.6 4.5 4.7


Romania 2.5 0.7 1.7 2.2 2.7


Latin America and Caribbean 4.4 3.0 3.3 3.9 3.8


Brazil 2.7 0.9 2.9 4.0 3.8


Mexico 3.9 3.9 3.3 3.9 3.8


Argentina 8.9 1.9 3.1 3.0 3.0


Middle East and N. Africa -2.2 3.5 2.5 3.5 4.2


Egypt
6 1.8 2.2 1.6 3.0 4.8


Iran 1.7 -1.9 -1.1 0.7 1.9


Algeria 2.4 2.5 2.8 3.2 3.5


South Asia 7.3 4.8 5.2 6.0 6.4


India
6, 7 6.2 5.0 5.7 6.5 6.7


Pakistan
6, 7 3.0 3.7 3.4 3.5 3.7


Bangladesh
6 6.7 6.2 5.8 6.1 6.3


Sub-Saharan Africa 4.7 4.4 4.9 5.2 5.4


South Africa 3.1 2.5 2.5 3.2 3.3


Nigeria 7.4 6.5 6.7 6.7 7.0


Angola 3.4 8.1 7.2 7.5 7.8


Memorandum items


Developing countries


excluding transition countries 6.5 5.0 5.3 5.8 5.9


excluding China and India 4.5 3.3 3.5 4.2 4.4


6.


7. Real GDP at factor cost, consistent with reporting practice in Pakistan and India. See Table SAR.2, South Asia Regional Annex for details.


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.




GLOBAL ECONOMIC PROSPECTS | June 2013




3


been disrupted by political and social tensions and
Euro Area weakness. Assuming that tensions in the
region gradually ease, growth is projected to slowly
strengthen from 2.5 percent in 2013 to 3.5 percent
in 2014 and 4.2 percent in 2015.


Risks are less pronounced and more balanced than a
year ago, with new risks gaining prominence


Although acute risks in high-income countries are
down, more modest downside risks linger as these
economies continue to adjust. Importantly, downside
risks are now balanced by the possibility of
stronger growth should confidence improve more
quickly than anticipated in the baseline.

For developing countries that have already
recovered from the crisis, or that are expected to in
2013, macroeconomic policy may need to be
tightened to contain or prevent inflation, asset-
price bubbles, and deteriorating current accounts.
Tightening would have the further advantage of
restoring depleted policy buffers. In countries
where unemployment remains high and spare
capacity is ample, notably in developing Europe, a
loosening of policy may be in order where policy
space exists. The rebalancing effort in China, and its
unsustainably high investment rate are ongoing
challenges.


Most countries need to prioritize structural
reforms to expand their growth potential


While projected growth rates are satisfactory and
well above the growth rates of the 1990s, they are 1
–2 percentage points slower than in the pre-crisis
boom period. To achieve higher growth on a
sustained basis, developing countries will need to
focus on domestic challenges. These differ across
countries, but share common themes. In general,
policymakers will need to redouble efforts to
restore and preserve macroeconomic stability and
reduce bottlenecks by streamlining regulations;
improving their enforcement; and investing in
infrastructure, education, and health.


New risks include a faster decline in commodity
prices, ...


Over the past year, energy and metals prices have
been easing in response to supply and demand-side
substitution induced by high prices (metal prices
are down 30 percent since their February 2011


peak). If prices decline to their longer-term
equilibrium more quickly than assumed in the
baseline, GDP growth among Sub-Saharan African
metal exporters could decline by as much as 0.7
percentage points, while current account and fiscal
balances could deteriorate by 1.2 and 0.9 percent of
GDP, respectively. Lower oil prices would have
similar impacts for oil exporters (-0.4 percent of
GDP), but would tend to benefit developing
countries as a whole (+0.3 percent of GDP).


… and the potential impacts of a withdrawal of


quantitative easing


Quantitative easing has benefited developing
countries by stimulating high-income-country
GDP, lowering borrowing costs, and avoiding a
financial-sector meltdown. On balance, the
increased liquidity has not generated excessive
capital flows to developing countries. Net capital
flows to developing countries have recovered to
4.2 percent of developing-country GDP, but
remain well below the 2007 level of 7.2 percent of
GDP. However, flows have been more volatile.
Based on this experience, the recent intensification
of monetary easing in Japan should not prove too
disruptive for developing countries over the
medium term, but it could generate large
fluctuations in flows over the short run that are
difficult to manage.

Once high-income countries begin to pursue
quantitative easing less actively or begin to unwind
long-term positions, interest rates are likely to rise.
Higher interest rates will increase debt-servicing
costs, and could increase default rates on existing
loans. Banks in countries that have enjoyed very
strong growth and asset-price inflation, together
with high levels of government or private sector
debt, may be at particular risk. In the longer term,
higher interest rates will raise the cost of capital in
developing countries and can be expected to
reduce the level of investment that firms wish to
maintain. As investment rates adjust to these higher
capital costs, developing-country investment
spending and growth can be expected to decline by
as much as 0.6 percentage points per annum after
three years.




GLOBAL ECONOMIC PROSPECTS | June 2013




4


Recent Developments


The global economy is transitioning into what is
likely to be a smoother and less volatile period.
Financial market risk indicators, such as credit
default swap rates, sovereign debt spreads, and
stock market volatility indicators have all improved
significantly since June 2012 (figure 1).



Financial market conditions have
improved over the past year


The improvement reflects progress toward fiscal
sustainability in the Euro Area, reinforced
assurances that the European Central Bank (ECB)
will do whatever it takes to save the Euro Area, and
concrete steps toward reinforcing those aspects of
institutional weakness that contributed to Euro
Area difficulties (box 1).

These improved financial market conditions have
persisted for almost a whole year, despite being
subjected to stresses, including elections in several
economies, concerns about a potential banking
crisis in Slovenia, the Cyprus rescue package, and
an extended period of very slow or negative
growth. The durability of the improved indicators
attests to the improvement in conditions.
Nevertheless, concerns remain, particularly among
banks in high-spread countries, which continue to
be burdened by relatively large quantities of
underperforming loans and relatively weak levels of
capitalization (IMF 2013b).


The better financial conditions in the Euro Area, in
tandem with the extraordinary monetary policy
steps undertaken by the Federal Reserve Bank in
the United States, the Bank of England, the ECB,
and most recently the Bank of Japan, have flooded
markets with liquidity. This in turn has reduced
yields on long-term debt and the price of riskier
assets—including developing-country equities,
bonds, and bank loans. As a result, by May gross
capital flows to developing countries, which were
weak for most of the post-crisis period, have
recovered to close-to-peak levels. Bank lending and
equity issuance has doubled relative to the same
period a year ago (figure 2). Nevertheless, as a
percent of developing-country GDP, capital flows
remain well below pre-crisis levels.

The recovery in bank flows is especially important,
because it suggests that the most acute effects on
developing countries of the deleveraging among
high-income banks have passed. Most of the recent
recovery in banking flows has benefitted
developing Europe and Central Asia, which was
the developing region hardest-hit by the crisis and
by the Euro Area deleveraging process. Flows in
most regions, except the Middle East & North
AfricaFN1, were significantly higher than in 2012,
with Europe & Central Asia (mainly banking and
bond), and East Asia & Pacific (mainly bond and
equity) recording the biggest increases.

Despite the improvement in gross flows and
in financial indicators among high-income
countries, developing-country financial-
market prices have been weak. Thus, while
stock markets in high-income countries
surged in the post–June 2012 period (the



Gross capital flows to developing countries
have recovered in nominal terms


Source: World Bank; Dealogic.


Figure 2.


0


20


40


60


80


2009Q1 2009Q4 2010Q3 2011Q2 2012Q1 2012Q4


New equity issuance Bond issuance Bank Loans


Gross capital flows to developing countries, 3month ma, $billions



Financial indicators worldwide have
improved since June 2012


Source: World Bank; Bloomberg.


Figure 1.


-40


-30


-20


-10


0


10


20


30


-400


-300


-200


-100


0


100


200


300


High-spread
Euro Area


Commercial banks
Euro Area


High-spread
Euro Area


Developing-country VIX U.S. (S&P 500) Europe (STOXX
600)


CDS Rates
Bond Yields Equity market valuationsVolatility


Change since June 2012, basis points Change since June 2012, percent




GLOBAL ECONOMIC PROSPECTS | June 2013




5


Stoxx Europe 600, Standard & Poor’s 500
Index, and Nikkei 225 are up 17.5, 18.1, and
44.5 percent, respectively), overall indexes for
developing countries have declined. This said,
some developing-country stock markets have
shown strong gains, raising concerns about
overvaluation. Equity market indexes in
Indonesia, Malaysia, the Philippines, and
Thailand all recorded highs in 2013, partly
reflecting strong inflows of foreign private
capital. Indeed, stock markets in these
countries have declined lately as concerns
about high valuations and prospects of
scaling back of the U.S. stimulus program
weighed in on investor sentiment.


The generally better performance of high-income
stock markets in the recent period reflects both a
difference in timing (developing-country stocks
recovered earlier in the cycle), and the relatively
high valuations that developing-country stock
markets had at the start of the crisis. Currently
price-earnings ratios of major developing-country
firms remain much lower (between 12 and 18) than in
high-income countries (where they are between 16
and 24).

Overall, net capital flows (inflows + outflows) to
developing countries fell by about 7 percent in
2012, reflecting broadly stable net inflows (1.5
percent) and a 28.4 percent increase in outflows,




Concrete steps taken to reduce Euro Area fragilities




A wide range of significant steps taken over the past few years have calmed investors and led to a significant rebound in


key markets. These steps and developments include:


 ECB President Mario Draghi’s forceful “whatever it takes” speech on July 26, 2012 and the introduction of a new
Outright Monetary Transactions (OMT) facility;


 Widespread fiscal consolidation that has brought Euro Area government deficits down from 6.4 percent of GDP
in 2009 to an estimated 2.9 percent in 2012 (IMF 2013a), although the deficits of Ireland, and Spain still exceed


5 percent of GDP;


 Euro Area agreements to establish a banking union for the area; reinforce monitoring and respect of budgetary
rules; require countries to enter into binding fiscal reform contracts; and proposals to increase democratic legitimacy;


 Early repayment of more than 25 percent of ECB crisis loans by Euro Area banks during the first quarter of 2013
(the loans were not due until 2014 and 2015).




Other developments in 2013 have tested the resilience of this improved climate, including:


 Inconclusive elections in Italy and weak polls for other leaders that underscore ongoing political risks;
 Uncertainty about government’s willingness to accept conditionality if the OMT were activated;
 Fears that the bailing in of depositors during the Cyprus rescue would lead to deposit flight in other European


jurisdictions.




While these developments led to some widening of credit default swap (CDS) rates and yields on the debt of high-


spread Euro Area countries, the increases were modest compared with earlier declines, and yields for high-spread coun-


tries are down for the year to date.




Box 1.


Box Figure 1.1


Source: Bloomberg.


0


200


400


600


800


1000


1200


1400


1600


1800


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


5-year sovereign CDS rates, basis points


Spain


Ireland


Italy


Portugal


Spain


Ireland


Italy


Portugal
Spain


Ireland


Italy


Portugal


Spain


Ireland


Italy


Portugal


Spain


Ireland


Italy


Portugal


Spain


Ireland


Italy


Portugal


Spain


Ireland


Italy


Portugal


Box Figure 1.2


Source: Bloomberg.


-80


-60


-40


-20


0


20


40


60


Italy Portugal Spain


Between January-March


Since March


Yields on 10-year sovereign debt, basis points




GLOBAL ECONOMIC PROSPECTS | June 2013




6


roughly proportionately distributed across foreign
direct investment (FDI), equity, debt, and other
outflows (table 2). Both net inflows and outflows
are projected to rise. Overall net capital inflows
should rise by about 5.7 percent in 2013, with
much of the increase reflecting the stronger flows
toward the end of 2012. They are expected to rise
by 2.9 percent in 2014 and 7.5 percent in 2015,
reaching $1.4 trillion or about 4.3 percent of
developing-country GDP in 2015.


Capital costs are rising, reflecting
reduced high-income country risks

Not only have developing-country stock markets
underperformed high-income stock markets,
developing country sovereign credit default swap
(CDS) rates and yields (figure 3) have been rising,


despite the improved ratings of developing
countries, and strong investor appetite for
developing-country bonds.FN2



Rising spreads, even as demand is strong and
growing, may reflect a welcome and ultimately
healthy improvement in market perceptions of the
riskiness of investing in high-income countries.
Part of the decline in developing-country risk
premiums over the past five years was due to the
increased riskiness of high-income country debt.FN3
Now that those risks have receded, investors may
be shifting their portfolios back into high-income
country assets, resulting in an increase in
developing-country yields and spreads and better
stock-market performance in high-income
countries.



Net financial flows to developing countries ($ billions) Table 2.


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


Current account balance 409.4 233.0 173.3 129.6 -16.7 -74.9 -108.2 -126.3


Capital Inflows 812.7 701.0 1,218.8 1,175.0 1,192.4 1,260.9 1,297.4 1,394.8


Private inflows, net 782.3 620.0 1,145.6 1,145.1 1,178.3 1,250.2 1,290.7 1,391.7


Equity Inflows, net 583.4 541.3 710.5 710.4 758.1 791.1 803.5 863.5


Net FDI inflows 637.0 427.1 582.3 701.5 670.0 719.3 715.7 758.2


Net portfolio equity inflows -53.6 114.2 128.2 8.9 88.1 71.8 87.8 105.3


Private creditors. Net 198.8 78.7 435.1 434.6 420.2 459.1 487.2 528.2


Bonds -8.6 61.0 129.7 123.8 190.3 187.3 164.4 151.9


Banks 223.3 -11.9 37.2 108.2 82.0 104.7 125.3 146.9


Short-term debt flows -17.1 17.8 257.6 189.3 141.0 158.5 188.2 221.1


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 -321.2 -175.2 -314.1 -284.7 -365.4 -371.3 -416.3 -464.4


FDI outflows -211.8 -144.3 -213.9 -198.0 -238.0 -275.0 -325.0 -370.0


Portfolio equity outflows -32.1 -75.9 -50.6 4.3 -12.4 -17.3 -24.3 -29.4


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) 491.5 525.8 904.7 890.4 827.1 889.6 881.1 930.4


Net unidentified Flows/a -82.1 -292.8 -731.3 -760.8 -843.8 -964.5 -989.3 -1,056.7


Source: The World Bank


Note: e = estimate, f = forecast


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




GLOBAL ECONOMIC PROSPECTS | June 2013




7


These developments may also reflect concern on
the part of investors about inflation of asset prices
in some developing countries (such as Brazil,
Indonesia, Lao PDR, Philippines, Thailand, and
Turkey) and the recent easing of commodity prices.
Risk premia could have risen because high asset
prices have been interpreted as a harbinger of
sharp future correction; or if an expectation of
lower commodity prices had raise concerns about
future government revenues and governments’
capacity to repay existing debt and spending
programs.


Improved financial conditions are
yielding stronger economic activity

Global economic activity has strengthened over the
past several months (figure 4). The turn around,
which began in the East Asia & Pacific region, has
spread more widely. Developing-country industrial
production grew at a 5.1 percent annualized pace
during the first quarter of 2013 (0.6 percent if
China is excluded), and high-income-country
industrial production expanded at a 2.9 percent
annualized pace.

Despite Euro Area weakness, high-income-country
GDP growth strengthened in the first quarter of
2013.


 In the United States, GDP rose 2.4 percent in
the first quarter of 2013, despite sharp payroll
tax increases that have cut into consumer
incomes. The strength was supported by a
recovering housing market (house prices are at
a two-year high) and an increase in payroll jobs


(more than ½ a million jobs were added in the
first quarter). Investment demand, which was
unusually weak in the second half of 2012, has
also contributed (durable goods orders
increased at a 20 percent annualized pace
through March, although order growth has
since eased).


 In Japan, the move toward a much more
relaxed monetary and fiscal policy (first
announced in November 2012 but made more
concrete during the first quarter of 2013)
prompted a sharp acceleration in GDP, which
grew at a 4.1 percent annualized pace in the
first quarter of 2013.


 In the Euro Area, GDP contracted once again
in the first quarter, declining at a 0.8 percent
(saar, -0.2% q/q sa), with growth in Germany
turning marginally positive. For the region as a
whole, industrial production expanded at a 0.7
percent annualized rate in the first quarter, and
the annualized pace of decline among high-
spread economies eased to only 0.3 percent.




Developing-country growth eased in
2013Q1 but remains solid

Among those developing countries that report
quarterly GDP, data suggest an acceleration in
activity during the fourth quarter of 2012—notably
in East Asia & Pacific, where quarterly GDP
expanded by 8.3 percent in the fourth quarter (for
more regional detail, see box 2 and the regional
annexes). In South Asia, however, growth
continued to be weak, with GDP growing at only a



Aggregate industrial activity has picked up


Source: World Bank; Datastream.


Figure 4.


-10


-5


0


5


10


15


20


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


% change in industrial production, 3m/3m saar


China


Other developing


Other


Euro area


high-income



Developing country borrowing costs have risen
but remain below historical averages


Source: World Bank; JP Morgan.


Figure 3.


200


260


320


380


440


500


Jul '11 Oct '11 Jan '12 Apr '12 Jul '12 Oct '12 Jan '13 Apr '13


Basis points


2000-2007 Average


Sep 09-May 11 Average


2005-2007 Average


EMBIG sovereign bond spreads




GLOBAL ECONOMIC PROSPECTS | June 2013




8


4.7 percent annualized pace in the final quarter of
2012. Industrial production data, which are
available for a wider range of countries, display a
clearer acceleration trend toward the end of
2012.

During the first several months of 2013, however,
the pace of growth in developing countries appears
to have slowed, particularly in East Asia, where
quarterly growth in China, and Indonesia has eased,
and actually turned negative in Malaysia and
Thailand. Elsewhere signs are more mixed.
Growth has slowed in Chile, Mexico, and South
Africa, but strengthened in Philippines, Lithuania,
Peru, Turkey, and Ukraine. First quarter GDP in
India also disappointed, expanding only 4.8 percent
y-o-y or about 5 percent q/q saar.

Available industrial production data confirm this
mixed picture (figure 5), with activity rates slowing
in East Asia & Pacific (to 8.6 percent saar), firming
in Europe & Central Asia (at 2.4 percent), returning
to positive territory in Latin America & the
Caribbean (0.5 percent), and easing somewhat in
South Asia at a robust 7.7 percent. Available data
show that activity was contracting in Sub-Saharan
Africa and rapidly in the Middle East & North
Africa during the three months ending February
2013.

Although there are some signs of acceleration,
output in several large middle-income countries
remains weak, compared with the pre-crisis boom
period. Growth rates in Brazil, India, the Russian
Federation, Turkey, and South Africa are all well


below post-crisis rates, despite relatively easy policy
stances and amid indications of overheating in
some (see discussion beginning on page 17).


The sharp recovery in trade appears
to be losing momentum

After contracting for several months, global trade
is expanding once again (figure 6), with the total
volume of exports and imports rising at a 5.0
percent annualized pace in the first quarter of 2013.
The upturn in trade was driven by developing
country imports, which rose at an 18.0 percent
annualized pace in 2013Q1. This helped stir a 2.9
percent annualized increase in high-income
country exports in 2012Q4 (figure 6).

The pick-up in import demand among developing
countries was broadly-based, with import volumes
rising in East Asia & Pacific, Latin America & the
Caribbean, and South Asia. Data for the Middle
East lag and, as of February 2013, do not show
signs of acceleration. The pick-up in global
demand, including in high-income countries, is also
supporting faster export growth in developing
countries (box 3). Developing countries exports
were expanding at a 15.5 percent annualized pace
during the first quarter of 2013.

Most recently, there are signs of an easing in the
pace of global trade. Developing-country import
demand slowed to an annualized pace of 10.8
percent in April, and both export (-5.4 percent) and
import demand (-3.6 percent) from high-income



Regionally, output shows signs of slowing in East Asia & Pacific, and stability or strengthening elsewhere


Source: World Bank.


Figure 5.


-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


2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1


% change in industrial production, 3m/3m saar




GLOBAL ECONOMIC PROSPECTS | June 2013




9



Recent Regional Economic Developments




(The regional annexes to this volume contain more detail on recent economic developments and outlook, including country-specific forecasts.

The East Asia & Pacific region led the rebound in global economic activity during the fourth quarter of 2012. The landscape
for trade and industrial production is changing, however, reflecting China’s rebalancing efforts, the yen depreciation, lower
commodity prices, capacity constraints (in Indonesia, Malaysia, the Philippines, and Thailand), and a gradual tightening of
macroeconomic policies. These factors have combined to reverse earlier output gains in China, Indonesia, Malaysia, Thai-
land, and Vietnam contributing to easing of industrial production growth from double digit rates to just 6 percent annualized
pace during the first quarter of 2013. Growth rates of both exports and imports are also moderating but regional trade contin-
ues to expand at double-digit rates. Industrial activity in the Philippines, which relied less on domestic stimulus measures,
continues to expand by a double-digit rate in early 2013, partly because of the country’s strong trade linkages to a rebound-
ing Japan. A relatively loose policy stance in the region, excluding China, during 2012 has contributed to a buildup of debt
and has fueled goods and asset price inflation.

Output in the developing Europe & Central Asia region also improved considerably, growing at a 2.4 percent annualized
pace in the three months ending March 2013. With the exceptions of Ukraine and Latvia, all countries had positive industrial
production growth, and the rebound was particularly strong in Serbia. The US. dollar value of imports also accelerated during
the first quarter, suggesting firming of domestic demand. However, US dollar value of regional exports have slowed with
weak growth in Russia and Latvia, despite the strong import demand from developing countries and strengthening import
demand from high-income Europe. Inflation has eased slightly since food price hikes and administrative tariffs caused it to
gain momentum in the second half of 2012.

Economic activity in Latin American & the Caribbean softened in the first quarter of 2013, with industrial production remain-
ing relatively flat, after a slight contraction in the fourth quarter. Slower domestic consumption in conjunction with weak exter-
nal demand caused economic activity to slow in many countries in the region, with annualized quarterly growth easing in
Brazil, Mexico, Chile, and contracting in Venezuela. As elsewhere, regional import demand bounced back in 2012Q4 but has
eased to a more sustainable pace of 8.7 percent annualized pace in 2013Q1. Meanwhile, lower commodity prices contribut-
ed to significant declines in export revenues. Despite slower growth than during the pre-crisis period, several countries in the
region continue to struggle with high and even rising inflation, suggesting structural bottlenecks. Price controls in Argentina
have partially contained inflation but could lead to shortages of certain goods, while in Venezuela the recent currency devalu-
ation has exacerbated local price pressures. In Brazil, inflation continues to surprise on the upside on higher food and service
prices.

Economic outturns in the Middle East & North Africa continue to be dominated by political and social developments.
Among oil exporters, hydrocarbon output resumed its downward trend in the second half of 2012 as the boost from Libyan oil
production to prewar levels faded. Output among oil importers rebounded at an annualized 10.4 percent pace in Q1, reflect-
ing a recovery in Egypt from sharp declines in 2012, but momentum has slowed reflecting rising political tensions in Egypt
and Tunisia, spillovers from the Syrian conflict to Jordan and Lebanon, and weak external demand that have dampened ac-
tivity among oil importers. With the exception of Iraq and Morocco, inflation remains persistently high across the region, rising
over 40 percent in the Islamic Republic of Iran because of a tightening of international sanctions. But there has been a slight
easing in some economies as global food prices have moderated. Declining foreign exchange reserves, widening external
and fiscal financing gaps (only partly reflecting weak demand from Euro Area trading partners) pose challenges to macroeco-
nomic stability and management in the region. Aid from the wealthier economies in the region has helped bridge financing
gaps in Egypt, Jordan, Morocco, and Tunisia.

Economic activity in South Asia picked up in the second half of 2012, supported by strengthening external demand and
fiscal and policy reforms. By the first quarter of 2013, industrial production was rising at different paces in Bangladesh, India,
and Pakistan, while in Sri Lanka, it stabilized in 2012Q4. After slowing sharply in 2012, regional export volume growth accel-
erated to a 15.7 percent annualized pace in the three months ending in April 2013. Year-on-year inflation rates are moderat-
ing across the region, helped in part by an easing of international commodity prices. As inflation moderated, monetary policy
eased in Pakistan (in late 2012), in Bangladesh and India (in the first half of 2013), and in Sri Lanka (2012H2 and 2013H1)
to support growth. However, inflation momentum remains strong, particularly in Bangladesh and India, mainly reflecting sup-
ply-side constraints and entrenched inflationary expectations.

Exports from Sub-Saharan Africa were not exempt from the decline in global trade during 2012 (the exception being agricul-
tural exporters whose trade held up during the second half of the year). Industrial production slowed sharply in the second
half of 2012 among oil exporting economies (Angola, Gabon, and Nigeria), partly because of domestic challenges in Nigeria.
Similarly, labor unrest was partly responsible for the flat growth in South Africa’s industrial production in 2012Q2 and Q3.
South Africa GDP rebounded to 2.1 percent annualized pace in 2012Q4, before slumping once again in Q1 2013 to 0.9 per-
cent (q/q saar). Although more recent data for the rest of the region is not available, a similar mixed result is expected, with
stronger global industrial production supporting growth in some, but weaker commodity prices cutting into incomes in others.
Earlier policy tightening (particularly in East Africa) and improved harvests in 2012 have contributed to slow regional inflation,
with prices rising at a 6.8 percent annualized pace during the first quarter. Rwanda took advantage of low interest rates and
investor appetite for higher-yielding assets to issue its inaugural Eurobond in April 2013, while other countries in the region
(including Ghana, Kenya, and Nigeria) have plans to follow suit.


Box 2.




GLOBAL ECONOMIC PROSPECTS | June 2013




10


countries turned negative in April. Also, China's
economic growth appears to be losing momentum
as export growth slowed from 12.7 percent (y/y) in
April to one percent (y/y) in May - its slowest
expansion in 15 months. With China being an
important trading partner in many developing
countries, weaker growth there will weigh down on
the imports of other developing countries.


Commodity prices have weakened in
response to new capacity
Despite the strengthening of the global economy,
the prices of most industrial commodities have
been declining (figure 7). While it is still too early to
be certain, the declines appear to result from both
increased supply and increased substitution on the
demand side induced by the high prices of the past
several years.

Since 2000, capital expenditures by major firms in
oil and metals markets have quintupled (figure 8).
Overall, they increased an average of 15 percent
annually since 2005 in the case of oil and 20
percent in the case of metals. The impact of
increased supply is most visible in energy markets
(figure 9), where higher prices have made
technologies economically viable and spurred large
increases in North American oil and natural gas
production and large increases in African oil
production (see the Commodity Annex for a more
complete discussion). Recent developments have
also been influenced by the recovery of production
in Middle East countries such as Libya and Iraq.


Similarly, the coming on stream of new projects in
Latin America (Chile, Peru), Africa (Zambia,
Democratic Republic of Congo), and Asia (China,
Mongolia) have placed substantial downward
pressure on metals prices even as sales have
strengthened. But demand suppression has also
been at work. Global demand for refined metals
increased 4.5 percent in 2012 (9.9 percent in
China), but metal demand by Organization For
Economic Cooperation and Development
(OECD) member countries fell by 3.9 percent in
2012.

The combination of increased supply and weak
demand has yielded a buildup in global stocks. For
example, combined copper stocks at the major
metals exchanges are up 46 percent since 2012.
Aluminum stocks, which have been rising since
end-2010, increased 8 during the past 12 months.



Commodity prices have been falling de-
spite stronger growth, due to increase supply


Source: World Bank.


Figure 7.


120


140


160


180


200


220


240


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


USD Price index, 2005=100


Agricultural goods


Energy


Food


Metals and minerals



Capital expenditure in the resource sector is up
5-fold since 2000, putting pressure on prices


Source: World Bank; Bloomberg.


Figure 8.


0


100


200


300


400


500


600


0


25


50


75


100


125


150


1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012


USD billion
Base Metals Companies' CapexCrude Oil Exploration & Production Spending


USD Billion



Developing-country imports have led a rebound
in trade


Source: World Bank; Datastream; Haver.


Figure 6.


-20


-10


0


10


20


30


40


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


Annualized growth of export and import volumes (3m/3m saar)


Developing Countries (Imports)


Euro Area


Other


(Exports)


High-income
(Exports)




GLOBAL ECONOMIC PROSPECTS | June 2013




11


Expectations are that prices will continue to ease
over the medium term. The World Bank forecast,
which calls for the price of a barrel of oil to ease to
$102 in 2013, and to $101 in 2015, reflects a
technical assumption that oil prices will slowly
decline between now and 2025 to a level consistent
with the real cost of producing a barrel of oil from
the Canadian tar sands using today’s technology
(the Canadian tar sands are among the most
abundant and most expensive to produce sources
of crude oil). Metals prices are expected to decline
in real terms by 3.7 and 1.4 percent in 2013 and
2014, respectively, reflecting increased supply and a
gradual reduction in the metals intensity of
developing-country (especially Chinese) growth


(see Commodity Annex for more details). Food
prices are also projected to decline (7.7, 6.0, and 5.5
percent over 2013–15), reflecting a gradual
improvement in supply conditions and reduced
production costs due to lower energy and fertilizer
prices.


Inflationary pressures remain subdued

Despite the monetary stimulus in high-income
countries and an acceleration in developing-country
growth in 2012Q4, inflationary pressures remain
relatively subdued, although East Asia & Pacific,
the Middle East & North Africa and South Asia are
showing signs of rising inflation (figure 10).


Box .3



South-South Trade




As reported in the January 2013 edition of Global Economic Prospects (World Bank 2013a), more than half of developing-
country trade is now with other developing countries, up from 37 percent in 2001. China has played a big role in this pro-
cess (26 percent of total exports from all developing countries are going to China, up from 14 percent in 2001). But even
excluding China’s trade with other developing countries, and not withstanding rhetoric suggesting that developing-country
growth has come on the back of high-income imports, growth of trade between the remaining developing countries has also
outpaced trade with high-income countries by a wide margin throughout the first decade of this century (box figures 3.1 and
3.2).


The U.S. dollar value of trade between developing countries has grown annually by an average of 19.3 percent over the
past decade (17.5 percent if trade with China is excluded) versus about 11 percent for developing-country exports to high-
income countries. Importantly, every developing region shows the same basic trend, with intra-developing-country trade
outstripping developing-developed trade, and by a large margin—except for Europe and Central Asia, where EU integration
helped increase trade between the region and high-income countries.


Interestingly, the rapid expansion of intra-developing-country trade reflects more than just commodity trade, with the value
of developing-country exports of manufactures rising at about the same rate as the value of commodities as a whole. The
result is all the more surprising because commodity prices more than doubled over the sample period, suggesting that the
volume of manufacturing trade between developing countries was expanding particularly rapidly. The one broad commodity
grouping that exceeded manufacturing trade growth was metals and ores, mainly reflecting the very strong demand in Chi-
na for these products. Excluding China from developing-country trade, the intra-developing country value of metals and ores
trade grew somewhat less quickly than manufactures.


Box 3.


Box Figure 3.1 South-South imports, by type


Source: World Bank; UNCTAD.


0


5


10


15


20


25


Agricultural
Raw Materials


Ores and
Metals


Fuels, All Fuels,
Petroleum


Manufactured
Goods


All developing


Developing, ex China


Average all developing countries


Average


(excl. China)


Average annual growth 2000-2011, percent


Box Figure 3.2 South-South trade by region



Source: World Bank; UNCTAD.


0


5


10


15


20


25


East Asia &
Pacific


Europe &
Central Asia


Latin
America &
Caribbean


Middle-East
& North
Africa


South Asia Sub-Saharan
Africa


All developing Developing (excl. China) High-Income Imports


Average all developing countries


Average (excl. China) Average exports to


High Income countries


Average annual growth 2000-2011, percent




GLOBAL ECONOMIC PROSPECTS | June 2013




12


Inflation in high-income countries remains low.
Inflationary pressures in China appear to have
eased but may be intensifying in Indonesia and Lao
PDR following years of rapid growth and relatively
loose macroeconomic policy, and core inflation
remains high in Vietnam. In the Middle East &
North Africa, high prices reflect both efforts to
reduce the fiscal burden of price subsidization by
raising some regulated prices, as well as supply
disruptions caused by civil and armed strife. In
South Asia, increases in regulated prices have also
played a role, as have tight market conditions
despite the relatively slow pace of growth.

In contrast, inflation rates in developing Europe
and Central Asia have declined to close to 7
percent, down somewhat from the 8½ to 9 percent
average during the pre-crisis period. The easing
partly reflects still-large output gaps, but structural
reforms have also contributed.

Monetary policy in developing countries continues
to ease. Since January, the Reserve Bank of India
has cut interest rates by a cumulative 75 basis
points despite still strong inflationary pressures. In
Mexico, the central bank has cut rates by 50 basis
points—its first interest rate cut since July 2009.
Other policy easing included a 100-basis-point cut
implemented by the Bank of Colombia in three
consecutive actions. Interest rates were also
lowered in Albania, Azerbaijan, Belarus, Georgia,
Kenya, Mongolia, Sri Lanka, Thailand, Turkey,
Uganda, and Vietnam. Only five developing
countries (Brazil, the Arab Republic of Egypt,
Gambia, Ghana, and Tunisia) have raised interest
rates in 2013; Serbia raised and then cut rates.


Although global inflationary pressures remain
benign, given the lags in monetary policy
transmission, this additional easing may add to a
strengthening activity already under way, resulting
in additional inflationary pressures in countries
operating close to full capacity, without much
payoff in additional output.


Economic weakness in high-income
countries has cut into aid flows

Ongoing fiscal adjustments and budgetary
problems among high-income countries have led to
a decline in aid for two consecutive years for the
first time since 1997. According OECD (2013)
data, net official development assistance (ODA)
flows in 2012 fell 4 percent in real terms to $125.6
billion, bringing the total decline since 2010 to 6
percent. As a share of Gross National Income in
donor countries, ODA for developing countries
fell to 0.29 percent in 2012 from 0.31 percent in
2011. Cuts to aid budgets were steepest among
high-spread Euro-area economies, with Spain
having cuts its aid budget by 50 percent, Italy by 35
percent, Greece by 17 percent, and Portugal by 13
percent. ODA increased among only nine reporting
economies, with Korea (18 percent), Luxembourg
(10 percent), and Australia (9 percent) reporting the
largest increases. Turkey almost doubled its
assistance to North African countries after the
Arab spring.

The outlook for aid remains gloomy for poor
countries. The OECD expects aid flows to recover
only modestly in 2013 and to remain stable during



Inflation is broadly under control


Source: World Bank; Datastream.


Figure 10.


0


2


4


6


8


10


2011Q1 2011Q3 2012Q1 2012Q3 2013Q1


Annualized change in consumer prices, 3m/3m saar


Developing Countries


High Income Countries


China


East Asia excl. China P.R.



Increased supplies have opened up
arbitrage opportunities


Source: World Bank; Datastream.


Figure 9.


0


5


10


15


20


25


2009 2010 2011 2012 2013


US$/mmbtu


Brent


WTI


NGas US


NGas Europe


LNG Japan




GLOBAL ECONOMIC PROSPECTS | June 2013




13


2014 to 2016. The bulk of the increase in flows is
expected to benefit middle-income Asian
economies, with flows to countries with the largest
Millennium Development Goals gaps declining.
Bilateral aid to Sub-Saharan economies declined 7.9
percent in 2012 in real-terms.



Outside Europe, remittance flows to
developing countries are largely
unaffected


The European debt crisis and rise in
unemployment rates in high-income countries
(which account for the bulk of remittance flows to
developing countries) has negatively affected
incomes of migrants and, in turn, their ability to
send money home (for a more detailed discussion,
see World Bank 2013a). Nevertheless, migrants
appear to have absorbed these shocks to some
extent and continue sending remittances to their
family and friends in need. As a result, the value of
remittances to developing countries rose to $401
billion in 2012, up 5.3 percent. or about half the
11.5 percent increase recorded in 2011. As a share
of recipient-country GDP, remittances rose only
0.2 percentage point.

This aggregate story masks important differences
across countries. For instance, the large number of
migrants in the Arabian Gulf generated significant
increases in remittance flows from the Gulf
Cooperation Council countries—with the U.S.
dollar value of remittances to South Asia and the
Middle East & North Africa rising 12.3 and 14.3


percent, respectively. By contrast, developing
regions that are more closely tied to high-income
Europe (figure 11), where the protracted debt crisis
has taken a severe toll on economic activity,
experienced much weaker increases in remittances.
Remittance flows to the developing Europe &
Central Asia region fell 3.9 percent and increased
1.6 percent in Sub-Saharan Africa in U.S. dollar
terms in 2012, following increases of 13.5 and 4.9
percent, respectively, in 2011. Flows to Latin
America were hit especially hard by the continuing
downturn in Spain, where the unemployment rate
rose above 26 percent, forcing many Latin
American migrants to return home. The dollar
value of remittance flows to Latin America rose 0.9
percent in 2012, with absolute declines in some
countries like Colombia (-2.3 percent) that have
significant numbers of migrants in Spain.

The U.S. dollar value of remittance flows to
developing countries is projected to increase 6.7
percent in 2013 and to gradually firm to a 10.2
percent rate of increase in 2015, reflecting a modest
easing in oil prices and a gradual strengthening of
growth in high-income countries. Despite the
increases in nominal terms, flows are projected to
remain broadly stable when expressed as a share of
developing countries’ GDP.



Global outlook: less
volatility, somewhat
stronger growth



Hard data so far this year point to a global
economy that is slowly getting back on its feet.
However, the recovery remains hesitant and
uneven. Several times since the onset of the crisis
in 2008, expectations of a firming of growth have
ended in disappointment. And the current
conjuncture is no different. Forward-looking
indicators, including business surveys, have
strengthened over the past six months only to
weaken again recently (figure 12).

While an important clue as to current and future
developments, a pessimistic bias has crept into the



Remittances continued to expand in 2012,
broadly in line with developing country GDP


Source: World Bank.


Figure 11.


0


20


40


60


80


100


120


0


1


2


3


4


5


6


East Asia &
Pacific


Europe &
Central Asia


Latin
America &
Caribbean


Middle East
& N. Africa


South Asia Sub-Saharan
Africa


% of GDP Billions of USD


Value of Remittances (RHS axis)


Remittances as
% of GDP (LHS axis)




GLOBAL ECONOMIC PROSPECTS | June 2013




14


relationship between Purchasing Manager’s Indexes
(PMI) and actual output. Based on the historical
relationship between industrial activity and the
World Bank’s global PMI indicator (a weighted
average of national and Markit PMI indicators),
PMIs between 2010 and 2013 have been
systematically about 3.0 points lower than they
should have been.

While this pessimistic bias could be just a statistical
artifact, it could also be an indicator of increased
caution on the part of firms. Under this
interpretation, firms having been disappointed by
poor growth outcomes in the past may be skeptical
of stronger growth now, and could be holding back
on investment until they are sure that another
slowing is not in the offing. Such behavior, may be
self-fulfilling and could explain why despite
improved conditions in financial markets, and the
gradual accumulation of pent-up demand for
consumer and investment durables, the recovery
(especially in Europe) remains modest.


A gradual recovery in high-income
countries

Activity in high-income countries has been under
considerable pressure from fiscal and banking
sector consolidation and associated uncertainties.
These pressures are expected to remain over the
forecast period, although the drag they are exerting
on growth is projected to diminish, in part because
much of the necessary adjustment has already been
accomplished.


In the United States, the private sector recovery
appears to be relatively robust. By some measures,
growth in the first quarter of 2013 was stronger
than expected with industrial production expanding
at a 4.4 percent annualized pace, and retail sales at a
2.9 percent pace. First quarter GDP growth was
relatively weak at 2.4 percent, in part because of a
decline in government spending. The gathering
momentum in the U.S. economy is both reflected
in and prompted by an improving labor market
(unemployment has fallen to 7.6 percent) and
recovery in the housing market.

Progress toward agreeing on a credible plan to
bring the deficit down to sustainable levels has
been slow. However, policy makers have extended
both the debt ceiling and spending authorizations
well into the future, thereby reducing the likelihood
of a debt-ceiling confrontation and the threat of
default. On the downside, both the tax increases
agreed at the beginning of the year and the
spending sequester will be a drag on growth in
coming quarters, continuing to offset some of the
strength from the private sector recovery. Overall,
GDP growth for the year is projected to slow
somewhat, compared with 2012, to about 2.0
percent in 2013, before strengthening to 2.8
percent in 2014 and 3.0 in 2015.

The economy of the Euro Area remains very weak
despite improved financial conditions and some
signs of strengthening. On the positive side,
funding costs in core Euro Area countries have
declined, and lending has started to grow again.
Imports, exports, and industrial production have all
returned to positive (albeit modest) growth.

However, borrowing costs in high-spread
economies remain very high; unemployment
continues to rise (including in so-called core
economies); and weak growth is compromising
progress on the fiscal front. Moreover, although
important structural and fiscal consolidation
reforms have been undertaken (see box 1), the pace
of progress has eased, leading to concerns of
reform fatigue, while several elections have
highlighted popular discontent with austerity.
Finally, unemployment is crushingly high in
periphery economies (27 percent in Spain and
Greece, 18 percent in Portugal, 14 percent in
Ireland, and 12 percent in Italy).



Business confidence has improved, but re-
mains weaker than conditions would suggest


Source: World Bank; Haver Analytics; Markit.


Figure 12.


44


47


50


53


56


59


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


Balance of responses, > 50 implies expansion


China


Developing excl. China


Euro area


High Income non-EU




GLOBAL ECONOMIC PROSPECTS | June 2013




15


Growth in the Euro Area is expected to pick up
slowly during the course of 2013, in part because
the drag from fiscal consolidation and banking
sector restructuring in the core countries is
expected to become less intense.FN4 As a result,
quarterly growth for the Euro Area as a whole is
expected to return to positive territory in the
middle of 2013 and then gradually gain strength.
Nevertheless, whole year GDP is projected to
contract by 0.6 percent in 2013, with annual growth
slowly strengthening to 0.9 percent in 2014 and to
about 1.5 percent by 2015. Despite the return to
positive growth, little progress is expected to be
made in reducing unemployment. Weakness in
high-spread economies where the deepest
adjustments are occurring will continue, with
growth not turning positive until 2014 and then
only to a soft 0.3 percent.

Growth in Japan rebounded in the fourth quarter
of 2012 and into the first quarter of 2013,
expanding at a 4.1 percent annualized pace, with
consumer demand rather than investment a major
driver—although industrial production expanded
rapidly (8.9 percent in 2013Q1). Trade
denominated in U.S. dollars has dropped off
precipitously (as of April 2013, it was 8.0 percent
lower than in June 2012), in part because of the 18
percent depreciation of the Yen vis-à-vis the dollar
since March 2012. The decline also reflects bilateral
weakness in Japan’s exports and imports to and
from China, apparently linked to tensions over
disputed territories.

The strength in the Japanese economy partly
reflects the effects of announcements of a shift


toward looser monetary policy made in November
and confirmed with announcements of a large
quantitative easing, fiscal stimulus and structural
reform policy in January. Growth is projected to
come in at 1.4 percent this year and in 2014 and at
1.3 percent in 2015. For growth to remain strong
through 2015, however, Japan will have to
implement a robust set of productivity enhancing
policy changes. Measures announced to date,
include deregulation of the agriculture and
electricity sectors, a relaxation of rules in health
care, investment tax incentives, (including FDI);
some corporate governance reforms; and a partial
relaxation of restrictions on the investment
behavior of pension funds.



Prospects for developing countries
vary widely, reflecting local economic
and policy conditions

Overall, developing-country GDP is expected to
firm somewhat in 2013, growing by 5.1 percent and
gradually rising to 5.6 percent in 2014 and 5.7
percent in 2015 (Box 4 provides a regional
breakdown of prospects, while the regional
annexes provide additional detail). That aggregate
story, however, hides considerable regional and
country-level variation (figure 13). At least four
classes of developing countries can be identified:


 countries (including many in East Asia and Sub
-Saharan Africa) that are growing rapidly and
already close to or above potential, and
therefore at risk of overheating;



Acceleration will be muted in regions already operating at close to full capacity


Source: World Bank.


Figure 13.


-4


-2


0


2


4


6


8


10


High Income
Countries


East Asia &
Pacific


Europe &
Central Asia


Latin America &
Caribbean


Middle East & N.
Africa


South Asia Sub-Saharan
Africa


2011 2012 2013 2014 2015


Annual GDP growth, percent




GLOBAL ECONOMIC PROSPECTS | June 2013




16



Regional outlook



Growth in the East Asia & the Pacific region slowed to 7.5 percent in 2012 largely due to weakening of growth in China
(relative to the recent path). The regional growth is projected to slow further to 7.3 percent in 2013 with still weak 7.7 percent
growth in China and easing of growth in the region excluding China from 6.2 percent in 2012 to 5.7 reflecting weak global
demand and domestic policy tightening. The regional growth is projected to pick up to 7.5 percent in 2014 and 2015 as Chi-
na's growth firms up and growth in the region excluding China accelerates to 5.9 percent in 2014 and then 6 percent in 2015
supported by strengthening global trade flows. The main risks to the region are internal, associated with a sharp reduction in
Chinese investment, quantitative easing in Japan and rapidly rising debt and asset prices pose risks for Indonesia, Malaysia,
Thailand and the Philippines. Efforts to enhance productivity gains through market reforms should deepen, especially in
Cambodia, the Lao PDR, Myanmar, and Vietnam, while building buffers against future shocks remains a policy priority in Lao
PDR, and small Pacific islands.


GDP growth in Europe & Central Asia is estimated to have sharply slowed to 2.7 percent in 2012 from 5.6 percent in 2011
as the region faced significant headwinds including weak external demand, deleveraging by European banks, a poor harvest,
and inflationary pressures. While GDP growth in 2013 in the region will be supported by improved agricultural performance
and reduced deleveraging pressures, the rebound will nevertheless be constrained by the weak carryover growth caused by
low economic activity in 2012Q4; ongoing fiscal adjustments by the region’s economies, and high unemployment. The recov-
ery in export demand is expected to be gradual. The region’s growth is expected to reach 2.8 percent in 2013 and 4.2 per-
cent by 2015. Medium-term prospects for the region will critically depend on progress in addressing structural constraints to
economic growth including capacity constraints, high unemployment, and lack of competitiveness.


Growth in Latin America & the Caribbean is expected to strengthen to 3.3 percent in 2013, from 3.0 percent in 2012, sup-
ported by stronger demand domestically and abroad. Growth should converge toward potential after very weak growth in
2012 in Brazil (0.9 percent) and Argentina (1.9 percent). Growth in most other countries is expected to ease slightly or decel-
erate this year. Growth is expected to decelerate markedly in Venezuela (to 1.4 percent), as highly expansionary policies are
reversed. Over the medium term, the regional economy is expected to grow just under 4 percent annually, supported by
stronger capital flows (notably FDI), recovering external demand, and structural reforms in some of the larger economies.
Such improvements will be essential if the region is to sustain stronger growth over the medium term in the context of slow
growth among major trading partners. Risks facing the region include the possibility of overheating in some of the faster -
growing economies and the potential impacts of even weaker-than-projected commodity prices.

Growth in the Middle East & North Africa region is projected to slow to 2.5 percent in 2013, from 3.5 percent in 2012, re-
flecting a second year of recession in the Islamic Republic of Iran, subdued growth in the Arab Republic of Egypt, and a mod-
est pickup in Algeria. Political tensions remain high in advance of scheduled elections and referendums, and security risks
are dragging down activity and investment. In the wake of lower private capital inflows since 2010, fiscal and external account
imbalances among oil importers are increasing, in turn exacerbating funding pressures and undermining fiscal sustainability
particularly in Egypt. However, a gradual strengthening of demand in key Euro Area trading partners and the moderation in
global food prices could provide some respite in the near term. Among oil exporters, surging government spending has in-
creased vulnerability to a sustained fall in oil prices. Medium-term prospects hinge on the resolution of political tensions and
security risks, and on the implementation of reforms to place the region’s economies on a more sustainable footing and to
boost investment, jobs, and growth.


GDP growth in South Asia slipped to 4.8 percent in 2012, mainly reflecting a continued deceleration in India, and slower
growth in Sri Lanka and Bangladesh. Growth in Pakistan and Nepal remains sluggish, below regional peers. Regional GDP
growth is projected to pick up to 5.2 percent in 2013, before accelerating to 6.1 percent and 6.4 percent in 2014 and 2015, in
line with strengthening external demand, normal monsoons (after poor rains in 2012), and a gradual pickup in investment
spending. Continued progress in fiscal consolidation and implementation of reforms that reduce structural constraints and
lower inflationary expectations will determine the pace of recovery. Domestic risks that have gained in importance include a
possible derailing of reforms, a resurgence of inflation, and weaker-than-expected monsoon rains.

Growth in Sub-Saharan Africa has remained robust at an estimated 4.4 percent in 2012 (5.4 percent if South Africa is ex-
cluded), supported by resilient domestic demand and still relatively high commodity prices. Strengthening external and resili-
ent domestic demand, an accommodative policy environment, increasing investment, still high commodity prices, and in-
creased export volumes in countries with new mineral discoveries (Sierra Leone, Niger, and Mozambique) are expected to
underpin a return to the region‘s pre-crisis growth rate of around 5.2 percent over the forecast horizon (2013–15). Nonethe-
less, risks remain tilted to the downside. A weaker-than-expected recovery in high-income countries and sharper-than-
expected decline in commodity prices will slow growth in the region and lead to deterioration in fiscal and current account
balances, which remain strained in a number of economies in the region. Other domestic risks include overheating in econo-
mies operating close to capacity, adverse weather conditions, and political instability.


Box 4.




GLOBAL ECONOMIC PROSPECTS | June 2013




17


 countries that appear to be running up against
capacity constraints at growth rates well below
the growth rates of the pre-crisis period,
including several large and economically
important middle-income countries;


 countries with considerable slack in their
economies, whether because of the severity of
the post-crisis downturn (developing Europe),
or because of social and political disruptions to
economic activity (Middle East & North
Africa); and finally


 developing countries where recovery from the
crisis appears complete, and there are no
outward signs of overheating—this is the
largest group of the four.




Strong growth and capacity constraints are
issues for many countries in East Asia, Sub-
Saharan Africa, and Latin America

Policy makers in fast-growing economies that are
close to (or above) full capacity should be focusing
on avoiding overheating, rebuilding fiscal and
monetary conditions, and implementing structural
reforms to allow their economies to sustain the fast
growth. Managing macroeconomic policy is
difficult at the best of times. For fast-growing
economies—especially those that are having
success in exploiting previously untapped
potential—the challenge is particularly difficult
because judging where an economy is relative to
potential is daunting when domestic economic
structures are rapidly changing and both foreign
and domestic investors are expressing strong
confidence in an economy’s future (box 5). While
there are clear costs associated with overheating,
especially when fast growth has been accompanied
by rapid credit expansion, there are equally clear
opportunity costs associated with prematurely
slowing an economy and potentially forgoing fast
growth and rising incomes.

For countries that combine rapid growth and
already tight capacity conditions, the risks of
overheating are higher; these risks include high or
rising inflation or both (figure 14); growing current
account deficits (as domestic supply is unable to
meet rapidly rising demand); and asset price
bubbles. In these economies, a tightening of either
or both fiscal and monetary policy might be in


order. That would be especially desirable in
countries where monetary conditions have been
relaxed in recent years, or where structural deficits
are relatively high and the economy could therefore
benefit from restoring some of the fiscal cushions
that were expended in responding to the crisis.

In China, ongoing rebalancing efforts remain a
priority as does engineering a gradual decline in its
unsustainably high investment rate. Should
investments prove unprofitable, the servicing of
existing loans could be come problematic —
potentially sparking a sharp uptick in non-
performing loans that could require state
intervention (see World Bank 2013a, for more).


In still other countries, growth in the post-crisis
period has been weaker than during the boom
because of underlying supply-side constraints

Growth in Brazil, India, Russia, and South Africa
has been 2–3½ percentage points slower since
2010 than it was during the pre-crisis boom period
of 2003–07 (table 3). While different factors are at
play in each of these middle-income countries,
there are several common factors. First, growth
during the boom period was much stronger than
during the preceding four years or even 10 years.
Many began to think that these higher pre-crisis
growth rates might be consistent with potential
output growth, a view that the strong bounce-back
of growth in the period immediately following the
crisis seemed to confirm.FN5 However, countries
have had difficulty sustaining such rapid growth
without generating goods or asset price pressures.



Inflation tends to be higher in countries
with limited spare capacity


Source: World Bank; Datastream.


Figure 14.


0.0


0.5


1.0


1.5


2.0


2.5


3.0


3.5


4.0


-10 -5 0 5 10 15 20


Cambodia
Burundi


Mongolia


Cote d’Ivoire


Pakistan


Indonesia


Ghana


GabonParaguay


Central African
Republic


Laos PDR


Burkina Faso


Seychelles


Togo


Sri Lanka


Bolivia


Philippines


Mauritania


Chile


Rwanda


Niger


Quarterly inflation (saar), 2013Q1 %


Tightness *


* Tightness is the sum of the output gap in 2013 and the difference between the actual and potential growth rates in 2013


Sierra Leone




GLOBAL ECONOMIC PROSPECTS | June 2013




18


This, plus increasing current account deficits,
suggest that underlying potential output growth
was slower than pre-crisis growth rates might have
suggested. Indeed, World Bank estimates of
potential output indicate that, in each of these
countries, pre-crisis growth was well in excess of
potential growth. Weak post-crisis growth in
several of these countries has not generated
significant spare capacity. Rather it has eliminated what
were in some cases large positive output gaps in 2007.

To the extent that current output gaps are relatively
small (or positive), efforts to increase growth
through monetary and fiscal stimulus risk being (or
may have been) ineffective and might add to debt
or inflationary pressures without any sustained
progress in increasing output or reducing
unemployment.

According to the World Bank estimates in table 3,
the 2012 output gap in Brazil, India, and Turkey is
either positive or close to zero (less than 1 percent),


suggesting limited scope for growth to accelerate in
the short run (growth in 2012 was slower than
potential growth in most of these countries).
Moreover, growth rates in the future are likely to
be constrained by the rate of growth of potential,
which although higher than post-crisis averages for
these countries, remains well below pre-crisis
growth rates.

Of course, there is considerable uncertainty
surrounding these (or any) estimates of potential
output.FN6 However, inflation increased over the
past year in two of the five countries in table 3, and
current account balances deteriorated in all but
one. These developments suggest that supply
constrains rather than deficient demand nay be at
the root of the slower growth during recent years
(table 4).

For all of these countries, if growth is to return to
pre-crisis growth rates on a sustainable basis, much
more attention will need to be paid to policies that
tackle supply-side bottle necks, whether they stem
from weak or poorly enforced regulations,
corruption, inadequate or irregular provision of
electricity, or inadequate investments to improve
educational and health outcomes.


Output gaps and unemployment are persistent
problems for many countries in developing
Europe

Several countries in developing Europe participated
in the excesses of the pre-crisis boom period, with
both households and firms taking on high levels of
debt often denominated in foreign currency and
often used to finance consumption rather than



Inflation is rising or current account deterio-
rating in countries with tight output gaps


Source: World Bank.


Table 4.


Levels (MRV) Change in past year


Inflation


(y/y)


Current


account


(% GDP)


Inflation


percentage


points


Current


account


(% GDP)


Brazil 6.5 -2.3 1.4 -0.2


India 9.4 -5.4 -0.9 -1.9


Russia 7.4 3.9 3.6 -1.4


Turkey 6.5 -6.0 -5.0 3.7


South Africa 5.9 -6.2 -0.2 -2.8



Growth post-crisis has been much weaker than during the pre-crisis period in several middle-income
countries


Note 1: Average annual compound growth rate
Note 2: Calendar year average of fiscal year GDP measured at factor cost for India
Source: World Bank.


Table 3.


Average Growth Output Gap Growth in 2012


1995-99 1999-03 2003-07 2010-12 2007 2010 2012 Actual Potential


Brazil 1.4 2.3 4.7 1.8 1.7 2.4 -0.8 0.9 3.2


India 6.6 5.4 8.8 6.1 2.5 2.2 0.9 5.3 6.8


Russia -0.4 6.8 7.6 3.9 9.7 -1.9 -1.3 3.4 3.7


Turkey 3.4 3.0 7.3 5.4 4.3 -2.4 -0.2 2.2 4.0


South Africa 2.4 3.4 5.2 2.8 5.0 -0.7 -1.0 2.5 3.0




GLOBAL ECONOMIC PROSPECTS | June 2013




19



Slower growth in the post-crisis period mainly reflects a return to underlying potential growth rates after
above-potential growth during the boom period



Defining potential growth and why it is important
Forecasting is always a challenging exercise—even more so
when the global economy is going through a large adjustment.
To provide some anchor to the forecasting process, the World
Bank relies on potential GDP (growth).

Potential output is defined as the trend growth in the productive
capacity of the economy, that is, it is the estimated level of out-
put attained when the entirety of the capital stock and effective
labor supply is employed. It is thus a measure of the maximum
sustainable output (growth)—the level of real GDP (growth) in a
given year that is consistent with a stable inflation and the way
in which the factors of production, capital and labor, are optimal-
ly combined in the production process.

In calculating the potential GDP, working-age data comes from
the United Nations, while the capital stock is estimated using
the perpetual inventory method from investment data and as-
suming a depreciation rate of 7 percent (IMF 2005). TFP was
calculated using a Hodrick-Prescott filter through spot estimates
of total factor productivity (TFP) (i.e. the Solow residual).

In the pre-crisis period, developing-country GDP grew 2 percentage
points faster, on average, than potential GDP
Developing-country GDP grew on average by 8.3 percent each
year between 2005 and 2007, approximately 2.0 percentage
points faster than the annual growth of potential output1 during
that period. As a result, World Bank estimates suggest that de-
veloping-country demand was fully 3.5 percentage points higher
than supply in 2007 (output was broadly in balance in 2005).

The crisis erased excess demand, with most countries returning
reabsorbing spare capacity relatively quickly
With the crisis, developing-country growth slowed sharply from
8.5 percent to 1.9 percent between 2007 and 2009, broadly the
same slowdown observed in high-income countries in percent-
age point terms (6.6 points for developing countries, 6.3 points
for high-income countries). As a result, the excess demand of
the end of boom period was erased and a negative output gap
of 0.9 percent of potential GDP was opened up by 2009. The
rebound in activity in 2010 more than absorbed the gap, with
positive or close to zero output gaps in all developing regions
except Europe and Central Asia. Slower-than-potential growth
in East Asia & Pacific, and South Asia closed output gaps from
above, while growth broadly in line with potential in Latin Ameri-
ca has kept the gap closed in that region. In Sub-Saharan Afri-
ca, where estimates of potential are particularly difficult, GDP
has grown less quickly than potential in the post-crisis period,
opening up a small negative output gap.

Growth since the crisis has been constrained by domestic bottle-
necks and productivity, stymieing efforts to use expansionary mac-
roeconomic policy to boost growth
While growth during the post-crisis period has been slower than
during the pre-crisis period, it has, on average, been in line with
underlying potential growth. Potential growth for all developing
regions has slowed relative to the boom period by an estimated
0.5 percentage point. Slower population and TFP growth have
contributed to the slower growth. The rate of growth of the capi-
tal stock for all developing regions increased, but declined if
China is excluded from the calculation. In terms of contributions
to potential growth, about ¼ of the slowdown is attributable to
slower population growth for the developing world excluding China and ⅔ due to slower TFP growth. The major contributor to
slower potential growth in South Asia was slower capital stock accumulation. Weaker TFP growth was the largest driver of
slower growth among BRICS, while in Latin America & the Caribbean, weaker population growth was a major factor.

To achieve faster growth, developing countries will have to focus on supply-side reforms
There is obviously significant uncertainty surrounding measures of output gaps and potential output, particularly among de-
veloping countries where the structure of economies is changing so quickly. Nevertheless, these results serve as a reminder
that developing countries will need to continue with structural policy reforms that eliminate bottlenecks, enhance productivi ty,
and stimulate capital accumulation if they are to achieve sustainably faster growth rates over the medium term.


Box 5.




1. The data reproduced in this box derive from the World Bank’s macroeconometric model and its estimates of total factor productivity (TFP) and potential
output. These estimates are derived following a production-function technique similar to that used by the OECD and the European Commission, as described
in (Burns, Janse van Rensburg, and Bui 2013). Future TFP growth, which influences current TFP growth through the employed smoothing algorithm, is
assumed to be equal to the average observed in the pre-boom period 1995-2005.


Potential output and its determinants Box table 5.1


Source: World Bank.


1995-2005 2005-2007 2007-2009 2009-2012 2012-2015


Developing countries


Actual GDP 4.8 8.3 3.8 6.2 5.5


Potential GDP 4.9 6.3 6.1 5.8 5.7


Total Factor Productivity 2.1 2.7 2.5 2.3 2.3


Capital Stock 4.3 7.7 7.9 8.0 7.3


Working-Age Population 2.0 1.8 1.7 1.5 1.7


East Asia & Pacific


Actual GDP 7.4 11.6 8.0 8.5 7.5


Potential GDP 8.1 9.1 8.9 8.6 8.0


Total Factor Productivity 4.0 4.9 4.7 4.4 4.2


Capital Stock 9.4 10.5 11.1 11.3 9.5


Working-Age Population 1.6 1.4 1.2 1.1 1.3
Europe & Central Asia


Actual GDP 4.0 7.7 -1.5 4.6 3.6


Potential GDP 3.2 5.4 4.3 3.7 3.8


Total Factor Productivity 2.8 2.7 2.0 1.8 1.8


Capital Stock -0.1 7.3 5.8 5.5 5.3


Working-Age Population 0.6 0.7 0.8 0.4 0.5


Latin American & Caribbean


Actual GDP 2.9 5.5 1.0 4.4 3.7


Potential GDP 2.9 3.8 3.7 3.6 3.4


Total Factor Productivity 0.7 1.2 1.2 1.1 0.9


Capital Stock 2.7 4.5 4.6 4.7 4.9


Working-Age Population 2.0 1.7 1.6 1.5 1.4
Middle-East & North Africa


Actual GDP 4.4 5.6 3.7 1.9 2.4


Potential GDP 4.3 4.3 3.8 3.1 2.8


Total Factor Productivity 1.0 0.9 0.5 0.1 0.1


Capital Stock 3.3 5.4 6.0 5.1 4.0


Working-Age Population 3.2 2.4 2.1 2.1 2.2
South Asia


Actual GDP 5.8 8.9 5.3 7.3 5.9


Potential GDP 6.0 7.4 7.1 6.7 6.1


Total Factor Productivity 2.3 2.9 2.8 2.6 2.4


Capital Stock 6.4 9.8 9.3 9.1 7.5


Working-Age Population 2.4 2.1 2.0 1.9 1.9
Sub-Saharan Africa


Actual GDP 4.0 6.7 3.6 4.7 5.2


Potential GDP 3.8 5.2 5.3 4.9 5.1


Total Factor Productivity 1.0 1.5 1.3 1.2 1.1


Capital Stock 2.4 5.9 7.1 6.4 6.9


Working-Age Population 2.8 2.7 2.7 2.6 2.7


(Average annual percent change)


Output gaps Box table 5.2


Source: World Bank.




2005 2006 2007 2008 2009 2010 2011 2012 2013


Developing -0.2 1.5 3.5 3.1 -0.9 0.6 1.0 0.1 -0.6


East Asia & Pacific -2.0 -0.4 2.5 2.2 0.8 1.6 1.5 0.6 -0.2


Europe & Central Asia 3.4 6.0 8.0 7.0 -3.6 -2.1 -0.2 -1.1 -1.9


Latin America & Caribbean -0.5 1.3 2.9 2.8 -2.5 -0.3 0.4 -0.1 -0.1


Middle-East & North Africa 0.0 0.9 2.6 2.6 2.4 4.1 2.1 -1.0 -2.5


South Asia -0.5 0.8 2.3 0.8 -1.0 1.8 2.4 0.8 -0.1


Sub-Saharan Africa 0.4 1.8 3.2 2.9 -0.2 -0.1 -0.3 -0.8 -0.9


Output Gap ((actual GDP - potential)/potential, %)




GLOBAL ECONOMIC PROSPECTS | June 2013




20


investments in new productive capacity. In
addition, the banking sectors in many of these
countries had close relations with European banks.
As a result, their own difficulties in dealing with
rising quantities of nonperforming loans were
magnified by a drying up of external funding
sources upon which many banks had relied. As in
high-income Europe, the adjustment that ensued
following the crisis was brutal. Unemployment
soared to record levels, as banks deleveraged and
households and firms cut into spending in an effort
to repair damaged balance sheets. Fiscal conditions
deteriorated throughout the region, with severe
consequences in a few countries where public debt
levels had risen even during the boom years.

The good news is that growth rates for many of the
hardest-hit countries have recovered to levels close
to their underlying potential output. However,
growth has not been strong enough to make
significant inroads into existing unemployment and
spare capacity.FN7 Arguably, these economies have
been caught in a high unemployment equilibrium.
Traditional policy advice in situations like this
would be to use fiscal and monetary policy to
stimulate growth and help close output gaps, but
for many countries already high fiscal deficits and
the necessity of restoring bank balance sheets limit
the scope for such actions (figure 15). For these
countries, policy may have to focus on increasing
economic flexibility (including labor retraining) to
promote improved competitiveness and take
advantage of faster growth elsewhere.


Output gaps are small and appear to be closing
for the majority of developing countries



The bulk of developing countries are in a relatively
positive place, with modest output gaps (countries
close to the center of the figure 16), that are closing
(countries in the green-shaded portions of the
graph), either because output growth has slowed
below potential and is therefore easing inflationary
pressures, or because output is growing somewhat
faster than potential. In these economies, policy
appears to be broadly on track, although authorities
may need to examine the overall stance of fiscal
policy to evaluate whether there is scope for a
gradual tightening to regenerate buffers consumed
during the crisis period or to tighten monetary
policy and in some cases rebuild reserves to
provide room for a monetary policy easing should
the global economy weaken sharply.



Post-crisis risks have
receded, with domestic
challenges gaining
prominence



The cumulative steps taken by Euro Area countries
over the past several years have greatly reduced the
fiscal sustainability problems on the continent. The



Output gaps are small or closing in the
majority of developing countries


Source: World Bank.


Figure 16.


Speed of gap closure in 2013,
percentage points


Size of output
Gap (2012)


China


-5


-4


-3


-2


-1


0


1


2


3


4


5


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


East Asia & Pacific Europe & Central Asia La n America & caribbean


Middle-East & North Africa South Asia Sub-Saharan Africa


Overhea ng


Crashing


Gap closing from below


Gap closing from above



Fiscal space is limited among many
economies with large output gap


Source: World Bank.


Figure 15.


-6


-5


-4


-3


-2


-1


0


Mali Romania St.
Vincent


Ukraine Bulgaria Slovenia Lithuania Cameroon South
Africa


Output Gap


Fiscal Deficit


Percent of GDP, 2012




GLOBAL ECONOMIC PROSPECTS | June 2013




21


International Monetary Fund (IMF) estimates that
⅔ of Euro Area countries have already done
enough fiscal adjustment (through end of 2013) to
achieve debt sustainability and debt reduction (IMF
2013b, 8). This fiscal consolidation although
enormously painful has, in conjunction with
reassurances offered by the European Central Bank
(ECB), helped restore confidence in the Euro Area
even as concerns about individual countries and
banks remain. Indeed, as the uncertainty evoked by
the Cyprus rescue effort illustrated, continued
careful management of conditions at both the
country level and the regional level is required.
Much of the uncertainty that surrounded U.S. fiscal
policy toward the end of 2012 has dissipated.
Congress has twice extended the debt ceiling well
in advance of reaching it, reducing the likelihood
that a return of brinkmanship will cause the debt to
go unpaid. The decision to allow payroll taxes to
expire and increase tax rates on some wealthier
individuals, together with the spending cuts
associated with the sequester have reduced the U.S.
general government deficit by an estimated 1½
percent of GDP.

Nevertheless, little progress has been made toward
setting U.S. fiscal policy on a sustainable medium-
term path. At 7.0 percent of GDP in 2012, the
general government deficit remains very high, and
gross general government debt is projected to
reach 107 percent of GDP in 2013. As a result, the
IMF 2013b) estimates that an additional deficit
reduction of some 8.2 percent of GDP will be
required before fiscal policy in the United States
returns to a sustainable path (almost twice the
estimated cuts required in the Euro Area). In Japan,
the same number is more than twice as high again,
even when seeking the less ambitious objective of
reducing general government gross debt to 173
percent of GDP.


Traditional risks have receded, but
other risks and challenges have
emerged or grown in stature



Even as the post-crisis risks from the high-income
world have declined in importance, a new set of
uncertainties and risks are emerging or gaining in
stature. For instance, developing countries are
increasingly concerned about:


 the potential effects of the radical relaxation of
both fiscal and monetary policy in Japan;


 the potential impacts on revenues, government
balances, and growth among commodity
exporters, if the increased supply and demand
suppression that high commodity prices have
evoked begins to generate strong downward
pressures on commodity prices;


 domestic challenges, including inflationary
pressures and asset price bubbles, and weaker
than pre-crisis growth rates.


 The challenges that the eventual withdrawal of
quantitative easing may bring.




Dealing with sharply relaxed fiscal
and monetary policy in Japan

After several months of signaling that they would
be loosening fiscal and monetary policy, Japanese
authorities announced at the beginning of 2013 a
three-pronged macroeconomic growth strategy,
comprising new public works spending of ¥10
trillion, a new monetary policy aimed at reaching a
2 percent inflation target in the medium term, and
structural policies aimed at increasing total factor
productivity growth. For the moment, the precise
nature of the programs is not entirely clear—for
example, only about half of the announced new
spending appears to be net new spending. Similarly,
the impact and details of announced to incite firms
to invest, reduce protection in the service and
agricultural sectors and stimulate female labor
participation is unclear. The monetary easing,
which, as announced, would about the same size as
the third round of quantitative easing (QE3) in the
United States, has only just begun.

Japanese quantitative easing can be expected to
affect developing countries in three ways:


 The yen’s depreciation is likely to dampen
developing-country exports (figure 17). However,
income elasticities are typically larger than price
sensitivities and in this particular instance,
developing countries gain from increased
import demand from Japan might outweigh
the losses associated with the Yen’s (real)
depreciation;




GLOBAL ECONOMIC PROSPECTS | June 2013




22


 By adding to the looseness of global monetary
conditions, through lower global interest rates
and perhaps increased capital inflows,
potentially adding to overheating pressures,
especially in developing East Asia & Pacific;


 Through increased demand for final goods and
intermediate products used in Japanese
exports, mainly benefiting countries involved
in the supply chains of Japanese exporters.


 Longer-term unless the structural component
of the reform agenda is successful in boosting
productivity and GDP growth, the fiscal and
monetary stimulus elements are unlikely to
have a lasting positive effect for developing
country GDP, while increased liquidity and
indebtedness could prove destabilizing.



Ultimately the overall impact on individual
developing countries will depend in part on the
importance of Japan as a trading partner, the size
of liquidity leakage from the Japanese economy, the
extent that individual developing countries attract
additional capital flows, and the extent to which the
quantitative easing boosts Japanese final and
intermediate demand for the exports of developing
countries (box 6 and the Exchange Rate Annex
cover different channels and likely impacts in more
detail).

Finally, the financial impact of Japanese quant-
itative easing could be attenuated by the scaling
back or even withdrawal of U.S. quantitative


measures (see the following discussion for more on
this point).


Past investments are boosting the
supply of industrial commodities,
potentially ending the supercycle



Since early 2011, industrial commodity prices have
been weakening, a process that appears to be
intensifying in 2013, despite signs that the global
economy is gaining strength (figure 18). Indeed,
since their peak in early 2011, the price of metals
and minerals is down 30 percent and that of energy
is down 14 percent, with prices off 12 and 5
percent, respectively, between January 2013 and the
end of May 2013. This price weakness has sparked
discussion about whether a supercycle in
commodity prices is coming to an end—
particularly within the metals industry, where large
increases in supply are coming on stream in
response to investments spurred by the high prices
of the past several years. FN8

While the baseline assumption of a gradual easing
in prices over the projection period remains the
most likely outcome, a steeper decline cannot be
ruled out. Table 5 reports the results of two
simulations. The first scenario examines the
impacts on developing-country GDP, current
accounts, and fiscal balances of a scenario where
oil prices, reach the real long-term supply cost of
$80 per barrel (industry experts’ current estimate
of the cost of profitably extracting oil from the



Since early 2011, metals and energy prices have
been weakening


Source: World Bank; Datastream.


Figure 18.


70


100


130


160


Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13


USD price index, Jan 1 2012 =100


Copper


Nickel


Crude Oil



Japanese depreciation has pushed up devel-
oping country real effective exchange rates


Source: World Bank.; IFS; JP Morgan.


Figure 17.


90


100


110


120


130


140


150


Jan '06 Jan '08 Jan '10 Jan '12


Developing Countries


China


East Asia excl. China


Europe & Central Asia


Latin America & Caribbean


South Asia


Real effective exchange rates (January 2005=100)




GLOBAL ECONOMIC PROSPECTS | June 2013




23



Potential impacts of Japanese quantitative easing on developing countries




The yen’s depreciation caused developing-country exchange rates to appreciate 1.7 to 3.7 percentage points more than would


have been the case otherwise


Since September 2012, the yen has depreciated in real effective terms by 21 percent. So far, the impact on developing
economies is measurable, if relatively muted. Developing-country real-effective exchange rates appreciated by 4.7 percent
over the same period, which was 3.5 percentage points more than their average appreciation over any six-month period
between 2005 and 2012. Countries in East Asia & Pacific have closer direct trade ties with Japan and their currencies were
hit harder, rising by 6.1 percent versus an earlier average appreciation of 2.4 percent. Thailand experienced a sharp 12.5
percent real-effective appreciation of its currency. Simulations suggest that in the absence of the yen’s depreciation, curren-
cies in developing countries generally and in East Asian developing countries specifically would have appreciated 1.7 and
3.7 percentage points less quickly.

The yen’s depreciation likely to dampen developing-country exports
The yen’s depreciation will tend to make imports more expensive for Japanese consumers and will, therefore, initially reduce Japa-
nese demand for developing-country imports. However, typically income elasticities are larger than price sensitivities and in this partic-
ular instance, developing country exporters’ gains from increased import demand from Japan might outweigh the losses associated
with the Yen’s (real) depreciation.




Effects are not larger because few developing countries compete directly with Japan


Impacts on developing-country exports to the rest of the world would be limited because few compete directly with Japan.
Only four developing countries have an export similarity index with Japan in excess of 50 (100 implies an identical export
structure), and even for those where similarities are relatively high, impacts may be limited given differences in markets
served (Mexico competes in the auto sector, but is focused in the U.S. market, which represents only 22 percent of Japa-
nese auto exports).


Countries like Thailand and Philippines that are in Japan’s supply chain may benefit from increased Japanese exports


Suppliers of parts and components to Japan in regional production networks, particularly Thailand and the Philippines,
could benefit from gains by Japanese exporters in global markets and even derive additional benefits through increased
potential FDI from Japan. Firms in trade partner countries (including those in East Asia & Pacific) would also benefit from
Japanese technology, machinery, and equipment at competitive costs. In the area of service trade, tourists from developing
East Asia to Japan would have increased purchasing power that would contribute to further narrowing Japan’s trade deficit
with the region. Trade partners in the region and globally would benefit from an increase in Japan’s demand for global im-
ports.


Quantitative easing will help keep interest rates low and may contribute to the volatility of capital flows


The announced quantitative easing component of the Japanese stimulus package is roughly twice the size of QE3 in the
United States. However, financial leakages to developing countries are unlikely to be twice those associated with the U.S.
QE3 because capital outflows from the United States tend to flow more directly to developing countries than do Japanese
outflows (only 3 percent of Japanese portfolio outflows are directed to developing countries, versus 8.3 percent for the Unit-
ed States). However, Japanese capital markets are thinner than U.S. capital markets and, therefore, may be less able to
absorb the additional capital flows, forcing a larger share to leak out. Finally, IMF (2013d) found that the impacts of QE3 on
developing countries was much less marked than earlier episodes because markets were much calmer then (as they are
now).


Evaluations of the effect of U.S. QE on developing countries offer unclear guidance about the potential impact of Japanese QE


Finally, it is not all that clear what the impact of the leakages (however large they may be) will be on developing countries.
Research by the Asian Development Bank (2013) suggests that the main impact on developing countries of the U.S. quanti-
tative easing was globally positive, mainly because it lowered borrowing costs and boosted demand. Similarly IMF (2013d)
suggests that flows to developing countries have not been excessive and have been broadly manageable, although volatili-
ty associated with changed sentiment in high-income countries has generated temporary strains and monetary policy chal-
lenges. While lower interest rates may be contributing to asset bubbles and excess risk taking, they have also permitted the
relatively inexpensive financing of a great deal of capacity enhancing investment.


By extending periods of low interest rates and boosting capital flows, Japanese QE could exacerbate regional bubbles


Japanese QE will undoubtedly serve to keep borrowing costs down for an even longer period than would have occurred
otherwise. That may contribute to asset price bubbles and volatile capital flows, although to what extent is difficult to evalu-
ate, just as the evidence concerning the impact of the U.S. policy in this regard is mixed.


Box 6.




GLOBAL ECONOMIC PROSPECTS | June 2013




24


Table .5

Impact of a more rapid supply-induced decline in industrial commodity prices




Table 5.


Scenario 1: Oil price gradually declines to $80/bbl real by June 2014, other commodity prices react endogenously


2013 2014 2015 2013 2014 2015 2013 2014 2015


World 0.1 0.4 0.3 0.0 0.1 0.0


High income countries 0.1 0.5 0.4 0.1 0.4 0.5 0.0 0.2 0.1


Developing countries 0.1 0.3 0.1 0.0 0.0 -0.1 0.0 -0.2 -0.3


Oil exporters


Developing countries -0.1 -0.4 0.1 -0.3 -1.4 -1.4 -0.2 -1.1 -1.1


East Asia and Pacific 0.1 0.4 0.4 0.0 0.0 0.1 0.0 -0.2 -0.3


Europe and Central Asia -0.2 -0.8 -0.3 -0.5 -2.3 -2.3 -0.4 -1.8 -1.8


Latin America and Caribbean -0.1 -0.3 0.4 -0.2 -0.8 -0.7 -0.1 -0.6 -0.5


Middle East and N. Africa -0.4 -1.4 0.1 -0.8 -3.5 -2.2 -0.4 -2.1 -2.3


South Asia n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.


Sub-Saharan Africa -0.3 -1.4 -0.8 -0.9 -4.5 -4.4 -0.6 -2.9 -3.3


Oil importers


Developing countries 0.2 0.6 0.1 0.2 0.7 0.5 0.1 0.2 0.1


East Asia and Pacific 0.2 0.8 -0.1 0.2 0.8 0.4 0.1 0.2 0.1


Europe and Central Asia 0.1 0.4 0.3 0.2 0.8 0.9 0.1 0.2 0.1


Latin America and Caribbean 0.0 0.2 0.1 0.0 0.2 0.2 0.0 -0.1 -0.2


Middle East and N. Africa 0.1 0.5 0.4 0.1 0.5 0.6 0.0 0.2 0.1


South Asia 0.2 0.9 0.8 0.3 1.4 1.5 0.1 0.7 0.7


Sub-Saharan Africa 0.0 0.2 0.2 0.0 0.2 0.2 0.0 0.0 0.0


Real GDP Current Account (% of GDP) Fiscal Balance (% of GDP)


Scenario 2: Metal prices gradually decline by a cumulative 20% by June 2014


Source: World Bank.


2013 2014 2015 2013 2014 2015 2013 2014 2015


World 0.0 0.0 0.0 0.0 0.0 0.0


High income countries 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0


Developing countries 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -0.1


Metal exporters


Developing countries 0.0 -0.2 -0.1 -0.1 -0.3 -0.3 0.0 -0.2 -0.3


East Asia and Pacific n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.


Europe and Central Asia 0.0 -0.2 -0.1 -0.1 -0.3 -0.3 0.0 -0.3 -0.3


Latin America and Caribbean 0.0 -0.1 -0.1 0.0 -0.2 -0.2 0.0 -0.2 -0.2


Middle East and N. Africa n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.


South Asia n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.


Sub-Saharan Africa -0.1 -0.7 -0.5 -0.2 -1.2 -1.2 -0.1 -0.8 -0.9


Metal importers


Developing countries 0.0 0.1 0.0 0.0 0.2 0.1 0.0 0.0 0.0


East Asia and Pacific 0.0 0.1 -0.1 0.0 0.2 0.1 0.0 0.1 0.0


Europe and Central Asia 0.0 0.2 0.1 0.1 0.3 0.3 0.0 0.0 -0.1


Latin America and Caribbean 0.0 -0.2 -0.1 -0.1 -0.3 -0.4 0.0 -0.3 -0.3


Middle East and N. Africa 0.0 0.1 0.1 0.0 0.2 0.2 0.0 0.1 0.1


South Asia 0.0 0.2 0.2 0.1 0.4 0.4 0.0 0.2 0.2


Sub-Saharan Africa 0.0 0.0 0.0 0.0 0.1 0.1 0.0 0.0 0.0


Real GDP Current Account (% of GDP) Fiscal Balance (% of GDP)




GLOBAL ECONOMIC PROSPECTS | June 2013




25


Canadian tar sands) by mid-2014 rather than
declining gradually to that price by 2025, as in the
baseline. The faster decline is assumed to come
from a shift in expectations about future prices
brought about by increasing production and
reserve discoveries in the United States and other
nonmembers of the Organization of Petroleum
Exporting Countries (OPEC). In this simulation,
the price of other commodities react in line with
historical cross-price and output elasticities (energy
is a major cost factor in the production of both
metals and agricultural commodities). As a result,
metals and food prices also fall, by about 7 and 3½
percent, respectively, relative to the baseline.

In this scenario, global GDP is positively affected
(up 0.4 percentage point in 2014 relative to
baseline), because the positive effects on oil-
importing economies outweigh the negative impact
on oil-exporting countries. The GDP of
developing-country oil exporters is projected to
decline by a relative modest 0.4 percent in this
scenario in 2014, but the effects on current account
and fiscal balances are larger—-1.4 and -1.1 percent
of GDP, respectively. The simulation assumes that
exporters are able to finance the deterioration in
these balances. If they were unable to do so, GDP
impacts would be substantially larger. For the most
part, developing-country oil exporters are still
running current account surpluses, but fiscal
deficits exceed 3 percent of GDP in 6 of 16
countries for which data exist. If countries could
not finance additional deficit, they could be forced
into a procyclical tightening of policy that would
exacerbate the cycle.

The second simulation analyzes the impact of a
more rapid decline in metals prices, which are
assumed to fall by a further 20 percent by June
2014 relative to the baseline, in response to
additional capacity coming onstream following past
investments (see earlier discussion). In this
scenario, the effects on global and oil-importing
country GDP are broadly unchanged, in part
because, unlike oil, the share of metal and minerals
in the imports of most countries is small (even in
China, which consumes a disproportionate share of
the world’s metals, metals and minerals represent
only 16 percent of total imports). The impact on
metals exporters is more severe. Among Sub-
Saharan African metal exporters, GDP could fall
by as much as -0.7 percent in Sub-Saharan Africa,
balance of payments declining by 1.2 percent of


GDP, and the fiscal balance by nearly 1
percent.

Unlike oil exporters, these impacts are more likely
to be binding for developing metals exporters
whose average government and current account
deficits are equal to 2.7 and 6.3 percent of GDP.
Assuming that increases in government deficits
above the 3 percent level cannot be financed, GDP
impacts would increase to -0.5 percent for the
metal exporting countries facing financing
constraints, versus –0.2 percent for countries
where there are no financing constraints.

Notwithstanding the 16 percent decline in oil
prices between their March 2012 peak and May
2013, commodity prices are much higher than they
were at the turn of the century. For example,
between their 2001 record lows and 2012, nominal
oil prices are up more than 300 percent, while
metals and agricultural prices are up 225 and 157
percent, respectively.


The eventual tightening of monetary
policy in high-income countries may
slow growth in developing countries



Although much of the current debate in developing
countries concerns the potential impacts of
Japanese quantitative easing (see earlier discussion),
the implication for developing countries of backing
away from current levels of stimulus and even the
withdrawal of stimulus are at least equally
important. Although Japan has embarked on a new
stimulus policy, there are increasing signs that the
United States will soon either reduce the size of or
stop its QE efforts. If that happens, not only will
the net effect of Japanese easing likely be offset (at
least partially) by tighter policies in the United
States, but over the medium term, developing
countries are likely to face tighter financial
conditions, with potentially important real-side
implications.FN9

As monetary policy in high-income countries
begins to be less accommodative, long-term
interest rates can be expected to rise. Currently,
U.S. long-term interest rates are some 110 basis
points below their pre-crisis level and 140 basis
points lower than their long-term average in real
terms. Assuming that a relaxation of quantitative




GLOBAL ECONOMIC PROSPECTS | June 2013




26


easing leads U.S. long-term interest rates to rise to
their long-term average in real terms, and that
developing-country interest rate spreads remain
constant, developing-country borrowing costs
would rise by the same amount as long-term U.S.
rates.

Econometric evidence suggests, however, that
developing-country spreads tend to rise when base
rates increase. Work done for the 2010 edition of
Global Economic Prospects suggests that a 100-basis-
point increase in high-income-country base rates is
associated with a 110 to 157 basis point increase in
developing-country yields (World Bank 2010;
Kennedy and Palerm 2010, 2013and IMF 2013a).

If real base rates return to their long-term averages,
they would rise from about 188 basis points today
to around 322 basis points (the mean level between
1990 and 2007). Based on historical experience,
that could cause developing-country yields to rise
by between 150 and 270 basis points, with
countries with relatively good credit histories and
low spreads at the bottom end of the range and
those with less good records toward the upper end
of the range. This is broadly in line with recent
IMF (2013a, 38–39) estimates that suggest that
three-fourths of the 465 basis point decline in
developing-country yields since December 2008
has been caused by external rather than domestic
factors.FN10

Simulations suggest that the associated increase in
the cost of capital would cause desired capital-to-
output ratios in developing countries to decline,
resulting in slower investment growth for an
extended period as well as a slower rate of growth
of potential output of around 0.6 percentage points
per annum after three years during the transition
period to a lower capital-output ratio. Longer term,
potential output could be lower by between 7 and
12 percent unless measures are undertaken to
reduce domestic factors that contribute to the high
cost of capital in developing countries. Efforts in
this regard could more than completely offset the
impact of tighter global conditions.




Higher interest rates could also
expose risks in countries with high
debt levels



In addition to the longer-term effects that a return
to higher capital costs would have, there is also the
risk that the transition to higher rates occurs in an
abrupt and disruptive fashion (IMF 2013d). In such
a scenario, rather than a gradual increase in long-
term rates as monetary stimulus eases, markets
react preemptively, causing rates to jump quickly,
potentially trapping some participants in vulnerable
positions that appeared manageable under low
interest rates but proved not to be under suddenly
higher interest rates.

Developing countries that have run up private and
public sector debt during the low-interest period
could be particularly vulnerable. So too would be
countries with relatively weak domestic financial
sectors and elevated current account or
government deficits that might make them
vulnerable to either a sharp increase in capital costs
or a reduction in flows.

Although the majority of developing countries
appear to be in good condition in this regard,
public debt levels are high and proving difficult to
manage in countries such as Cape Verde, Egypt,
Eritrea, Jamaica, Jordan, Lebanon, Pakistan, and
Sudan. IMF statistics suggest that gross general
government debt exceeds 50 percent of GDP in 36
low- and middle-income countries and increased in
12 of these by 10 or more percentage points of
GDP between 2007 and 2012 (figure 19).



Several developing countries combining
high and rapidly rising government debt are
at risk


Source: IMF.


Figure 19.


0


20


40


60


80


100


120


140


160 Debt in 2012


Change in debt since 2007 (percentage points)


% of GDP




GLOBAL ECONOMIC PROSPECTS | June 2013




27


Individual country exposure is not limited to
general government debt. In several economies,
private sector debt has been increasing rapidly as
well. And private debt can rapidly become a public-
sector problem as the recent financial crisis
illustrated for high-income countries and the East
Asia crisis for developing countries. In this respect,
18 developing countries have private external debt
exposures in excess of 30 percent of GDP. Three-
quarters of these are in developing Europe and
Central Asia reflecting strong banking and inter-
company linkages with high-income Europe. In the
case of Seychelles and Papua New Guinea, the
gross private sector debt reflects a thriving offshore
-banking system (figure 20). While that changes the
nature of the associated risk, it does not eliminate
it, as the recent experiences of Cyprus, Iceland, and
Ireland illustrate.

While external debt is sometimes more
problematic, because exchange rate movements can
affect domestic agents’ ability to service loans, local
currency debt can also problematic — especially if
problems with domestic debt provoke a local
banking crisis.

Data on domestic banking claims on the private
sector (such data exclude debt associated with local


bond markets) suggest a number of countries
where debt levels are especially high (second panel
of figure 20.) However, interpreting the data is
difficult, because while debt to GDP levels can
reflect vulnerability, they also reflect the extent of
intermediation — which is generally associated
with stronger growth and higher incomes.

Countries where debt levels are high, and have
been rising rapidly, may represent the greatest risk.
In East Asia for example, combined nonfinancial
corporate and household debt has increased in
several countries, reaching 130 percent of GDP in
China and Malaysia in 2012. For the East Asia
region as a whole, private debt has increased by 19
percentage points of GDP since 2007, while in
Latin America it has increased by 9 percentage
points. Household debt (only by deposit-taking
corporations) in Thailand has risen 15 percentage
points since 2007 and now stands at 63.4 percent
of GDP (see World Bank 2013 for more). Total
household debt is estimated to be about 77 percent
of GDP in Thailand and almost 80 percent of
GDP in Malaysia.





Private sector debt levels, as well, are elevated in some developing countries


Source: World Bank; International Debt Statistics; World Development Indicators; IMF IFS.
Note 1: External private debt include private nonguranted external debt with short- and long-term maturity.
Note 2: Domestic credit to private sector refers to financial resources provided to the private sector, such as through loans, purchases of nonequity securi-
ties, and trade credits and other accounts receivable, that establish a claim for repayment. For some countries these claims include credit to public enterprises.
Note 3. Orange bars indicate low income countries.


Figure 20.


0 40 80 120 160


China
South Africa


Malaysia
Vietnam
St. Lucia
Panama


Thailand
Mauritius
Lebanon


Latvia
Grenada


Tunisia
Fiji


Jordan
Bulgaria


Morocco
Chile


Vanuatu
Cape Verde


Brazil
Belize


Dominica
Ukraine


Montenegro
Bosnia and Herzegovina


Maldives
Lithuania


Nepal
St. Vincent & the Grenadines


Mongolia
Bhutan
Turkey


India
Honduras


Bangladesh
Serbia


Costa Rica
Samoa


Russian Federation
Macedonia, FYR


Colombia Private Domestic Debt (% GDP)*


0 20 40 60 80 100 120


Seychelles


Latvia


Papua New Guinea


Bulgaria


Kazakhstan


Ukraine


Moldova


Romania


Nicaragua


Kyrgyz Republic


Lithuania


Georgia


Serbia


Lao PDR


Jordan


Jamaica


Macedonia, FYR


Armenia


Bosnia and Herzegovina


Chile


Belarus


Turkey


Guyana


Malaysia


Guatemala


El Salvador


Zimbabwe


Albania External Private Debt (% GDP)




GLOBAL ECONOMIC PROSPECTS | June 2013




28



Concluding remarks



Overall, the global economy is moving into a new
and hopefully less volatile phase. The extreme risks
and swings in perceptions that have driven global
capital and output markets have eased significantly,
even as new risks and challenges have gained in
prominence.

The majority of developing countries have
navigated the crisis and immediate post-crisis
period very well. With the exception of some
countries in developing Europe and the Middle
East & North Africa, they recovered relatively
quickly from the crisis and have enjoyed solid, if
less rapid than boom period, growth rates. With
the demand gaps opened up by the crisis largely
filled, future growth will increasingly be determined
by the success with which countries succeed in
addressing supply-side bottlenecks, including gaps
in physical, social, and regulatory infrastructure:


 In many countries, policy attention is
appropriately returning to simplifying
regulations, opening up to trade and foreign
investment, investing in infrastructure and
human capital. These are the policies that have
underpinned the acceleration in developing
country growth over the past 20 years, and it is
only through continued reform and progress in
these policies that the strong productivity
growth of the past 20 years can be maintained.


 For the many countries operating at close to or
even above full capacity, macroeconomic
policy may need to be tightened—both to
reestablish fiscal space that was used up in
response to the crisis and to prevent
inflationary pressures and asset bubbles from
building up.




The external risks facing developing countries have
also evolved:


 The recent decline in industrial commodity
prices is, perhaps, signaling an end to the
upward phase of the commodity cycle. Policy
makers in commodity-exporting countries need
to take a close look at the potential
consequences of a sharper-than-anticipated
decline in commodity prices for growth,
government finances, and their external
financing needs.


 For countries in East Asia, the recent
intensification of monetary easing in Japan
could prompt strong and disruptive capital
inflows, adding to already existing inflation and
currency pressures.


 Longer term, as high-income monetary policy
becomes less accommodative, interest rates in
developing countries will rise. Higher rates may
generate difficult adjustments and possibly
domestic crises, especially in countries where
public and private sector indebtedness has
been on the upswing.


 Over the longer term, higher interest rates will
translate into increased capital costs, potentially
slowing developing-country growth by as
much as 0.6 percentage points per annum after
three years as firms reduce debt levels to more
manageable levels.




GLOBAL ECONOMIC PROSPECTS | June 2013




29






1. Equity flows to the Middle-East & North Africa completely dried up in the first four months of 2013, with just one


bond issue from Lebanon ($1.1 billion) and two syndicated bank deals worth about $643 million.


2. Traditionally, risk premiums are measured as the difference between developing-country yields or CDS rates and


those of similar U.S. assets, with the idea that the U.S. assets proxy for the risk-free rate of return. As the crisis hit,


the riskiness of U.S. financial assets clearly went up, even if yields did not, either in the short run because of flight-


to-quality effects or later because of quantitative easing. At the same time, spreads on developing-country financial


assets declined. Only part of that decline can be explained by improved credit quality (IMF 2013b), the rest being


explained by the increased riskiness of the base rate and the reduced cost of credit.


3. Since January 2013, 10 developing-country borrowers have been upgraded and only six downgraded. In addition,


over the past 18 months, eight developing countries (or developing-country governments)—Angola, Bolivia,


Honduras, Mongolia, Paraguay, Rwanda, Tanzania, and Zambia—have issued bonds for the first time (in Bolivia’s


case, for the first time in more than 90 years). Since 2010, 14 countries have entered international bond markets for the first time.


4. The IMF (2013a) estimates an overall fiscal contraction for the Euro Area of 0.7 percent of GDP, compared with


0.5 percent in 2012 and 2.1 percentage points in 2011.


5. The measures of potential used here are based on a production function method and rely on estimates of trend total


factor productivity growth as well as assumptions that the full capacity rate of employment (employment divided by


working-age population) are constant over time and that all of the services of the capital stock are available—where


the capital stock is estimated as equal to the sum of all past investments depreciated at a 7 percent rate.


6. For instance, the South African Reserve Bank’s latest estimate of annual long-run potential output growth is 3.5


percent. However the bank also notes that “our estimates for South Africa over the same period as the ECB study


reflect a decline from an average of 3.9 per cent (2000–07) to 2.8 per cent (2008–10); more or less similar to the


estimated magnitude of decline in the euro area and the United States” (Ehlers and others 2013, 10).


7. For negative output gaps to close, growth must temporarily exceed the rate of growth of potential and vice versa.


8. Heap (2005) argues that industrial commodities go through a super-cycle where prices are likely to stay high for an


extended period of time. Jerrett and Cuddington 2008 have empirically visualized the hypothesis for a number of


metals. Erten and Ocampo (2012) identify four super-cycles in real commodity prices during the period 1865-2009,


ranging between 30-40 years with amplitudes 20-40 percent higher or lower than the long run trend (similar cycles


have been identified by Cuddington and Zellou (2013) for metals).


9. See World Bank 2010, chapter, 3 for a more detailed discussion of the impact of higher borrowing costs.


10. The IMF work differs from the World Bank work in citing high-income-country stock market volatility as the main


external factor underpinning the decline in spreads. The World Bank (2010) includes high-income stock-market


volatility with a much wider range of risk appetite indicators to derive a synthetic price-of-risk indicator that


simultaneously determines developing country and high-income country risk premiums.












Notes




GLOBAL ECONOMIC PROSPECTS | June 2013




30


References




Asian Development Bank. 2013. Asian Development Outlook, 2013: Asia’a Energy Challenge. Asian Development Bank,
Manilla, Phillipinnes.


Alan Heston, Robert Summers and Bettina Aten, Penn World Table Version 7.1, Center for International Comparisons of
Production, Income and Prices at the University of Pennsylvania, Nov 2012.


Burns, A., T. Janse van Rensburg, and T. Bui. 2013. “Estimating Potential Output in Developing Countries”. World Bank
Prospects Paper. forthcoming


Cuddington, John T. and Abdel M. Zellou (2013). “A Simple Mineral Market Model: Can it Produce Super Cycles in
prices?” Resources Policy, vol. 38, pp. 75-87.Cuddington, John T. and Abdel M. Zellou (2013). “A Simple Mineral Market
Model: Can it Produce Super Cycles in prices?” Resources Policy, vol. 38, pp. 75-87.


Ehlers, N., L. Mboji, and M. M. Small. 2013. “The Pace of Potential Output Growth in the South African Economy.” South
African Reserve Bank Working Paper WP/13/01, South African Reserve Bank, Pretoria.


Erten Bilge and Jose Ocampo. 2012. “Super-Cycles of Commodity Prices since the Mid-Nineteenth Century.” Initiative for
Policy Dialogue ,Working Paper Series, Columbia University.


Heap, Alan. 2005. “China—The Engine of a Commodities Super Cycle.” Citigroup Smith Barney, New York.


IMF (International Monetary Fund). 2005, World Economic Outlook. Washington, DC: IMF.


______. 2013a, Fiscal Monitor Report. April, Washington, DC: IMF.


______. 2013b, Global Financial Stability Report. April, Washington, DC: IMF.


______. 2013c, World Economic Outlook. April, Washington, DC: IMF.


______. 2013d, Unconventional Monetary Policies—Recent experience and prospects. May, Washington, DC: IMF.


International Energy Agency (IEA). 2012a, Oil Market Report (13 November 2012). OECD/IEA, Paris.


______. 2012b, World Energy Outlook 2012. OECD/IEA, Paris.


Jerrett, Daniel and John T. Cuddington. 2008. “Broadening the Statistical Search for Metal Price Super Cycles to Steel
and Related Metals.” Resources Policy, vol. 33, pp. 188-195.


Kennedy, Michael, and Angel Palerm. 2010.“Emerging Market Bond Spreads: The Role of World Financial Market
Conditions and Country- Specific Factors.” World Bank Prospects Working Paper, Washington, DC. Downloaded 5/24/2013
http://siteresources.worldbank.org/INTPROSPECTS/Resources/334934-1295458722434/ProspectsPaper2010Nov.pdf


______. 2013. “Emerging Market Bond Spreads: The role of global and domestic factors from 2002 to 2011”, Journal of
International Money and Finance. Forthcoming.


OECD Briefing Note. 2013. "Aid to poor countries slips further as governments tighten budgets"
http://www.oecd.org/dac/stats aidtopoorcountriesslipsfurtherasgovernmentstightenbudgets.htm

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


_____. 2012A. Global Economic Prospects: Uncertainties and Vulnerabilities. World Bank. Washington DC.


_____. 2012B. Global Economic Prospects: Managing Growth in a Volatile World. World Bank. Washington DC.


_____. 2013A. Global Economic Prospects: Assuring growth over the medium term. World Bank. Washington DC.


______. 2013B, Migration and Development Brief, No. 20. Washington, DC. World Bank. http://siteresources.worldbank.org/
INTPROSPECTS/Resources/334934-1288990760745/MigrationDevelopmentBrief20.pdf





GLOBAL ECONOMIC PROSPECTS | June 2013 Industrial Production Annex






INDUSTRIAL


PRODUCTION


GLOBAL


ECONOMIC


PROSPECTS Annex June 2013




GLOBAL ECONOMIC PROSPECTS | June 2013 Industrial Production Annex


33



Overview



Growth in industrial sectors in the post 2008-2009
period has been unimpressive globally, with the
exception of East Asia and Pacific, and China in
particular. After bouncing back in the immediate
aftermath of the crisis global industrial production
growth weakened again in the second half of 2010,
and after a short-lived acceleration dipped again in
mid-2011 and in the second half of 2012. Financial
turmoil in high-income countries, and uncertainties
surrounding the course of policy actions in high-
income countries combined in some cases with
policy-induced slowdowns in some of the larger
developing countries and/or capacity constraints
have restrained the pace of activity.

Overall, more than four years after the financial
crisis began, global industrial output is only 5.3
percent higher than its pre-crisis peak. Output in
high-income countries is still 6.5 below pre-crisis
levels, with output in the Euro area and Japan
sharply lower and output in the United States
having almost regained pre-crisis levels. Output in
developing countries outside China is 2.6 percent
higher than its pre-crisis peak.

Growth in developing countries has been most
dynamic in East Asia and Pacific mainly reflecting
double-digit IP growth in China, where output is
67.9 percent higher than the pre-crisis high, versus
12 percent in the remaining countries in the region.
Industrial output in South Asia and Europe and
Central Asia are 19.6 and 2 percent higher
respectively than their pre-crisis peaks. Industrial
output in Latin America and the Caribbean and
Sub Saharan Africa is more or less in line with the
pre-crisis levels. Middle East and North Africa is
the only developing region where industrial output
is lower than four years ago, largely due to the fall
in production associated with the socio-political
unrest during the Arab Spring.








Recent economic
developments



Industrial production growth
strengthened to an above trend pace
in early 2013



Output strengthened in much of the world toward
the end of 2012 and into the first quarter of 2013,
with global output expanding at a close to 3.4
percent annualized pace in the three month leading
to March, supported by strengthening final demand
and rising inventories (figure IP.1).

Developing countries industrial output expanded at
about a 5.1 percent annualized pace during the first
quarter of 2013, with East Asia and Pacific’s
industrial production growing at a 8.6 percent
annualized pace and China’s industrial output
expanding at a 9.7 percent annualized pace in the
first quarter of 2013 (figure IP.2). Industrial output
growth in other developing regions has varied
markedly, but has been generally much softer.
Growth has remained unimpressive in Latin
America and the Caribbean as performance in
Mexico has been softening and despite a modest
improvement in growth in Brazil (figure IP.3).
Output growth remained relatively flat in Europe
& Central at 2.4 percent annualized pace in the first
quarter of 2013, on account of relatively weak



Global industrial production expands at
an above-trend pace in Q1 2013


Source: World Bank; Datastream.


Fig IP.1


-40


-30


-20


-10


0


10


20


Jan '06 Jan '08 Jan '10 Jan '12


Developing Countries High Income Countries World


Percent, 3m/3m saar




GLOBAL ECONOMIC PROSPECTS | June 2013 Industrial Production Annex


34


performance in Russia and Turkey. Growth
remained strong in the South Asian subcontinent
despite a deceleration of growth in India expanding
at an 7.7 percent annualized pace in the first
quarter of 2013. Data for the Middle-East and
North Africa and Sub Saharan Africa lags, but was
still declining in both regions in the three months
to February.

Among high-income countries outside of the Euro
Area industrial output also accelerated – reaching
3.5 percent up from 0.7 percent in the fourth
quarter of 2012, mostly on rapid expansion in the
United States and Japan. A recovering housing
market and the creation of more than half a million
payroll jobs in the first quarter of 2013 have
supported the acceleration in activity, boosting
consumer demand. Investment demand has also
recovered with capital goods orders rising at a 20
percent annualized pace in the first quarter of 2013.
As a result industrial production in the U.S.
expanded at a 4.4 percent annualized pace in the
first quarter of 2013, up from the 2.6 percent
annualized pace recorded in the final quarter of
2012, despite a significant fiscal drag. In Japan, the
relaxation of both monetary and fiscal policies,
have prompted a sharp rebound in activity, with
industrial production growth rebounding to 9
percent annualized pace in the first quarter of 2013.

In the Euro area industrial production stabilized,
expanding 0.7 percent annualized in the first
quarter of 2013 compared to a 8.1 percent
annualized pace of decline in the fourth quarter of
2012. An increase in energy and capital goods


production was behind the improved outturns.
Excluding Germany, where output performance
has been more robust (up 1.2 percent annualized
pace in the first quarter of 2013), the improvement
in industrial sector performance is less dramatic as
output declined most rapidly among the high-
spread economies that are enduring the harshest
fiscal consolidations.

Capital-goods orders point to increased global
capital spending in early 2013, but momentum may
be weakening. After a sharp decline in mid-2012,
G3 capital goods orders recovered briskly in the
latter part of 2012, with shipments following a
similar path (figure IP.4). Capital- goods orders



Industrial production growth recovers in
Europe and Central Asia in Q1 2013


Source: World Bank; Datastream.


-40


-20


0


20


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


Europe & Central Asia


Latin America & Caribbean


Middle East & N. Africa


Percent, 3m/3m saar


Fig IP.3


Strong industrial production growth in
East Asia in Q1 2013


Source: World Bank; Datastream.


-30


-20


-10


0


10


20


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


South Asia Sub-Saharan Africa East Asia and Pacific


Percent, 3m/3m saar


Fig IP.2




Capital goods orders are picking up in both


high income and developing countries


Source: World Bank; Datastream.
Note: US capital goods orders exclude defense and aircrafts orders.
Capital goods import orders for developing countries.


Fig IP.4


-60


-40


-20


0


20


40


60


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


Developing countries capital
goods imports


Germany Japan USA


Percent, 3m/3m saar




GLOBAL ECONOMIC PROSPECTS | June 2013 Industrial Production Annex


35


rose at a rapid pace in the first quarter of 2013,
with US capital goods orders rising at a 21.4
percent annualized pace, up from a 13.8 percent
expansion in the fourth quarter of 2012. In Japan,
after a robust recovery in the last quarter of 2012
(15.5 percent) capital goods orders growth
accelerated markedly to 31.8 percent in the first
quarter of 2013, while in Germany capital goods
orders rose 3 percent over the same period, almost
half the pace recorded in fourth quarter of 2012
(8.3 percent). In developing countries, capital
goods orders eased only slightly, rising at an 22
percent annualized pace in the first quarter of 2013,
down marginally from the 19 percent pace
recorded in fourth quarter of 2012, pointing
to sustained investment growth in these
economies.

Data for April suggest however that the pace
of expansion of capital goods orders might be
easing in the US in the second quarter of the
year. Similarly capital import orders by
developing countries are also showing signs
of moderating.


...but there are signs of moderation in
the pace of expansion into the
second quarter



Forward-looking indicators like purchasing
manager’s indexes suggest a slower pace of activity
for the second quarter, as fiscal tightening in the
US cuts into activity there and capacity constraints
in many developing economies moderate growth –
which should nevertheless continue to expand
broadly in line with underlying potential. Indeed
the step down in the global manufacturing Markit
PMI in April to the lowest level since December
(but still above the 50 mark that indicates
expansion) followed by a marginal increase in May
suggest that global manufacturing output growth is
moderating into the second quarter of 2013.
Sentiment regarding leading indicators components
such as new orders and finished goods inventories
improved only modestly.

Notably high-income and developing countries
PMIs moved in opposite directions in May, with
sentiment improving in most high-income
countries surveyed and deteriorating in three
quarters of developing countries.


Business sentiment in the U.S. is weighed down by
the fiscal drag, with higher taxes likely to weigh on
consumer spending, and budget sequestration
further limiting domestic demand growth. The US
manufacturing ISM index softened at the end of
the first quarter and dropped below the 50 growth
mark in May, on softer domestic demand and
notwithstanding a boost in external demand.
Meanwhile the business sentiment as gauged by the
Markit PMI deteriorated to a six-month low in
April, before inching up to 52.2 in May, remaining
in growth territory.

PMIs in major developing countries such as
Brazil, China, India, Russia and Turkey all
declined for two or more consecutive
months.

The moderation in output in East Asia is expected
to be relatively broad, as suggested by PMI indexes.
The May PMI has been weaker than expected in
China, where the PMI retreated 1.2 points to 49.2.
In China industrial output growth has decelerated
further to 7.4 percent annualized pace in the three
months leading to April. Interpreting the trade and
industrial output data for East Asia is made more
difficult by the timing of the Lunar New Year
which fell in February this year.

Although PMIs improved in the Euro area in May,
to the highest level since 2012, they continue to
indicate contraction albeit at a slower pace.
Sentiment improved in Germany, France, Italy, and
Spain (albeit from depressed levels). Meanwhile
sentiment in Japan improved for a fifth consecutive
month, to its highest level in more than a year, as
inventories are relatively low while orders are
rising.

Noteworthy is the fact that despite stabilizing at a
higher level than the one recorded in the fourth
quarter of 2012, business sentiment remains at
historically low levels globally, suggesting business
confidence remains fragile and is yet to return to
pre-crisis levels.


…nevertheless growth is expected to
remain solid at a trend like pace

Industrial production growth in developing
countries is expected to moderate to a more
sustainable pace over the short term, with growth




GLOBAL ECONOMIC PROSPECTS | June 2013 Industrial Production Annex


36


in China remaining in the low double-digit range,
while output elsewhere in East Asia moderates.
The continuation of supportive fiscal policy with a
front-loading of infrastructure spending is expected
to benefit China’s industrial production. In
addition, according to recent surveys labor demand
continues to outpace labor supply, especially
in the service sector, and might lead to
increased labor income in the months ahead,
which should be supportive of private consumption.

Some of the manufacturers in the region may be
challenged by the large depreciation in the Japanese
yen, induced by monetary easing, and may lose
market share over the short-term, although other
than China and Thailand, most countries in the
region do not compete directly with Japan (see
Main Text). Japanese output is expected to
continue to post a robust recovery, following an 8
percent annualized bounce back in the first quarter
of 2013.

Growth in industrial output is also expected to
remain soft in countries with capacity constraints,
including some of the larger developing economies.
Industrial output performance will remain weak in
Brazil, despite significant stimulus from the
government, as high production costs, and capacity
constraints continue to weigh on growth.
Furthermore retail sales growth has decelerated
markedly, as rising inflation has caused real wage
growth to slow. Quarterly industrial production
growth in South Asia is projected to
moderate, as growth in India slows from
unsustainable levels.

In Latin America, the weakness in the Mexican
industrial sector should be reversed in mid-2013, as
the Mexican manufacturing sector growth will re-
link with the better performing U.S. manufacturing.
However, performance in Argentina’s industrial
sector is likely to be weak as a result of recent
policies that restrict access to foreign currency for
essential capital imports.

Growth in industrial production is expected to
strengthen in the second half of 2013 in Europe
and Central Asia, supported by modestly stronger
domestic and high-income European demand,
which should help narrow the still wide output gap
in the region. Still weak private credit growth will
continue to weigh on industrial sector activity this
year.


Growth in Middle East and North Africa will
recover but remain subdued despite large excess
capacities, in part due to weak domestic demand.

In the Euro Area output is projected to strengthen
modestly in the second half of the year, as the pace
of fiscal consolidation eases and pent-up demand
forces should support growth.

The recent declines in commodity prices, including
oil and metals prices appear to mainly reflect higher
supply (see commodity annex and main text).
Lower input prices rather than suggesting slower
demand going forward, should provide a fillip to
activity, both by increasing real incomes and
reducing production costs.

In order for growth in global industrial production
to return to its long time trend over the medium
term the pace of growth in high-income economies
needs to accelerate as they still account for a
significant share of global industrial output, and
lead in global innovation for local markets, which is
expected to support growth in industries such as
automobile, chemicals, machinery and
pharmaceutical (McKinsey 2012).

In terms of growth rates industrial sectors were
much more dynamic in developing countries,
expanding at an annual pace of 8.5 percent over the
2002-2007 period compared to 2.6 percent in high-
income countries (figure IP.5). Among developing
countries East Asia and Pacific was the most
dynamic region (11.2 percent average annual pace),
followed by South Asia (9.4 percent) and Europe



Growth in major developing economies
is weaker than in the pre-crisis period


Source: World Bank; Datastream.


-15


-10


-5


0


5


10


15


20


1992 1996 2000 2004 2008 2012


India South Africa Brazil China


Percent, 3m/3m saar


Fig IP.5




GLOBAL ECONOMIC PROSPECTS | June 2013 Industrial Production Annex


37


and Central Asia (8.1 percent). Latin America and
the Caribbean’ performance was less impressive
(5.1 percent), expanding at the same pace as that of
Sub-Saharan Africa. Middle East and North Africa
expanded at a slowest pace among developing
regions (4.1 percent).

During the boom years (2002-2007) global
industrial production expanded at an average pace
of 4.1 percent a year, with developing countries
accounting for about 54 percent of growth in
global industrial production (figure IP.6). East Asia
and Pacific contributed more than 36 percent to
global growth, with China alone accounting for
almost a third. Among developing regions the
second largest contributor to growth in global
industrial production was Latin America and the
Caribbean (8.7 percent), followed by Europe and
Central Asia (6.4 percent) and South Asia (5.4
percent) (figure IP.7).

A significant part of the expansion in the
global industrial production came from rapid
growth in the construction, mining, and
utilities sectors in developing countries.
These sectors together accounted for close to
30 percent of overall global growth during
the 2000-2010 period, with China accounting
for more than half of that contribution (17
percent). The expected slowdown in
investment in China over the coming years,
partly as the property market cools down,
may subtract from the global industrial
production trend growth if not supplemented
by stronger growth in other major emerging


economies with large infrastructure gaps such
as India and Brazil, whose infrastructures are
perceived as inadequate given their level of
economic development (WEF 2012-2013).

Overall growth in the industrial sector, and
manufacturing in particular, stands to gain from the
shift in demand towards developing economies.
Output in industries that need to be close to
consumers due to cost structures (high
transportation costs) and that produce products
that are not heavily traded (food processing) is
likely to expand rapidly as income in developing
countries continue to rise.



Risks and
vulnerabilities



The downside risks of a further deterioration
in performance in the Euro area, of steeper
fiscal consolidation in the United States and
Japan, persist although the probability
associated with these risks has declined since
our January 2013 edition. An additional risk
is that of an abrupt slowdown in investment
in China which would have significant
consequences for exporters of capital goods
in particular in East Asia but also Germany
and the United States.



Regional contributions to developing
country industrial production


Source: World Bank.


-4


-2


0


2


4


6


8


10


12


1995 1998 2001 2004 2007 2010


South Asia


Middle East and Africa


Latin America & Caribbean


Europe & Central Asia


East Asia & Pacific


percentage points


Fig IP.7


Contribution to global industrial production
growth


Source: World Bank.


-40


-30


-20


-10


0


10


20


30


40


1995 1998 2001 2004 2007 2010


High-income Developing


Percentage points


Fig IP.6




GLOBAL ECONOMIC PROSPECTS | June 2013 Industrial Production Annex


38


If commodity prices decline markedly capital
expenditures, which have risen sharply during the
boom years especially in oil and metals markets,
could slow significantly, affecting capital goods
producing countries. Lower commodity prices and
lower fuel prices in particular could boost real disposable
incomes and bolster demand for other manufactures.

There is also an upside risk associated with the
performance of the U.S. economy and its resilience
in the face of the fiscal drag. Similarly the
performance in the Euro Area could be stronger
than in our baseline.

As policies in high-income countries become less
accommodative the cost of capital is likely to rise
over the medium term and costlier capital could
limit investment and growth in industrial
production. (GEP 2010).





GLOBAL ECONOMIC PROSPECTS | June 2013 Industrial Production Annex


39






McKinsey Global Institute. November 2012 Manufacturing the future: The next era of global growth and innovation.




WEF (World Economic Forum). 2012-2013 Global Competitiveness Report. Washington DC.



World Bank. 2010. Global Economic Prospects: Crisis, Finance, and Growth. World Bank. Washington DC.


References




GLOBAL ECONOMIC PROSPECTS | June 2013 Inflation Annex






INFLATION


GLOBAL


ECONOMIC


PROSPECTS Annex June 2013




GLOBAL ECONOMIC PROSPECTS | June 2013 Inflation Annex


43


Global inflation is subdued as cost
pressures related to commodity
prices continue to ease and demand
factors in high income countries
remain weak



Despite loose global monetary conditions and an
acceleration in economic activity, global consumer
prices rose at a modest 2.7 percent annualized rate
in the three months ending April of 2013 (figure
INF.1).

This was the slowest first quarter increase in
global consumer prices since 2009, reflecting
subdued high-income country growth and a
moderation of global commodity prices
(figure INF. 2).

Core inflationFN1 eased insignificantly in the
majority of countries for which consistent data
series are available. For the OECD country group
as a whole, quarterly core inflation declined to 1.6
percent in 1Q2013 compared to 1.9 percent in
1Q2012.


Developing country inflation ticked
down in April 2013 on declining
commodity prices



Developing country pricesFN2 rose at a 6.9
percent annualized rate in the three months


to April of 2013 showing some moderation
from more accelerated growth over the past
two quarters.

The recent down t ick in developing
country inf lat ion is notable , presumably
s ignal ing an end to the gradual rise that
began in the summer of 2012 — prompted by
the upturn in international grain prices
related to droughts in the US, Eastern
Europe and Central Asia and shortage of
grain supplies.

Among developing countries, inflation in low
income economies has shown the fastest
declining trend throughout 2012, both on a
year-over-year and a quarterly annualized
basis.

The year-over-year inflation in these
economies is now about half of the 14
percent rate recorded a year ago (figure INF.2
and 3).

Quarterly inflation on an annualized basis
bottomed out in August of 2012 after slowing
to a 5.5 percent rate with price acceleration
partly reflecting the temporary increase in
international food prices in Q42012 (see
above).

More recently, as commodity prices have
eased and growth has weakened, quarterly
inflation has also moderated falling back to a
5.5 percent annualized rate in the three
months ending April of 2013.




Global inflation slowed in Q1 2013


Source: World Bank; Datastream.


Fig INF.1


0


2


4


6


8


Apr '11 Jul '11 Oct '11 Jan '12 Apr '12 Jul '12 Oct '12 Jan '13 Apr '13


CPI, % change, 3m/3m, saar


High income


Developing



Inflation decline reflect easing
commodity prices


Source: World Bank; Datastream; ILO.


Fig INF.2


0


2


4


6


8


10


12


14


16


-20


-10


0


10


20


30


40


50


10M10 11M04 11M10 12M04 12M10 12M4


International Energy (LHS) International Food (LHS)


Developing CPI (RHS) Low Income CPI (RHS)


Developing Local Food CPI (RHS)


Price indexes, % change, year-on-year




GLOBAL ECONOMIC PROSPECTS | June 2013 Inflation Annex


44


High-income country inflation remains
weak

Year-over-year inflation in high-income
countries has remained under 2 percent since
April 2012, while quarterly inflation has
displayed more volatility partly reflecting
changes in energy prices (figure INF. 4).

Quarterly core inflation on an annualized
basis for the G-7 country group declined to
1.4 percent in 2013Q1 compared to 1.7
percent in 1Q2012. The low trend rate of
inflation in high-income countries reflects
still ample spare capacity, and the weakness
of the recovery especially in the Euro Zone
and Japan.


In Japan, the sharp depreciation of the yen since
September 2013 (see main text and exchange rate
annex) has pushed quarterly inflation into a
positive territory in January and February.

More recently however, price pressures in Japan
eased again reflecting moderating global
commodity prices. Quarterly inflation on an annual
basis dropped to a negative 0.6 percent in the three
months to April and the year-over-year inflation
stood at a negative 0.7 percent — well below the
authorities new 2 percent annual inflation target.


Global monetary conditions continue
to be loose with Japan implementing
aggressive monetary easing

In high-income countries low interest rates are
combined with the Federal Reserve’s Federal Open
Market Committee’s continued monthly purchases
of $85 billion of housing-market debt and
Treasuries and quantitative easing in the UK and
Japan and further policy easing in the Euro Area
with the interest rate cut by another 25 basis points
to 0.50 percent implemented in May.


Developing country monetary policy
has loosening bias in general

The majority of the developing country central
banks continue to keep their interest rates on hold
at historical low levels in their effort to stimulate
domestic demand as global economic activity



Low-income country inflation has shown
the fastest decline


Source: World Bank and Datastream.


Fig INF.3


0


2


4


6


8


10


12


14


Jan '12 Apr '12 Jul '12 Oct '12 Jan '13 Apr '13


3 month-over-3 month year-over-year


CPI, % change



Unconventional monetary policy helped major high-income economies to avoid disinflation but Japan
is still caught in disinflationary trap


Source: World Bank; Datastream.


Fig INF.4


-3


-2


-1


0


1


2


3


4


5


6


7


8


Jan '11 Apr '11 Jul '11 Oct '11 Jan '12 Apr '12 Jul '12 Oct '12 Jan '13 Apr '13


High income USA Japan Euro area UK


CPI, % change, 3m/3m, saar


-1


0


1


2


3


4


5


High income Euro Area USA UK Japane


2011 average 2012 average 2013 year to date Inflation target


CPI, % change, year-over-year




GLOBAL ECONOMIC PROSPECTS | June 2013 Inflation Annex


45


remains weak and inflation pressures
generally subdued. Some developing countries
implemented additional rate cuts most
recently following quite disappointing
Q12013 growth outcomes in the overall
context of moderating global price pressures.

About twenty developing and seven high-
income countries and economic unions
implemented policy rate cuts in the first
months of 2013. This included a cumulative
75 basis point rate cut implemented by the
Reserve Bank of India and a 50 basis point
rate cut in Mexico–first easing since July
2009. Other policy easing measures in LAC
included a 100 basis point rate cut (to 3.25
percent) by the Bank of Colombia in three
monthly consecutive rate cuts and a 50 basis
points rate cut by the Bank of Jamaica.

In Sub-Saharan Africa Angola, Kenya, Sierra
Leone and Uganda continued to ease policy
and Botswana and the West African States
implemented their first rate cuts in few years.
In ECA—where growth has weakened and
price pressures have generally moderated—
policies have been eased in a number of
developing countries, including Albania,
Azerbaijan, Belarus, Georgia, Macedonia and
Turkey.

In the EAP Mongolia cut its policy rate by
175 basis points, Vietnam implemented a 100
basis point cut this year and Thailand
implemented a rate cut in May following a


sharp output contraction in the first quarter
of 2013.

Monetary policy was tightened by about six
developing central banks in 2013, including
Brazil, Ghana, Gambia, SerbiaFN3, Tunisia and
Egypt in an attempt to curtail inflationary
pressures fueled by domestic factors,
including rapid credit expansion and currency
depreciation, particularly in Egypt.


Monetary policy globally and in
developing countries is increasingly
embracing inflation targeting



The Central Banks in most of the major countries
are now following some type of inflation targeting
regime.FN4 For the most part, inflation remains
within inflation target (figure INF. 5) — with the
notable exception of some large middle income
countries, including Indonesia, Brazil, Russia,
Turkey and South Africa, where headline inflation
has tended to exceed targets due to recurring price
pressures related to supply constraints.


Loose policy stance in developing
countries may be counterproductive
in countries operating at full capacity


In general, the central banks worldwide are keeping
rates low with major focus still on downside risks
in the global economy. Accommodative policy



Developing country inflation outcomes are
increasingly reflecting local conditions


Source: World Bank; Datastream.


Fig INF.6


0


2


4


6


8


10


12


East Asia &
Pacif ic


ECA excludes
Belarus)


LAC (excludes
Venezuela)


Sub-Saharan
Africa


MENA (excl.
Iran and Syria)


South Asia


2011 (average) 2012 (average) 2013 (year-to-date)


CPI, % change, 3m/3m, saar



With some exceptions inflation is
anchored within the targeted rates


Source: World Bank; Datastream.


Fig INF.5


-3


-1


1


3


5


7


9


11


In
d


ia


N
ig


e
ria


U
g


a
n


d
a


B
ra


zi
l


R
u


ss
ia


S
o


u
th


A
fr


ic
a


G
e


o
rg


ia


In
d


o
n


e
si


a


A
rm


e
n


ia


T
u


rk
e


y


P
h


ili
p


p
in


e
s


M
e


xi
co


C
h


ile


C
o


lo
m


b
ia


C
h


in
a


T
h


a
ila


n
d


P
e


ru U
K


E
u


ro
a


re
a


U
S


A


Ja
p


a
n


Apr-13 Upper bound of inflation target


CPI, % change, year-over-year




GLOBAL ECONOMIC PROSPECTS | June 2013 Inflation Annex


46


stance may be adequate in the economies with
remaining output gaps and subdued demand.

Some developing regions continue to experience
price pressures reflecting local conditions despite
benign global inflationary pressures (figure INF.6).

In the economies that are operating at full capacity
the loose policy stance may be counterproductive
contributing to domestic price pressures without
much payoff in additional output.

Moreover, a loose policy stance and low rates are
encouraging risk taking attitude, fueling asset
bubbles and pushing domestic debt to risky levels
in the economies that are operating above their full
capacity.FN5


Headline inflation in East Asia and
the Pacific region accelerated in early
2013 reflecting a strong rebound in
economic activity and
accommodative policies



Inflation has ticked up in a number of countries in
the East Asia and the Pacific region in the first
quarter of 2013 after declining through much of
2012. Annualized quarterly inflation in the East
Asia and the Pacific region accelerated to 3.5
percent rate in the three months to March 2013
compared with 2 percent a year earlier (figure INF.
7) reflecting price acceleration in China, Indonesia
and Lao, PDR.


In China, although the headline inflation rate
remains under the central bank target of 3.5
percent, price pressures are present. Quarterly
inflation accelerated to a 3.7 percent annualized
rate in the three months to February, the highest
since October 2011, but eased in March in
response to tightening of monetary conditions and
administrative measures addressed toward curbing
property prices.

In Indonesia, inflation has been building up
rapidly, with the quarterly inflation
accelerating to a 9.5 percent annualized rate
in the three months to April reflecting
currency depreciation and hikes in food prices
due to trade restrictions. Core inflation in
Indonesia eased to 4.21 percent (year-over-year) in
March from February's 4.29 percent but remains high.

In Malaysia and Thailand currency appreciation
combined with broadly stable commodity prices
has helped curb inflationary pressures. Inflation
also eased in Mongolia to 10.4 percent (year-on-
year) in April which was the lowest rate observed
since July 2011 reflecting a slow-down in economic
activity.

Overall, the headline inflation remains within the
central bank targeted range in the majority of the
EAP countries, with the exception of Indonesia.
Given limited spare capacity in the region, the
generally loose stance of macroeconomic policy
could stoke inflationary pressures and amplify the
credit and asset price risks, especially in case of the
volatile capital inflows including from Japan in
relation to the latest quantitative easing.



Price pressures are building up in
EAP


Source: World Bank; Datastream.


Fig INF.7


0


2


4


6


8


10


12


14


Jan '11 May '11 Sep '11 Jan '12 May '12 Sep '12 Jan '13 May '13


EAP (excluding China)


China


Indonesia Lao, PDR Malaysia


CPI, % change, 3m/3m, saar



Inflation eased in ECA


Source: World Bank; Datastream.


Fig INF 8


-2


0


2


4


6


8


10


12


14


16


Jan '11 May '11 Sep '11 Jan '12 May '12 Sep '12 Jan '13 May '13


ECA (excl. Belarus)


Russia


Central & Eastern Europe Turkey


CPI, % change, 3m/3m, saar




GLOBAL ECONOMIC PROSPECTS | June 2013 Inflation Annex


47


Inflation has moderated in Europe and
Central Asia but price pressures are high in
large middle income countries



In Europe and Central Asia, inflation has
eased recently due to declines in food prices
following last summer’s poor crop (figure
INF. 8). Besides, in most economies, ample
spare capacity and high unemployment is
keeping inflationary pressures at bay.

Azerbaijan, Bulgaria, Georgia and Macedonia
have been experiencing considerable easing in
consumer price inflation since the end of
2012 reflecting weak domestic demand and
easing commodity prices with Georgia
experiencing deflation since October 2012.

The year-over-year inflation remains high in
some large economies (notably Turkey and
Russia), reflecting limited spare capacity.
Quarterly inflation in those economies eased
most recently reflecting slowing growth and
declining commodity prices, but the timing
and the pace of easing price pressures diverge
and reflect domestic policies.

Quarterly inflation has slowed to 3.8 percent
annualize rate in the three months to April in
Russia where monetary policy remained tight
despite slowing growth. The headline
inflation at 7.2 percent in April was
nevertheless above the central bank’s 5-6
percent targeted rate.FN6

Policy easing in Turkey contributed to
accelerating inflation to 9.7 percent
annualized rate in the three months to March
2013. Turkey’s quarterly core inflation eased
to 6.5 percent in 1Q2013 compared to 9.6
percent in 1Q2012. The headline inflation
also dropped to 6.1 percent in April reflecting
global decline in commodity prices, but
remains above the central bank’s 5 percent
annual inflation target.

In Kazakhstan, adjustments in regulated
prices put a temporary upward pressure on
inflation with quarterly inflation increasing to
7.9 percent annualized rate in the three
months to November 2012. Tight policy and


easing commodity prices contributed to
moderating price pressures in 2013. Quarterly
inflation slowed to 5.3 percent (q/q saar) and
year-over-year at 6.4 percent (saar) in April
2013 was at the lower point of the 6-8
percent annual inflation target band.

In Belarus, quarterly inflation remains high at
35.8 percent (saar) in the three months to
April 2013. Price pressures increased in the
first quarter of 2013 following a significant
decline to 10.3 percent annualized rate in the
three months to November from the earlier
hikes in response to stabilization measures.
Belarus has been experiencing high level of
inflation since 2011 following almost a
threefold devaluation of the national currency
against the US dollar implemented to correct
external macroeconomic imbalances.


Although inflation remains sticky in
the largest countries of the region,
price pressures moderated across
the rest of the Latin America and the
Caribbean

Quarterly inflation in Latin America and the
Caribbean (excluding Venezuela) eased to 5
percent in 1Q2013 from 5.9 percent in
4Q2012 indicating easing of price pressures,
partly reflecting moderating commodity
(notably food) prices (figure INF.9).



Diverging inflation trends across LAC


Source: World Bank; Datastream.


Fig INF.9


-2


0


2


4


6


8


10


12


14


0


10


20


30


40


Jan '11 Apr '11 Jul '11 Oct '11 Jan '12 Apr '12 Jul '12 Oct '12 Jan '13 Apr '13


LAC (excl. Venezuela)


Brazil


Argentina


Venezuela (RHS)


Colombia


Mexico


CPI, % change, 3m/3m, saar




GLOBAL ECONOMIC PROSPECTS | June 2013 Inflation Annex


48


Inflation outcomes across countries mirror
diverging policy stances, with Colombia,
Chile, Peru and Mexico seeing strong growth
combined with moderate consumer price
inflation.

Brazil has been on the other hand trapped in
slow growth and high inflation equilibrium.
Headline inflation was 6.5 percent in April
2013—just at the upper limit of the central
bank’s 4.5 percent +/-2 inflation targeting
band.

Till very recently monetary policy had been
easing contributing to a cumulative 525 basis
point cut between August 2011 and end of
2012. Brazil was however one of the few
developing countries that starts to tighten its
policies in 2013 by implementing two
consecutive rate cuts in April and May
(cumulative 75 basis point rate increase).

Currency devaluation has exacerbated local
price pressures in Venezuela, where the year-
over-year inflation reached 35.2 percent in
May—12.6 percentage points higher than last
year.

In Argentina, quarterly inflation on an
annualized basis, which has accelerated in
Q42012 eased most recently partly reflecting
moderating commodity prices. However, the
year-over-year inflation remains stubbornly
high partly reflecting import restrictions
combined with loose policies.


In the Middle-East & North Africa high
prices reflect both supply disruptions
caused by civil and armed strife as
well as the measures addressed at
adjusting large macro-economic
imbalances

Average inflation in the Middle-East & North
Africa exceeds 22 percent with quarterly
inflation even higher. Prices pressures
emanate from variety of sources, including
high costs associated with importing food
and fuel (Jordan and Tunisia) due to the
region’s high dependence on internationally
traded food commodities, supply shortages
caused by political and armed conflict in
some countries and international sanctions in
others (Iran and Syria), and currency
depreciation and administered price increases
adding to pressures in some countries (e.g.
Egypt) (figure INF.10).


In South Asia consumer price based
index remains high but the wholesale
price index-based inflation moderated
significantly, especially in India

Year-over-year inflation ticked down in South
Asia region in April on moderating
commodity prices, but quarterly inflation still



Inflation accelerated in MENA


Source: World Bank; Datastream.


Fig INF.10


-5


0


5


10


15


20


25


30


35


Jan '11 Apr '11 Jul '11 Oct '11 Jan '12 Apr '12 Jul '12 Oct '12 Jan '13 Apr '13


MENA (excl. Iran and Syria)


Egypt


Tunisia Marocco MENA


CPI, % change, 3m/3m, saar



Inflation remains high in South Asia


Source: World Bank; Datastream.


Fig INF.11


-1


3


7


11


15


19


Jan '11 May '11 Sep '11 Jan '12 May '12 Sep '12 Jan '13 May '13


South Asia


India


Pakistan Bangladesh Shri-Lanka


CPI, % change, 3m/3m




GLOBAL ECONOMIC PROSPECTS | June 2013 Inflation Annex


49


shows some acceleration. This mainly reflects
an upward adjustments to domestic fuel
prices (figure INF. 11) implemented over the
past months.

On a country level, in India, year-over-year
consumer-based inflation declined below 10
percent in April, and the wholesale price
index-based inflation declined below 6
percent for the first time in more than three
years. However quarter-over-quarter
consumer-price based inflation continued to
rise and stood at 11.3 percent annualized rate
in the three months to April.

Other countries in the region, including
Bangladesh and Pakistan, and Sri-Lanka until
most recently, have been experiencing
moderating price pressures recently reflecting
decline in commodity prices with both
quarterly and annual inflations easing during
the first quarter of 2013 in line with the
global trends.

Several countries in the region eased
monetary policy between mid-2012 and 1Q
2013 as they saw core inflation coming down.
Those countries include Pakistan, which cut
its key policy rate by a cumulative 250 basis
points between August and December 2012,
and Sri-Lanka and India where policy rates
have been eased more recently.

Price pressures in South Asia continue to
stem from growing demand for food and


energy reflecting raising household incomes
combined with tight supplies related to
bottlenecks and structural constraints in the
production and distribution of food and
utilities.


Inflation experienced a steep decline
in Sub-Saharan Africa, but price
pressures prevail in a number of
large countries reflecting capacity
constraints and loose policies

In Sub-Saharan Africa (excluding South
African republic) quarterly inflation eased by
about 6 percentage points since last year
reflecting commodity price moderation and
tight monetary conditions (see main text).

But with many countries operating at little or
no spare capacity, loose policies directly
contribute to consumer price inflation.
Ghana and Kenya, for example have seen
their quarterly inflations accelerating in April
to 15.4 percent annualized rate and 8.5
percent respectively reflecting easing
policies.

In South Africa, year-over-year inflation has
been around the upper limit of the Central
Bank targeted rate since some time despite
slow growth due to weakening of the rand
and wage hikes. Core inflation also
accelerated to 5 percent (y/y) in 1Q2013.

In some countries of East Africa, notably
Uganda and Tanzania, inflation remains
contained following a massive decline in 2012
(figure INF.12). In West Africa, moderating
commodity prices and tight policies
contributed to easing price pressures. In
Nigeria, for example, the year-over-year
inflation eased to 8.6 in March 2013—the
lowest level in five years. Inflation also
remained low in the countries of West
African Economic and Monetary Union
(WAEMU) (Benin, Burkina Faso, Cote
d’Ivoire, Guinea Bissau, Mali, Niger, Senegal,
and Togo).


Fig INF.11

Inflation has recently eased in Sub-
Saharan Africa but selected countries
are experiencing price pressures


Source: World Bank; Datastream.


Fig INF.12


2


5.6


9.2


12.8


16.4


20


-10


0


10


20


30


40


50


Jan '11 Apr '11 Jul '11 Oct '11 Jan '12 Apr '12 Jul '12 Oct '12 Jan '13 Apr '13


Sub-Saharan Africa (excl.
South Africa)


South Africa


Nigeria


Ghana


CPI, % change, 3m/3m, saar




GLOBAL ECONOMIC PROSPECTS | June 2013 Inflation Annex


50


Some developing countries continue
to experience high inflation rates or
severe disinflation due to country
specific conditions

Year-over-year inflation exceeded 15 percent in
only seven developing countries in the first quarter
of 2013 including Belarus (>20%), Iran (>40%),
Malawi (>35%), South Sudan (>24%), Sudan
(>40%), Syria (>49%), and Venezuela (>35%).

Burundi, Eritrea, Ethiopia and Guinea all
experienced sharp inflationary peaks in 2012,
but managed to reduce price pressures
containing inflation rate below 15 percent as
of April of 2013.




Outlook and risks


The inflation outlook mirrors the growth outlook
and remains uncertain. Under the baseline scenario,
which assumes global economic recovery and
moderating commodity prices, inflation is
projected to pick up only gradually with
strengthening global demand as it remains to be
predominantly anchored around the targeted rates.
Moreover, the impact of accelerating inflation in
developing countries will be counterbalanced by
subdued price pressures in the high-income
economies, reflecting a continued low consumer
confidence and slow economic activity. Price
pressures are likely to persist in a selected number
of economies such as Brazil, India, Russia, Turkey,
South Africa with supply bottlenecks, especially in
case of demand stimulating policies.

In addition, many developing countries remain
vulnerable to medium-term price pressures through
excessive credit and debt build-up, feeding into
asset prices. Moreover, with international reserves
declining and/or deficit countries relying on
foreign capital inflows, there is not only limited
scope for monetary easing, but there is a medium-
term risk that a “normalization” of monetary policy
in developed countries may encourage capital flight
and put "unwanted pressure" on foreign exchange
markets and potentially (further) erode reserves,


while destabilizing currencies and exerting upward
pressure on inflation. This risk is however unlikely
to unfold over a short term period given the weak
pace of recovery in high-income countries and in
the context of the latest (May 2, 2013) interest rate
cuts in Euro Area.

In the near term, global inflation is likely to remain
at around 3 percent (year-on-year) largely due to
depressed price pressures in the high-income
countries. Developing country inflation is projected
to accelerate to 7 percent in the case of a continued
loose monetary policy environment.

The inflation outlook is subject to any supply-side
shock related risk. Upside risks may entail a
moderate acceleration – but even with this increase
inflation is likely to remain below its 2011 levels.
Global oil supply risk is related to a possible
deterioration in political conditions in the Middle
East but can also stem from the technical
problems. A major supply cutoff could limit
supplies and result in prices spiking well above US$
150/bbl depending on the severity, duration and
response from OPEC, emergency reserves, and
demand curtailment.

Downside risks include further easing in inflation
in high-income countries in case of continued low
confidence and weak economic activity. There is
also a downside risk related to slower economic
growth, especially by emerging economies,
including China.

While the Fed and ECB’s interventions have
helped to avoid the worst potential effects of
banking-sector de-leveraging and liquidity
constraints in high-income Europe, the ultra-loose
monetary policy in high-income countries,
including in Japan, could once again be sowing the
seeds for the kinds of disruptive, inflationary, and
asset-bubble creating capital inflows that
characterized the second half of 2010.

Moreover, in some developing countries monetary
policy has also been very loose, while debt burdens
have risen rapidly. Although global inflationary
pressures remain benign, given the lags in monetary
policy transmission, additional easing may add to a
strengthening activity already underway resulting in
additional inflationary pressures in countries
operating close to full capacity, without much
payoff in additional output.




GLOBAL ECONOMIC PROSPECTS | June 2013 Inflation Annex


51


Notes:


1. Consumer prices, all items non-food, non-energy. OECD data and classification.


2. Developing country inflation is calculated on a GDP weighted basis.


3. Following earlier tightening Serbia has recently cut its policy rate by 25 basis points.


4. The UK has a 2 per cent inflation target with no explicit upper bound. If inflation rises more than 1 percentage


point above the target the Governor of the Bank must write an open letter to the Chancellor explaining the reasons


for the deviation.


5. EAP Update, April 2013, WB, Philippine Economic Update, April 2013, WB, Global Financial Stability report,


April 2013, IMF.


6. Formally the Bank of Russia will finalize its move to inflation targeting by 2015. Currently, it is still using the


currency corridor and uses interventions, although recently the Central Bank of Russia has largely refrained from


using currency interventions allowing the ruble to float.




GLOBAL ECONOMIC PROSPECTS | June 2013 Finance Annex






FINANCIAL


MARKETS


GLOBAL


ECONOMIC


PROSPECTS Annex June 2013




GLOBAL ECONOMIC PROSPECTS | June 2013 Finance Annex


55


Recent developments
in financial markets



The “risk-off” phase in global financial
markets has continued since the
beginning of the year

Global financial markets have been mostly calm
since the beginning of the year following the
substantial improvements during the second half of
2012 (GEP 2012 January). Investor confidence, as
proxied by risk premia and credit default swap
(CDS) rates, has remained relatively strong despite
negative developments in Euro Area (box FIN.1),
including continued economic weakness, political
gridlock in Italy that has stalled reforms, and the
Cyprus crisis that culminated in the imposition of
capital controls—a first in the Euro Area.
Developing-country CDS rates have in general
remained at low levels (figure FIN.1). Increases in
Egyptian and Argentinean CDS rates were the
main exceptions (figure FIN.2). Egyptian spreads
rose due to the rising deficit and debt tied to the
economic consequences of political turmoil, while
Argentinean rates increased due to the uncertainty
generated by a US court decision concerning the
repayment to creditors that did not participate in
the 2005 and 2010 restructuring of Argentinean
debt.FN1


Developed country stock markets
have outperformed developing
countries so far in 2013



The developed country equity stock market indices
gained value during the five months of 2013 but
have declined since late May as the concerns about
possible tapering of United States quantitative
easing have increased. The total year to date gain
was 11.1 percent (figure FIN.3). The benchmark
S&P 500 index for the United States reached a new
record level on May 19th as improving economic
data reports seemed to confirm that the U.S.
economy was gaining momentum (figure FIN.4).



CDS rates for most developing regions re-
mained stable despite the events in March


Source: World Bank; Bloomberg.


Fig FIN.1


0


100


200


300


400


500


Jan '12 Apr '12 Jul '12 Oct '12 Jan '13 Apr '13


5-year sovereign CDS rates, basis points


East Asia & Pacific


Europe & Central Asia


Latin America & Caribbean


Middle East & N. Africa




Argentina’s CDS rates surged in March


from already very high levels


Source: Bloomberg.


Fig FIN.2


0


500


1000


1500


2000


2500


3000


3500


4000


Apr '11 Sep '11 Feb '12 Jul '12 Dec '12 May '13


5-year sovereign CDS rates, basis points



Developed country equities are outper-
forming developing country


Source: Bloomberg.


Fig FIN.3


75


80


85


90


95


100


105


110


115


120


125


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


MSCI Emerging Markets


MSCI Developed Markets


MSCI Equity Index (Jan.2011 = 100)




GLOBAL ECONOMIC PROSPECTS | June 2013 Finance Annex


56



Similarly, the Japanese Nikkei stock market
index gained almost 50 percent in value
between January and May reflecting the
expectations related to the monetary easing
program announced by the Bank of Japan
(box FIN.2). Nevertheless, the year to date
gain for the index was only 23 percent after
the sharp decline since late May. Investor
appetite in Europe has been also positive but
less robust due to the region’s weak economic
outlook. After a similar adjustment since
May, the year to date gain for European stock
market index was only 5.4 percent.




Recent developments in the Euro Area.




A wide-range of significant steps taken over the past few years have calmed investors and led to a significant rebound in key


markets. These steps and developments include:


 ECB President Draghi’s forceful “whatever it takes” speech on July 26th 2012
 The introduction of a new Outright Monetary Transactions (OMT) facility
 Wide-spread fiscal consolidation that has brought Euro Area government deficits down from 6.4 percent of GDP in


2009 to an estimated 2.9 percent in 2012 (IMF, 2013), although the deficits of Ireland, Poland, and Spain still ex-


ceed 5 percent of GDP


 Euro Area-wide agreements to establish a banking union; to reinforce monitoring and respect of budgetary rules; to
require countries to enter into binding reform contracts; and proposals to increase democratic legitimacy through


direct election of European Commission President in 2014.


 Early repayment of more than 25 percent of ECB crisis loans by Euro Area banks during the first quarter of 2013
(the loans were not due until 2014 and 2015).




Other developments in 2013 have tested the resilience of this improved climate, including:




 Inconclusive elections in Italy and weak polls for other leaders that underscore ongoing political risks.
 Uncertainty about government’s willingness to accept conditionality if the OMT were activated.
 Fears that the bailing in of depositors during the Cyprus rescue would lead deposit flight in other European jurisdic-


tions.


While these developments led to some widening of CDS rates and yields on the debt of high-spread Euro Area debt, the


increases were modest compared with earlier declines, and yields for high-spread countries other than Italy are down for the


year to date.


Box FIN.1


Box Figure FIN 1.1



















Source: World Bank; Bloomberg


0


200


400


600


800


1000


1200


1400


1600


1800


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


5-year sovereign CDS rates, basis points


Spain


Ireland


Italy


Portugal


Spain


Ireland


Italy


Portugal
Spain


Ireland


Italy


Portugal


Spain


Ireland


Italy


Portugal


Spain


Ireland


Italy


Portugal


Spain


Ireland


Italy


Portugal


Spain


Ireland


Italy


Portugal


-80


-60


-40


-20


0


20


40


60


Italy Portugal Spain


Between January-March


Since March


Yields on 10-year sovereign debt, basis points



Performance in selected stock markets


Source: Bloomberg.


Fig FIN.4


75


85


95


105


115


125


135


145


155


Apr
'11


Jul
'11


Oct
'11


Jan
'12


Apr
'12


Jul
'12


Oct
'12


Jan
'13


Apr
'13


Stock Market Index (Jan. 2011 = 100)


Nikkei


S&P500


Stoxx 600




GLOBAL ECONOMIC PROSPECTS | June 2013 Finance Annex


57


Overall, equity markets in Europe and Japan have
recovered more than 80 percent of their 2007
value, versus a more than full recovery in the
United States.

In contrast with the strong performance in high-
income markets earlier in the year, the developing
country stock market performance has been
relatively weak since the beginning of the year.
Stock market indeces declined in Brazil (-13.4
percent) and Russia (-10 percent), whereas they
remained more or less stable in China (0.1 percent)
and India (0.7 percent). The weakness in
developing country stock markets partly reflects
weak corporate earnings and country specific
factors. Recent curbs on property markets in
China, for example have contributed to the
weakness in share values, while easing in
commodity prices have affected stock market
performances in Brazil and Russia. Equity markets
in several East Asian countries—Indonesia, the
Philippines, and Thailand—reached record highs
earlier in the year, helped by strong foreign private
capital inflows.

The earlier decoupling in the equity market
performance of developed and developing
countries also likely reflects a decline in the
investors’ perceptions of the riskiness of high
-income country financial assets, and growing
concerns about asset prices bubbles and
growth prospects in some middle-income
countries. Such a revaluation would likely
induce investors to shift their portfolios away
from developing to developed markets, and


may help explain why yields on developing
country debt are rising (see below).


Developing country bond yields have
risen since January despite the
general “risk-off” phase in global
financial markets…

Indeed, the cost of international bond financing —
proxied by 10-year U.S. Treasury bond yield +
EMBIG cash bond spread—has gone up this year
after reaching a record low level in early January
(figure FIN.5). Unlike previous episodes, the recent
rise in the yields did not occur during a period of
heightened global risk-aversion. Moreover, the
widening in secondary-market bond spreads was
not associated with a decline in benchmark US
yields. US treasury yields tend to fall during the
periods of heightened risk-aversion in global
financial markets as they are considered safe assets.
Over the past few years, developing country bond
yields have tended to remain relatively constant,
even as benchmark yields (US 10 year treasury
yield) fluctuated—implying that spreads have risen
as benchmark yields fell. During the first half of
2013, however, developing-country spreads have
increased amid rising benchmark US 10-year
Treasury yields (figure FIN.6)—and despite the
continued trend toward upgrading of developing
country debt by rating agencies.FN2



These developments could be consistent with the
beginning of a new trend where the price of risk


Fig FIN.5


Cost of bond financing increased in Febru-
ary and March


Source: World Bank; JP Morgan.


Fig FIN.5


4


4.6


5.2


5.8


6.4


7


Sep '11 Jan '12 May '12 Sep '12 Jan '13 May '13


Percent


The record low borrowing
cost on Jan 3rd = 4.2%


Implicit yield =


Yield on US 10 year treasury


+ EMBIG bond spread



Bonds spreads widened despite “the risk-
off” phase


Source: JP Morgan.


Fig FIN.6


200


250


300


350


400


450


500


Jul '11 Oct '11 Jan '12 Apr '12 Jul '12 Oct '12 Jan '13 Apr '13


EMBIG Sovereign Bond Spreads excluding Argentina, basis points


Sep 09-May 11


Average


2005-07 Average




GLOBAL ECONOMIC PROSPECTS | June 2013 Finance Annex


58


returns to levels that are more normal. The trend
decline in spreads for developing countries over
the last five years has been partly explained by their
improved credit quality. Much of the improvement
however reflects the very low policy rates and
quantitative easing in high-income countries
(World Bank, 2010; IMF, 2013), with easy
monetary conditions having suppressed the price
of risk in both developed and developing countries.
Recent increases possibly reflect market
expectations that the pace of quantitative easing in
the United States may ease soon even though
Fed policymakers have reassured the markets
that they will remain accommodative.


Despite the weak performance of the
stock markets, gross capital flows to
developing countries remained robust
during the early months of 2013

During the first five months of 2013, gross
capital flows (international bond issuance,
cross-border syndicated bank loans and
equity placements) to developing countries
rose by 63 percent year-on-year and reached a
historic high at $306 billion (figure FIN.7).
All types of flows posted around 60 percent
increase, with record levels of international
bond issuance by developing countries. Flows
strengthened in every region except North
Africa and Middle East (box FIN.2). The
sharpest increase was in Europe and Central
Asia, where the flows more than doubled.

Syndicated bank lending to developing countries
totaled $91 billion during the first five months of
2013, 69 percent higher compared with a year ago.
Despite the relative weakness in April, bank
lending has been on a rebound since the second
quarter of 2012 (figure FIN.8). While many factors
were at play, an easing in the deleveraging process
by European banks has been the key. As early as
June 2012, three quarters of European banks had
complied with the ECB’s capital ratio
requirements. Moreover, according to the April
ECB Bank Lending Survey, Euro Area banks have
eased the pace of tightening of their credit
standards.FN3 Euro Area banks have begun
repaying ECB crisis loans and have already started
to repay some of the loans well in advance (box
FIN.1).



Gross flows have remained robust since
September 2012


Source: World Bank; Dealogic.


Fig FIN.7


0


15


30


45


60


75


Jan '12 Apr '12 Jul '12 Oct '12 Jan '13 Apr '13


Equity Issuance


Bond Issuance


Syndicated Bank Lending


$billion



Syndicated bank lending has risen since
July 2012 due to less deleveraging


Source: World Bank; Dealogic.


Fig FIN.8


0


5


10


15


20


25


30


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


3-month moving average, $ billion



Both the average spread on bank loans and the
average term of bank loans remained stable


Source: World Bank; Dealogic.


Fig FIN.9


50


110


170


230


290


350


0


1


2


3


4


5


6


7


2005 2006 2007 2008 2009 2010 2011 2012 2013 2014


Basis points Years


Average spread


Average Term of Loans (RHL)




GLOBAL ECONOMIC PROSPECTS | June 2013 Finance Annex


59


Almost 70 percent of the bank lending during the
first five months of 2013 went to resource-related
companies, mostly for acquisition and trade
finance purposes. The average cost of bank
financing declined by 18 bps to 3.3 percent as the
benchmark 6 month US libor rate has eased in
2013, while average bank spreads have remained
stable (figure FIN.9). The average maturity of the
bank loans declined slightly to 5.4 years, with the
share of long-term syndicated bank lending (at
least five years of maturity) falling to 35 percent
from 55 percent in 2012. Syndicated lending for


trade finance declined by 11 percent during the
first five months of 2013 compared with the same
period last year, while the average maturity of the
loans increased for one year.

The increase in equity flows—initial public
offering (IPO) and follow-on issuance—was due
to the strong follow-on issuance from East Asia,
Europe and Central Asia, and Latin America and
the recovery of the overall IPO activity from last
year’s low level. While China still dominates
overall equity volume, equity issuance also




Regional gross capital flows




Gross capital flows to developing countries rebounded in all regions, except North Africa and Middle East. A surge in bank


lending to firms in the Russia Federation helped to boost flows to the European and Central Asia region to about $105 bil-


lion during the first five months of 2013, more than twice their $46 billion level of last year. Bank lending to Russia increased


more than threefold from last year with syndicated loans from European lenders more than doubling.




All types of capital flows increased in the East Asia and Pacific region, where capital flows totaled $92 billion during the first


five months of 2013 compared with $55 billion the same period in 2012. Syndicated bank lending in the region almost dou-


bled, reaching $27 billion compared with $14 billion in 2012. Flows to South Asia strengthened mainly due to strong bond


issuance by India. Meanwhile, Sub-Saharan Africa saw a marked strengthening in bank lending (led by South Africa and


Nigeria) and bond issuance which were more than enough to offset a decline in equity and bond flows. Notably, Rwanda


came to the international bond market for the first time with the $400 million 10-year bonds, benefiting from growing inves-


tors’ appetite for riskier developing-country debt.




In contrast, gross capital flows to the Latin America and Caribbean region increased by 23 percent from a year ago, reach-


ing about $79 billion in the first five months of 2013. Equity placement rose by 154 percent due to a strong issuance activity


from Brazilian firms including the largest developing-country corporate bond issuance on the record ($11 billion) by the Bra-


zilian oil company Petrobras. In contrast, bank lending to the region fell by 34 percent.




Capital flows to Middle East and North Africa have been weak so far in 2013, with only one syndicated loan deal for Jordan


($288 million) and two bond issues for Lebanon and Morocco ($1.1 billion and $750 million, respectively). For equity issu-


ance, only Tunisia were able to raise $119 million through four transactions.


Box FIN.2


Box figure FIN 2.1 Regional gross capital flows ($billions)


Source: World Bank; Dealogic.


0


5


10


15


20


25


30


35


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


Equity Bond Bank


Europe & Central Asia


0


5


10


15


20


25


30


35


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


Latin America & Caribbean


0


1


2


3


4


5


6


7


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


Middle East & North Africa


0


1


2


3


4


5


6


7


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


South Asia


0


1


2


3


4


5


6


7


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


Sub-Sahran Africa


0


5


10


15


20


25


30


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


Equity Bond Bank


East Asia & Pacific




GLOBAL ECONOMIC PROSPECTS | June 2013 Finance Annex


60


increased in other countries, including Indonesia,
Malaysia, Philippines, Thailand, Brazil, Russia,
Chile, and Mexico.

International bond flows to developing countries
have been particularly robust, reaching a
historically high level at $158 billion for the first
five months of the year with the record monthly
issuance of $45 billion in April. Developing
countries have issued more than 20 billion per
month since September 2012 with the exceptions
of seasonally low December and February when
the Chinese Lunar New Year was this year (figure
FIN.10). The heavy issuance has been supported by
investors’ robust risk appetite and low borrowing cost.

The strong appetite for higher-yield developing-
country debt has been driven by low yields in high-
income countries because of quantitative easing.
This has created an opportunity for several non-
investment-grade (non-IG) companies to tap into
international bond markets. In fact, the share of
non-investment grade corporate issuance rose to
31 percent of the value of bonds issued by
developing countries (compared with 18 percent in
2012) and 46 percent of the number of bonds (34
percent in 2012) (figure FIN.10). In addition, there
has been a long line of first-time sovereign bonds
issuers including Honduras ($500 million) and
Rwanda ($400 million). Even Papua New Guinea is
planning to tap the international debt market soon.


Foreign direct investment inflows to
developing countries remained robust
in 2012 after the increased
uncertainty in global financial markets
earlier in the year.

After slowing down during the first half of 2012,
foreign direct investment (FDI) inflows to
developing countries picked up strongly in the final
quarter of the year. Nevertheless, flows totaled
$670 billion, 5 percent lower than $701 billion in
2011 (figure FIN.11).FN4 The weakness in the flows
earlier in the year was mostly the result of increased
uncertainty in global financial markets due to Euro
Area problems. The impact of the uncertainty was
much more profound for high-income economies
where FDI inflows declined by 32 percent (figure
FIN.12). Most developed countries experienced



Corporates dominated the bond flows


Source: World Bank; Dealogic.


Fig FIN.10


0


5


10


15


20


25


30


35


40


45


Sep


'12


Oct


'12


Nov


'12


Dec


'12


Jan


'13


Feb


'13


Mar


'13


Apr


'13


May


'13


Corporate (IG)


Sovereign (IG)


Corporate (non-IG) Sovereign (non-IG)


$ billion



FDI inflows to developing countries


Source: World Bank; Central banks of selected countries.


Fig FIN.11


60


80


100


120


140


160


180


2009Q1 2009Q4 2010Q3 2011Q2 2012Q1 2012Q4


$ billion



Almost half of the global FDI inflows in
2012 went to developing countries


Source: World Bank; Central banks of selected countries.


Fig FIN.12


0


50


100


150


200


250


300


350


2010Q1 2010Q3 2011Q1 2011Q3 2012Q1 2012Q3


Developing Countries


High-Income OECD


$ billion




GLOBAL ECONOMIC PROSPECTS | June 2013 Finance Annex


61


declines compared to 2011. While Finland,
Netherlands and Belgium experienced net
disinvestments in 2012, FDI inflows declined by
almost 90 percent in Denmark and Germany. The
relative resilience of FDI in developing countries
mostly reflects stable re-invested earnings and
intra-company loans. The share of developing
countries in global FDI inflows reached its highest
level at 45 percent in 2012.

FDI inflows were weak in most of the developing
regions. The largest contraction was in South Asia
where flows declined around 20 percent due to
slow growth and regulatory uncertainties in India
and Pakistan. FDI inflows to the East Asia region
also declined with China, Malaysia, and Thailand
all experiencing contractions. Despite the 8
percent drop in FDI inflows due to the ongoing
structural changes in its economy, China was the
top FDI recipient in the world in 2012. Similarly, FDI
inflows declined in most Eastern European
economies, reflecting economic weakness in high-
income Europe with largest drops in Latvia,
Lithuania, and Serbia.

In contrast, FDI inflows to Latin American
economies rose by 10 percent supported by still
high (if weakening) commodity prices and
increased investment from the United States,
especially to Argentina, Chile and Colombia.

Limited high frequency data indicate a mixed
picture so far in 2013: robust flows to Chile, India
and Russia and easing in other developing
countries. Flows to other developing countries will
likely rebound in the second half of the year.


Several countries in emerging Europe, including Russia
and Serbia, have announced plans to accelerate
privatization efforts this year. FDI flows are expected to
increase by 7 percent reaching $719 billion in 2013.


Hot money flows: a new heat wave
from the East?

The loose monetary policy run by high-income
countries since the 2008/09 crisis has prompted
investors to borrow cheaply and invest in high-
yielding markets. Investors have been attracted to
developing country local currency assets (equity
and bonds) because of their stronger growth
potential, and interest rate differentials. This has
led to significant levels of the flows to equity and
local currency debt securities (also referred as hot
money flows). Flows to a few large middle-income
countries were particularly strong in 2010 (See
GEP January 2011). Managing the fluctuations in
these flows, which tend to be quite volatile, can be
quite challenging and some countries have
introduced special measures including capital controls.

The data for these flows—portfolio investment
with a breakdown of issuance in the country—are
only available for few countries and exhibit a
mixed picture for 2013 (figure FIN.13). Despite
the current relatively low risk environment and
high liquidity in the market, flows to local stock
and bond markets have moderated for Turkey but
have picked up in Brazil. While flows to Mexico
surged in the last quarter of 2012 and were at
record high levels in 2012, the data for 2013 are
not available.



Mixed picture for hot money flows


Source: World Bank; Central banks of selected countries.


Fig FIN.13


-2


-1


0


1


2


3


4


5


6


7


8


9


2009Q1 2010Q1 2011Q1 2012 Q1 2013 Q1


Brazil Mexico Turkey


Foreign investment in equity and local currency bond markets (% of GDP)



The flows to EM Mutual Funds declined
sharply after January


Source: World Bank; Haver.


Fig FIN.14


-10


0


10


20


30


40


Jan '12 Apr '12 Jul '12 Oct '12 Jan '13 Apr '13


EM Fixed-Income Funds EM Equity Funds


$ billions




GLOBAL ECONOMIC PROSPECTS | June 2013 Finance Annex


62




Japan’s monetary easing and developing countries




In November 2012, the Bank of Japan (BoJ) signaled that it would undertake monetary easing measures to


fight against deflation. The BoJ announced the actual quantitative and qualitative easing measures on April 4 th


this year. These measures include the monthly purchase of ¥7.5 trillion ($75 billion) of the Japanese govern-


ment bonds aiming to double its monetary base in two years. It will also expand the average maturity of bonds


that it purchases from three to seven years. More importantly, the BoJ will continue these “as long as neces-


sary”.




The BoJ’s quantitative easing (QE) program is similar to the QE3 program in the US. The $75 billion monthly


purchase of government bonds is similar in size to the Fed’s monthly $85 billion purchase under QE3. Both


programs seek to depress the return on low-risk assets, in order to push investors into riskier assets.




While the immediate beneficiary of the program is domestic assets, spillover into international capital markets


is inevitable. In the case of the Japanese program, the size of the outflows may be larger, in part because at


$8.8 trillion for bonds and $3.3 trillion for equities, the Japanese market is only 22 and 8 percent the size of


U.S. markets. The bulk of these flows are likely to go to other high -income countries, only 2.4 percent of Japa-


nese external holdings are in developing countries. However, Japanese investors have been actively investing


in local currency bond and equity markets in some developing countries (box table).




There are already indications that Japanese institutional investors have been recently increasing their expo-


sure to developing countries via Uridashi funds (typically foreign currency bonds) and larger Toshin invest-


ment trust funds (predominantly equity). According to the Investment Trusts Association of Japan, Japanese


portfolio investment in local debt securities increased in Mexico (by 34 percent), Turkey (28 percent) and


Thailand (17 percent) during the first two months of 2013. The increase was less pronounced in Philippines


(5.9 percent) and South Africa (4.4 percent).




Although the depreciation of yen will make the assets abroad relatively more expensive, the Japanese QE


program might also increase direct investment by lowering the cost of capital for Japanese multinationals.


Developing countries receive a larger 20 percent share of these outflows. Asian developing countries in turn


receive two thirds of these flows. Rising outward FDI flows from Japan in recent years have been particularly


important for Thailand, accounting for 40 percent of that country’s FDI inflows in 2012, up from 28 percent in


2009.


Box FIN.3


Box table FIN 3.1 Japanese outward investment position by
destination, 2011 ($ billion)


Source: Bank of Japan.


FDI


Total PI: Equity PI: Debt


Total 935.4 3,279 647 2,632


Developed Countries 742.5 3,203.5 618.6 2,584.9


Developing Countries 192.8 75.6 28.3 47.3


P.R.China 73.5 10.3 9.8 0.5


Thailand 31.0 2.3 1.5 0.9


Indonesia 13.9 5.8 3.3 2.6


Malaysia 9.9 4.3 1.6 2.7


Philippines 9.0 2.7 0.3 2.5


Viet Nam 5.6 0.1 0.1 0.0


India 13.6 5.0 3.4 1.6


Mexico 2.6 11.6 0.5 11.1


Brazil 30.0 28.1 5.6 22.4


Russia 1.5 2.0 1.2 0.8


R.South Africa 2.2 3.2 0.9 2.3


ASEAN 107.6 27.2 13.3 13.9


Portfolio Investment




GLOBAL ECONOMIC PROSPECTS | June 2013 Finance Annex


63


As an alternative measure, high-frequency data on
flows to Emerging Market (EM) Mutual Funds—
which only represent a portion of such flows—
indicate a decline in recent months (figure FIN.14).
The fall has been particularly sharp for EM equity
funds with net outflows in March and May. The fall
partly reflects weak corporate earnings and country
specific factors (discussed earlier). In addition,
downside risks for the returns on these assets have
also risen, in particular if US Treasuries were to rise
earlier and higher than expected.

Looking forward, Japan’s decision to begin a
quantitative easing program may reverse the trend
in these flows (box FIN.3). The Bank of Japan’s
(BoJ) commitment to purchase $75 billion of
government bonds a month (just short of the Fed’s
monthly purchase of $85 billion) is likely to weaken
returns in Japanese markets, and make developing-
country assets more attractive than otherwise.
While Japanese investors’ tend to have a stronger
home-bias than US investors, the Japanese
domestic market is smaller than the U.S. and as a
result the impact on domestic asset prices is likely
to be larger, and the incentive to invest abroad
larger. How large of an impact on developing
country assets will depend on whether investors
turn to high-income country or developing assets.
Here, Japanese investors tend to allocate a smaller
share of their external assets to developing
countries than American investors do, although
they have been active in many developing country
local currency debt markets. Their portfolio
investment tends to be geographically diverse with
a significant presence in Brazil, Mexico and
Turkey.

Expectations of policy actions have already
bolstered portfolio outflows with an increase in
flows to developing countries. For example, the
flows to Toshin funds (investing in local and
international equity and bond markets) and
Uridashi funds (typically foreign currency bonds)
have been very robust since the beginning of the
year. According to the Investment Trusts
Association of Japan, Japanese portfolio
investment in local debt securities increased
in Mexico (by 34 percent), Turkey (28
percent) and Thailand (17 percent) during the
first two months of 2013. The increase was
less pronounced in Philippines (5.9 percent)
and South Africa (4.4 percent).


If the current trend gains momentum in coming
months, some developing countries might face
challenges in managing the impact of these flows
on their economy.



Prospects



The level of net private capital inflows going to
developing countries is set to rise in nominal terms
but as a percent of total developing country GDP,
net inflows are forecast to ease by 2015. After the
1.4 percent increase in 2012 reaching $1.2 trillion
(4.9 percent of developing countries’ aggregate
GDP), net capital inflows to the developing world
had a strong start in 2013 (figure FIN.15 and table
FIN.1). They are expected to increase to $1.3
trillion (4.7 percent of GDP) with another record
level of bond flows, rebounding bank lending and
robust FDI inflows.

While the prospects for capital flows to developing
countries remain positive in the medium-term, some of
the factors that have been in play over the last few years
are expected to weaken. For example, while developing
countries will continue to grow relatively faster than
developed countries and their credit quality has improved,
the growth differential is expected to narrow as growth in
high-income countries picks up. Perceptions of the
riskiness of high-income country investments have also
declined, which should lead to a portfolio shift in their
favor over the medium term.



Net private capital flows are set to rise
in nominal terms


Source: World Bank.


Fig FIN.15


-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


2004 2006 2008 2010 2012 2014 2016


As a share of GDP(RHS)


STdebt


Bank lending


Bond flows


Portfolio Equity


FDI Inflows


$ trillion Percent




GLOBAL ECONOMIC PROSPECTS | June 2013 Finance Annex


64



In addition, the uniformly accommodative stance
of monetary policy in high-income countries may
become more diverse as the United States reduces
the extent of quantitative easing and Japan expands
it. A gradual transition toward monetary policy
tightening in the US is likely to increase the cost of
capital for developing countries and expectations
of such a move may lead to an easing in flows even
earlier. This may be partially offset by the
quantitative easing in Japan, if investors there
substantially increase their appetite for developing
country asset. The overall effect is likely to tighter
external financial conditions for developing
countries.



The impact of tighter external financial
conditions will be evident for bond flows to
developing countries—both international
issuance and foreign investment into local
currency bond markets. After reaching record
highs in 2012 and 2013 bond flows are
expected to fall gradually in 2014 and 2015.

Bank lending on the other hand is expected
to rise gradually particularly now that intense
deleveraging pressures have eased—although
the extent of the bounce back may be limited
by a stricter regulatory environment.



Net capital flows to developing countries ($ billions) Table FIN1.


2


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


Current account balance 409.4 233.0 173.3 129.6 -16.7 -74.9 -108.2 -126.3


Capital Inflows 812.7 701.0 1,218.8 1,175.0 1,192.4 1,260.9 1,297.4 1,394.8


Private inflows, net 782.3 620.0 1,145.6 1,145.1 1,178.3 1,250.2 1,290.7 1,391.7


Equity Inflows, net 583.4 541.3 710.5 710.4 758.1 791.1 803.5 863.5


Net FDI inflows 637.0 427.1 582.3 701.5 670.0 719.3 715.7 758.2


Net portfolio equity inflows -53.6 114.2 128.2 8.9 88.1 71.8 87.8 105.3


Private creditors. Net 198.8 78.7 435.1 434.6 420.2 459.1 487.2 528.2


Bonds -8.6 61.0 129.7 123.8 190.3 187.3 164.4 151.9


Banks 223.3 -11.9 37.2 108.2 82.0 104.7 125.3 146.9


Short-term debt flows -17.1 17.8 257.6 189.3 141.0 158.5 188.2 221.1


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 -321.2 -175.2 -314.1 -284.7 -365.4 -371.3 -416.3 -464.4


FDI outflows -211.8 -144.3 -213.9 -198.0 -238.0 -275.0 -325.0 -370.0


Portfolio equity outflows -32.1 -75.9 -50.6 4.3 -12.4 -17.3 -24.3 -29.4


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) 491.5 525.8 904.7 890.4 827.1 889.6 881.1 930.4


Net unidentified Flows/a -82.1 -292.8 -731.3 -760.8 -843.8 -964.5 -989.3 -1,056.7


Source: The World Bank


Note: e = estimate, f = forecast


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




GLOBAL ECONOMIC PROSPECTS | June 2013 Finance Annex


65


FDI inflows to developing countries are projected
to increase through the forecast period, reaching
$758 billion (2.4 percent of GDP) by 2015.
Despite considerable real-side uncertainties in the
short term, multinational corporations 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 removing
barriers to foreign investment. For example,
following its recent World Trade Organization
accession, Russia has committed to reducing
restrictions on foreign investors in a number of
service industries. Other countries in Eastern
Europe have been pursuing privatization in their
services sector. Similarly, India may attract an
influx of investment in the coming years now that
the cap on foreign ownership in multi-brand retail
and aviation businesses has been raised. As long as
Japanese monetary easing reduces the cost of
capital for its multinationals, it should also support
FDI flows to Asian economies, particularly
Thailand and Vietnam in the short-term.

While remaining the main FDI destination among
developing countries, FDI inflows to China are
expected to ease over the medium term. The
Chinese economy has been going through
structural adjustments with rising wages and
production costs, which will continue to limit the
efficiency-seeking FDI. The fall will be partly
compensated, however, by the market-seeking
FDI flows as multinationals would like to serve its
growing middle-income population.


Despite the expectation that private capital flows
to developing countries will increase, the outlook
is subject to significant downside risks. First,
despite the recent progress towards a resolution
for Euro Area debt crisis, considerable
uncertainties remain and as highlighted by the
Cyprus bailout, event risk persists. Any major
setback could lead to a renewed crisis of
confidence. Similarly, lack of progress in dealing
with fiscal challenges in the United States has a
similar potential to generate confidence issues.

Another factor that might generate volatility in the
global financial markets is the process of
unwinding of monetary easing in the United
States. As discussed earlier, the expectations
related to a possible ease in the pace of
quantitative easing have already led to the recent
increase in US 10-year Treasury yields
accompanied widening in spreads. Hence, any
rapid shift in the expectations related to the
process might generate sharp adjustments in the
financial markets and capital flows to developing
countries.







GLOBAL ECONOMIC PROSPECTS | June 2013 Finance Annex


66


Notes



1. Argentina defaulted a record $95 billion in sovereign debt in 2001. The country managed to restructure 92 percent


of the debt in 2005 and 2010. Since then, Argentina has been in a long legal fight with bondholders who did not


entered debt swaps. In the fall of 2012, a U.S. court ruled that Argentina had to repay the unrestructured debt,


which prompted fears that the country would have to default once again on its unrestructured debt. As of yet the


issue remains unresolved. According to a recent report published by the International Monetary Fund, ongoing


litigation against Argentina could have pervasive implications for future sovereign debt restructurings by increasing


leverage of holdout creditors. (http://www.imf.org/external/np/pp/eng/2013/042613.pdf)


2. Since January 2013, the sovereign ratings of 11 developing country borrowers have been up graded versus 5


downgrades.


3. According to the April ECB report, net tightening of credit standards declined for loans to businesses in the Euro


area. Net tightening for firms is now below its historical average. Credit standards also declined for households,


although they remain higher than the historical average.


4. Historical FDI data have been revised as several countries have started to report under Balance of Payments and


International Investment Position Manual (BPM6).




GLOBAL ECONOMIC PROSPECTS | June 2013 Trade Annex






TRADE


GLOBAL


ECONOMIC


PROSPECTS Annex June 2013




GLOBAL ECONOMIC PROSPECTS | June 2013 Trade Annex


69


Recent Developments



After a cyclical rebound in global
trade, the pace of trade expansion is
decelerating once again

Following the slump in Q2 2012, global trade
began a cyclical rebound in Q3, led by an
acceleration in developing country imports, which
sparked an uptick in both high-income country and
developing-country exports.FN1 As high-income
country activity picked up, so too did their import
demand helping to further boost overall trade in
the fourth quarter and into the first quarter of
2013. However, reflecting ongoing fragility in the
global economic recovery, particularly in high-
income countries, the pace of trade expansion has
slowed in recent months. Indeed, in the three
months leading to April 2013, global trade
expansion had decelerated to a below trend pace of
0.8 percent (3m/3m saar) compared with 10.9
percent in March (figure TRADE.1).


The deceleration in import demand
has been broad-based, impacting
both developing and high-income
countries

The rebound in developing country import
demand began almost as soon as the Euro Area
financial market tensions of May-June 2012 began


to ease. In both Q4 2012 and Q1 2013, this import
rebound gained strength in part because of the
firming derived demand it generated in high-
income and other developing countries. However,
weaker growth momentum in some large
developing countries (including Brazil, China,
India, Russia and South Africa) is reflected in the
slowing down of the aggregate developing country
import demand, even if still remaining robust.
Indeed, in the three months to April 2013,
developing country import demand was expanding
at a 10.9 percent pace (down from the 18.0 percent
pace registered in March). Nonetheless,
developments differ across developing regions (see
box TRADE.1).

Similar to the slowdown observed in developing
countries, high-income country import demand
also weakened in recent months. However, unlike
the still positive import demand growth in
developing countries (reflecting stronger domestic
demand conditions there), high-income countries
import demand growth contracted in the three
months leading to April (-3.7%, 3m/3m saar).
Although on aggregate import demand among high
-income countries decelerated in April,
developments have not been uniform across
individual economies (figure TRADE.2).


US import demand growth
decelerates, after earlier cyclical
rebound.



The ongoing steady strengthening of US private
sector economic activity, (GDP grew at 2.4 percent
in Q1 2013, q/q saar compared with 0.4 percent in
Q4 2012) was supportive of the rebound in its
import demand. After contracting for four
consecutive months between August 2012 and
November 2012, US import demand growth
started expanding once again in December,
peaking at 5.9 percent (3m/3m saar) in January
Nonetheless, by March, business sentiment
indicators for the US began declining. This decline
in sentiment was reflected in real-side activity as
both US industrial production and trade expansion
slowed. Indeed, in March, US import demand
growth contracted at a 2.5 percent (3m/3m saar)
pace. And although there was an uptick in April
(0.3 percent, 3m/3m saar), import demand is still
expanding below trend. A strengthening US




Divergence in import growth among


high-income countries


Source: World Bank; Datastream.


Fig TRADE.1


-10


0


10


20


30


40


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


(import volumes, %ch 3m/3m saar)


High-Income


Developing


World




GLOBAL ECONOMIC PROSPECTS | June 2013 Trade Annex


70



Regional import developments




Import demand in East Asia & the Pacific registered a solid rebound in both Q4 2012 and Q1 2013 (Box fig


TRADE 1.1). The robustness of trade in the region also reflects increasing trade and financial integration, alt-


hough concerns have been raised about the potential impact on regional trade of the decline in Sino -Japanese


trade and from the sharp depreciation of the yen (see main text). Indeed, declining business sentiment for some


of the larger economies in the region suggest a weakening of this expansion in Q2 2013. Available data for April


shows that the pace of import momentum decelerated to 13.4 percent (3m/3m saar) from 25.4 percent in March.




In Europe and Central Asia, import demand in the two largest economies in the region, Russia and Turkey,


has rebounded rapidly — rising at a 19.7 percent pace in Russia and at 12.1 percent in Turkey in Q1 2013—


partly reflecting the advanced stage of recovery in these economies. In those developing European countries


with closer ties to the Euro Area, output gaps remain elevated and the recovery in import demand has lagged,


the expansion in import demand has been weaker. On aggregate import demand in the region expanded at 16.8


percent rate in the three months ending March 2013.




Strong domestic demand in Latin America’s largest economy (Brazil), supported by loose monetary policy and


household tax incentives, contributed to solid import demand in the region. Indeed in Q1 2013, import demand


in Brazil grew at an above trend 21.3 percent pace. However, for the region as an aggregate import demand


was 5.9 percent in Q1 2013. The weaker aggregate regional expansion in Q1 2013 reflects recent deceleration


in import demand in both Argentina and Mexico. In April Brazil’s import growth contracted, but strengthening


import demand from other countries in the region supported the acceleration of the region’s import demand to


6.1 percent (3m/3m saar).




In South Asia where India, dominates trade activity, the replenishing of depleted stocks and earlier monetary


policy easing, contributed to the robust expansion in South Asia’s imports. However, India’s export growth has


not kept apace with its import demand, thus contributing to a growing trade balance and current account deficit.




The latest available region wide data for Sub Saharan Africa and the Middle East and North Africa is Febru-


ary 2013 (Box fig Trade 1.2). Fortunes for both regions however, diverge. As was the case for other developing


regions, import demand in Sub Saharan Africa strengthened through February to a robust 17.5 percent pace


(slightly higher than the developing country average of 16.6 percent at the time) from 13.1 percent in the previ-


ous month. However, in the Middle East and North Africa, the contraction in import demand which commenced


in August 2012 was sustained through February 2013 ( -4.8 percent, 3m/3m saar), even if at a weaker pace. The


weakness in import demand in the region in part reflects the effects of political challenges on demand condi-


tions in some countries in the region.


Box TRADE.1




Box fig TRADE 1.1 Import volume growth among


selected developing regions


Source: World Bank; Datastream.


-40


-20


0


20


40


60


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


(import volumes, %ch 3m/3m)


East Asia & Pacific


Latin America


South Asia


& Caribbean




Box fig TRADE 1.2 Import volume growth among


selected developing regions


Source: World Bank; Datastream.


-20


0


20


40


60


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


Europe & Central Asia


Middle East & N. Africa


Sub-Saharan Africa


(import volumes, %ch 3m/3m saar)




GLOBAL ECONOMIC PROSPECTS | June 2013 Trade Annex


71


economy should be supportive of global trade as the US
still remains the world’s largest importer, accounting for
some 12.5 percent of global imports in 2011.


After contracting for several months,
import demand in high-income
Europe begins expanding once
again.

Notwithstanding a steady trend decline in its
market share, the European Union still remains the
world’s largest trading bloc and customs union,
hence developments in Europe are of significant
importance in global trade. Euro Area import
demand began expanding once again in February
2013 (3.5 percent, 3m/3m saar) – the first
expansion in ten months— and has continued
expanding through March (3.4 percent, 3m/3m
saar). The pick-up in Euro Area imports has
occurred not with standing the weak domestic
demand conditions there: rising and record high
unemployment, tight lending conditions, ongoing
fiscal uncertainty, and lingering uncertainty
weighing down on investor confidence. The
strengthening of import demand could reflect the
rebuilding of inventories after several months of
contracting imports demand, rather than
strengthening of domestic demand conditions in
the bloc.

Overall, net exports demand in the Euro Area is
contributing to mitigating the weakness in Euro
Area demand. For instance, in 2012, net exports
contributed 1.6 percentage points to Euro Area
GDP growth, notwithstanding the overall


contraction of 0.6 percent in output (figure
TRADE.3). Since exports tend to have a large
import component, the acceleration in imports in
2013 Q1 likely reflects better exports as well as
modest strengthening in the Euro Area economy.



Japanese imports demand has
rebounded in recent months.

Japan accounts for 6.5 percent of global trade,
hence developments there remain important,
particularly so in the East Asia region where it is an
important final market for several economies.

After several months of contracting import
demand (between August 2012 and February
2013), import demand in Japan has begun
accelerating once again, consistent with the
strengthening of economic activity recorded in Q1
2013 (3.5 percent, q/q saar up from 0.3 percent in
Q4 2012) as the effects of strong government
stimulus measures begin to impact real side activity.
Indeed, in the three months to April import
demand accelerated to 6.3 percent compared with a
12.9 percent pace of contraction that occurred in
December 2012.


Exports have lagged imports but are
growing rapidly — with all regions
participating in the trade rebound

Supported by the rebound in global economic
activity (as observed by the pick-up in import




External demand is mitigating the weak-


ness in Euro Area domestic demands


Source: World Bank; Eurostat.


Fig TRADE.3


-1.00


-0.80


-0.60


-0.40


-0.20


0.00


0.20


0.40


0.60


0.80


2011Q4 2012Q1 2012Q2 2012Q3 2012Q4


Net exports


Domestic Demand


GDP


(quarter-on-quarter GDP growth,
$ billions




Import demand in selected high-income


economies


Source: World Bank; Eurostat.


Fig TRADE.2


-20


-10


0


10


20


30


2010 2010 2011 2011 2012 2012 2013


Japan Euro Area United States


(import volumes, %ch 3m/3m saar)




GLOBAL ECONOMIC PROSPECTS | June 2013 Trade Annex


72


demand), developing country exports strengthened in
Q4 2012 (14.8 percent, q/q saar), and this pick-up
was sustained through Q1 2013 (15.5 percent, q/q
saar), albeit at a different pace across individual
developing regions (table Trade.1). Nonetheless,
along with the deceleration in global import
demand, the pace of export growth is showing
signs of deceleration, with developing country
export growth expanding at an annualized pace of
7.8 percent in the three months to April 2013
compared with the 15.4 percent recorded in the
previous month.

During Q1 2013 the pace of export expansion was
strongest in East Asia (26.1 percent, q/q saar) led
by China and also in South Asia (23.2 percent, q/q
saar) led by India. Central and Eastern European
countries are benefitting from the strengthening
import demand in the Euro Area with exports
from the region expanding by a solid 14.5 percent
(3m/3m saar) annualized pace in Q1 2013.
However stagnant export growth from Russia and
the sharp decline in Turkey’s export growth
weighed down on the overall Europe and Central
Asia exports. Hence in Q1 2013 overall exports in
the region expanded by only 1.8 percent—well
below the developing country growth of 15.4
percent. Latin America and the Caribbean region
was the only developing region where export
growth contracted in Q1 2013, mainly due to
contracting export growth in Mexico (-7.4
percent, q/q saar) and Brazil (-4.4 percent,
q/q saar). However, a pick-up in Brazil’s
export volumes in supported the rebound
observed for the region in April (5.0
percent , 3m/3m saar)


Data for both Sub Saharan Africa and the Middle
East lags behind other developing regions. Latest
available for the region is February 2013. In both
regions, export growth had rebounded from the
contracting activity in the months prior to
November 2012. Indeed, in the three months to
February export growth was accelerating at 19.7
percent in Sub Saharan Africa and 12.8 percent in
the Middle East and North Africa.



Medium Term
Prospects for Global
Trade



After its slump in 2012 (2.8 percent growth), global
trade growth is projected to pick-up in 2013 and
gradually strengthen through 2015. Underlying
this pick-up in activity is the expected
strengthening of the Euro Area economy (largest
trading bloc) by Q3 2013, and the ongoing steady
recovery in the US and robust developing country
growth expected to continue through 2015.

Global trade in goods and services is projected to
increase by 4.0 percent in 2013, before
strengthening to 5.0 percent in 2014 and reaching
5.4 percent in 2015. Despite this relatively strong
growth projection, global trade volumes will
remain below their pre-crisis trend — potentially
suggesting a slowing in the long-term trend for



Export growth in developing regions




Source: World Bank; Datastream.


Table TRADE.1


2013 (3m/3m, saar)


Q2 Q3 Q4 Q1 April


East Asia & Pacific 23.2 -12.2 17.5 26.1 11


Europe & Central Asia 8.3 -10.5 9.2 1.8 -3


Latin America & Carribbean -6.1 -4.1 10.6 -7.5 5


Middle East & North Africa -21.5 -42.9 38.7


South Asia -6.4 -11.8 9.6 25.8 15.3


Sub Saharan Africa 48.4 -34.2 4.9


2012 (q/q, saar)


Export Volume Growth


Regions




GLOBAL ECONOMIC PROSPECTS | June 2013 Trade Annex


73




The Re-orientation of South-South Trading Partners in Recent Years




Though accounting for about a third of global trade, the faster projected trade growth for developing countries (between 6.4


percent to 8.4 percent annual growth over forecast horizon) compared to high-income countries (2.8 percent to 4.3 percent


over forecast horizon) between 2013 and 2015 is expected to be a key driver in the expansion of global trade. As document-


ed in GEP 2013A, over the past decade, the most dynamic segment of global trade is trade among developing countries –


so called “South-South” trade. Indeed, over the past decade the USD value of trade between developing countries has


grown annually by an average of 19.3 percent (17.5 percent if trade with China is excluded) versus about 11 percent for


developing country exports to high-income countries.




This trend is expected to continue over the forecast horizon. One significant element that has driven this South-South trade


has been the growing role of East Asia as a major global trading bloc. Together this region, accounts for about half of the re-


orientation towards South-South trade, with China, being the most dynamic trading partner. Indeed, without exception, every


single developing region has increased its trade with China, while contemporaneously reducing their trade dependency on


high-income markets (Box Figure Trade 2.1). The developing regions to have most re-oriented and increased their trade with


China over the past decade have been those with a comparative advantage in natural resources. Between 1999 to 2011 Sub


Saharan Africa increased their exports to China from 2.23 percent of their total exports to 22.73 percent, Latin America in-


creased theirs from 1.0 percent to 11.5 percent and the Middle East and North Africa from 2.21 percent to 15.29 percent.


Reflecting the strong integration of production networks in East Asia, the share of exports from other East Asian economies


to China has increased from 4.5 percent in 1999 to 18.6 percent in 2011.




The rapidly growing South-South trade has however not been driven by only China but also other developing regions, in


particular the rest of the East Asia region. However, outside of China and East Asia Pacific region, in general, the diversif ica-


tion of trading partners towards other developing regions, though occurring, has been less dynamic compared to that with


the East Asia region (see Box Table TRADE 2.1).




Indeed, outside of trade with the East Asia region, the most significant re-orientation has been increasing exports from both


the Middle East and North Africa. Excluding this, the re-orientation of trade with other developing regions has been some-


what less dynamic (see Box Table TRADE 2.1). More surprising however is the relatively slow progress towards increased


integration among developing countries in the same region, with the exception of East Asia where regional trade integration


(share of intra-regional imports) almost tripled since 1999. Indeed, excluding China which tends to export a greater share to


high-income countries, the share of the other East Asian countries exports to the East Asia region increased by 20 percent-


age points (from 7.1 percent to 30.3 percent of their total exports). This is not the case in other developing regions. Although


Europe and Central Asia remains the second most trade-integrated developing region (thanks to many countries benefitting


from multiple trade agreements in the region, especially those associated with the European Union) part of the progress


made in regional integration appears to have been eroded by the weak demand post crisis, as intra-regional trade having


risen to 27.8 percent by 2008 (from 19.2 percent in 1999), has since declined to 25.5 percent in 2011 (see Box Fig TRADE


Box TRADE.2



Box Fig TRADE 2.2 Intra-regional import shares among


developing regions ( percent)


Source: UN COMTRADE.


0


5


10


15


20


25


30


ECA LAC SSA EAP South
Asia


MENA


1999-2000


2010-2011



Box Fig TRADE 2.1 Cumulative change in share of regions


total exports going to China and high-
income countries, 2000—2011 (percent).


Source: UN COMTRADE.


-30%


-25%


-20%


-15%


-10%


-5%


0%


5%


10%


15%


20%


25%


2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


EAP LAC MENA


South Asia Sub-Saharan Africa ECA
Trade
with
China


Trade with
US, Japan and
Euro Area




GLOBAL ECONOMIC PROSPECTS | June 2013 Trade Annex


74


rapidly growing developing country market shares.
Nevertheless, trade is expected to continue
reorienting itself toward developing countries (box
Trade.2). Partly as a result of this trend,
increasingly more of developing country trade is
now with other developing countries — both
reflecting increases in inter-regional and intra-
regional trade, especially the in the East Asian region.



Risks



Fragile global economy. Downside risks to the
forecasted uptick in global trade activity have not


changed over the past six months.
Nonetheless, unlike earlier periods where the
balance of risks were weighted on the
downside, these are now more balanced (see
main text). Downside risks continue to
include a worsening of conditions in the Euro
Area, the possibility that markets react badly
to a failure of either the United States or
Japan to map out a credible medium-term
deficit reduction strategy, a rapid decline in
Chinese growth and geopolitical concerns. To
these may be added the possibility that high
commodity prices, which have supported the
value of global trade — if not the volume —
could decline rapidly with deleterious
consequences for incomes and imports of
commodity exporting countries, but benefits
for importers.


2.2). For both Latin America regional trade integration has steadied around 16 percent over the past decade. And in Sub


Saharan Africa, after increasing by some 5 percentage points between 1999 and 2002, the share of regional trade has also


steadied at around 12 percent of total trade, reflecting significant cross border barriers as well as increased external com-


petition due in part to unilateral tariff liberalization. Among developing regions, the Middle East and North Africa and in


South Asia remain regions with the least intra-regional trade, about 3 and 4 percent of their total trade is carried among


regional neighbors. Not surprising several analytical studies (including those using gravity models) continue to point to the


underperformance of intra-regional trade in the Middle East and North Africa (Dennis, 2006; Devlin and Yee, 2005; Zarrouk,


2003 Al-Atrash and Yousef, 2000), as well as in South Asia (Kumar etal 2009) and in Sub-Saharan Africa (Buys etal.


2010).




While trade in natural resources, in particular ores and metals has been the fastest growing commodity category of imports


among developing countries, the growth in trade in manufactured goods among developing countries has also been solid -


growing as fast as petroleum imports and faster than agricultural raw material imports. The strength of importance of ores


and metals is however accentuated by the inclusion of China. Excluding China, manufactured goods has been the fastest


component of south-south trade, reflecting increased production chain interlinkages among developing countries, particu-


larly in the East Asian region.




Box table TRADE 2.1 The diversification of trading partners between developing regions has been most dy-


namic between all developing regions and the East Asia region


Source: UN COMTRADE.


EXPORT MARKET


IMPORT MARKET EAO EAP ECA LAC MENA SAS SSA
East Asia excl. China (EAO) 6.3 4.2 0.5 1.0 -0.2 2.2 0.5


East Asia & Pacific (EAP) 20.4 8.0 3.6 10.8 11.1 8.5 18.0


Europe Central Asia (ECA) 1.4 3.1 6.2 1.0 1.3 2.9 0.8


Latin America & Carribean (LAC) 1.3 4.1 0.0 1.3 -0.6 2.7 0.5


Middle East & North Africa (MENA) 0.4 0.6 0.5 0.6 0.4 1.4 -0.7


South Asia (SAS) 2.5 2.5 0.5 1.2 6.6 1.5 0.5


Sub Saharan Africa (SSA) 0.4 1.0 0.2 0.7 0.4 2.5 5.2


(additional increase in exports share going to import market, in percentage points)


( e.g. an additional 18.0% of SSA share of its total exports was re-oriented towards the EAP region)




GLOBAL ECONOMIC PROSPECTS | June 2013 Trade Annex


75


However, outturns in the global economy,
particularly from high-income countries could
surprise on the upside, compared to the
subdued uptick embedded in our current
forecasts (high-income growth of 1.2 percent
in 2013 strengthening to 2.3 percent by 2015
– see main text for details). This could arise
from another of reasons including the pent-
up demand in high-income countries, low
levels of inventories, and improved credit
flows to real economy in high-income
countries. If this were to occur, this would
lead to a rapid rise in not only high-income
trade but also that of developing country
trade than currently embedded in our
forecasts.

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, while
slowing down compared to a year ago, still reveals
some worrisome trends. The World Trade
Organization reports that in the five months
leading to mid-October 2012, an additional 71 new
trade restricting or potentially distorting measures
were introduced. The most frequent measure used
was the initiation of anti-dumping investigations,
followed by stringent customs procedures. This
represents a decline from the 108 new measures
introduced a year ago. Nonetheless, although the
pace of imposition of new restrictions dropped,
recent experience suggest that, once imposed it is
difficult to remove such restrictions, inevitably due
to the political constituencies that they build. For
instance, only 21 percent of new trade-restricting
measures introduced since October 2008 by G-20
countries have been removed, thereby leading to a
cumulative increase in the stock of trade
restrictions. Indeed on a net basis (i.e. accounting
from removal of restrictions), current existing
measures imposed by G-20 countries since
October 2008, is estimated to affect some 3.5
percent of global trade (as of October 2012), up
from 2.9 percent in May 2012.


The resurgence in announced bilateral and
regional trade agreements among high-
income countries could mitigate the
acceleration of developing country trade.

Notable among these are the US-EU free trade
agreement and the Trans Pacific Partnership (US
and nine other economies, including high-income
countries such as Japan, Australia, New Zealand,
Singapore and Chile). While bilateral and regional
preferential trade agreements have proliferated in
past decades, these new accords (if agreed to) are
much larger in scope. A trade agreement between
the US and the EU alone would be unprecedented
in size - accounting for some 40 percent of global
trade! Hence were the preferences included in a
potential deal between the US and the EU, not
extended to other developing countries within the
multilateral trading system this could disadvantage
developing countries.

A principle concern with agreements is the extent
to which non-participant third parties will be
affected by trade diversion, potentially leading to a
decline in global welfare, even if the agreement
benefits the parties to it. Given the size of high-
income countries, these potential trade-diverting
impacts from preferential trade agreements are
further magnified and developing countries are
likely to be the loosers from such an agreement,
were it to be trade-diverting. Hence, efforts to
clinch a multilateral deal (Doha Round) will over
the long-term maximize global welfare.




GLOBAL ECONOMIC PROSPECTS | June 2013 Trade Annex


76


Notes

1. The null hypothesis that developing country import volumes do not granger cause high-income export volumes is


rejected at 1 percent level, after 3 lags. Similarly the null hypothesis that high-income import volumes do not


granger cause developing country export volumes is rejected at 1 percent level, after 4 lags.








Aggarwal, A., (2008). Regional Economic Integration and FDI in South Asia—prospects and problems. Macroeconomics


Working Papers No. 22141, East Asian Bureau of Economic Research.


Al-Atrash, H. and T. Yousef (2000). Intra-Arab Trade: Is it too Little?, IMF Working Paper WP/00/10.


Buys, P., Deichman, U., Wheeler, D (2010). Road Network Upgrading and Overland Trade Expansion in Sub Saharan


Africa, Journal of African Economies, 19(3): 399-432.


Dennis, A (2006). The Impact of Regional Trade Agreements and Trade Facilitation in the Middle East and North Africa,


Policy Research Working Paper, World Bank.


Devlin, Julia and Peter Yee (2005). "Trade Logistics in Developing Countries: The Case of the Middle East and North


Africa". The World Economy, Vol. 28, No. 3, pp. 435-456, March 2005.


Kumar, R., and M. Singh (2009). India’s Role in South Asia Trade and Investment Integration.


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.


Zarrouk, J (2003). "A Survey of Barriers to Trade and Investment in Arab Countries", in Gala, A. and B. Hoekman (eds),


Arab Economic Integration., Brookings Institution Press, Washington DC.


References




GLOBAL ECONOMIC PROSPECTS | June 2013 Exchange Rates Annex








EXCHANGE


RATES


GLOBAL


ECONOMIC


PROSPECTS Annex June 2013




GLOBAL ECONOMIC PROSPECTS | June 2013 Exchange Rates Annex




79


Recent developments




Real exchange rates in high income
countries since mid-2012 have been
driven mainly by accommodative
monetary policies

Policy measures in high income countries
designed to restore financial market
confidence and support economic growth
have played a significant role in movements
of trade-weighted real effective exchange
rates (REER) of both high income and
developing countries in recent months.FN1
Among the major high income currencies, the
Japanese yen depreciated by a steep 21
percent in real effective terms between
September 2012 and April 2013 (figure
ExR.1). This depreciation came about as
markets reacted to initial announcements of
macroeconomic policy changes to raise
inflationary expectations and support Japan’s
growth. These announcements were followed
up by the introduction of an explicit 2
percent inflation target in January 2013, and
by a commitment in early April to aggressive
monetary easing—including near-zero interest
rates and an asset purchase program that
would double Japan’s monetary base by the
end of two years—in pursuit of that target.
Although Japan’s expansionary policies were
undertaken primarily for domestic goals, they


have contributed to the abovementioned
sharp depreciation of its currency. Some
possible implications of the large yen
depreciation are discussed in box ExR.1.

The appreciation of the euro in trade-
weighted real effective terms since mid-2012
(discussed in the January 2013 edition of the
Global Economic Prospects report) continued into
the first half of 2013, partly because of the
Japanese depreciation and partly because
financial market tensions remained subdued.
By February 2013, the euro had appreciated 9
percent in REER terms from its trough in
July 2012.FN2 Since February, the continued
economic weakness in the Euro Area and
uncertainties surrounding Italian elections
(February) and Cyprus’ banking sector
problems (March) tempered the euro’s earlier
appreciation, bringing the total rise since July
2012 to 7.1 percent in REER terms by April
2013.

Despite these large fluctuations, the US dollar
has remained broadly stable in real-effective
terms — holding approximately the same
level in April as in July 2012. In between
times, it first depreciated during the second
half of 2012, and then rebounded in early
2013 as the yen declined. Since January, the
US dollar is up by 2.5 percent in real effective
terms.


But recent swings in G3 currencies mask
important medium term trends

Notwithstanding its steep depreciation since
September 2012, the yen was only 2.3 percent
lower in REER terms in April compared with
its level in mid-2008 prior to the global
financial crisis. And despite its strong
appreciation since mid-2012, the euro is 12.7
percent lower (REER terms) than its pre-
financial crisis level. By contrast, the US
dollar has appreciated 3.1 percent in REER
terms since mid-2008. In addition to the
effect of the recent yen depreciation, the
relative strength of the dollar over the longer
period partly reflects the status of the US
dollar as a “safe haven” during times of
market turmoil and heightened risk aversion,
when investors sought the safety of US
government bonds and other financial assets.




Depreciation of the yen and appreciation of


euro in trade-weighted real effective (REER)


terms since mid-2012


Source: World Bank; IFS; JP Morgan.


Fig ExR.1


75


80


85


90


95


100


105


110


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


Japan United States Euro Area


Real effective exchange rate (January 2011 = 100)




GLOBAL ECONOMIC PROSPECTS | June 2013 Exchange Rates Annex




80


Box ExR.1




Yen depreciation: Some implications




The yen weakened to a four-year low of 103 against the US dollar in May 2013, depreciating 25 percent from its


level in September 2012, mainly in response to announcements of expansionary monetary policies. In trade -


weighted real effective (REER) terms, the yen depreciated 21 percent between September and April. Together


with gradually strengthening global demand, the weaker yen appears to have halted an earlier slide in Japan’s


exports (Japanese exports fell by 24 percent in US dollar terms between June 2012 and January 2013 due to


weak global growth and a territorial dispute with China, its largest trade partner). Between January and April,


Japanese exports rose 9.5 percent in US dollar terms, while imports contracted 5.8 percent. Japanese GDP


accelerated to a 4.1 percent annualized pace in Q1 2013, from 1.2 percent in Q4 2012. Sentiment improved


among Japanese automobile manufacturers in the first quarter, in part due to improved prospects for exports.




The above trends are broadly consistent with empirical studies which find that large real exchange rate


depreciations tend to stimulate exports, and in turn, economic growth (see, for instance, Hausmann, Pritchett


and Rodrik (2005) and Freund and Pierola (2012) for cross-country evidence, and Thorbecke and Kato (2012)


for evidence from Japanese consumption exports). Conversely, Kappler et al. (2012) using a cross -country


dataset find that large exchange rate appreciations result in a reduction in real exports and a deterioration of


current account balances.




The implications of the large yen depreciation for Japan's trade -partner countries need to be considered with


some caveats. The unprecedented monetary easing in the current episode together with fiscal stimulus may


raise Japan’s aggregate demand substantially. As income elasticities are typically larger than price sensitivities,


in this particular instance, developing -country exporters’ gains from increased import demand from Japan might


eventually outweigh the losses associated with the Yen’s (real) depreciation. The effect of the yen depreciation


on exports of trade partner countries would also vary depending on the extent of their complementarities and


competition with Japanese exports in world markets. For instance, using industry -level data, Li, Liu and Song


(2010) find that Japan and China’s export structure tends to be complementary, while Japan and South Korea


compete in exports of technology-intensive products. The study found that a real depreciation of the yen had a


positive impact on China’s (relatively more labor -intensive) exports, but a negative impact on South Korea’s


(relatively more high tech and capital intensive) exports.FN3




Moreover, countries that import capital goods or intermediate products from Japan or those that are part of


Japanese firms’ regional production chains (e.g., Thailand, Philippines, India) could benefit from a weaker yen


through reduced costs of imported inputs. Outward investment flows resulting from Japanese monetary easing


may also benefit developing countries (see GEP Finance Annex). Larger and higher productivity firms in trade-


partner countries may be able to absorb some of the exchange rate changes in their markups, reducing the


sensitivity of their exports to exchange rate movements (see Berman, Martin and Mayer (2012) for evidence


from French firm-level data).




Over the longer term, however, the benefits for developing countries are contingent on Japan raising its longer -


term potential growth through structural and policy reforms. In the short -term, Japanese quantitative easing


could add to the looseness of global monetary condition, through lower global interest rates and potentially


strong and disruptive capital flows to developing countries, and could raise overheating pressures, particularly


in East Asian countries.




For Japan itself, studies suggest that competitiveness gains from REER depreciation may be temporary and


difficult to sustain over time, and may even introduce costly distortions in the real and financial sectors of the


economy (Haddad and Pancaro (2010)). Indeed, despite a rise in exports following depreciation episodes in the


past, Japan’s share in global trade has declined almost steadily during the last two decades, from over 9


percent in 1991 to 4.6 percent by 2012. Moreover, the eventual adjustment of prices of non -traded goods over


time implies that a shift in the monetary policy stance alone cannot be used to sustain a particular real


exchange rate that is misaligned with fundamentals (Eichengreen 2008). Overall, the evidence indicates that a


real exchange rate depreciation may provide a temporary boost to exports, but structural reforms that bring


about sustained improvements in productivity and reduce barriers to trade, investment and labor mobility are


likely to play a larger role in a longer-term growth strategy.


Box ExR.1




GLOBAL ECONOMIC PROSPECTS | June 2013 Exchange Rates Annex




81


Given the protracted debt crisis in the Euro
Area during this period and financial market
uncertainties, unconventional monetary
policies undertaken by the US Federal
Reserve in the form of several rounds of
quantitative easing may have possibly
prevented an even stronger appreciation of
the US dollar in REER terms compared with
its pre-financial crisis level.FN4


The trend appreciation of developing
country currencies has picked up
pace since mid-2012



Together with easing of financial market
tensions since mid-2012 and the large yen
depreciation, the appreciation of developing
country currencies picked pace in the second
half of 2012 and early 2013. The GDP-
weighted average of trade-weighted real
effective exchange rates (REER) for
developing countries rose by 4.7 percent
between September 2012 and April 2013—a
significantly faster pace compared with the
almost flat trend (0.7 percent annual
appreciation) during the previous 24 months
(figure ExR.2). The steep appreciation during
this recent 7-month period was also faster
than the 5.4 percent annual REER
appreciation of developing-country currencies
observed prior to the financial crisis, between
January 2005 and August 2008. The earlier
strong appreciation had occurred during a
boom in international commodity prices,
sustained inflows of foreign capital into
developing countries, and a faster pace of
growth and higher rate of productivity
increases in developing countries compared
with high income countries (see Global
Economic Prospects July 2012 edition). And
prior to that, the average REER for
developing-country currencies was broadly
unchanged in 2004 compared with its level in
1995.

Notwithstanding the overall REER
appreciation in the group of developing
countries since the second half of 2012, there
was significant variation in the magnitude of,
and factors contributing to, currency
movements in individual countries. The


internationally-traded currencies of typically
middle-income emerging market economies
were influenced by: movements in high
income currencies (in particular, the large yen
depreciation); a rebound in private capital
inflows to developing countries; elevated
international commodity prices; strengthening
economic activity and exports in the group of
developing countries; and country-specific
differences in policies and performance.

The 21 percent REER depreciation of the yen
since September 2012 appears to have
resulted in significant appreciation pressures
in Japan’s trade partners, particularly among
countries in the East Asia region. Simulations
suggest that in the absence of the steep yen
depreciation, on average trade-weighted real
effective exchange rates in the East Asia and
Pacific region would have appreciated 3.7
percentage points less quickly during this
seven-month period (compared to the actual
6.1 percent appreciation), and the average
REER for the group of developing-countries
would have appreciated 1.7 percentage points
less than that observed.

In addition to the yen depreciation, a
rebound in private capital flows since the
third quarter of 2012 and elevated commodity
prices appear to have contributed to



A faster appreciation of developing-
country real effective exchange rates
(REERs) since mid-2012


Note: The four developing regions shown in the chart account for close
to 90 percent of GDP of developing countries. Sub-Saharan Africa
(SSA) and the Middle East and North Africa (MENA) regions are not
shown in the chart, but are included in the overall Developing Country
aggregate.
Source: World Bank; IFS; JP Morgan.


Fig ExR.2


90


100


110


120


130


140


150


Jan '06 Jan '08 Jan '10 Jan '12


Developing Countries


China


East Asia excl. China


Europe & Central Asia


Latin America & Caribbean


South Asia


Real effective exchange rates (January 2005=100)




GLOBAL ECONOMIC PROSPECTS | June 2013 Exchange Rates Annex




82


appreciation pressures in several emerging
market countries. Private capital flows to
countries in Europe and Central Asia, East
Asia and Pacific, and South Asia have risen
robustly since mid-2012 (see GEP Finance
Annex). Some studies suggest that surges in
capital inflows are likely to be associated with
appreciation of real effective exchange rates
of recipient countries (see Magud and Sosa
(2010) for developing countries, and
Jongwanich and Kohpaiboon (2013) for
emerging Asia). The average REER
appreciation of large emerging economies
appears to be positively related with a decline
in their sovereign credit default swap (CDS)
rates, an indicator of financial risk (figure
ExR.3).

International commodity prices strengthened in
early 2013 on an improving global outlook, but
have eased in more recent months following an
improvement in supply conditions (see GEP
Commodity Annex). Notwithstanding these shorter-
term movements, industrial commodity prices in
2012 and early 2013 were elevated compared to
both the immediate post-financial crisis period and
the period prior to 2007. Real effective exchange
rates of commodity exporters have typically moved
together with international commodity prices
(figure ExR.4). But they have diverged in the most
recent period, with real effective exchange rates
appreciating despite the recent easing of
commodity prices, suggesting that other factors


may be playing a role in buoying these currencies in
recent months.

Strengthening global trade since the third quarter
of 2012 and a recovery in developing-country
exports have also contributed to increased foreign
currency revenues in developing countries.
However, in a few countries, country-specific
factors seem to have been more significant
contributors to movements in real effective
exchange rates. The factors relevant for different
developing countries and regions are discussed
below.


Both yen devaluation and robust capital inflows
contributed to appreciation pressures in East
Asia

East Asian currencies faced significant appreciation
pressures from both the large depreciation of the
yen as well as from a surge in private capital
inflows since the second half of 2012. In inflation-
adjusted terms, between September 2012 and April
2013, bilateral real exchange rates of several
countries in East Asia appreciated 25-30 percent
relative to the Japanese yen, while Thailand’s
currency appreciated a larger 34 percent (figure
ExR.5).FN5

Because of the relatively large weight
(compared with other developing regions) of
Japan in their trade, the average GDP-



Real effective exchange rates in emerging
economies tend to appreciate with improvements
in financial market conditions, and vice-versa


Notes: GDP-weighted averages of CDS spreads and REERs for
Brazil, Chile, Colombia, Indonesia, Mexico, Malaysia, Peru, Russia,
Thailand and Turkey. China is excluded from the chart due its man-
aged exchange rate regime.
Source: World Bank; IFS; JP Morgan.


Fig ExR.3


0


100


200


300


400


500


600


90


100


110


120


130


Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13


REER of selected emerging markets excl. China (GDP-weighted avg.)


CDS spreads of selected emerging market countries excl. China [Right]



Industrial commodity prices and real
effective exchange rate of commodity
exporters tend to move together, except
in the most recent period


Source: World Bank; IFS; JP Morgan.


Fig ExR.4


60


80


100


120


140


160


180


200


100


110


120


130


140


150


Sep-08 Aug-09 Jul-10 Jun-11 May-12 Apr-13


REER of commodity exporters


Industrial commodities price index [Right]




GLOBAL ECONOMIC PROSPECTS | June 2013 Exchange Rates Annex




83


weighted REER for developing countries in
the East Asia & Pacific region has
appreciated strongly by 6.1 percent since
September 2012, versus 3.7 percent for other
developing regions. The Thai baht
appreciated 12.5 percent in REER terms in
this period—as strong capital inflows added
to upward pressures from the yen
depreciation—while currencies of China and
Indonesia appreciated 5.9 and 5.4 percent,
respectively. By contrast, the South Korean
won appreciated a smaller 3.9 percent in
REER terms, in part due to political tensions.


Currencies in Latin America & Caribbean
and Eastern Europe & Central Asia were
influenced by capital inflows and international
commodity prices


In the Latin America & Caribbean region, despite
an easing of commodity prices in recent months
(although prices remain elevated relative to recent
years—see GEP Commodity Annex), several Latin
American currencies have appreciated in REER
terms since early or mid-2012 (figure ExR.6).FN6
The Mexican peso rose 8.3 percent since
September 2012 together with an upturn in the
United States (Mexico’s largest trading partner) and
rising demand for Mexican exports, and strong
portfolio inflows into government bonds.

Chile’s currency has risen 6 percent in REER terms
since early 2012 as a result of robust commodity
revenues and private capital inflows. The Brazilian
real rose 7.4 percent in real effective terms since
September 2012—after depreciating 12 percent
during the previous 1½ years following imposition
of capital control measures. The financial
transactions tax (IOF) on foreign currency inflows
into Brazil’s domestic debt markets was reduced to
zero in early June 2013. The challenges that
developing-country policymakers face when
confronted with surges in capital inflows that result
in appreciation of real effective exchange rates, and
some of the measures that have been used to
alleviate their impacts are discussed in box ExR.2.



Real effective exchange rates in several emerging economies in Latin America & Caribbean and
Europe & Central Asia have appreciated in recent months, building on earlier upward trends


Source: World Bank; IFS; JP Morgan.


Fig ExR.6


80


90


100


110


120


130


Jan '08 Jan '10 Jan '12


Brazil Colombia Mexico Chile Peru


Real effective exchange rate (January 2008=100)


70


82


94


106


118


130


Jan '08 Jan '10 Jan '12


Russia Turkey Romania Bulgaria


Real effective exchange rate (January 2008=100)




East Asian currencies appreciated in real


effective (REER) terms since September 2012


Source: IFS, JP Morgan and World Bank.


Fig ExR.5


-10


0


10


20


30


40


-5


0


5


10


15


20


REER


Bilateral RER relative to US dollar


Bilateral RER relative to Yen [Right]


Percent appreciation September 2012-March 2013




GLOBAL ECONOMIC PROSPECTS | June 2013 Exchange Rates Annex




84




How should developing countries react to capital flows-induced real exchange rate appreciation?




The shifts in monetary policy stances in high income countries since the global financial crisis—although designed primarily to


support their domestic goals of reviving domestic growth and raising inflationary expectations, rather than facilitate depreciation


of their currencies or engage in “competitive devaluation”—have still raised concerns among developing country policymaker


about their unintended consequences in the form of surges in private capital flows, real exchange rate appreciation and possi-


ble loss of export competitiveness (Eichengreen (2013) and Kappler et al. (2012)). Recent research finds that the direct contri-


bution of quantitative easing measures in the United States on capital flows into emerging market economies was relatively


modest (see Fratzscher, Lo Duca, and Straub (2012) and Morgan (2011)). However, other studies suggest that the indirect


impact of the extended period of unconventional monetary policies in high income countries in terms of reducing global risk


aversion and lowering the cost of capital, together with stronger economic performance of emerging economies, may have


been important factors behind surges in capital flows into developing countries in recent years (see, for instance, Ghosh et al.


(2012) and Forbes and Warnock (2012)). Cross-country and country-specific studies indicate that these inflows have often


been associated with appreciation of real effective exchange rates in recipient countries (see, for instance, Magud and Sosa


(2010), Combes, Kinda and Plane (2011), Jongwanich and Kohpaiboon (2013), and Ibarra (2011)).




The interrelated goals of maintaining exchange rate and financial stability and open capital accounts in a situation of unconven-


tional monetary policies in high income countries and abundant global liquidity complicates the task of developing country au-


thorities. For instance, lowering interest rates to discourage foreign inflows may exacerbate existing domestic credit and asset


price bubbles and cause overheating in certain sectors. But raising interest rates to curb credit growth can risk attracting even


more capital inflows and further appreciate the exchange rate (which, in turn, can attract even more short-term speculative in-


flows)—with potentially destabilizing consequences for sovereign and firm balance sheets if these flows were to reverse sud-


denly. Moreover, for countries that have relatively less flexible exchange rate regimes, this lack of exchange rate flexibili ty can


create incentives for taking on foreign debt and thereby increase the share of foreign currency credit in overall credit (Magud,


Reinhart, and Vesperoni (2012)). The “impossible trinity” of not being able to achieve all three policy objectives of exchange


rate stability, free capital mobility, and an independent monetary policy - and a fourth related objective of financial stability - has


sometimes been cited as a reason for developing countries to impose some form of controls on capital flows (see Eizenman


(2010)).




Emerging economies faced with disruptive short-term foreign capital inflows (“hot money”) have resorted to various measures


to correct the resulting temporary deviation of exchange rates from underlying fundamentals, and to alleviate the impact of the-


se flows on credit markets. These include direct foreign exchange interventions, interest rate policies, prudential regulations


(e.g., restrictions on banks’ borrowing from abroad, limits on domestic lending to certain sectors), and various forms of capital


controls—such as taxes and fees on capital inflows, minimum holding periods for government bonds, withholding taxes on capi-


tal gains, and minimum waiting periods to repatriate capital, among others (see Ostry et al. (2012)). Brazil’s earlier financial


transactions tax (IOF) on foreign currency inflows into domestic debt markets is a well-known example (This tax was reduced to


zero in early June). Earlier, Thailand had imposed withholding taxes on foreign holdings of government bonds in 2010, while


Indonesia had imposed a six-month holding period for central bank bonds and limits on short-term foreign borrowing by banks


in 2011 (IMF 2012). Peru’s central bank raised reserve requirements on dollar-denominated deposits several times in 2012 and


in the first half of 2013, citing the need to moderate inflows of foreign capital and control credit growth; and intervened in foreign


exchange markets in the first half of 2013 to stem appreciation of the sol. Turkey has also used prudential measures, including


allowing banks to hold part of their required reserves in foreign exchange, which can alleviate pressures from the foreign ex-


change market when capital inflows are strong. Colombia intervened periodically in foreign exchange markets during 2012 to


moderate the rise of its currency against the US dollar.




The evidence on the effectiveness of controls on volumes of capital flows is however mixed (Magud, Reinhart and Rogoff


(2011)), although these measures may alter the composition of inflows (Ostry et al. (2012)). Fratzscher (2012) finds that rather


than being motivated by capital flows volatility, capital controls have typically been associated with significantly undervalued


exchange rates, in addition to concerns about signs of overheating, such as high credit growth and rising inflation. Neverthe-


less, when faced with a surge of capital inflows that threaten to overwhelm domestic financial markets and result in asset pr ice


volatility and bubbles, credit booms, and real exchange rate appreciation, capital flow management (CFM) measures such as


temporary controls on foreign capital, domestic prudential measures, and interventions in foreign exchange markets may re-


duce exchange rate volatility and provide space for the domestic economy to adjust to the changed external circumstances


(IMF (2012)). But if these result in real exchange rates that are persistently out of line with underlying macroeconomic funda-


mentals in the medium-term, capital controls can cause distortions and suboptimal investment and production decisions across


tradable and non-tradable sectors, and impose unnecessary economic costs.




Box ExR.2




GLOBAL ECONOMIC PROSPECTS | June 2013 Exchange Rates Annex




85


Among developing countries in the Europe &
Central Asia region, the Russian ruble appreciated
3.8 percent in REER terms since September 2012
on the back of a surge in syndicated bank lending
and buoyant crude oil revenues (figure ExR.6).
Notwithstanding weakening GDP growth, the
Turkish lira rose 7.1 percent in REER terms in the
same period, partly reflecting robust capital inflows
and an improvement in its export performance, as
robust exports to the Middle East offset weakening
demand from the Euro Area. The Turkish lira has
exhibited one of the largest appreciation among
regional currencies, strengthening by 17 percent in
REER terms since January 2012, although it still
remains 3 percent below its level in early 2008 prior
to the global financial crisis. The Romanian leu
appreciated by a strong 10.4 percent in REER
terms between September 2012 and April 2013,
also reflecting robust inflows into local currency
bond markets (see GEP Finance Annex).

Commodity exporting developing countries in the
Europe & Central Asia region and in Latin
America & Caribbean typically have weaker trade
linkages with Japan compared to that of East Asian
countries, and were therefore less affected by the
yen depreciation.


Domestic developments played a more
significant role in South Africa and India



Some notable exceptions to the general
appreciation trend among developing countries
include countries with growth concerns, in
particular, South Africa and India (figure ExR.7).


Until recently, movements of the rand tended to
track closely South Africa’s terms of trade,
adjusting flexibly to international commodity price
movements (see Global Economic Prospects June 2012
edition), and in turn, facilitating internal economic
adjustment. This historical link appears to have
been broken in the most recent period, as the rand
weakened in REER terms in the second half of
2012 despite a rally in international commodity
prices. The rand’s performance was adversely
affected by mining sector tensions, a downgrade of
South Africa’s sovereign rating, and weak growth
in 2012; and by further weakening of activity in the
first quarter of 2013. The Indian rupee has also
been weak due to slower growth and a widening
current account deficit, but stabilized somewhat in
REER terms in the second half of 2012 and early
2013, mostly due to robust portfolio inflows after
announcement of a number of reforms, including
raising limits on foreign direct investment in the
retail, broadcasting and aviation sectors.


Current account balances of
developing countries deteriorated and
international reserves as a share of
imports have fallen

The weak global economy and decline in the pace
of expansion in international trade in 2012,
together with rebalancing of China towards
domestic sources of growth in recent years, have
sharply reduced the overall current account balance
of developing countries (figure ExR.8). Oil
exporters among developing countries gained from



Domestic factors played a role in weakening of
REERs in India and South Africa


Source: World Bank; IFS; JP Morgan.


Fig ExR.7


70


82


94


106


118


130


Jan '08 Jan '10 Jan '12


India South Africa


Real effective exchange rate (January 2008=100)



Combined current account surplus of devel-
oping countries has disappeared


Source: World Bank.


Fig ExR.8


-2


-1


0


1


2


3


4


5


-2


-1


0


1


2


3


4


5


2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012


Oil exporters (Developing)


China


Oil importers excl. China


All Developing


Current account balance as share of developing-country GDP (Percent)




GLOBAL ECONOMIC PROSPECTS | June 2013 Exchange Rates Annex




86


sustained high international oil prices during 2011-
2012 and in early 2013, although a modest 2.5
percent decline in crude prices is projected for the
whole year (see GEP Commodity Annex). By
contrast, robust domestic demand and high crude
oil prices in recent years (up until early 2013)
contributed to strains on oil importers’ trade and
current accounts balances.

At the same time, developing countries’ holdings
of international reserves have declined as a share
of imports since 2010 (figure ExR.9). Reserves
have fallen the most among oil importers in the
Middle East and North Africa region (a decline
equivalent to 3.5 months of imports) and in South
Asia (decline equivalent to 3.9 months of imports).
Reserves in Europe and Central Asia declined to
2.3 months of imports as regional trade and
investment was adversely affected by the weakness
in Western Europe. The decline in average reserve
coverage of imports in other regions is smaller: by
1 month in East Asia and Pacific excluding China,
and by 0.3 month in Sub-Saharan Africa. By
contrast, international reserves in months of
imports remained broadly stable in the Latin
America and Caribbean region in this period
(rising by 1 month of imports), mainly on the back


of strong commodity revenues and robust capital
inflows.

Notwithstanding declining import cover across
developing regions, reserves still stand well above
the critical 3 months of imports in the vast
majority of developing countries, with a few
exceptions. However, the number of developing
countries with reserves equivalent to less than 3
months of imports rose to 17 countries as of April
2013 from 11 in January 2010 (figure ExR.10). For
instance, in Egypt and Pakistan, international
reserves have fallen below 3 months of imports.

Smaller reserves relative to imports may increase
the risk of sudden depreciation of real exchange
rates due to shifts in investor sentiment or other
external shocks. It should be noted, however, that
reserves in months of import cover are a relatively
crude measure of reserve adequacy and may need
to be complemented with other measures that take
into account a country’s overall external financing
needs. Moreover, reserve adequacy depends,
among other factors, on the exchange rate regime:
countries with flexible exchange rates and without
the need to defend a particular exchange rate may
require a lower reserve coverage of imports.


Capital flow management measures and exchange rate restrictions should ideally be transparent, targeted, temporary and non


-discriminatory (IMF (2012)). For instance, prudential measures such as restrictions on bank lending to reduce overheating in


certain sectors may be preferable to direct capital controls that discriminate on the basis of residency. Macro-prudential


measures may, however, raise implementation issues and conflict with other domestic policy objectives. Moreover, for coun-


tries with weak financial systems and limited capacity to manage volatile capital flows, controls on short-term capital move-


ments may need to be part of their policy toolkit over the medium-term. Overall, such measures should not aim to maintain a


real exchange rate that is persistently out of line with underlying macroeconomic fundamentals, and not be seen as a substi-


tute for structural and labor market reforms that are needed for improving productivity and longer-term competitiveness.



Import cover has fallen across developing
regions except in Latin America & Caribbean


Source: World Bank; IFS; Datastream.


4


6


8


10


12


14


16


Jan '09 Jan '10 Jan '11 Jan '12 Jan '13


East Asia excl. China


Europe & Central Asia


Latin America & Caribbean


MENA Oil importers


South Asia


Sub-Saharan Africa


International reserves in months of imports


Fig ExR.9


Number of developing countries with reserves
less than 3 months of imports has risen


Source: World Bank; IFS; Datastream.


Fig ExR.10


0


5


10


15


20


25


30


35


40


Less than 3 3 to 6 6 to 8 8 to 10 10 to 12 12 or more


Jan. 2010


Apr. 2013 or MRV


Number of developing countries


International reserves in months of import cover




GLOBAL ECONOMIC PROSPECTS | June 2013 Exchange Rates Annex




87


Conclusions



The weaker current account and reserve position of
developing countries can imply increased vulnerability to
shifts in investor sentiment. The trade balances and
reserve positions of developing countries have
started to improve in line with a pickup in exports
and easing of international commodity prices. But
as discussed, these indicators remain significantly
weaker compared with the levels in 2010. Although
buoyant private capital flows have helped to
finance the larger current account deficits of the
group of developing countries excluding China and
crude oil exporters, they also render their balance
of payments and real exchange rates vulnerable to
sudden shifts in investor sentiment and reversal of
capital inflows. This can happen, for instance, in
response to domestic problems (e.g., weaker than
expected growth, recognition of asset price
bubbles); increased risk aversion resulting from
renewed fiscal and debt tensions in high income
countries; or from an unanticipated move towards
a tighter monetary policy stance in some high
income countries.

Increased coordination on policies affecting currencies can
help to mitigate the spillovers of domestic policies across
borders. Given that domestic policies of large
countries aimed at boosting their own growth can
have significant unintended spillovers on currencies
of other countries, greater international
coordination on policies that affect currencies may
prove mutually beneficial (Eichengreen (2013),
IMF (2012), Ostry, Ghosh and Korinek (2012),
Hoekman (2013); see also the G-7 Statement
(2013) and G-20 Communiqué (2013)). For
instance, coordination in monetary policies across
large economies can ensure that spillovers of
domestic policies on other countries and effects on
exchange rates are minimized (Basu (2013)).

Developing countries should try to adjust to persistent foreign
currency inflows and maintain real exchange rates that are
consistent with macroeconomic fundamentals. Maintaining
flexible market-determined exchange rates can
facilitate adjustment of the domestic economy to
changes in capital inflows, commodity revenues,
and other external shocks. However, in the shorter
term, as discussed earlier, developing countries
(including those with sound macroeconomic


fundamentals) may face destabilizing currency
pressures resulting from surges in capital inflows.
In specific circumstances, temporary controls on
capital flows and macro-prudential measures may
help in reducing exchange rate volatility caused by
external events (IMF 2012). But over the longer-
term, such controls can cause unnecessary
distortions and suboptimal investment and
production decisions, especially if they result in real
exchange rates that are persistently out of line with
underlying macroeconomic fundamentals.
Therefore, exchange rate policies and related
capital flow management measures should not be
seen as a substitute for structural and labor market
reforms, and investments in infrastructure and
human capital that are necessary to raise
productivity and growth over the longer term.





GLOBAL ECONOMIC PROSPECTS | June 2013 Exchange Rates Annex




88


Notes

1. Since the global financial crisis of 2008-09, central banks in the G3 economies (United States, Euro Area, and


Japan) have maintained a highly accommodative policy stance—reducing short-term policy interest rates to below 1


percent and implementing unconventional monetary policies, including large-scale financial asset purchases—in


order to restore financial market confidence and support economic growth (see GEP Finance and Inflation Annexes).


2. In late July 2012, the head of the European Central Bank Mario Draghi promised to stand behind the currency


union after financial market tensions intensified during mid-year. Subsequent measures taken by Euro Area


authorities to restore financial market confidence—including, among others, the Outright Monetary Transactions


bond purchase program announced in September 2012 and extension of Greek debt in November 2012—resulted


in an easing of financial market tensions and reduced the tail risk of exit of periphery countries from the Eurozone.


Despite fiscal contraction, accommodative monetary policies in general appear to have contributed to increased


market confidence in the ability of the Euro Area currency union to weather negative shocks (see GEP Finance


Annex for more details).


3. The extent of complementarity, however, may have declined since the 1997-2004 period covered by the study as


China has moved towards production of higher value-added products in recent years. See also Auboin and Ruta


(2013) on other studies on the relationship between exchange rates and trade.


4. The US Federal Reserve has undertaken three rounds of quantitative easing (QE) since November 2008. Recent


research finds that the dollar weakened significantly in real trade-weighted terms following QE announcements


(Glick and Leduc 2013). An unanticipated QE announcement equivalent to a 1 percentage point reduction in


federal funds interest rate futures resulted in a 0.5 percentage point depreciation of the dollar in REER terms


following the announcement. Fratzscher, Lo Duca, and Straub (2012), however, find that QE1 and QE2 had


opposite effects on the US dollar. QE1 measures undertaken in the immediate aftermath of the global financial


crisis in late 2008 were associated with inflows into US financial assets, which, in turn, appreciated the US dollar.


But QE2 measures implemented from August 2010 onwards triggered a portfolio rebalancing from US financial


assets toward emerging market equities, resulting in a marked depreciation of the US dollar


5. South Korea, Singapore, and Hong Kong SAR, China which are part of geographic East Asia, are considered high


income countries according to the World Bank’s income classification, and are therefore not included in the East


Asia and Pacific (EAP) regional aggregates.


6. The evidence suggests that the effect of capital flows and commodity revenues on real effective exchange rates of


commodity-exporters tends to be larger in countries that are relatively more integrated with international financial


markets (see January 2013 edition of the Global Economic Prospects).











Aizenman, Joshua. 2010. “The Impossible Trinity (aka The Policy Trilemma)” The Encyclopedia of Financial Globalization.


Working Papers, UC Santa Cruz Economics Department, No. 666.




Auboin, Marc, and Ruta, Michele. 2013. “The Relationship between Exchange Rates and Trade: A Review of the


Literature.” forthcoming, World Trade Review.




Basu, Kaushik. 2013. “Monetary Policy Now Needs Global Teamwork”. Op-Ed, The Age (Australia), April 26th.






References




GLOBAL ECONOMIC PROSPECTS | June 2013 Exchange Rates Annex




89


Berman, Nicolas, Philippe Martin and Thierry Mayer. 2012. “How Do Different Exporters React to Exchange Rate


Changes?” Quarterly Journal of Economics, vol. 127, pp. 437-492.




Bernanke, Ben S. 2013. “Monetary Policy and the Global Economy.” Speech at the Department of Economics and


STICERD, London School of Economics, on March 25.




Chen, Qianying, Andrew Filardo, Dong He, and Feng Zhu. 2011. “International Spillovers of Central Bank Balance Sheet


Policies.” Manuscript, Bank for International Settlements, November.




Combes, Jean-Louis, Patrick Plane, and Tidiane Kinda. 2011. “Capital Flows, Exchange Rate Flexibility, and the Real


Exchange Rate.” IMF Working Paper 11/9, Washington, DC: International Monetary Fund.




Eichengreen, Barry. 2008. “The Real Exchange Rate and Economic Growth.” Working Paper No. 4. Commission on


Growth and Development, Washington, DC: World Bank.




Eichengreen, Barry. 2013. “Currency War or International Policy Coordination?” Manuscript, University of California,


Berkeley.




Forbes, Kristin J., and Francis E. Warnock. 2012. “Capital Flow Waves: Surges, Stops, Flight, and Retrenchment.”


Journal of International Economics, vol. 88, pp. 235-251.




Fratzscher, Marcel. 2012. “Capital Controls and Foreign Exchange Policy.” European Central Bank (ECB) Working Paper


No. 1415, February.




Fratzscher, Marcel, Marco Lo Duca, and Roland Straub. 2012. “A global monetary tsunami? On the spillovers of US


Quantitative Easing.” CEPR Discussion Paper No. 9195, October.




Freund, Caroline, and Martha D. Pierola. 2012. “Export Surges.” Journal of Development Economics, vol. 97, pp. 387-395.




G-7 Statement. 2013. “Statement by G7 Finance Ministers and Central Bank Governors”. G7/8 Finance Ministers Meeting.


February 12 (http://www.g8.utoronto.ca/finance/fm130212.htm).




G-20 Communiqué. 2013. “Communiqué: Meeting of Finance Ministers and Central Bank Governors”, Moscow, 15-16


February.




Ghosh, Atish R., Jun Kim, Mahvash S. Qureshi, and Juan Zalduendo. 2012. “Surges.” IMF Working Paper 12/22,


January, Washington, DC: International Monetary Fund.




Glick, Reuven and Sylvain Leduc. 2013. “Unconventional Monetary Policy and the Dollar.” FRBSF Economic Letter,


Federal Reserve Bank of San Francisco, April.




Haddad, Mona, and Cosimo Pancaro. 2010. “Can Real Exchange Rate Undervaluation Boost Exports and Growth in


Developing Countries? Yes, But Not for Long.” Economic Premise 20, June, Washington, DC: World Bank




Hausmann, Ricardo, Lant Pritchett, and Dani Rodrik. 2005. "Growth Accelerations," Journal of Economic Growth, vol. 10


(4), pp. 303-332.




Hoekman, Bernard. 2013. “Global Governance of International Competitiveness Spillovers.” Manuscript, Global


Governance Programme, European University Institute, CEPR and ERF, February.




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2080-2090.





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IMF 2012. “The Liberalization and Management of Capital Flows: An Institutional View.” IMF Staff Paper, November,


Washington, DC: International Monetary Fund.




Jongwanich, Juthathip, and Archanun Kohpaiboon. 2013. “Capital flows and Real Exchange Rates in Emerging Asian


Countries.” Journal of Asian Economics, vol. 24, pp. 138–146.


Kappler, Marcus, Helmut Reisen, Moritz Schularick, and Edouard Turkisch. 2012. “The Macroeconomic Effects of


Large Exchange Rate Appreciations.” Open Economies Review. June.




Li, Muqun, Wei Liu, and Shunfen Song. 2010. “Export Relationships among China, Japan, and South Korea.” Review of


Development Economics, vol. 43(3), pp. 547-562.




Magud, Nicolas, Carmen M. Reinhart, and Kenneth Rogoff. 2011. “Capital Controls: Myth and Reality-A Portfolio


Balance Approach.” NBER Working Paper #16805, February, Cambridge, MA: National Bureau of Economic Research.




Magud, Nicolas, Carmen M. Reinhart, and Esteban Vesperoni. 2012. “Capital Inflows, Exchange Rate Flexibility, and


Credit Booms.” IMF Working Paper 12/41, February, Washington, DC: International Monetary Fund.




Magud, Nicolas, and Sebastian Sosa. 2010. “When and Why Worry About Real Exchange Rate Appreciation.” IMF


Working Paper 10/271, December, Washington, DC: International Monetary Fund.




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Manila: Asian Development Bank.




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Stability Risks from Capital Flows.” Journal of International Economics, vol. 88, pp. 407-421.




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GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex






COMMODITY


MARKETS


GLOBAL


ECONOMIC


PROSPECTS Annex June 2013




GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex


93


Overview


After strengthening in early 2013 due to improved
economic outlook, most industrial commodity pric-
es retreated below their end-2012 levels (figure
COMM.1). Food prices have been declining as
well, mainly a reflection of improved supply condi-
tions (figure COMM.2). The price of crude oil
(World Bank average) dropped to US$ 99/bbl in
April, 8 percent below its February peak. The metal
price index is down 13 percent since its February
2013 peak. Precious metals are down as well, 15
percent since February and more than 25 percent
since the all time high of August 2011.

In the baseline scenario, which assumes no
major macroeconomic shocks or supply dis-
ruptions, oil prices are expected to average
US$ 102/bbl in 2013, down from US$ 105/
bbl in 2012 (table COMM.1). Agricultural
prices are projected to decline almost 6 per-
cent in 2013 (food, beverages, and raw mate-
rials down by 5.5, 8.9, and 5.8 percent, re-
spectively), under the assumption of average
crops. Metal prices will to decline marginally (a lit-
tle more than 1 percent) and therefore will remain
17 percent lower than their 2011 average. Fertilizer
prices are expected to decline more than 7 percent,
mainly reflecting low natural gas prices in the Unit-
ed States. Precious metals prices are expected to
decline more than 10 percent as institutional inves-
tors are increasingly considering them less attrac-
tive “safe haven” alternatives, which comes on top
of weak physical demand.


There are a number of risks to the baseline
forecasts. Downside risks include weak oil
demand if growth prospects deteriorate
sharply, especially in emerging economies
where most of the demand growth is taking
place. Over the longer term, oil demand
could be dampened further if the substitution
between crude oil and other types of energy
accelerates. On the upside, a major oil supply
disruption due to political turmoil in the Mid-
dle-East could result in prices spiking by $50
or more. The severity of the outcome would
depend on numerous factors, including the
severity and duration of the cutoff, policy
actions regarding emergency oil reserves, de-
mand curtailment, and OPEC’s response.

A key uncertainty in the outlook is how
OPEC (notably, Saudi Arabia) reacts to
changing global demand and non-OPEC sup-
ply conditions. Since 2004 when crude oil
prices started rising, OPEC has responded to
subsequent price weakness by cutting supply,
but has not been as willing to intervene when
prices increase. However, as non-OPEC sup-
plies continue to come on stream and demand
moderates in response to higher prices, the
sustainability of this approach may come un-
der pressure.

OPEC’s spare capacity has averaged 4.6 mb/d dur-
ing the first four months of 2013, almost 30 per-
cent higher than a year ago but only marginally
higher than average of the past decade—it had
dropped below 2 mb/d in the middle of 2008
when oil prices reached US$ 140/bbl. OECD in-




Commodity price indices


Source: World Bank.


Fig COMM .1


50


100


150


200


250


Jan '07 Jan '08 Jan '09 Jan '10 Jan '11 Jan '12 Jan '13


$US nominal, 2005=100


Energy, 2005=100, current$ (World (all countries))


Metals and minerals, 2005=100, current$ (World (all countries))Agriculture, 2005=100, current$ (World (all countries))


Energy


Metals


Agriculture


Energy


Metals


Agriculture




Food price indices


Source: World Bank.


Fig COMM.2


100


150


200


250


300


Jan '07 Jan '08 Jan '09 Jan '10 Jan '11 Jan '12 Jan '13


$US nominal, 2005=100


Edible Oils


Grains




GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex


94


ventories averaged 2.7 mbd during the first five
months of 2013, remarkably similar to the corre-
sponding period in 2012.

Price risks on raw materials, especially metals, de-
pend both on the speed at which new supply
comes on stream and on China’s growth prospects.
Metal prices have declined 30 percent since their
early 2011 highs, and by 8 percent between Febru-
ary and May 2013. The price weakness reflects both
moderate demand growth and strong supply re-
sponse, in turn a result of increased investments of
the past few years, induced by high prices. For
some metals, stocks have increased considerably as
well. For example, combined copper stocks at the
major metals exchanges are up 46 percent since
2012. Aluminum stocks, which have been rising
since end-2010, increased 8 during the past 12
months.

The prospects for the metal market depend im-
portantly on Chinese demand, as the country ac-
counts for almost 45 percent of global metal con-
sumption. However, if robust supply trends contin-
ue and weaker than anticipated demand growth
materializes, metal prices could follow a path con-
siderably lower than our baseline, with significant
consequences for metal exporters (see simulations
in main text).

In agricultural commodity markets, the key risk is
weather. According the global crop outlook assess-


ment released by the US Department of Agricul-
ture in May 2013, the global maize market will be
better supplied in the coming, 2013/14, season.
However, because stocks are still low by historical
standards, any adverse weather event could induce
sharp increases in maize prices—as it did in the
summer of 2012 when maize prices rallied almost
40 percent in less than two months. The wheat
market, which is currently better supplied than
maize, could also come under pressure either due
to a bad crop or in sympathy with higher maize
prices—as the crops are competing for the same
land. In contrast, price risks for rice are on the
downside, especially in view of the large public
stocks held by Thailand. Edible oil and oilseed
markets have limited upside price risks as well due
to well supplied oilseed (mostly soybeans in South
America) and edible oil (primarily palm oil in East
Asia) markets. Global supplies of the major 8 edi-
ble oils are expected to reach a record 155 million
tons this season, up from last season’s 152 million
tons. Global oilseed supplies will experience similar
growth.

Trade policy risks (similar to 2008 and 2010) ap-
pear to be low as evidenced by the virtual absence
of export restrictions since the summer of 2012,
despite sharp increases in grain prices. Finally,
growth in the production of biofuels is slowing as
policy makers increasingly realize that the environ-
mental and energy independence benefits from
biofuels are not as large as initially believed.



Nominal price indices-actual and forecasts (2005 = 100)


Source: World Bank.


Table COMM.1


2008 2009 2010 2011 2012 2013 2014 2011/12 2012/13 2013/14


Energy 182 114 145 188 187 183 181 -0.4 -2.1 -1.2


Non-Energy 182 142 174 210 190 181 179 -9.5 -4.7 -1.1


Metals 180 120 180 205 174 172 173 -15.3 -1.3 0.8


Agriculture 171 149 170 209 194 182 179 -7.2 -5.9 -1.8


Food 186 156 170 210 212 200 192 0.7 -5.5 -4.0


Grains 223 169 172 239 244 242 226 2.4 -1.0 -6.4


Fats and oils 209 165 184 223 230 209 202 3.3 -9.0 -3.2


Other food 124 131 148 168 158 150 147 -5.9 -5.0 -2.1


Beverages 152 157 182 208 166 151 153 -20.2 -8.9 0.8


Raw Materials 143 129 166 207 165 156 162 -20.0 -5.8 4.1


Fertilizers 399 204 187 267 259 241 229 -2.9 -7.1 -4.8


Precious metals 197 212 272 372 378 338 328 1.7 -10.7 -3.0


Memorandum items


Crude oil ($/bbl) 97 62 79 104 105 102 101 1.0 -2.5 -1.3


Gold ($/toz) 872 973 1,225 1,569 1,670 1,500 1,450 6.4 -10.2 -3.3


ACTUAL FORECAST CHANGE (%)




GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex


95


Crude oil


Oil prices have fluctuated within a remarkably tight
band around US$ 105/bbl (figure COMM.3) over
the past 18 months. Fluctuations have been driven
mainly by the geopolitical concerns in the Middle
East on the supply side and European debt issues
along with changing developing-country growth
prospects on the demand side. Price increases earli-
er in 2013 reflected some geopolitical tensions in
the Middle East and improving global outlook pro-
spects. However, as supply conditions improved
and market concerns over the Euro Area eased
once again, crude prices began weakening. And
they are now 5 percent lower than at the beginning
of the year.


Recent Developments



Large supplies of Canadian crude oil (especially
from tar sands) to the United States, combined
with rapidly rising U.S. shale liquids production
have contributed to a build-up of stocks at a time
when U.S. oil consumption is dropping and natural
gas supplies are increasing rapidly.

Although the price of Brent crude (the internation-
al marker) topped US$ 117/bbl in February, West
Texas Intermediate (WTI, the U.S. mid-continent
price) averaged US$ 21/bbl less due to the large
built up of stocks at Cushing, Oklahoma, the deliv-
ery point of WTI. The Brent-WTI price differential
declined to less than 10 percent in May, nine per-


centage points lower compared to the January 2011
-May 2013 average of 17.7 percent and the lowest
since January 2011 (figure COMM. 4).

Downward pressures on mid-continental prices
have eased, partly in response to some 760 thou-
sand barrels a day in rail shipments in 2013Q1
from oil producing regions to refineries—an 8-fold
increase from 90,000 barrels per day in 2011Q1—
according to the June 2013 assessment by the As-
sociation of American Railroads. Downward pres-
sures on West-Texas crude will abate further when
the new pipelines to the U.S. Gulf become opera-
tional or reversal of existing pipelines that carry oil
from the East Coast to Mid-Continent U.S. are
completed—currently expected some time in late
2014 or early 2015.

The decline in non-OPEC output growth in
2011 appears to have reversed. Non-OPEC
producers added 0.7 mb/d to global supplies
in 2012 and an additional 0.5 mb/d in
2013Q1, mainly reflecting earlier large-scale
investments. In the United States horizontal
drilling and hydraulic fracturing have contrib-
uted almost 1.5 mb/d of crude oil production
during the two years since 2011Q1 (figure
COMM.5). Currently, the U.S. States of Texas
and North Dakota, where most of shale oil
production takes place account for almost 45
percent of total U.S. crude oil supplies, up
from 33 percent a year earlier. Indeed, the
IEA projects that global crude oil supply will
increase by 8.4 mb/d by 2018 up 5 percent
from the 91 mb/d in 2012. The increase
mainly reflects surging North American crude




Oil prices and OECD oil stocks


Source: World Bank; International Energy Agency (IEA).


Fig COMM.3


20


40


60


80


100


120


140


2500


2600


2700


2800


2900


Jan '07 Jan '08 Jan '09 Jan '10 Jan '11 Jan '12 Jan '13


$US per bbl million bbl


Oil Price, World Bank average (left axis)


OECD oil inventories (right axis)




Brent/WTI price differential


Source: World Bank.


Fig COMM.4


-5


0


5


10


15


20


25


30


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


percent


January 2011 to


May 2013 Average




GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex


96


output (2.3 mb/d from US “light tight oil”,
which includes production from shale, and
1.3 mb/d from Canada’s oil sands).

Although shale liquid (also referred to as tight oil)
and shale gas techniques have great potential to be
applied worldwide, there are public concerns re-
garding the ecological impacts of such technolo-
gies. In addition, several countries that are believed
to have similar reserves to those in the United
States may be slow to utilize that potential due to
difficulties in accessing drilling rights, poor regula-
tory frameworks, and limited “know-how” in ex-
ploring and developing the resources.

Oil production among OPEC member countries
averaged 36.9 mb/d in 2013Q1, down from previ-
ous quarter’s 37.2 mb/d. Yet, this is 10 mb/d high-
er than 2002Q2, the lowest of the Organization’s
recent history but still higher than the official 30
mb/d quota. Iraq—still outside OPEC’s quota—
has reached pre-war levels of production, currently
standing slightly over 3 mb/d. Libya’s oil output is
about 80 percent of pre-war levels of 1.4 mb/d.
Iran’s oil exports were 0.8 mb/d in April, a decline
of 60 percent since June 2011 when sanctions took
effect, and may tumble even further as new sanc-
tions take effect from July 2013.

The post-2010 net growth in OPEC oil production
reduced spare capacity among its member coun-
tries from to 6.3 mb/d in 2009Q4 to 3.1 mb/d in
2012Q2, a 50 percent decline (figure COMM.6).
However, OPEC’s spare capacity reversed the
downward trend, standing at 4.6 mb/d during the
first 4 months of 2013, of which nearly two thirds
is in Saudi Arabia. The Saudi government has
promised to keep the global market well supplied
(and has the ability to do so), but also deems US$
100/bbl to be a fair price.

According to IEA, spare capacity in the global oil
market is expected to rise to more than 7 mb/d in
2014, almost three times higher than the 1.5-3.0
mb/d range between 2004 and 2008. It should then
begin to decline by 2016 as growth in the United
States will slow while demand growth remains firm.

World oil demand increased modestly, a little
more than 1 percent, or 0.9 mb/d in 2012
(figure COMM.7). Japan is the only OECD
economy for which crude oil consumption
increased (by 1 mb/d) in 2012. Most of that




World oil demand growth


Source: World Bank; IEA.


Fig COMM.7


-4


-2


0


2


4


2001
Q1


2002
Q1


2003
Q1


2004
Q1


2005
Q1


2006
Q1


2007
Q1


2008
Q1


2009
Q1


2010
Q1


2011
Q1


2012
Q1


2013
Q1


mb/d, year over year growth


OILDEMGRO_OECD


China Non-OECD, ex China




US crude oil production


Source: U.S. Energy Information Administration.


Fig COMM.5


0


1


2


3


4


5


Jan '07 Jan '08 Jan '09 Jan '10 Jan '11 Jan '12 Jan '13


mb/d


Other


Texas & N. Dakota




OPEC spare capacity


Source: IEA.


Fig COMM.6


0


2


4


6


8


Jan '07 Jan '08 Jan '09 Jan '10 Jan '11 Jan '12 Jan '13


mb/d




GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex


97


increase was to fill the loss of nuclear power
generation capacity as a result of the Tohoku
earthquake. Oil consumption among OECD
countries has fallen by almost 5 mb/d, or 10
percent, from its 2005 peak. Non-OECD de-
mand remains robust. In fact, non-OECD
economies are expected to consume more oil
than OECD economies during 2013Q2, for
the first time in history (44.5 mb/d the for-
mer versus 45 mb/d the latter). IEA expects
non-OECD demand to reach 54 percent of
global demand by 2018.


Outlook and Risks in the Oil Market

Nominal oil prices are expected to average
US$ 102/bbl during 2013 and decline to US$
101/bbl in 2014. Over the longer term, oil
prices are projected to fall in real terms, due
to growing supplies of conventional and
(especially) unconventional oil, efficiency
gains, and substitution away from oil (box
COMM.1 discusses the substitution possibili-
ties between oil and other types of energy).
The assumptions underpinning these projec-
tions reflect the upper-end cost of developing
additional oil capacity, notably from oil sands
in Canada, currently assessed by the industry
at about US$ 80/bbl in constant 2013 dollars.
While it is expected that OPEC will continue
to limit production to keep prices relatively
high, the Organization is also sensitive to let-
ting prices rise too high, for fear of inducing
innovations that would alter fundamentally
the long term path of oil prices.


World demand is expected to grow at less
than 1.5 percent annually over the projection
period, with all the growth coming from non-
OECD countries as has been the case in re-
cent years (figure COMM.8). Growth in oil
consumption among OECD countries is ex-
pected to continue to be subdued due to low
growth, and efficiency improvements in vehi-
cle transport induced by high prices—
including a gradual switch to hybrid, natural
gas and electrically powered transport. Pres-
sures to reduce emissions due to environmen-
tal concerns are expected to further dampen
oil growth demand at global level.

Growth in oil consumption in developing coun-
tries, on the other hand, is expected to remain rela-
tively strong in the near and medium term. In the
longer-term, however, it is expected to moderate as
the share of low-energy using services in these
economies grow, subsidies are phased out, and (as
noted above) other fuels become incorporated into
the energy mix.

On the supply side, non-OPEC oil produc-
tion is expected to continue its upward climb,
as high prices have prompted higher levels of
exploration (including deep water offshore
and shale liquids) and the implementation of
new extractive technologies to increase the
output from existing wells (figure COMM.9).
Significant production increases are expected
in Brazil, the Caspian, and West Africa, which
together with the United States and Canada
are likely to more than offset declines in ma-
ture areas such as the North Sea.




Crude oil consumption


Source: IEA.


Fig COMM.8


25


30


35


40


45


50


55


2003
Q1


2004
Q1


2005
Q1


2006
Q1


2007
Q1


2008
Q1


2009
Q1


2010
Q1


2011
Q1


2012
Q1


2013
Q1


mb/d


OECD


Non-OECD




Crude oil production


Source: IEA.


Fig COMM.9


25


30


35


40


45


50


55


Jan '01 Jan '03 Jan '05 Jan '07 Jan '09 Jan '11 Jan '13


mb/d


OECD
Non-OECD


OPEC


Non-OPEC




GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex


98




Until the mid-2000s, the prices of the world’s key natural
gas markets (U.S., Europe, and Japan) had been tied to
oil prices. Thus, in addition to moving in a synchronous
manner with each other and with oil, both natural gas and
oil were priced the similar levels in terms of energy con-
tent. In other words, natural gas and crude oil markets
were integrated—though due to administered pricing
mechanisms, not market forces. Coal, which has been
priced independently, was traded about one third the price
of oil, in energy equivalent terms (figure Box COMM. 1.1).

The energy price boom of the early 2000s changed all
that. First, it delinked U.S. natural gas prices from oil pric-
es and from European and Japanese natural gas prices.
Second, it generated a gap between WTI (the mid-
Continent US price) and Brent (the international marker).
Third, it linked US natural gas and coal prices. This box
elaborates on the reasons behind such changing patterns
and concludes the following. The WTI-Brent gap will close
soon, perhaps as early as 2014 or 2015 at the latest. The
coupling of U.S. natural gas and coal prices is likely to re-
main (and, perhaps, strengthen). Natural gas price con-
vergence will depend on various investment and policy
factors, thus it may take some time before it materializes.
Yet, the future relationship between natural gas and oil
prices is more complex to analyze. It will depend on
whether induced innovation takes place—something that
cannot be evaluated or projected.

Induced innovation in the extraction of natural gas through
fracking and horizontal drilling techniques (often referred
to as “unconventional” gas), primarily in the U.S. was fol-
lowed by supply increases in turn lowering US natural gas
prices. Low gas prices made it an attractive alternative to
some U.S. energy intensive industries, especially electrici-
ty generation, which are gradually switching from coal to
natural gas. Indeed, the US has experienced a marked re-
duction in coal use, 10.5 percent down from 2006-08 to
2009-11, when global consumption increased 9 percent.
As a result, beginning in 2009 US natural gas and coal
have been traded at similar price levels in energy equiva-


lent terms but they diverged from European natural gas
and Japanese liquefied natural gas (LNG) prices (figure
Box COMM 1.2).


Will natural gas prices converge? There are numerous
market (both demand and supply) and policy constraints,
the removal of which is likely to induce coupling of natural
gas prices in the longer term.


 Supply—Increased unconventional gas supplies
outside the U.S. Unconventional gas production has tak-
en place almost exclusively in the United States. Yet, un-
conventional natural gas reserves, are plentiful in many
regions, including North America, Latin America, and most
importantly Asia Pacific. Industry estimates show that
more than 40 percent of known global natural gas re-
serves recoverable at current prices and technology are
unconventional. Reasons for the slow technology adoption
include poor property rights, limited know-how, and envi-
ronmental concerns.


 Trade—Construction of LNG facilities and gas pipe-
lines. Currently, 31 percent of natural gas crosses interna-
tional borders—21 percent through pipelines and 10 per-
cent in LNG form (by comparison, nearly two thirds of
crude oil is traded internationally, 46 percent as oil and 20
percent as products.) As more LNG facilities come on
board and new gas pipelines are constructed, trade of nat-
ural gas will increase, thus exerting upward (downward)
price pressure in producing (consuming) regions. Never-
theless, it should be noted that regardless of how much
natural gas trade increases, LNG will be traded at much
higher prices than gas through pipelines because of the
high costs of liquefying and transporting.


 Demand—Relocation of energy intensive industries.
In addition to the substitution from coal to natural gas by
the energy intensive industries in the U.S., there is evi-
dence that industries are moving to the United States to
take advantage of the “natural gas dividend”, in a way re-
versing the long standing trend of U.S. industries moving
to Asia (and elsewhere) in response to the “labor cost divi-
dend.” Four energy-intensive industries that are taking (or


A Global Energy market? Box COMM.1


Box figure COMM. 1.2 Natural gas prices


Source: World Bank.


0


5


10


15


20


Jan '01 Jan '03 Jan '05 Jan '07 Jan '09 Jan '11 Jan '13


$US/mmbtu


Europe


Japan (LNG)


US


Europe


Japan (LNG)
US


Europe


Japan (LNG)


US


Box figure COMM. 1.1 Energy prices


Source: World Bank.


0


5


10


15


20


25


Jan '01 Jan '03 Jan '05 Jan '07 Jan '09 Jan '11 Jan '13


$US/mmbtu


Crude Oil


Coal


Natural Gas (US)




GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex


99


will take) advantage of lower energy prices in the U.S. are
paper, aluminum, steel, and chemicals, whose energy
costs as a share of total material costs ranges between 5
and 9 percent (the share for total US manufacturing is 3
percent, 4-5 times more energy intensive than agriculture,
see box COMM.3).


 Substitute product—Coal. More trade in coal is likely
to take place, thus further facilitating convergence of natu-
ral gas prices and also strengthening the convergence of
coal and natural gas prices, already underway. Indeed,
between 2005 and 2012 global coal exports almost tripled
(from 258 to 758 million tons) pushing coal traded as a
share of production to almost 15 percent. Furthermore, an-
ecdotal evidence points to even further increases. For ex-
ample, a recent article (“Tata Eyes Coal Assets Freed by
Global Fracking Boom”, Bloomberg, April 30, 2013) noted
that Tata Power, India’s second largest electricity produc-
er, is seeking coal supplies from the U.S., Colombia, and
Canada (they account for 13.9, 1.5, and 0.9 percent of
global coal production; China’s share is 50 percent).


 Policies—US energy exports, nuclear energy, prop-
erty rights. Three types of policies are expected to in-
crease trade in natural gas and, consequently, price con-
vergence. First, the U.S. is gradually removing re-
strictions on energy exports, most of which were intro-
duced after the oil crisis of the 1970s in response to ener-
gy security concerns. Second, several countries are re-
considering nuclear energy policies, especially after the
Tohoku accident; some plan not to replace aging nuclear
power units while others contemplate early decommission-
ing. Thus, nuclear power’s diminishing contribution to glob-
al energy consumption —which has already declined from
its 2001 peak of 6.4 percent to 4.9 percent in 2011—will
be substituted by coal, natural gas, and to a lesser extent
renewables (see table COMM 1.1 for historical and current
energy consumption shares). Third, countries with large
unconventional reserves are likely to introduce policies to
strengthen property rights, a key reason for not devel-
oping them.

Subsequent to the natural gas boom, fracking and hori-
zontal drilling were applied to the US oil sector, which, as
expected, induced similar supply response. These oil sup-


plies along with increasing crude inflows from Canadian oil
sands caused decoupling of WTI from Brent with the latter
being traded 18 percent above the former after January
2011 (figure Box COMM. 1.3). Historically (1983-2005),
WTI was traded with a 6 percent premium over Brent, be-
cause the mid-Continent US was a “deficit” region. Follow-
ing increased imports from Canadian oil sands during
2006-10, WTI and Brent were traded in par. After January
2011, however, Brent has been traded with a premium
over WTI following increased domestic shale oil supplies—
it averaged 18 percent between January 2011 and May
2013. The premium may persist for another two years, un-
til a new pipeline begins transferring surplus oil from Cush-
ing, Oklahoma to the US Gulf (some oil is currently moving
by truck and rail). The WTI discount is likely to stabilize
around 5 percent, (a mirror image of the pre-2006 premi-
um) when the market reaches equilibrium—oil supply in
the mid-Continent US exceeds demand and the surplus
moves to the Gulf at the lowest possible cost.

What about convergence of natural gas and oil prices?
Because more than half of global crude oil supplies go to
the transportation industry, the prospects of substitutability
between crude oil and other types of energy will depend
on the degree to which vehicles can switch from crude oil-
base fuels to natural gas or electricity. As discussed in the
January 2013 edition of Global Economic Prospects: Com-
modity Market Outlook (p. 7, box 1), contrary to natural
gas, crude oil products have convenient distribution net-
works and refueling stations that can be reached by cars
virtually everywhere in the world. Thus, in order for the
transport industry to utilize natural gas at a scale large
enough to make a dent in the crude oil market, innovations
must take place such that the distribution and refueling
costs of natural gas become comparable to those of crude
oil. The second alternative, electricity, has its own draw-
backs, namely, storage capacity and refueling time. Con-
sider that a truck with a net weight capacity of 40,000
pounds were to be powered by lithium-sulphur batteries
for a 500-mile range, the batteries would occupy almost 85
percent of the truck’s net capacity, leaving only 6,000
pounds of commercial space. Hence, as was the case in
natural gas, for large scale electricity use by vehicles, in-
novation in battery technology must take place.


Box figure COMM. 1.3 Brent and WTI prices


Source: World Bank.


20


40


60


80


100


120


140


Jan '07 Jan '08 Jan '09 Jan '10 Jan '11 Jan '12 Jan '13


$US per bbl


Brent


WTI


Box table COMM 1.1 Shares of global primary energy


consumption (percent)


Source: BP Statistical Review.
Note (1): “Other” includes biofuels, solar, wind, geothermal, and bio-
mass
Note (2): The shares were calculated in oil equivalent terms


Oil Gas Coal Nuclear Hydro Other


1965-69 42.6 16.8 34.7 0.2 5.6 0.0


1970-74 47.3 18.6 27.7 0.9 5.4 0.1


1975-79 46.5 18.9 27.0 2.1 5.5 0.1


1980-84 41.4 20.3 28.3 3.7 6.2 0.1


1985-89 39.0 21.2 28.2 5.3 6.1 0.2


1990-94 38.7 22.3 26.3 6.0 6.3 0.4


1995-99 38.4 22.9 25.5 6.2 6.5 0.5


2000-04 37.3 23.4 26.4 6.1 6.1 0.7


2005-09 34.7 23.4 29.0 5.4 6.3 1.1


2010-11 33.1 23.7 30.3 4.9 6.4 1.6




GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex


100


Metals


Following the post-2008 financial crisis collapse,
metal prices regained strength and increased almost
continuously to reach new highs in February 2011
when the World Bank price index reached 229
(2005 = 100), up 164 percent since its December
2008 low (figure COMM.10). This increase (along
with the sustained increases prior to the financial
crisis) generated large new investments inducing a
strong supply response.

Most of the additional metal supply went to meet
demand from China, whose consumption share of
world refined metals reached 44.2 percent at the
end of 2012, up from 42 percent in the previous
year (figure COMM.11). Metal prices, however,
have been weakening since 2011. This decline
along with the drop in energy prices and (an even
sharper) decline in precious metal prices has
prompted economists and analysts to argue that
that the so-called commodity super cycle may be
coming to an end (see box COMM.2 for a discus-
sion on super-cycle and how it relates to global
metals reserves).




Recent Developments


Aluminum demand increased by 6.8 percent in
2012 according to World Bureau of Metal Statistics
(WBMS), led for the second year by double digit
demand growth in China (15 percent) and a 7.5
percent increase in Indian demand. Consumption


contracted in European Union (7.7 percent) and
Brazil (5.2 percent) on the back of continued eco-
nomic weakness. Aluminum consumption contin-
ues to benefit from substitution away from copper,
mainly in the wiring and cable sectors (copper pric-
es are now more than four times higher than alumi-
num prices, whereas the two were similar prior to
the 2005 boom). Substitution is expected to contin-
ue for as long as the aluminum prices remain twice
as high as copper prices, according to industry analysts.

Aluminum supply was up marginally by 3.2 per-
cent, down from 7.5 percent growth in 2011. Out-
put was constrained by high energy costs, which
account for nearly 40 percent of total production
costs. Supply growth is coming from countries with
abundant (or, often, subsidized) energy, including
China (up 12 percent), United States (up 4.4 per-
cent), and United Arab Emirates (up 6.2 percent).
Nevertheless, aluminum production has declined
sharply in the European Union (down 19 percent)
on environmental pressures and adverse economic
developments, Canada (down 6.9 percent) due to
labor disputes. Brazil and Russia have experienced
marginal declines as well. Aluminum stocks at the
London and Shanghai exchanges (combined) are
up 8 percent for the year (end-May 2013/end-May
2012). Stocks have been rising for some time, and
are currently (May 2013) 20 percent higher than
their end-2010 levels. However, significant amount
of aluminum inventories are tied up in warehouse
financing deals and unavailable to the market.

Copper demand expanded by 4.7 percent in
2012, up from 1.4 percent the year before, accord-
ing to WMBS data with China’s apparent demand



Metal Prices


Source: World Bank.


Fig COMM.10


0


15


30


45


60


0


2


4


6


8


10


Jan '01 Jan '03 Jan '05 Jan '07 Jan '09 Jan '11 Jan '13


$'000/ton$'000/ton


Nickel (left axis)


Copper (right axis)


Aluminum (right axis)
Nickel (left axis)


Copper (right axis)


Aluminum (right axis)



Consumption of key metals


Source: World Bureau of Metal Statistics.


Fig COMM.11


0


10


20


30


40


50


1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012


millions tons


China


OECD


OtherChina
OECD


Other




GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex


101


increasing 11.7 percent, up from 7.2 in 2011. How-
ever, it is unclear how much of this demand in-
crease was due to stock build-up and how much
was actually consumed. Estimates of stock build-up
in Chinese bonded warehouses indicate an increase
of more than 160 percent in 2012 to some 850,000
tons. Elsewhere, demand for copper has recovered,
including Brazil (up 8.6 percent) after declining the
previous year, Mexico (up 20 percent), and the
United States (up 3.3 percent). Demand was espe-
cially weak in the European Union (down 7.7 per-
cent) and Japan (down 1.3 percent).

Supply of refined copper continued to expand at a
modest 2.9 percent pace in 2012, down from 3.2
percent increase in 2011. However, output of
mined copper rose 4.4 percent in 2012, up from 1.2
percent growth during 2009-2011. High copper
prices have induced a wave of new mines and ex-
pansions of existing ones that are expected to come
on-stream soon. For example, Escondida in Chile,
the world’s largest copper mine, is on track to in-
crease its production by 20 percent in 2013. Mined
copper output rose 7.1 percent in Africa in 2012,
with several mines coming on stream in Zambia
and the Democratic Republic of Congo. The Oyu
Tolgoi mine in Mongolia began production in 2013
and is expected to be one of the top five producing
copper mines in the World and increase that coun-
try’s production capacity four-fold. Copper stocks
at the London, New York and Shanghai exchanges
(combined) are up 95 percent in May 2013 com-
pared to the year ago.

Nickel demand expanded 6.1 percent in 2012,
down from 17 percent growth in 2011. The sharp-
est decline was in China, where apparent demand
rose 17.4 percent, versus 46 percent in 2011. China
now accounts for 40 percent of global stainless
steel production (a major source of nickel demand),
up from 4 percent a decade ago. Demand contract-
ed in most high income countries, including the
EU (down 8 percent) and Japan (down 8.3 percent)
and the US (down 6.2 percent).

Nickel supply grew by 13 percent in 2012, a second
year of double digit growth, slightly down from 16
percent growth in 2013. A wave of new nickel mine
capacity is likely to keep nickel prices close to mar-
ginal production costs. Several new projects will
soon ramp up production, including Australia, Bra-
zil, Madagascar, New Caledonia, and Papua New
Guinea. Another major global source of nickel is


Nickel Pig Iron (NPI) in China, which sources low-
grade nickel ore from Indonesia and the Philip-
pines. China’s production capacity may soon be
constrained, though, given that Indonesia has an-
nounced that it will develop its own NPI industry
and has introduced export quotas and may ban
nickel ore exports by end-2013. Nickel stock were
built up during 2012 as supplies exceeded the con-
sumption—LME stocks were 68 percent in May
2013 compared to a year ago.


Outlook and Risks in Metal Markets

Metal prices are expected to experience a modest
decline in 2013, which will come on the top of the
15 percent decline experienced last year. Aluminum
prices are expected to decline marginally in 2013
and following and upward trend thereafter in re-
sponse to rising power costs and the fact that cur-
rent prices have pushed some producers at or be-
low production costs. Nickel prices are expected to
decline 3 percent in 2013, and to follow 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 almost 7 percent in 2013 with more de-
clines in the subsequent years, mostly due to substi-
tution pressures and slowing demand. Over the
medium term, stainless steel demand is expected to
remain robust, growing by more than 6 percent
annually, mainly driven by high-grade consumer
applications, as emerging economies are increasing-
ly mimicking consumption patterns of high income
countries.

Most of the risks on metal prices are on the down-
side, especially weakening of China. As discussed in
the main text, if metal prices decline sharply (say,
20 percent over the course of next year, relative to
the baseline), while it will not have much of an im-
pact of global GDP, the decline will impact metal
exporting countries, especially Sub-Saharan African
metal exporters, whose GDP and fiscal balance
may decline as much as 0.7 and 1 percent, respec-
tively, compared to the baseline.





GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex


102


In 1990, the world consumed less than 43 million tons
metals. In 2012 it consumed 91 million tons. All this
growth was driven by China—in 1990 China accounted for
a mere 4 percent of global consumption; today it accounts
for almost 45 percent. In 1990, the world consumed 66
million barrels of oil per day (mb/d), 37 percent of which
was consumed by OECD economies. In 2012, it exceeded
90 mb/d, half of which is consumed by non-OECD econo-
mies. Despite these strong consumption growth patterns,
this box shows that the assumed resource depletion that
has occupied headlines often is less of an issue now than
it used to be. Nevertheless, problems exist, including envi-
ronmental concerns, concentration of resources, and the
high cost of extracting such resources.


Metal consumption by China during the past decade has
been so strong that it reversed the downward trend of
global metal intensity (that is, metal consumption per unit
of GDP), a turnaround that continues today. Thus, metal
intensity now is the same as it was the early 1970s—on
the contrary, food and energy intensities have continued
their long term downward trend. On the other hand, de-
spite the strong demand growth of oil by non-OECD econ-
omies, they still consume 2.6 barrels per year on a per
capita basis, as opposed to 13.7 by OECD economies.

The strong growth in consumption of industrial commodi-
ties by emerging economies along with the likelihood that
they will sustain high growth rates, inevitably raises the
issue of resource depletion. The issue of non-adequacy of
resources to sustain projected population and income
growth rates has been debated frequently, especially in
periods of high prices. Examples include the peak oil hy-
pothesis for crude oil reserves and the Club of Rome ar-
guments regarding food supplies (Meadows and others
1972).

Based on US Geological Survey data, figure COMM 2.1
reports global reserves for two ores (bauxite, iron ore),
five base metals (nickel, copper, zinc, lead, tin), and two
precious metals (gold, silver). The reserves are expressed


in terms of years of current production (the so-called re-
serves-to-production ratio, R/P), evaluated at two 2-year
periods (2000-01 and 2010-11) spanning the recent price
and consumption boom. (According to the U.S. Geological
Survey, reserves refer to the part of the reserve base
which could be economically extracted or produced at the
time of determination but does not imply that extraction
facilities are in place and operative).


Numerous stylized facts emerge from the analysis. First,
the R/P ratios for various metals paint a mixed picture
regarding resource scarcity. Specifically, the ratio in-
creased in three of the nine cases: nickel (from 43 to 46
years), copper (from 26 to 41), and silver (from 16 to 22).
It did not experience any appreciable change for gold and
zinc but declined marginally for lead (from 21 to 19 years).
Yet, three metals exhibited significant declines: Tin (from
34 to 19 years), iron ore (from 136 to 65 years), and baux-
ite (from 180 to 133). Second, the declines in the R/P
ratios reflect increased production, not declining reserves.
In fact, with the single exception of tin (whose reserves
declined nearly 40 percent during the 10-year period un-
der consideration) and gold (where reserves increased
only 4 percent), reserves increased between 16 percent
(bauxite) and 94 percent (copper). Third, the two largest
declines in the R/P ratio—iron ore, down by 71 years, and
bauxite, down by 47 years—took place in markets where
the respective metals are relatively abundant, hence less
of a need to invest in exploration and development activi-
ties. Thus, of the nine metals examined here, tin appears
to be the only reserve-constrained commodity.

What about energy? Figure COMM. 2.2 depicts R/P ratios
for natural gas and crude oil between 1980 and 2011. In
both markets the ratios have been increasing, a significant
3.1 percent per annum for crude oil and a marginal 0.4
percent for natural gas. In fact, the R/P ratio for crude oil
exceeded 54 years in 2011 for the first time. (According
to BP, “[reserves] are generally taken to be those quanti-
ties that geological and engineering information indicates
with reasonable certainty can be recovered in the future


Box Fig COMM 2.1 Global metal reserves


Source: US Geological Survey.


0 20 40 60 80 100 120 140 160 180


Lead


Tin


Gold


Zinc


Silver


Copper


Nickel


Iron Ore


Bauxite


Avg 2000-01


Avg 2010-11


Reserve-to-production ratio in years


Global reserves, demand growth, and the “super-cycle” hypothesis Box COMM.2


Box Fig COMM 2.2 Global oil and gas reserves



Source: BP Statistical Review.


20


30


40


50


60


70


1980 1986 1992 1998 2004 2010


years (reserves to production)


Crude Oil Reserves


Natural Gas Reserves




GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex


103


from known reservoirs under existing economic and oper-
ating conditions.”)


The increases of crude oil reserves during the 1980s is
due to additions by OPEC members. The 1999 uptick
reflects the addition of 120 billion barrels from Canada’s oil
sands (equivalent to 4 years of current global consump-
tion) while during the mid-2000s global reserves increased
due to Venezuela’s Orinoco Belt oil, currently estimated at
220 billion barrels (7 years of global consumption). The R/
P ratios for both crude oil and natural gas are likely to
increase enormously when the unconventional reserves
are added in the economically recoverable resource pool.
Indeed, industry experts have noted that when all global
recoverable reserves are considered, the world may have
as much as 2 centuries worth of natural gas, evaluated at
current consumption rates, prices, and technology.


While adequacy of reserves per se does not seem to be a
problem, at least in the foreseeable future, there are sev-
eral issues of concern, including environmental issues,
concentration of ownership, further demand strengthening,
and increasing extractions costs. First, by their very na-
ture, extraction of these resources may be associated with
environmental issues, such as contamination of ground
water resources or concerns that excessive fracking may
be linked to increasing frequency of earthquake activity.

Second, as we move forward, the reserves will become
more concentrated. For example, currently OPEC ac-
counts for more than 72 percent of oil reserves, nearly half
of which are located in Saudi Arabia and Venezuela. Natu-
ral gas reserves are concentrated as well, with the Rus-
sian Federation and Turkmenistan accounting for over one
third and Iran and Qatar accounting for nearly 28 percent.
(The Herfindahl concentration indices for crude oil and
natural gas reserves were 9.8 and 10.7 percent in 2011.)

Third, extracting these resources is becoming increasingly
costly. For example, the marginal cost of oil is currently
estimated at US$80/bbl for Canadian oil sands (this cost
forms the basis for the World Bank’s long term oil price
assumptions).




Last, a key issue on resource adequacy and prices will be
the strength of demand. The future of metal markets will
depend on the metal intensity of Chinese economy. Oil
consumption will depend on demand by emerging econo-
mies and whether their energy intensities emulate that of
high income countries. Consider, for example, that in per
capita terms, OECD countries consume 5 times more crude
oil than non-OECD countries or more strikingly, the U.S.
consumes 23 times more oil than India (figure COMM 2.3).

Many observers (see, for example, Heap 2005) looking at
the extremely robust demand for metals, and the rapidly
rising metals intensity of the Chinese economy, as well as
the strong oil demand by emerging economies, argued that
these commodities go through a super cycle where prices
are likely to stay high for an extended period of time. The
so-called “super cycle hypothesis” has been empirically
verified for a number of metals (Jerrett and Cuddington
2008). Super-cycles of this nature, especially for extractive
commodities, have taken place in the past rather infre-
quently (for example, during the industrial revolution in the
United Kingdom, and the westward expansion of the late
1800s/early 1900s in the United States). Erten and Ocampo
(2012) identified four such super cycles in real prices of
agriculture, metals, and crude oil during 1865-2009; the
length of the cycles ranged between 30-40 years with am-
plitudes 20-40 percent higher or lower than the long run
trend (similar estimates have been given by Cuddington
and Zellou (2013) for metals.) Furthermore, the mean of
each super-cycle was lower than for the previous cycle,
thus supporting the view that nominal prices of primary
commodities grow at a lower rate than nominal prices of
manufacturing commodities (Prebisch-Singer hypothesis).

Indeed, energy and metal prices (expressed as ratio to
manufacturing prices) experienced the largest and longest
boom since WWII (figure COMM 2.4). While most of the
conditions behind the post-2004 price boom are still in
place, there are signs that some conditions may be easing.
Perhaps, the 2008 and 2011 twin peaks of commodity pric-
es marked the beginning of the end of the current super
cycle. If so, the current super-cycle will be much shorter
than previous ones. But, it is too early to tell.


Box Fig COMM 2.3 Per capita oil consumption


Source: BP Statistical Review; UN; OECD; Eurostat.


0


5


10


15


20


25


World OECD US EU Non-
OECD


China India


Average 1965-66


Average 2010-11


barrels per person per year


Box Fig COMM 2.4 Commodity prices, MUV-deflated


Source: World Bank.


0


50


100


150


200


250


300


1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013


Agriculture


Energy


Index 2005=100, MUV deflated


Metals




GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex


104


Precious Metals



Following 18 months of relative stability, precious
metals prices declined sharply during 2013Q2—the
World Bank metal price index declined 20 percent
in the past 6 months (figure COMM.12). The de-
cline marked a reversal of eleven straight years of
increasing prices precious metal prices. The price
drop reflects changing perceptions of global risk,
given gold’s status as a “safe-haven” investment
asset. Holdings of gold by EFTs are down more
than 18 percent for the year. In contrast, holdings
of silver and platinum are up, 12 and 32 percent
respectively by end-May 2013.

High gold prices have attracted considerable invest-
ment in the gold mining industry, for both existing
and new mines. China has announced a new pro-
duction target of 450 tons per year by 2015, up
from 400 tons in 2012 when output grew12 per-
cent. Production in South Africa declined 13 per-
cent in 2012, in what might signal a long-term de-
cline as it was a fourth consecutive annual de-
cline—although it also reflected very serious labor
disputes in late 2012, which disrupted production
of both gold and platinum.

The precious metal index is expected to decline
almost 11 percent in 2013 (gold, silver, and plati-
num down by 10, 13, and 3 percent). Most risks are
on the downside due to supply improvements,
even as the pace of global recovery improves, in-
cluding easing of financial tensions in Europe.


Fertilizers



Fertilizers prices, a key input to the production of
most agricultural commodities especially grains and
oilseeds, experienced a 5-fold increase between
2003 and 2008, the largest increase among all key
commodity groups (figure COMM.13). In addition
to strong demand, the price hikes reflected increas-
es in energy prices, especially natural gas—some
fertilizers are made directly out of natural gas. In-
deed, fertilizer prices are now three time higher
than a decade ago, remarkably similar to the 3-forld
increase in energy prices.

Most recently fertilizer prices have been easing.
The World Bank’s fertilizer index declined 4 per-
cent in 2013Q1 after declining 3 percent in 2012.
The declines were more pronounced in potassium
and phosphate, each 8 percent down. Other types
of fertilizers changed only marginally. Weak de-
mand, especially by India and China has been the
key factor behind the weakness (demand by the US
and Latina America has been strong).

Fertilizer prices are expected to ease consid-
erably in the medium term; more than 7 per-
cent in 2013 and another 5 percent in the
next two years—primarily reflecting lower
production costs due to the projected moder-
ation of natural gas prices as well a number
of projects coming on-stream, especially in
the United Arab Emirates and the Former
Soviet Union, both important natural gas producers.




Precious metal prices


Source: World Bank.


Fig COMM.12


0


500


1000


1500


2000


2500


0


1000


2000


3000


4000


5000


Jan '01 Jan '03 Jan '05 Jan '07 Jan '09 Jan '11 Jan '13


$/troy oz ¢/troy oz


Nickel (left axis)


Copper (right axis)


Aluminum (right axis)


Gold (left axis)


Platinum (left axis)


Silver (right axis)
Gold (left axis)


Platinum (left axis)


Silver (right axis)




Fertilizer prices


Source: World Bank.


Fig COMM.13


0


200


400


600


800


1000


1200


1400


Jan '07 Jan '08 Jan '09 Jan '10 Jan '11 Jan '12 Jan '13


US$/mt


DAP


Urea


Potassium Chloride


DAP
Urea


Potassium Chloride


DAP


Urea


Potassium Chloride




GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex


105


Agriculture



With the exception of grains, most agricultur-
al prices have been declining almost continu-
ously since their early 2011 peaks (figure
COMM.14). Beverages and raw materials are
down 32 and 35 percent, respectively between
their February 2011 peaks and May 2013.
Non-grain food prices are down as well—
edible oils down 16 percent and other food
prices down 17 percent. Initially, grain prices
followed a similar (declining) path, but they re-
versed course sharply after the heat wave in sum-
mer of 2012 caused considerable damage in maize-
producing areas in the Midwestern United States,
while severe drought conditions in Eastern Europe
and Central Asia affected wheat production. The
World Bank food price index gained almost 11 per-
cent in just one month—from June to July 2012.
Since then supply conditions have improved con-
siderably across most food groups. For example,
both the edible oil and oilseed markets are well
supplied, with the global edible oil production ex-
pected to reach new record. Grain supplies are im-
proving as well. In its May 2013 assessment (the
first for next season’s crop), the U.S. Department
of Agriculture projected a marked improvement in
maize conditions for 2013/14, a comfortable wheat
crop, and a well-supplied rice market. In response
to this outlook most food prices have receded—
the food price index has lost most of its summer
2012 gains. Yet, upside risks exists, especially in maize, as
any adverse weather event to upset global markets.


Recent developments in agricultural
markets

Grain prices have been declining steadily since
the spike in the summer of 2012 as news for a bet-
ter supplied 2013/14 season were gradually emerg-
ing (figure COMM.15). Between July 2012 and May
2013, maize and wheat prices have declined 11
and 8 percent, respectively, partly eliminating the
gains during July and August of 2012. In its May
2013 update (the first for the 2013/14 crop sea-
son), the U.S. Department of Agriculture, placed its
global maize production assessment at 966 million
tons, up from 2012/13 season’s 857 million tons,
in turn increasing the stock-to-use ratio from 14.4
percent to 16.6 percent. Similarly, the global wheat
production assessment for 2013/14 stands at
slightly over 700 million tons, up from current sea-
son’s 655 million tons, inducing a marginal increas-
ing in the stock-to-use ratio as well.

After dropping below the US$ 600/ton mark in
November 2011, rice prices have fluctuated within
a very tight band around US$ 540/ton. They ex-
ceeded US$ 600/ton only twice: towards the end of
2011 when there were some reports of flood dam-
age to the Thai crop and last year when the Thai
government introduced its purchase program—a
public stock-holding mechanism. According to
U.S. Department of Agriculture’s May 2013 assess-
ment, global rice production is expected to reach
almost 480 million tons in 2013/14, 9 million tons
above the 2012/13 record. The stocks-to-use ratio
is expected to reach almost 27 percent, remarkably
similar to that of 2012/13 and well within historical




Agriculture price indices


Source: World Bank.


Fig COMM.14


100


140


180


220


260


Jan '07 Jan '08 Jan '09 Jan '10 Jan '11 Jan '12 Jan '13


2005=100


Food


Beverages


Raw materials


Food


Beverages


Raw materials




Wheat, maize and rice prices


Source: World Bank.


Fig COMM.15


200


400


600


800


1000


100


200


300


400


500


Jan '07 Jan '08 Jan '09 Jan '10 Jan '11 Jan '12 Jan '13


US$/mt US$/mt


Wheat (right axis)


Maize (right axis)


Rice (left axis)


Wheat (right axis)


Maize (right axis)


Rice (left axis)




GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex


106


norms. Trade in rice has improved as well reaching
a new record of 38.6 million tons during last calen-
dar year, aided in part by a surge in Chinese im-
ports (2.9 million in 2012, up from 0.5 million tons
a year earlier). And, early reports indicate that his
year may be another record for rice trade, perhaps
as high as 40 million tons.

Edible oil prices have declined almost 20 per-
cent since their summer 2012 peak, as measured by
the World Bank’s edible oil price index, effectively
eliminating all the gains during the first half of last
year. The decline reflects an improved South
American soybean crop as well as a better reas-
sessment of the U.S. soybean crop, for which yields
turned out to be higher than originally thought.
Palm oil supplies from Indonesia and Malaysia
have improved as well—these two countries ac-
count for 80 percent of global palm oil supplies.
Soybean prices have weakened as well during the
past 9 months, down almost 28 percent from their
September 2012 highs (figure COMM.16). The
extended soybean price spike during 2012 also re-
flects the overall tightness in the animal feed indus-
try. Soybean meal and white maize (the latter pro-
duced primarily in the United States) are close sub-
stitutes as they both are key inputs to the animal
industry.

Edible oils experienced the fastest production (and
consumption) growth rates of agricultural com-
modities during recent decades, and this is likely to
be the case for the future. Table COMM.2 reports
production growth rates for 8 commodities and
shows that in all four sub-periods since 1960, palm
oil and soybeans exhibited growth rates that are


two to three times higher than food commodities
as well as cotton (key raw material) and coffee,
whose growth is roughly aligned with population
growth. The main exception is maize, which during
2004-12 grew by an annual average of 3.7%, a re-
flection of biofuel demand. The four periods cap-
ture different price regimes, namely, increasing
commodity prices up to the first oil crisis (1960-
73), declining prices (1974-85), stable and low pric-
es (1986-2003), and high prices during the recent
boom (2004-12).

Edible oils are, perhaps, the only commodity group
whose income elasticity is high not only for low
and middle income countries but also for high in-
come countries. This reflects the fact that as in-
come increases, people tend to eat more in profes-
sional establishments and consume more pre-
packaged food items, both of which are utilizing
more edible oil than otherwise.

Beverage prices have declined as well. The
World Bank’s beverage price index (comprised of
coffee, cocoa, and tea) is down 32 percent since its
February 2011 record high. The earlier surge (and
recent decline) in beverages reflects mostly coffee
prices—specifically arabica—which reached a US$
6.00/kg during 2011, the highest nominal level ever
(figure COMM.17). The increase in arabica reflect-
ed a shortfall in Colombia production (the world’s
second arabica supplier after Brazil). However, as
Colombian production recovered partially, and cof-
fee companies began using more robusta in their
blends, arabica prices declined and they are now
traded at half their early 2011 highs. Global coffee
output reached 145 million bags in 2012, up from



Edible oil prices


Source: World Bank.


Fig COMM.16


400


600


800


1000


1200


1400


200


300


400


500


600


700


Jan '07 Jan '08 Jan '09 Jan '10 Jan '11 Jan '12 Jan '13


US$/ton US$/ton


Palm oil


Soybeans (right axis)




Production growth of key commodities


Source: U.S. Department of Agriculture.


Table COMM.2


1960-73 1974-85 1986-2003 2004-12


Maize 4.1% 3.9% 1.8% 3.7%


Rice 3.3% 2.9% 1.2% 2.0%


Wheat 3.9% 2.8% 0.8% 2.1%


Coffee 3.4% 2.2% 2.5% 1.8%


Cotton 2.7% 2.8% 1.4% 2.9%


Sugar 2.2% 2.6% 2.3% 1.9%


Palm oil 8.6% 10.1% 7.8% 6.8%


Soybeans 7.5% 6.8% 4.0% 4.7%




GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex


107


137 million bags in 2011. Furthermore, Brazil,
world’s top coffee supplier, is expected to have a
bumper crop in 2013/14 (April-March), currently
estimated at almost 47 million bags. Coffee sup-
plies from Vietnam (world’s largest robusta suppli-
er), Colombia, and Indonesia are also expected to
be large as well. After declining nearly 35 percent
during 2011, cocoa has been traded at around US$
2.35/kg. The weakness of cocoa prices reflects
partly weak demand in Europe, traditionally a key
consumer of cocoa for chocolate manufacturing.
Global cocoa production is expected to reach 3.96
million tons in 2012/13, down from last season’s
4.06 million tons. Declined by Central and South
America will offset increases by West Africa. Last,
sugar prices (not part of World Bank’s beverage
price index) have been weakening as well, down 22
percent since a year ago and 40 percent lower than
their 2011 peak. The sugar market is faced with a
large surplus. Global sugar production exceeded
182 million tons in 2012, up from 173 million tons
in 2011 while consumption in both years averaged
163 million tons. Good crops in both South Amer-
ica (especially Brazil) and Asia have contributed to
the surplus. Brazil, world’s top sugar supplier, in an
attempt to boost prices, announced a tax credit to
ethanol producers; yet, the announcement failed to
support prices.

Raw material prices have been relatively sta-
ble during the past two quarters after declining
sharply from their early 2011 peaks—down 35 per-
cent from February 2011 to August 2012 (figure
COMM.18). Cotton prices have found some
strength recently—they have gained 8 percent since
January 2013. The cotton market is well supplied


by historical standards; global production is ex-
pected to be 25.1 million tons in 2013/14, and con-
sumption at 24.3 million tons. An estimated 1 mil-
lion tons will be added to global stocks, pushing
the stocks-to-use ratio to 77 percent, the highest
since the end of World War II. Approximately 9
million tons of cotton have gone to the state re-
serves of China during the past two seasons, ex-
plaining the relative strength of cotton prices
(International Cotton Advisory Committee 2013).
Nevertheless, cotton prices increased the least dur-
ing the post-2004 commodity price boom—up 37
percent between 1997-2004 and 2005-12 as op-
posed to a 75 percent increase of the overall agri-
cultural price index—primarily because of the in-
crease in yields by China and India following the
adoption of biotechnology (Baffes 2011).

Natural rubber prices have been remarkably sta-
ble during the past two quarters, following their
sharp decline from their early 2011 peak (similar to
cotton). The decline in rubber prices reflected both
increased supplies and fears of demand deteriora-
tion, especially from China—most natural rubber
goes towards tire production, and China is the fast-
est-growing market for tires. Crude oil prices play a
key role in the price of natural rubber as well, be-
cause synthetic rubber, a close substitute to natural
rubber, is a crude oil by-product. Global natural
rubber production reached 11.3 million tons during
the 12-month period ending May 2013, 60 percent
of which is supplied by Thailand and Indonesia.
Almost 40 percent of global rubber consumption is
accounted by China, which has been growing at
more than 5 percent during the past few years.
That makes the longer term prospects of the rub-




Coffee prices


Source: World Bank.


Fig COMM.17


1


2


3


4


5


6


7


Jan '07 Jan '08 Jan '09 Jan '10 Jan '11 Jan '12 Jan '13


US$/kg


Robusta


Arabica




Raw material prices


Source: World Bank.


Fig COMM.18


1


2


3


4


5


6


7


Jan '07 Jan '08 Jan '09 Jan '10 Jan '11 Jan '12 Jan '13


US$/kg


Natural Rubber


Cotton




GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex


108


ber market sensitive to China’s growth outlook, as
is the case with most metals and mineral commodi-
ties. Timber prices have been remarkably stable as
well during the past two quarters. Initial expecta-
tion for a boom in timber demand (and prices) for
post-Tohoku earthquake reconstruction did not
materialize while global demand for timber prod-
ucts has weakened considerably.


Outlook and risks for agricultural
commodities

Agricultural prices are projected to decline 5.9 per-
cent in 2013 with most of the decline to be ac-
counted by beverages (–8.9 percent), followed by .
Raw material (-5.8 percent), and food commodities
(-5.5 percent). Within the food group, edible oils
are expected to decline the most (-9.0 percent),
followed by other food (-5.0 percent), and grains (-
1.0 percent). The largest declines among key food
commodities will be experienced by soybeans (-8.7
percent), palm oil (-13.9 percent), followed by oth-
er edible oils. Grains will change marginally (maize
and rice down by about 1 percent and wheat mar-
ginally up). The decline in beverages will be led by
arabica coffee (-18.5 percent) and less so cocoa (-
5.9 percent), while Malaysian longs and rubber will
account for most of the weakening in raw materials
(-11.2 and -9.7 percent, respectively). A number of
assumptions (along with associated risks) underpin
the outlook for agricultural commodities, namely,
crop conditions, energy prices, biofuels, macroeco-
nomic environment, and trade policies. A detailed
assessment of these risks is given below.

Crop conditions

It is assumed that crop production in the Southern
Hemisphere will not experience any adverse weath-
er conditions, and next season’s outlook will return
to normal trends. In its May 2013 outlook assess-
ment (the first for next season), the U.S. Depart-
ment of Agriculture estimated the 2013/14 crop
season’s global grain supplies (production plus
starting stocks) at 2.56 billion tons, up 5.7 percent
from 2012/13, thus replenishing most of the losses
due to the 2012 summer heat wave. If history is
any guide, when markets experience negative sup-
ply shocks similar to the 2012 drought, production
comes back within one (or, perhaps two) seasons
through resource shifting, as has been the case in
previous episodes (for example, maize in 2004/05,



Global Maize Supplies







Global Wheat Supplies






Global Rice Supplies





Source: US Department of Agriculture, May 2013 update.


Fig COMM.19a


0


8


16


24


32


40


500


600


700


800


900


1000


2000 2002 2004 2006 2008 2010 2012 2014


percent million t


Stocks-to-use Ratio (left axis)


Production (right axis)


Stocks-to-use Ratio (left axis) Production (right axis)


0


10


20


30


40


400


500


600


700


2000 2002 2004 2006 2008 2010 2012 2014


percent million t


Stocks-to-use (left axis)


Production (right axis)


Stocks-to-use (left axis) Production (right axis)


0


10


20


30


40


300


350


400


450


500


2000 2002 2004 2006 2008 2010 2012 2014


percent million t


Stocks-to-use (left axis)


Production (right axis)


Stocks-to-use (left axis) Production (right axis)


Fig COMM.19b


Fig COMM.19c




GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex


109


wheat in 2002/03, and rice in 2001/02, see figure
COMM.19a-c). However, it may take up to three
seasons before stocks are fully replenished—
subjecting the maize and (less so) wheat prices to
upside risks. As discussed earlier, the rice market is
well supplied also reflected in the remarkable stabil-
ity of rice prices.

Oil prices

The outlook assumes that in 2013 crude oil prices
will ease marginally and fertilizer prices will experi-
ence a 7 percent (both fertilizer and crude oil are
key inputs to agriculture, especially grains and
oilseeds). However, because of the energy intensive
nature of agriculture—the industry has been esti-
mated to be four to five times more energy inten-
sive than manufacturing—an energy price spike
could trigger proportional food price increases. The
energy price cross-price elasticity of agriculture
goods ranges from 0.2 to 0.3 (depending on the
commodity), implying that a 10 percent increase in
energy prices will induce a 2-3 percent increase in
agricultural prices.

Biofuels

Despite an only marginal increase in global
biofuel production in 2011 and 2012, the out-
look assumes biofuels will continue to play a
key role in the behavior of agricultural com-
modity markets. Currently, biofuels produc-
tion represents about the equivalent of 1.3
mbd crude oil production and are projected
to grow moderately over the projection period.


In the longer-term there is much uncertainty about
biofuel production. If biofuel production increases
at the rates suggested by some forecasts (more than
5 percent annually), as much as 10 percent of glob-
al land area allocated to grains and oilseeds could
be producing biofuel crops (evaluated at world av-
erage yields) within the next two decades. Such
assumptions are supported by the baselines of the
joint OECD/FAO Agricultural Outlook as well as the
IEA Energy Outlook, published in May 2013. How-
ever, policy makers are increasingly realizing that
the environmental and energy security benefits of
biofuels may not outweigh their costs, thus biofuels
policies are likely to ease. Indeed, biofuels grew
very little during the past two years with similar
expectation for this and next year (figure COMM.20).

Yet, the likely long-term impact of biofuels on
food prices is complex, as it goes far beyond land
diversion, subsidies, and mandates. The impact is
likely to depend more on the following factors: (i)
the level at which oil prices make biofuels profita-
ble and (ii) whether technological developments of
biofuel crops (or even new crops) could increase
the energy content of the respective plants, thus,
making them more attractive sources of energy.
Thus, high energy prices along with likely techno-
logical innovations could pose large upside risks for
agricultural prices in the longer term (box COMM
3 elaborates further on this issue).

Macroeconomic environment

The last assumption is associated with the risk of a
sharp reversal to the loose macroeconomic envi-
ronment, including low policy rates and quantita-




Biofuel production


Source: BP statistical Review of World Energy; OECD.


Fig COMM.20


0


0.2


0.4


0.6


0.8


1


1.2


1.4


1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012


mbd of oil equivalent




Commodity assets under management


Source: Barclay Hedge.


Fig COMM.21


0


50


100


150


200


250


300


350


2001
Q1


2002
Q1


2003
Q1


2004
Q1


2005
Q1


2006
Q1


2007
Q1


2008
Q1


2009
Q1


2010
Q1


2011
Q1


2012
Q1


US$ billion




GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex


110


tive easing. There are two channels through which
interest rates affect commodity prices—all com-
modities, not just agriculture. The first operates
through physical demand and supply: Low interest
rates may affect stock-holding behavior because of
the lower cost of capital, they may induce right-
ward shift in demand because of expansion in cur-
rent consumption, and they may increase invest-
ment lower borrowing costs and hence a rightward
shift of future supply. Thus, the effect of interest
rates can be either positive, negative, or, even zero,
depending on the relative elasticities. The interest
rate elasticity for food commodities appears to be
near-zero (see Baffes and Dennis (2013) for elastic-
ity estimates and a literature review). Research at
the World Bank (currently under way) shows
that the interest rate elasticity for metal pric-
es may be positive, implying that the shift of
supply schedule due to the lower cost of capi-
tal overwhelms shifts in demand (the impact
through stockholding is not as important in
metals and minerals).

The second channel operates through invest-
ment fund activity, the so-called financializa-
tion of commodities—a controversial and
hotly-debated topic. Investment fund activity
which has been increasing over the course of
the last ten years, exceeded US$ 330 billion
during 2012, according to BarclayHedge,
which tracks developments in the hedge fund
industry (figure COMM.21). Most of the
funds have been invested in energy and agri-
cultural commodity markets. The relationship
between investment fund activity and com-
modity prices is a highly debated topic. Some
have argued that these funds have sufficiently
large weight to unbalance the market, thus
impairing the price discovery mechanism.
Others have praised these investment vehi-
cles claiming that they inject liquidity in com-
modity markets. Despite some contrasting
views, the empirical evidence is, at best,
weak. While it is unlikely that these invest-
ments affect long term price trends, most
likely they have affected price variability.

Trade policies

Given the 2008 (and less so 2010) experience,
the outlook assumes that policy responses
will not upset agricultural markets, an as-
sumption that relies on markets remaining


well-supplied. If the baseline outlook materi-
alizes, policy actions are unlikely and, if they
take place, will be isolated with only limited
impact. For example, when the market condi-
tions for rice and cotton were tight (in 2008
and 2010, respectively), export bans induced
price spikes. However, last year’s Thai rice
purchase program and India’s export ban on
cotton did not have any discernable impact
on the respective prices. Interestingly, cotton
prices declined more the day after Indian ex-
port ban on cotton was announced (March
2012) than they gained the day of the an-
nouncement. In fact, there may be a down-
side price risk for rice if Thailand releases
some (or all) of the stocks it accumulated
through the purchase program, not an unlike-
ly scenario given that the costs of the pro-
gram account for as much as 1 percent of the
country’s total GDP (World Bank 2012).


Recent trends in domestic food prices



The discussion thus far has focused on price move-
ments in U.S. dollar terms. However, what matters
most to consumers is the price they pay for food in
their home countries. It is not uncommon for pric-
es paid by consumers in an individual country to
differ considerably from international prices, at
least in the short run. Reasons for this include ex-
change rate movements, trade policies intended to
insulate domestic markets, the long distance of domestic
trading centers from domestic markets (adding considera-
bly to marketing costs), quality differences, and differ-
ences in the composition of food baskets across
countries.

Table COMM.3 reports changes in domestic
wholesale prices of three commodities
(maize, wheat, and rice) for a set of low- and
middle-income countries—the selection of
countries was driven, in part, by data availa-
bility. These changes are compared to the
corresponding world price changes (reported
in the top row of each panel). The periods
chosen are 2013Q1 against 2012Q4
(capturing short run responses) and 2013Q1
against 2012Q1 (intended to capture longer
term effects). The table also reports price
changes between 2006-07 and 2011-12, effec-
tively capturing the entire food price boom
period.




GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex


111


World prices of all three grains changed little
between 2012Q4 and 2013Q1 (maize and
wheat down 3.8 and 9.6 percent, respectively
and rice up 0.7 percent); the US dollar did
not change much either. The corresponding
median domestic price changes were –0.6,
5.8, and 0.2 percent. Focusing at the variabil-
ity of price changes, however, a different pic-
ture emerges. The relative calm in world pric-
es was reflected in the domestic prices of
rice, less so in wheat, but not in maize where
5 countries experienced double digit increases
despite the moderate decline in world price.
A mixed picture emerges as well when
2013Q1 is compared to 2012Q1.

Again, the median domestic price increases
are somewhat similar to those of world pric-
es, but there is high variability around these
medians for maize and wheat (but not for
rice). For example, the world and the domes-
tic median price of maize increased 9.8 and
2.5 percent, respectively. Yet, six of the 17
countries in the sample experienced price de-
clines while seven countries experienced in-
creases exceeding 20 percent.

The last column reports price changes be-
tween 2006-07 and 2011-12, periods long
enough not be affected by the presence of
lags in any significant way. During these two
2-year periods, the world price of maize,
wheat, and rice went up by 107, 41, and 75
percent. Not surprisingly, all countries expe-
rienced large domestic price increases in all
three commodities, with corresponding medi-
an increases at 74, 66, and 48 percent. As was
the case with the shorter periods, there is
considerable variation across countries. For
example, rice prices increased by 130 percent
in East Africa (average of Tanzania and
Uganda) but only 44 percent in West Africa
(average of Niger, Mali, and Burkina Faso).

The tentative conclusion from this brief anal-
ysis is that in the short term, domestic prices
move, for the most part, independently of
world prices. A stronger link is present in the
longer term but large differences across coun-
tries are present, implying that domestic fac-
tors play a dominant and persistent role in
the food price determination process of local
markets.



Wholesale grain prices in (nominal
local currencies, percent changes)


Source: World Bank; FAO (http://www.fao.org/giews/pricetool/).


Table COMM.3


2013Q1/


2012Q4


2013Q1/


2012Q1


2006-07/


2011-12


World (US$) -3.8 9.8 106.7


Uganda 20.9 31.4 153.3


Nicaragua 18.6 20.6 73.8


Tanzania 17.7 46.6 130.9


Honduras 11.0 24.3 26.8


Mozambique 10.7 23.5 77.4


Dominican Republic 8.4 0.9 70.0


Bolivia 7.6 -6.9 49.3


Ukraine 4.7 23.1 131.9


Costa Rica -0.6 4.4 109.3


Thailand -0.8 1.2 42.6


Rwanda -1.3 10.4 68.4


El Salvador -3.7 -23.8 48.4


Panama -3.8 -9.5 94.4


Peru -4.0 -7.5 40.9


Guatemala -4.2 -8.1 51.9


Ethiopia -6.6 2.5 196.7


Kenya -15.4 -2.2 128.2


Median -0.6 2.5 73.8


World (US$) -9.6 15.3 40.8


Bolivia 9.9 -4.9 88.5


Sudan 8.9 31.5 132.1


India 7.8 38.3 34.3


Ukraine 5.8 30.9 124.4


Peru 2.6 2.6 25.3


El Salvador 2.5 70.5 43.6


Ethiopia -1.3 6.0 154.3


Bangladesh n/a 20.1 20.7


Median 5.8 25.5 66.0


World (US$) 0.7 3.6 75.2


Bangladesh 11.8 4.2 50.1


Tanzania 11.2 -1.1 120.9


Dominican Republic 7.2 1.5 19.5


Niger 6.7 -1.5 40.4


India 4.6 14.9 67.1


Guatemala 2.2 5.2 47.8


Panama 1.4 2.7 51.1


Uganda 1.2 -4.7 140.6


Mali 0.5 -5.8 35.2


Honduras 0.2 9.2 21.4


Burkina Faso 0.0 2.7 57.0


Nicaragua -0.3 6.7 68.7


Philippines -0.6 -2.6 39.5


Peru -0.7 -6.4 32.8


Thailand -1.8 4.9 47.4


Cambodia -1.9 0.0 74.1


El Salvador -3.6 -8.0 33.5


Bolivia -4.8 0.9 28.6


Rwanda -12.4 0.1 60.9


Median 0.2 0.9 47.8


Maize (17 countries)


Wheat (8 countries)


Rice (19 countries)




GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex


112


The interaction between food and energy commodities is
an important, complex, (sometimes) misunderstood, and
hotly debated subject. This box identifies some of the key
interaction channels between energy and food markets
(figure COMM 3.1). It argues that high energy prices may
affect food prices through four channels, namely, higher
cost of producing food, biofuel policies, profitable biofuels,
and increasing biofuel profitability through induced innova-
tion. The box concludes that, in the longer term, energy
could play an even more important role in the determina-
tion of food prices.

The Cost Link (A and B/C). The strong relationship be-
tween energy and non-energy prices was established long
before the post-2004 price boom. Gilbert (1989) estimated
transmission elasticity from energy to non-energy com-
modities of 0.12 and from energy to food commodities of
0.25. Hanson, Robinson, and Schluter (1993) based on a
General Equilibrium Model found a significant effect of oil
price changes to agricultural producer prices in the United
States. Borensztein and Reinhart (1994) estimated trans-
mission elasticity to non-energy commodities of 0.11. A
strong relationship between energy and non-energy prices
was found by Chaudhuri (2001) as well. Baffes (2007)
estimated transmission elasticities of 0.16 and 0.18 for
non-energy and food commodities, respectively. Moss,
Livanis, and Schmitz (2010) found that U.S. agriculture’s
energy demand is more sensitive to price changes than
any other input. Pindyck and Rotemberg (1990) concluded
that various unrelated primary commodity prices not only
co-move, but also co-moved in excess of what the macro-
economic fundamentals could explain. The strong ener-
food price link is also evidenced by the input-output values
of the GTAP database, which show that the direct energy
component of agriculture is four to five times higher than
manufacturing sectors (figure COMM 3.2).

The Policy-Driven Biofuel Link (D/F): In addition to be-
ing a key cost component, energy plays an important role
on the demand side through the diversion of some food
commodities to the production of biofuels. The role of bio-
fuels is not new. Kovarick (2012) identified four periods of


biofuel use. The first went up to the mid-19th century, when
the chief uses of biofuels were cooking and lighting. The
second period, the early 20th century, saw the expanded
use of biofuels in the internal combustion engines. The
third, covering the mid- to late-20th century, includes main-
ly the oil crises of the 1970s. The fourth period, the 21st
century, reflects environmental and energy independence
concerns. Indeed, biofuels constituted the largest demand
growth component of grains and oilseeds during the past
decade. Currently, they account for about 2-3 percent of
area allocated to grains and oilseed and represent the
equivalent of 1.2 million barrels of crude oil per day. Most
of biofuel production comes from maize-based ethanol in
the United States (48 percent share), followed by sugar-
cane-based ethanol from Brazil (22 percent), and edible oil
-based biodiesel in Europe (17 percent). Numerous stud-
ies have examined the impact of biofuels on food prices,
and give a wide range of estimates. Mitchell (2008) found
that the expansion of biofuels and the policy reactions that
higher prices induced, were responsible for almost three
quarters of the food price increases during 2000-08. Gil-
bert (2010) finds that at most one-quarter to one third of
the rise in food prices over 2006–2008 can be directly
attributed to biofuels. Roberts and Schlenker (2010) con-
clude that U.S. biofuel mandates increase maize prices
roughly 20 percent.

More recently, the impact of biofuels on food prices has
been studied through the link between energy and non-
energy prices. Serra (2011) found a long run linkage be-
tween ethanol and sugarcane prices in Brazil and also that
crude oil and sugarcane prices lead ethanol prices but not
vice versa. Saghaian (2010) established strong correlation
among oil and other commodity prices (including food) but
the evidence for a causal link from oil to other commodi-
ties was mixed. Gilbert (2010) found correlation between
the oil price and food prices both in terms of levels and
changes, but also noted that it is the result of common
causation and not a direct causal link. Zhang and others
(2010) found no direct long-run relationship between fuel
and agricultural commodity prices and only a limited short-
run relationship. Reboredo (2012) concluded that the pric-


Box Fig COMM 3.2 Energy Intensities

































Source: World Bank; GTAP database.


0 3 6 9 12 15 18


Turkey


India


Brazil


China


EU-12


Canada


US


SSA


DEVELOPING


HIGH INCOME


WORLD
Manufacture


Agriculture


Box Fig COMM 3.1 The Energy/Food Price Link

































Source: Baffes (2013).


Food
prices


E


Energy
prices


H Fertilizer
prices


A


Policies


Biofuel
production


D


The complex interplay among food, fuels, and biofuels Box COMM.3




GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex


113


es of maize, wheat, and soybeans are not driven by oil
price fluctuations.

Overall, despite a nearly 6-fold increase in biofuel produc-
tion during the first decade of the millennium, the price link
between energy and food commodities is not as clear-cut
as some would have expected. This may partly be ex-
plained by the non-market influence of mandates, which
caused biofuel production to rise (and perhaps influence
food prices) independently of what was happening to oil
prices. Consider an exogenous shock which pushes crude
oil prices up, in turn, lowering fuel consumption. Under a
mandated ethanol/gasoline mixture ethanol and maize
prices will decline, ceteris paribus, leading to a negative
food-oil price relationship (de Gorter and Just 2009).

The Link through Profitable Biofuels (G1): A more im-
portant issue is the level at which energy prices provide a
floor to food prices. If biofuels are profitable at current
energy prices, the income elasticity of food will rise toward
the higher elasticity of the larger (figure COMM 3.3) ener-
gy market, a point highlighted by numerous authors, in-
cluding Lustig (2008), Heady and Fan (2010), and Baffes
and Dennis (2013). Various rules of thumb to determine
when biofuel production becomes profitable have been
posited. One such rule suggests profitability is reached
when the US$ barrel price of crude oil is 50 percent or
more than the US$ price of a ton of maize. Another places
it at US$ 3/gallon of gasoline at the pump (in the U.S.). A
World Bank (2009) report argued that because of the
strong correlation between the maize and crude oil prices
above US$ 50/barrel, crude oil dictate maize prices. The
US Government Accountability Office (2009) noted that oil
above the $80-$120/barrel range may make biofuels prof-
itable (depending on the circumstances). Babcock (2011)
noted that high crude oil prices would have created market
-driven investment incentives in the US ethanol industry
even in the absence of policies.


Induced Innovation Link (G2): Profitable biofuels may
induce innovations by increasing the energy content of
biofuel crops hence increasing food prices even further.
To see the likely impact of biofuels-related induced inno-
vation on food prices consider the following illustrative


example. One hectare of land produces 10 tons of maize
generating US$ 2,500 in farmgate revenue either by sup-
plying maize to the food and feed industry at US$ 250/ton
or selling it to ethanol industry at US$ 0.63/liter (assuming
4,000 liters maize-to-ethanol conversion). If an improved
maize variety were to increase the ethanol content by 10
percent, it would generate US$ 2,750/hectare in farmgate
revenue, raising the cost of maize to the food and feed
industries to $275/ton, since this is how much the ethanol
industry would pay. Furthermore, the innovation in the
energy content of maize would induce proportional price
increases in all crops that could be grown on that land.
While the above example is hypothetical, it does illustrate
how innovations in the energy content (or in the efficiency
of extracting ethanol) of existing or new crops could trigger
food price increases, even in the absence of changes in
energy prices or demand and supply conditions of food
commodities.

The food-fuel-biofuel link can be summarized within two oil
price scenarios (figure COMM 3.4). Though less likely, the
“Low” oil price scenario could materialize if a sharp slow-
down in emerging economy growth takes place. It could
also materialize in response to innovation in battery tech-
nology and/or large scale utilization of natural gas that
could unleash substitution away from crude oil to electrici-
ty and natural gas by the transportation industry. Under
low oil prices, the energy costs to agriculture will decline
leading to lower food prices—scenario I(b). Furthermore,
low oil prices may ease biofuel policies, lowering food
prices even further—scenario I(a). Interestingly, while
scenario I(a) is consistent with a strong link between oil
and food prices (through production costs), scenario I(b)
weakens the link (because of the mandated nature of bio-
fuels). Now consider the “High” oil price scenario. As not-
ed above, high oil prices are likely to make biofuels profita-
ble, in which case food and oil prices will move in a syn-
chronous manner—scenario II(a). Moreover, profitable
biofuels may induce innovation in the energy content of
crops, in which case food prices could increase even fur-
ther—scenario II(b). Under scenario II(b), the oil-food price
link may weaken since food prices may increase even if
demand and supply conditions for food and energy mar-
kets do not change.


Box Fig COMM 3.3 Global Energy Shares

































Source: World Bank; BP Statistical Review.


Source: BP Statistical Review and author’s calculations


1.8%


5.2%


6.5%


23.9%


29.8%


32.6%


0% 10% 20% 30% 40%


Renewables


Nuclear


Hydro


Natural gas


Coal


Oil


3.2%


11.6%


27.2%


58.1%


0% 20% 40% 60% 80%


Geothermal


Solar


Biofuels


Wind


Box Fig COMM 3.4 Oil and Food Price Scenarios

































Source: World Bank




OIL PRICES


II
High


Innovation in
biofuels


G2)


II(b)
Very high food


prices and weak
food-oil price link


Biofuels become
profitable


(G1)


II(a)
High food prices


and strong food-oil
price link


I
Low


Biofuel policies are
retained


(D/F)


I(b)
Low food prices


and (perhaps) weak
food-oil price link


Biofuel policies ease
or are removed


(A, B/C)


I(a)
Very low food


prices and strong
food-oil price link




GLOBAL ECONOMIC PROSPECTS | June 2013 Commodity Annex


114








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GLOBAL ECONOMIC PROSPECTS | June 2013 East Asia and the Pacific Annex


117




EAST ASIA


and the


PACIFIC


REGION


GLOBAL


ECONOMIC


PROSPECTS Annex June 2013





GLOBAL ECONOMIC PROSPECTS | June 2013 East Asia and the Pacific Annex


119


Overview


Growth in the East Asia & the Pacific region
slowed to 7.5 percent in 2012, which nevertheless
represented 40 percent of global growth. The
slowdown was due to slower growth in China,
which has started to shift away its economy
from excessive reliance on investment and
net exports.

Growth in the rest of the region accelerated to 6.2
percent, 1.6 percentage points faster than the
average of the preceding decade and comparable to
growth during the boom and bounce-back years of
2007 and 2010.

With virtually all countries in the region having
recovered from the 2008 crisis—largely thanks to
domestic stimulus—rising debt levels and asset
bubbles are increasingly a source of concern
especially in the context of strong capital flows and
weak external demand environment.

Economic outlook: GDP growth in the
region is projected to slow to 7.3 percent in 2013
reflecting weak global conditions and waning
effects of stimulus measures. China is projected to
slow to 7.7 percent rate in 2013 but accelerate to
about 8 percent in 2014 and 2015 as global
conditions improve.

Growth in the rest of the region is expected to
slow to 5.7 percent in 2013 due to fiscal tightening,
capacity constraints and a negative contribution
from net exports reflecting exchange rate
movements and weak external demand. Growth is
projected to firm up to about 6 percent in 2014
and 2015 as external conditions improve.

Risks and vulnerabilities: The risk of a
serious crisis emanating from high-income
countries has declined, but the strength and timing
of recovery in Europe remains uncertain.

Developments throughout the region will remain
sensitive to outturns in China and Japan. The main
risk related to China remains the possibility that
high investment rates prove unsustainable,
provoking a disorderly unwinding and sharp
economic slowdown.


The depreciation of the Japanese yen in response
to loose monetary policy is likely to affect some
developing-country exports and growth in the
short-term. The effects are expected to be balanced
overall due to potential gains through supplies of
inputs, including parts and components as well as
imports of competitive technology, machinery and
equipment.

Japanese quantitative easing is likely to exacerbate
capital inflows, potentially contributing to demand
price pressures, asset price inflation and a further
rise in domestic debt encouraged by low borrowing
costs. Although net capital flows are not expected
to generate sustained pressures on regional
exchange rates, low Japanese interest rates could
increase capital flows and exchange rate volatility.

The recent decline in global commodity prices may
reflect a turning point as past investments came on
stream. Should this easing accelerate, fiscal and
current accounts, and incomes and growth in
commodity exporters like Indonesia, Malaysia,
Mongolia, Papua New Guinea (PNG), Timor Leste
and Solomon Islands could come under pressure,
even as lower prices would benefit importers. The
negative impact is expected to be muted in
Malaysia and Indonesia where the decline in oil
prices will contribute to an improvement of budget
balances through a reduction in fuel subsidies.

Policy recommendations: With most of
the region having fully recovered from the financial
crisis, and many countries growing at historically
high rates, policies could become less
accommodative. Should capital flows make
adjusting monetary policy difficult a larger share of
the burden may have to be borne by fiscal
tightening, while macro-prudential measures would
gain in importance to safeguard financial stability.
Fiscal consolidation can perhaps be achieved by
rationalizing current spending, which would allow
structural reforms and growth enhancing
infrastructure investment programs to continue.

Rebuilding buffers to absorb future shocks,
remains a priority in Cambodia, Lao PDR,
Vietnam, the Pacific islands and Mongolia where
gradual global and regional integration has
benefitted growth, but also made these economies
more vulnerable to global and regional business
cycles and commodity price fluctuations.





GLOBAL ECONOMIC PROSPECTS | June 2013 East Asia and the Pacific Annex


120


Recent developments




Although growth in the East Asia and
the Pacific region slowed to 7.5
percent in 2012, its contribution to
global growth was still an impressive
40 percent



The growth slowdown was largely due to slower
growth in China as it started to reduce its reliance
on net-exports and investment. China’s growth declined to
7.8 percent in 2012—the weakest rate since 1999.

Outside China, regional growth accelerated from
4.6 percent in 2011 to 6.2 percent in 2012. This
was 1.6 percentage points faster than the annual
average growth rate attained over the preceding
decade and comparable only to the growth rates
observed during the boom and bounce-back years
of 2007 and 2010.

This acceleration partly reflected Thailand’s
recovery from the devastating floods in 2011(figure
EAP. 1). GDP grew 6.5 percent in 2012 versus
only 0.1 percent in 2011. But the acceleration was
more widespread, if less spectacular elsewhere. Sixty
percent of countries in the region grew faster in 2012 than
in 2011, and more than two thirds grew faster than 6
percent.


This strong annual performance came despite a
mid-year slowdown, caused by slower growth in
China and the mid-year ramp-up in Euro Area
financial market tensions. After slumping sharply mid-
year, real-side activity (industrial production, and exports)
picked up pace in the fourth quarter (figure EAP.2).


Many countries swiftly reacted to the
mid-year slowdown and to the weak
external demand by loosening
macroeconomic policy

Monetary policy was relaxed, with the majority of
the central banks—Malaysia being a notable
exception—cutting policy rates during 2012.
Vietnam implemented the most aggressive easing,
cutting interest rates by 600 basis points,
unwinding a tightening of equal magnitude
implemented the year before.

Fiscal policy was broadly accommodative with
many countries in the region, including Indonesia,
Malaysia and Thailand accelerating public-sector
investment programs through budget and state-
owned enterprise activity, and local government
investments, particularly China. Malaysia stepped-
up its cash transfers and civil service bonuses,
Thailand enlarged its rice subvention scheme and
implemented the significant car buyer incentive programs.

Partly as a result, real credit growth in the region
accelerated sharply, reaching 20 percent rate in
Indonesia, 14.6 percent in China and 10 percent in
Malaysia and Thailand (figure EAP. 3).



Diverging trends in industrial output
growth across the region


Source: World Bank; Datastream.


Fig EAP.2


-25


-11


3


17


31


45


Jul '12 Oct '12 Jan '13 Apr '13


China


Japan


Philippines


Indonesia


East Asia (excl. China) Malaysia


Industrial production, % change, 3/3m, saar



Economic rebound of the East Asia and
the Pacific region has been impressive


Source: World Bank; Datastream.


Fig EAP.1


-7


-2


3


8


13


18


11Q111Q211Q311Q412Q112Q212Q312Q413Q1


ASEAN 4 China


Developing excl. EAP World excl. EAP


GDP, % change, quarter-over-quarter, saar





GLOBAL ECONOMIC PROSPECTS | June 2013 East Asia and the Pacific Annex


121



The stimulus measures coincided with a
revival in global capital flows and demand
(see capital flow section below), partly
because of the lags involved with macro
policy, and contributing to a sharp
acceleration in economic activity, with
regional quarterly GDP rebounding at a 8.4
percent annualized rate in 4Q2012.

Reflecting the stimuli, central budget deficits
deteriorated across the region exceeding 3
percent of GDP in all countries except
China, Indonesia, PNG and the Philippines.
Consolidated budget deficits, including local
budget financing had exceed 3 percent of
GDP in China.


The combination of the loose macro
policy and fast growth has
contributed to a significant rise in
private and public-sector debt levels
in the region

Government debt remains well below high-income
levels (it exceed 100 percent of GDP in some
European countries, including Greece, Italy and
Portugal, the United States and Japan), but have
continued to rise despite high rates of GDP
growth in Thailand, Malaysia and China.

Non-government debt has also been rising in
China, Malaysia and Thailand and now exceeds
150 percent of GDP in China and Malaysia and is
above 100 percent of GDP in Thailand (figures
EAP. 4 & 5).

Household debt represents the larger share of that
total, at around 77 percent of GDP in Thailand
(consolidated debt to deposit taking corporations
and other financial corporations), and is estimated
at around 80 percent of GDP in Malaysia.

Rapid growth of household debt resulted from a
combined effect of low interest rates and strong
demand. Present levels of household debt are
about 2-3 times higher of their pre-1997 crisis
levels in China, Malaysia and Thailand.

In China, non-Government sector debt is
concentrated in the corporate sector (about 2/3s



Household debt in Malaysia and
Thailand is high and expanding


Note: Decomposition of Malaysia’s debt is an estimate. For Thailand,


deposit taking corporations only.


Source: World Bank; BIS.


Fig EAP.5


0


10


20


30


40


50


60


70


80


90


Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12


Indonesia China Thailand Malaysia


Share of GDP



Credit growth accelerated across the
region during 2012


Source: World Bank; IFS; IMF.


Fig EAP.3


-10


0


10


20


30


40


50


07M03 08M03 09M03 10M03 11M03 12M03 13M3


China Indonesia Malaysia


Philippines Thailand Vietnam


Real credit growth, % change, year-over-year



Non-financial corporate debt is the
largest portion of China’s total debt


Source: World Bank; BIS; IMF.


Fig EAP.4


0 50 100 150 200


Malaysia


China


Thailand


Indonesia


General Government Non-Financial corporations


HH Other


Share of GDP





GLOBAL ECONOMIC PROSPECTS | June 2013 East Asia and the Pacific Annex


122


of total non-Government sector debt). The
composition of non-Government debt is more
balanced and corporate debt is lower than its pre-
1995-1997 crisis levels in Indonesia, Malaysia and
Thailand.

At the same time, the overall external
position of the key Asian economies has been
significantly strengthened over the past
decades through build-up of foreign asset and
strengthening of reserve base. The East Asia
economies are also better prepared to cope
with external headwinds in the context of the
flexible exchange rate regimes that they have
been increasingly adopting.

While fast growing Asian economies still have
fiscal room to counter-act a possible financial
crisis, the rapid build-up of debt during the
low-interest rate period increased the
exposure of the major regional developing
economies and raises certain concerns. It is
recommended that favorable growth period
could be used to strengthen buffers to
counteract future external shocks and reduce
vulnerabilities.


Robust, policy-fueled demand
conditions boosted import demand
across the region while exports
remained weak

This increased demand for imports was primarily
driven by high rates of investment, which led to a


surge in imports, including for capital goods. At the
same time, the terms of trade of commodity
exporting countries (Indonesia, Malaysia, Mongolia
and Papua New Guinea) deteriorated on weaker
commodity prices (figure EAP. 6).

Regional exports meanwhile came under pressure
from global weakness. A combined effect of those
developments put further pressure on net-exports
(exports-imports) which have been an increasingly
large drag on growth (figure EAP. 7).

Net-exports subtracted 4 percentage points from
overall GDP growth in Malaysia and about 1.5
percentage points in Indonesia and Thailand in
2012. In the Philippines, on the other hand the net-
export contribution to growth was positive partly
reflecting the post-Tokohu earthquake reconstruction
related exports to Japan.


The bulk of developing countries in
East Asia & the Pacific region have
completed their recovery from the
crisis

The relatively small hit to regional output in the
immediate wake of the crisis and the strong growth
since, means that the output gaps (the difference
between demand levels and underlying supply
potential) either only slightly negative or positive in
three quarters of countries in the region in 2012.
Less than 1/5th of the countries in the region have
been operating at or above their potential since
2011.



Imports expanded at double digit
rates across the region


Source: World Bank; Datastream.


Fig EAP.6


-60


-36


-12


12


36


60


Jul '12 Oct '12 Jan '13 Apr '13


China


Thailand


Japan


Philippines


Indonesia


East Asia (excl. China)


Import volume, % change, 3m/3m, saar



Exporter landscape changes partly reflect-
ing the REER moves, but China retains its
lead exporter position despite renminbi
appreciation


Source: World Bank; Datastream.


Fig EAP.7


-50


-40


-30


-20


-10


0


10


20


30


40


50


Jul '12 Oct '12 Jan '13 Apr '13


China


Japan


Philippines Indonesia East Asia (excl. China)


Export volume, % change, 3m/3m, saar





GLOBAL ECONOMIC PROSPECTS | June 2013 East Asia and the Pacific Annex


123


Strong growth in the last part of 2012
has contributed to some overheating
pressures in a number of countries in
the region

The overheating pressures manifested themselves
in growing current account deficits (as domestic
supply was unable to meet rapidly rising demand),
in rising inflation, asset price pressures and high
property prices depending on specific country
circumstances and policy context.


Strong domestic demand, partly due
to high investment rates has
contributed to a deterioration in
regional current account positions

This deterioration happened despite falling
commodity prices, which should have worked in
the other direction for the majority of countries in
the region. For the ASEAN-4 countries, the
deterioration was particularly marked (2.2 percent
of GDP), although the group’s current account
remained in surplus.

Most of this decline was due to an $26 billion, or
3.0 percent of GDP adjustment in Indonesia’s
current account position reflecting a record trade
deficit of $1.7 billion (figure EAP. 8).

In China, the current account surplus seem to have
stabilized at around 2.6 percent of GDP, consistent


with the earlier sharp adjustments from a peak level
of 10.1 percent of GDP in 2007.

Along the region’s smaller economies,
Mongolia’s current account deficit expanded
further reaching about 1/3rd of the country's
GDP reflecting both weaker commodity
prices and increased investment (with high
import content) in the mining sector. Lao and
Cambodia continued to record large current
account deficits (16 percent and 11.5 percent
of GDP respectively).


Inflation in the region as a whole
picked up in the first quarter of 2013,
but at a 3.1 percent annualized pace
remains relatively modest

This aggregate situation masks significant
intra-regional variation and mainly reflects
relatively modest inflation of 2.7 percent in
China (3m/3m saar) versus the rest of the
region where it has climbed to 5.1 percent
(3m/3m saar) in the three months to April
(figure EAP. 9).

In Indonesia, the quarterly inflation rate accelerated
to 9 percent (3m/3m saar) rate in the first quarter
reflecting capacity constraints, but also currency
depreciation and a rise in food prices due to trade
restrictions. Inflation has also accelerated strongly
in Lao, PDR and core inflation remains high and
the headline inflation extremely volatile in Vietnam
despite a slowing of growth.



Current account positions have general-
ly deteriorated especially for the com-
modity exporters


Source: World Bank; Datastream.


Fig EAP.8


-100


0


100


200


300


400


500


-30


-20


-10


0


10


20


30


40


50


2007 2008 2009 2010 2011 2012


Malaysia Thailand Indonesia


Philippines China (RHS)


USD billions USD billions



Selected countries in the region experi-
ence price pressures


Source: World Bank; IMF; IFS; Datastream.


Fig EAP.9


0


2


4


6


8


10


12


14


Jan '11 May '11 Sep '11 Jan '12 May '12 Sep '12 Jan '13 May '13


EAP (excluding China)


China


Indonesia Lao, PDR Malaysia


CPI, % change, 3m/3m, saar





GLOBAL ECONOMIC PROSPECTS | June 2013 East Asia and the Pacific Annex


124


In China, where growth has been slowing, inflation
pressures are less of a concern and the headline
inflation rate remains anchored around the central
bank’s revised 3.5 percent inflation target. However
price pressures are present in certain rapidly
growing segments of the economy, including
real estate.


Excess demand pressures and loose
monetary conditions may also be
contributing to asset price bubbles in
the region

Overall, the region’s stock market performance
has been mixed. The regional stock market
composite, the MSCI EMF Asia Index, up
only about 10 percent since June 2012 and
dropped by about 2 percent in the first four
months of 2013. Nevertheless, it
outperformed the global emerging market
benchmark indicator which registered an
overall 4 percent loss so far this year.

The modest performance of the regional index
masks diverging trends i.e. underperformance of


Chinese stocks and record highs reached by
some ASEAN country stocks. ASEAN
markets boomed with some markets
(Indonesia, Thailand, Lao, PDR and The
Philippines) advancing by 30-50 percent since
last May (table EAP. 1).

The rapid increase in stock prices combined
with high price-earnings ratios (between 17
and 22 still below those in high-income
countries) are raising concerns about
overvaluation of stocks. In fact, the top
performing East Asian developing market
stocks (Indonesia, the Philippines and
Thailand) have seen about a 7-8 percent
decline in past few weeks from this year —
around mid-May—picks.

Property prices continued to increase with
the average square meter prime property
price about two times more than the average
per capita income in Cambodia,FN1 1.3
times—of that in China and about 60 percent
of the average per capita income in Indonesia
and Thailand (compared with about 10 to 30
percent of the average per capita income in
high income and developing countries).



Asian stock performance Table EAP.1


Value


Year To


Date: 1-Year: Value


Year To


Date: 1-Year:


MSCI EMF Asia 651.267 -1.91% 9.70% 679.07 0.84% 10.00%


Philippines Stock Exchange PSEi Index 6,875.60 19.95% 38.43% 7,310.94 27.35% 53.84%


Vietnam Ho Chi Minh Stock Index / VN-Index 524.56 28.92% 25.81% 490.34 20.05% 13.21%


Jakarta Stock Exchange Composite Index 4,777.37 12.00% 26.28% 5,078.68 18.40% 30.62%


Stock Exchange of Thailand SET Index 1,528.55 11.81% 36.18% 1,617.89 18.32% 42.52%


Laos Securities Exchange Composite Index 1,338.82 10.21% 31.87% 1,376.45 13.31% 33.35%


FTSE Bursa Malaysia KLCI Index 1,787.80 7.71% 17.43% 1,766.72 5.94% 19.23%


Hong Kong Hang Seng Index 21,615.09 -3.01% 17.67% 23,082.68 2.43% 24.08%


Korea Stock Exchange KOSPI Index 1,932.70 -3.11% 4.75% 1,986.81 -0.51% 7.97%


Shanghai Stock Exchange Composite Index 2,210.90 -2.03% -1.83% 2,251.81 -0.69% -1.57%


Mongolia Stock Exchange Top 20 Index 14,998.14 -14.83% -20.45% 13,543.99 -23.09% -33.32%


Tokyo Stock Exchange Tokyo Price Index TOPIX 1,111.97 30.64% 55.80% 1,245.23 46.16% 72.01%


S&P 500 Index 1,642.81 16.30% 26.86% 1,654.90 16.96% 27.73%


NASDAQ Composite Index 3,473.77 15.68% 23.49% 3,479.36 15.84% 23.11%


Dow Jones Industrial Average 15,238.59 17.67% 24.69% 15,260.43 17.71% 24.45%


Source: Bloomberg.


as of June 10, 2013 as of May 16, 2013





GLOBAL ECONOMIC PROSPECTS | June 2013 East Asia and the Pacific Annex


125


Gross rental yields increased to 9 percent in
IndonesiaFN2 and 6-7 percent in the
Philippines and Thailand, which is two-three
times higher than high income and
developing country average.






Capital flows



The improvement in global financial market
conditions during the second half of 2012 (see
GEP January 2013) combined with the strong
growth in the East Asia and the Pacific region attracted
increased capital flows to the region towards year-end.
Overall net flows reached $457.8 billion—
about 10 percent lower than in 2011 or about
4.6 percent of regional GDP (figure EAP.
10). The composition of the net capital flows
to the region has changed reflecting local
conditions. Equity flows, reached about 74
percent of the total inflows to the region
reflecting a US$54.8 billion (about 38 percent
y/y reduction) decline of short-term debt
flows due to lower trade financing (table
EAP.2).

FDI inflows, which represent the bulk (more
than 90 percent) of total equity inflows
declined by 8.3 percent (by US$ 27.9 billion
in nominal terms), while net portfolio equity
inflows quadrupled (from US$ 8.4 billion in
2011 to US$31 billion in 2012) recovering to
their pre-2011 level in nominal terms. The
Bond issuance in the region, rose



Net capital flows to East Asia and the Pacific ($ billions)


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


Capital Inflows 206.9 255.1 516.5 510.1 457.8 471.8 481.9 515.3


Private inflows, net 207.3 251.2 513.5 508.7 457.6 471.9 483.2 517.2


Equity Inflows, net 203.8 183.9 329.5 343.2 337.9 325.6 327.7 331.6


Net FDI inflows 211.3 153.7 289.7 334.9 306.9 302.9 300.3 298.2


Net portfolio equity inflows -7.6 30.2 39.8 8.4 31.0 22.7 27.4 33.4


Private creditors. Net 3.6 67.3 184.0 165.4 119.7 146.3 155.5 185.6


Bonds 1.2 8.4 20.8 18.9 35.4 39.6 33.7 29.6


Banks 17.9 -6.1 13.2 1.8 -2.4 8.1 10.3 12.3


Short-term debt flows -13.3 65.0 148.9 144.9 90.1 98.3 111.3 143.2


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


Source: The World Bank


Note : e = estimate, f = forecast


Table EAP.2



Net capital flows recovered to their
2011 levels in nominal terms, but fell
short of average levels as share of GDP
observed over the past decade


Source: World Bank; Datastream.


Fig EAP.10


0


1


2


3


4


5


6


7


8


0


100


200


300


400


500


600


2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012


USD billions Share of GDP (RHS)


Share of GDP Billions of US Dollars


Decade avarage (% of GDP)





GLOBAL ECONOMIC PROSPECTS | June 2013 East Asia and the Pacific Annex


126


insignificantly to $35.4 billion in 2012 (a 16.5
percent increase) from what was a robust
pace of issuance ($18.9 billion) in 2011.



Economic outlook




While signs of overheating appeared
in several economies in 2012, the
pace of expansion has eased in
2013Q1 reflecting fiscal tightening,
and slow recovery of external
demand



Output growth slowed in China and in the other
fast growing ASEAN-4 economies, particularly in
Malaysia and Thailand following a sharp
acceleration in the second half of 2012. In
Malaysia, first quarter GDP growth came at a
negative 2.5 percent saar, slowing from 8 percent
rate in 2012Q4 mainly reflecting fiscal
consolidation but also negative contribution from
net-exports. Thailand’s output has contracted
sharply in Q12013 following a revised 11.7 percent
quarter-on-quarter saar growth in 2012Q4.

In China and Indonesia, the slowing was less
pronounced. China’s first quarter GDP
growth declined to a 6.6 percent quarter-


over-quarter saar, from 8.7 percent in
2012Q4. In Indonesia, GDP expanded at an
estimated 5.3 percent (q/q saar) in the first
quarter of 2013, after a brisk 6.9 percent
increase in 2012Q4 (figure EAP. 11).

Regional industrial production activity also slowed
to 6.0 percent (q/q, saar) in the first quarter,
reflecting modest slowdown in China and a much
sharper correction among ASEAN economies.


Prospects for the region going
forward point to a modest
acceleration in activity during the rest
of 2013, but annual growth is
projected to be lower than in 2012

Forward looking indicators suggest positive and
broadly-based, if somewhat weaker, growth going
forward. For instance, Purchasing Managers’
Indexes (PMI) for all countries in the region
recovered above the 50 threshold in April, but
remain volatile showing some recent strengthening
for Indonesia and weakening for Vietnam (figure
EAP. 12).

The projected pick up in activity will nevertheless
deliver somewhat slower growth in the region with
China estimated to growth at 7.7 percent in 2013
slightly below a 7.8 percent rate of 2012.

This will be combined with some quite
significant easing in ASEAN economies (5.7



East Asia & Pacific PMIs signal eco-
nomic expansion


Source: World Bank; Datastream.


FigEAP.12


40


45


50


55


60


May '10 Sep '10 Jan '11 May '11 Sep '11 Jan '12 May '12 Sep '12 Jan '13 May '13


China Japan Vietnam South Korea Indonesia


Difusion index, greater than 50 indicates expansion


50



Quarterly growth eased in Malaysia and
Thailand


Source: World Bank; Datastream.


Fig EAP.11


-45


-35


-25


-15


-5


5


15


25


35


45


55


08Q1 09Q1 10Q1 11Q1 12Q1 13Q1


Malaysia Thailand


Indonesia China


GDP growth, q/q , saar





GLOBAL ECONOMIC PROSPECTS | June 2013 East Asia and the Pacific Annex


127


percent in 2013 versus 6.2 percent in 2012)
(table EAP.3). Output growth pattern in
ASEAN reflects a combination of continued
strong growth in Indonesia and certain easing
in Malaysia, Thailand and the Philippines
from record high levels achieved in 2012.


Regional growth is projected to
recover to 7.5 percent in 2014 and
2015 on improved external
conditions, but the dramatic change
in Japanese policy introduces
significant uncertainty into the
forecast for developing East Asian
and the Pacific region

The projected slowdown of economic growth in
these three countries is reflecting capacity
constraints and an expected fiscal tightening of


policy in response to inflationary and asset price
pressures and growing debt levels, but also weak
recovery of global demand, including a projected
decline in demand for imports from Japan due to
yen depreciation.

Monetary conditions remain relatively loose with
the majority of the central banks on hold or easing,
including recent rate cuts in Mongolia, Vietnam
and Thailand.


Cambodia, Lao, Mongolia and Myanmar are
projected to continue to deliver strong growth
benefiting from a dynamic economic transformation,
although the prospects for the region’s small(er)
economies are mixed.

Output gains from the completion of a new
gold mine in Lao PDR have already been
realized and so growth is projected to slow.
In Cambodia, a rebound in global trade
should support further improvements in
garment production and exports.



East Asia and Pacific forecast summary




Table EAP.3


Est. Forecast


00-09
a


2010 2011 2012 2013 2014 2015


GDP at market prices b 8.1 9.6 8.3 7.5 7.3 7.5 7.5


(Sub-region totals-- countries with full NIA + BOP data)
c


GDP at market prices c 8.1 9.7 8.4 7.5 7.3 7.6 7.5


GDP per capita (units in US$) 7.3 8.9 7.6 6.8 6.7 6.9 6.9


PPP GDP 8.0 9.6 8.3 7.5 7.3 7.5 7.5


Private consumption 6.0 7.3 8.0 8.2 8.0 8.0 7.9


Public consumption 7.4 9.7 9.0 8.4 8.2 8.1 7.5


Fixed investment 10.8 11.4 8.8 8.2 6.8 6.4 5.6


Exports, GNFS d 10.3 23.7 8.6 4.4 8.7 9.5 10.1


Imports, GNFS d 9.6 19.5 6.2 5.4 8.4 8.9 9.3


Net exports, contribution to growth 0.8 2.7 1.5 0.0 0.8 1.0 1.1


Current account bal/GDP (%) 4.6 3.8 2.7 2.2 2.0 1.9 1.9


GDP deflator (median, LCU) 5.4 5.3 5.6 4.4 3.9 5.1 4.0


Fiscal balance/GDP (%) -1.8 -1.6 -1.4 -1.9 -2.3 -2.5 -2.4


Memo items: GDP


East Asia excluding China 4.4 6.9 4.6 6.2 5.7 5.9 6.0


China 9.4 10.4 9.3 7.8 7.7 8.0 7.9


Indonesia 4.6 6.2 6.5 6.2 6.2 6.5 6.2


Thailand 3.5 7.8 0.1 6.5 5.0 5.0 5.5


(annual percent change unless indicated otherwise)


Source : World Bank.


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).





GLOBAL ECONOMIC PROSPECTS | June 2013 East Asia and the Pacific Annex


128



East Asia and Pacific country forecasts








































































































































Source: World Bank.




Table EAP.4


Est. Forecast


00-09
a


2010 2011 2012 2013 2014 2015


Cambodia


GDP at market prices (% annual growth) b 7.2 6.0 7.1 7.3 7.0 7.0 6.2


Current account bal/GDP (%) -10.7 -10.1 -8.7 -11.5 -10.1 -9.3 -9.0


China


GDP at market prices (% annual growth) b 9.4 10.4 9.3 7.8 7.7 8.0 7.9


Current account bal/GDP (%) 5.0 4.1 2.8 2.6 2.5 2.5 2.4


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 -7.8 -7.5 -22.5 -7.8 -7.5


Indonesia


GDP at market prices (% annual growth) b 4.6 6.2 6.5 6.2 6.2 6.5 6.2


Current account bal/GDP (%) 2.5 0.7 0.2 -2.4 -2.5 -1.9 -1.9


Lao PDR


GDP at market prices (% annual growth) b 6.2 8.5 8.0 8.3 8.0 7.7 8.3


Current account bal/GDP (%) -2.5 -6.4 -10.6 -16.0 -21.8 -20.9 -20.2


Malaysia


GDP at market prices (% annual growth) b 3.9 7.2 5.1 5.6 5.1 5.1 5.3


Current account bal/GDP (%) 12.6 11.1 11.1 7.7 4.6 3.1 2.4


Mongolia


GDP at market prices (% annual growth) b 5.8 6.4 17.5 12.3 13.0 11.5 9.9


Current account bal/GDP (%) -6.3 -14.3 -30.3 -30.5 -22.8 -19.4 -19.4


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 9.0 4.0 7.4 20.0


Current account bal/GDP (%) -0.1 -25.6 -36.4 -28.4 -20.2 -13.0 9.0


Philippines


GDP at market prices (% annual growth) b 4.0 7.6 3.6 6.8 6.2 6.4 6.4


Current account bal/GDP (%) 1.5 4.5 3.1 2.8 2.8 2.7 2.6


Solomon Islands


GDP at market prices (% annual growth) b 4.3 7.8 10.5 4.8 4.0 4.0 5.1


Current account bal/GDP (%) -19.8 -30.8 -6.0 -5.8 -10.6 -8.7 -8.5


Thailand


GDP at market prices (% annual growth) b 3.5 7.8 0.1 6.5 5.0 5.0 5.5


Current account bal/GDP (%) 3.3 3.1 1.7 0.7 0.0 0.0 0.1


Timor-Leste


GDP at market prices (% annual growth) b 3.3 9.5 10.6 10.6 10.4 10.2 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 6.4 6.2 5.2 5.3 5.4 5.4


Current account bal/GDP (%) -8.8 -3.8 0.2 5.9 5.6 3.3 1.0


Source : World Bank.


World Bank forecasts are frequently updated based on new information and changing (global)


circumstances. Consequently, projections presented here may differ from those contained 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.





GLOBAL ECONOMIC PROSPECTS | June 2013 East Asia and the Pacific Annex


129


Projections for Mongolia have been revised
downwards, due to delays in major mining projects
and lower commodity prices. In Myanmar, the
reform momentum and continued improvements
in the international environment are projected to
drive growth gradually toward 6.5 percent in
2013/14 and 6.6 percent in 2014/15.
The outlook for the Pacific Islands is positive, but
given the small size of many economies, the
precise shape of the forecast will depend on the
timing with which ongoing and planned investment
projects in the extractive sector come on stream
(table EAP.4).



Countries in East Asia and the Pacific
region which have close direct trade
ties with Japan have seen their
currencies hit harder by yen’s
depreciation than other developing
economies



Thailand experienced a sharp 13.4 percent
real-effective appreciation of its currency
since July 2012 as the yen depreciated in real
effective terms by over 22 percent (figure
EAP. 13). In the short-term, exchange rate
depreciation is likely to hurt the exports of
countries that compete in the same kinds of
markets as Japan (South Korea, Singapore,
Taiwan, China) and those linked to those


economies through supply chains, especially
in generally weak demand environment.

Those negative impacts are expected to be
balanced by potential gains through supplies
of parts and components. The economies,
such as the Philippines, and Thailand that are
important suppliers of parts and components
to Japan in regional production networks,
could benefit from gains by Japanese
exporters in global markets. In addition,
increased demand for a number of key
regional export commodities (e.g. gas from
Malaysia) despite the overall deceleration of
Japan’s import demand, are also expected to
benefit the region. Additional benefits are
expected through competitive imports, which
would allow the regional firms and businesses
to benefit from the ability to import Japanese
technology, machinery and equipment at
lower costs.

If sustained over time, the depreciation of the
yen could eventually alter the dynamics of
trade in the region. It would help cut the
region‘s trade deficits even further, especially
between the EAP region and Japan, as Japan
is EAP‘s largest source of imports and fourth
largest export destination. In the medium-
term and assuming that Japan’s growth
accelerates and imports eventually pick-up,
trade partners in the region would benefit
from an increase in Japan‘s demand for
regional imports.

In general, Japan’s recovery as well as
recovery of its exports will depend on depth
of the structural reforms and its ability to
boost productivity (figure EAP. 14). Overall,
as competitive pressures increase, the
developing economies in the East Asia and
the Pacific region should continue to focus
on financial stability and accelerate structural
reforms to alter their productivity and
competitiveness.

Less certain is the likely impact of Japanese
quantitative easing on Japanese capital flows
toward regional economies. For countries
already operating at close to full capacity,
additional capital inflows can be expected to
increase upward pressure on currencies, or if
monetary authorities intervene upward



East Asia & Pacific regional REER
moves


Source: World Bank; Datastream.


Fig EAP.13


70


75


80


85


90


95


100


105


110


115


120


Jul '12 Sep '12 Nov '12 Jan '13 Mar '13 May '13


China Japan Thailand Malaysia Indonesia


Real Effective exchange rate index, July 2011=100





GLOBAL ECONOMIC PROSPECTS | June 2013 East Asia and the Pacific Annex


130


pressure on money supply, credit and
inflation. How large these effects may be will
depend on the extent to which outward flows
increase and the extent to which developing
countries are destinations for these flows (see
discussion in main text and for more detail in
the exchange rate annex).



Risks and
vulnerabilities



Uncertainties related to economic recovery in high
income countries have subsided, but are still
present. Regional risks have gained importance.

The regional outlook remains sensitive to outturns
in China, with the main risk stemming from the
possibility of an abrupt decline in China’s high
investment rates (see World Bank, 2013a for more).

In addition, as discussed above, there are
considerable uncertainties surrounding the impact
of Japan’s shift in macroeconomic policy. Overall,
weak yen could affect the dynamics of trade in
manufactures in the region in the short-term. By
extending periods of low interest rates and
boosting capital flows, Japanese QE could also
contribute to further pressures on asset prices and


may encourage further risk taking and credit
growth. Rising debt levels and asset prices in the
emerging East Asia & Pacific economies are
already the growing source of vulnerability (see
discussion on page 4-5). Should these trends
intensify, a disorderly unwinding of these pressures,
including perhaps a domestic banking-sector crisis,
cannot be ruled out, potentially. In ordered to
reduce the likelihood of such an outturn fiscal
policy likely needs to be tightened already in 2013
and monetary policy focus should be shifted to
financial stability and tail risk considerations. In the
medium-term, if Japan manages to escape its
deflation and rekindle growth with the measures
taken, all developing economies in the region
would benefit through various channels, including
through an increase in Japan’s demand for imports
(see also EAP Economic Update and Main text).

A strong supply increase in extractive commodity
markets following a quintupling in capital
expenditures globally has already put downward
pressure on prices. If these were to intensify,
commodity exporting countries, including
Indonesia, Malaysia, Mongolia, PNG could see
government revenues and current account
balances, which are in some cases already very high
(e.g. more than 30 percent of GDP in Mongolia)
come under significant pressure — even as lower
prices would benefit importers. In such a lower
price scenario, if investment projects are cancelled
and anticipated increases in output not
materialized, countries could find themselves in
financial difficulty. External debt is especially high
in Mongolia (more than 130 percent of GDP), and
in Papua New Guinea (about 100 percent of
GDP).



Policy
recommendations



Ensuring strong and stable consumption through
raising household incomes to sustain growth is a
priority in China along with the reorientation of
investments toward agriculture, human capital and
services and increased efficiency of investment.
The process of rebalancing also involves a gradual



Selected country shares of global
exports over the past two decades


Source: World Bank; Datastream.


Fig EAP.14


2


4


6


8


10


12


14


1991M01 1998M05 2005M09 2013M01


South Korea Japan
USA Germany


Export market share





GLOBAL ECONOMIC PROSPECTS | June 2013 East Asia and the Pacific Annex


131


shift in the structure of China’s debt toward a
reduction of corporate sector debt, including
through reduction of non-performing assets
accumulated during the years of investment-led
growth.

Policymakers in fast-growing-close to (or above)
full capacity ASEAN economies where policies
have been relaxed in recent years, including
Indonesia, Malaysia, Thailand and the Philippines
should be focusing their actions on avoiding
overheating and rebuilding fiscal and monetary
buffers which will be challenging in a continued
weak external demand environment. Slower growth
in conditions of overheating may be desirable.

However, while there are clear costs associated
with overheating, especially when fast growth has
been accompanied by rapid credit expansion, there
are equally clear opportunity costs associated with
prematurely slowing an economy and potentially
forgoing fast growth and rising incomes. Countries
that are too quick to respond to changes in the
global environment, risk the of inadvertently
running pro-cyclical policies. A balanced approach
in implementing policy tightening is recommended.
Macroeconomic policy needs to be more closely
driven by local economic conditions, including the
level of activity, building on the previous efforts
toward de-coupling the economies from external
demand.


Over the medium-term, the East Asia & Pacific
economies will benefit from continued efforts to
deepen structural reforms and to keep their global
competitive edge in the context of intensifying
global and regional competition. Countries need to
place greater emphasis on ensuring that market
forces are given sway to incite investment flows
into the most productive assets, including human
capital which will over time boost potential output.

Rebuilding buffers to deal with future shocks,
including with commodity shocks remains a
priority in Lao PDR, Vietnam, the Pacific islands
and Mongolia where gradual global and regional
integration has benefitted growth, but also made
these economies more vulnerable to global and
regional business cycles and commodity price
fluctuations. The effectiveness of the on-going
economic transformation in Myanmar, establishing
a track record of reforms under the WTO
accession framework by Lao, and progress in
implementing market oriented reforms in
Cambodia and Vietnam are also important
elements of ensuring sustainable growth.





GLOBAL ECONOMIC PROSPECTS | June 2013 East Asia and the Pacific Annex


132


Notes:

1 Footnote 1 (Price per square meter / GDP per capita)*100


2. The gross annual rental income, expressed as a percentage of property purchase price. This is what a landlord can


expect as return on his investment before taxes, maintenance fees and other costs.
















_____World Bank, 2013a, January 2013 Global Economic Prospects




_____World Bank East Asia and the Pacific regional Economic Update, April 2013




_____World Bank, China 2030 study, 2012




_____World Bank, Regional Economic Updates for Indonesia and for The Philippines), 2013




_____IMF, World Economic Outlook, April, 2013






References




GLOBAL ECONOMIC PROSPECTS | June 2013 Europe and Central Asia Annex


133




EUROPE


and


CENTRAL


ASIA


REGION


GLOBAL


ECONOMIC


PROSPECTS Annex June 2013




GLOBAL ECONOMIC PROSPECTS | June 2013 Europe and Central Asia Annex


135


Overview



The Europe and Central Asia region suffered a
significant economic slowdown in 2012 as the
region faced significant headwinds, including weak
external demand, deleveraging by European banks,
poor harvest and inflationary pressures. As a result,
growth fell to 2.7 percent in 2012, compared with
5.6 percent in 2011 with a sharp slowdown in
developing Europe and less severe adjustments
among Commonwealth of Independent States.

External conditions have significantly improved in
2013 with calmer financial markets and the
recovery in global trade. As a result, capital flows to
the region have increased with the sharpest
improvement in cross-border syndicated bank
lending. The pick-up in bank-lending partly reflects
the moderation in the pace of Euro Area bank
deleveraging and going forward, this should ease
the supply-side credit constraints. In addition,
several sovereigns and corporates successfully
tapped international bond markets. Similarly,
following the sharp decline in 2012, FDI in the
region is expected to rebound this year. Despite the
recovery in global trade, the region’s export
performance has been mixed. Export growth has
been weak in Russia and Latvia but considerably
strong in Romania, Lithuania and Turkey. Several
countries have benefited from the increased
diversification in terms of export destination in
recent years.

Outlook for 2013-2015: GDP growth in
Europe and Central Asia is projected to rise
only slightly in 2013 to 2.8 percent. While
growth in the region will be supported by better
harvest and improved external conditions, the
rebound will be constrained by the weak carry-over
from last year, ongoing fiscal adjustments, and high


unemployment in several countries, particularly in
developing Europe. Growth in the two biggest
economies in the region—Russia and Turkey—has
been held back by supply bottlenecks. While
growth in Russia is projected to slow to 2.3 percent
in 2013, from 3.4 percent in 2012, growth in
Turkey is expected to increase to 3.6 percent from
2.2 percent, supported by relatively loose
macroeconomic policies. As a result, Turkey’s
current account deficit is expected to widen further
to 6.9 percent in 2013.

Going forward, growth in the region should firm
to 3.8 percent in 2014 and 4.2 percent in 2015 as
the fiscal and financial restructuring that has been a
drag on growth within the region and in the Euro
Area loses intensity. Several domestic factors,
including fiscal and monetary policies and policies
addressing structural issues, are expected to
generate differentiation in economic performance
among countries in the region.

Risks and vulnerabilities: While overall
risks are less pronounced than a year ago, the
region’s economic outlook is still subject to
various challenges. First, although the risk of
a serious Euro Area crisis has diminished,
outturns in developing Europe will remain
sensitive to the speed of the recovery in the
region’s high-income neighbors. Another risk
is related with commodity prices. The growing
supply and demand substitution brought on by
high prices have recently weakened commodity
prices. A sharper decline in commodity prices
would have potentially important adverse
consequences for commodity exporting countries
in the region.

Developments in the global financial markets
remain important for the region. A sudden
reversal of global financial conditions—due
to unexpected developments in Euro-area or
in the United States—might affect significantly
those countries with high external financing
needs (current account deficits and
amortization of external debt). In the longer
term, the cost of capital is likely to rise as
high-income countries step back from
quantitative easing. Initially this could expose
vulnerabilities in the region that have built up
during periods of sustained low borrowing
costs. In the long-term, it will reduce growth,
capital flows and FDI to the region.


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 dif-
fer from those contained in other World Bank documents.




Box ECA.1




GLOBAL ECONOMIC PROSPECTS | June 2013 Europe and Central Asia Annex


136


Recent Developments


After the significant headwinds of the
past two years, there are signs of a
rebound during the first quarter of this
year

Hit hard by the weakness in high-income Europe,
the Europe and Central Asia region suffered a
significant economic slowdown in 2012 (box
ECA.1). The region’s growth fell to 2.7 percent in
2012 compared with 5.6 percent the year before.
The slowdown was particularly severe in Eastern
European countries, whose GDP grew less than 1
percent and actually declined in the case of Serbia.
While the adjustment among Commonwealth of
Independent States (CIS) countries was less severe,
they also grew less quickly in 2012 than in 2011.

The early months of 2013 suggest that economic
activity may have bottomed out for the Eastern
European countries. While first quarter GDP data
is available for only a few countries, they point to a
rebound in economic activity. In Lithuania, for
example, the real GDP grew 3.5 percent (y/y saar)
in 2013Q1, up from 3 percent in the 2012Q4. The
acceleration was boosted by strong export growth
at 14.9 percent (3m/3m saar), which helped offset
slowing retail sales. In Serbia, GDP growth
rebounded strongly to about 1.7 percent (y/y saar)
in the first quarter, mainly due to Fiat production,
exports and base effects. Ukraine’s growth
remained negative at -0.7 percent (y/y saar), but the
pace of decline was significantly slower than the 2.5
percent (y/y saar) fall in the final quarter of 2012,
suggesting that output picked up in the fourth quarter.

Higher frequency data for industrial production
also point to strengthening activity in the region,
with annualized growth of 2.4 percent rate in
2013Q1 (figure ECA.1). Industrial output grew
particularly strongly in Serbia (rising at a 19 percent
annualized pace). Other countries also reported
positive growth including Romania (8.1 percent,
3m/3m saar), Turkey (3.8 percent), Kazakhstan
(3.4 percent), Bulgaria (3 percent), Lithuania (1.8
percent) and Russia (1.4 percent). The strong
rebound mostly reflects base effects, especially for


Bulgaria and Serbia, following the contraction
during the second half of 2012. The acceleration in
economic activity in these countries was more than
offsetting a 10.6 percent decline in Ukraine.

The USD value of imports in the region
accelerated sharply during the first quarter, rising at
a 25.2 percent annualized pace (3m/3m saar) in
March suggesting significant firming of domestic
demand. The rebound was particularly evident in
Romania where the USD value of imports grew at a
3 percent pace (3m/3m saar) after a strong contractions in
2012Q4. That said there has been some easing in import
value growth in Latvia during the same time.

While remaining above the expansion/ contraction
level of 50, business confidence indicators such as
Markit’s Purchasing Manager Index (PMI) suggest
a slight easing in economic activity for Russia and
Turkey in April.


Despite the recent pick-up in global
trade, the region’s exports have
contracted so far in 2013



As discussed in the main text, much of volatility
that characterized the period from 2008 until June
2012 appears to have eased, and after declining
sharply in mid-2012 global trade is recovering,
driven by developing countries import demand (see
trade annex). Even in the Euro Area, import demand
growth has turned positive during the first few
months of 2013.




Rebound in economic activity in most


economies


Source: World Bank; Datastream; Haver.


Fig ECA.1


-30


-20


-10


0


10


20


30


Jan '12 Apr '12 Jul '12 Oct '12 Jan '13 Apr '13


IP volume growth (3m/3m saar)


Kazakhstan


Russia


Serbia


Ukraine


Turkey


ECA




GLOBAL ECONOMIC PROSPECTS | June 2013 Europe and Central Asia Annex


137


The recovery in import demand, particularly
developing-country import demand has led a
recovery in high-income and developing-country
exports (see main text), but these benefits have not
been shared by developing countries in Europe &
Central Asia (figure ECA.2). In contrast, the USD
value of their export contracted at a 0.4 percent
(3m/3m saar) annualized rate in the three-months
ending in March, with weak foreign sales in Russia
and Latvia the main explanation. A 11.3 percent
annualized decline in the value of Russian exports
mainly reflected weaker commodities sales,
particularly natural gas, which were hit by a slump
in the European market where Russian natural gas
is facing newfound competition.

For several other countries, the USD value of
exports did surge, by an annualized 14.5 percent in
the case of Romania and 9.4 percent in the case of
Lithuania. The growth in Romania's exports
reflected steady improvement in the share of the
car parts industry and transport equipment in total
foreign sales. Lithuania’s exports were supported
by robust oil exports—the country's biggest traded
commodity, while exports in manufacturing also
picked up due to improved competitiveness
following a large devaluation.

Similarly, Turkey’s exports bounced back in March
by 4.8 percent annualized rate after declining
sharply earlier in the year. The earlier sharp
contraction was because of a decline in gold
exports (and prices) with no sale to Iran in January
and weakening exports to Europe—mainly to
Germany, UK and Italy. That said gold exports to


Iran (as payment for natural gas import) resumed in
February but at a much slower pace than in 2012.FN1

All three countries benefited from their rising sales
to countries outside high-income Europe. In fact,
many countries in the region have managed to
diversify their export destinations in recent years,
which should benefit the export performance of
the region in coming months (see box ECA.2).


Improved access to international debt
markets…

Global financial markets have been significantly
calmer since July 2012, including during the first
four months of 2013 (see the Finance Annex for
details). Market risk perceptions have remained
relatively stable, despite continued economic
weakness in the Euro Area, political gridlock in
Italy that has stalled reforms, and the Cyprus crisis
that culminated in the imposition of capital
controls—a first in the Euro Area.

In this improved environment, gross cross-
border capital flows (international bond
issuance, cross-border syndicated bank loans
and equity issuance) to the Europe and
Central Asia region strengthened in the
second half of 2012 and into 2013, with
inflows in during the first four months of
2013 reaching $88.5 billion, more than double
their year earlier levels of $37.4 billion (figure
ECA.3). While equity issuance remained
subdued, both bank lending and bond issuance




Export from the region slowed exports


Source: World Bank; Datastream; Haver.


Fig ECA.2


-40


-20


0


20


40


60


80


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


Value growth (3m/3m saar)


ECA exports


Developing country imports


High-income country imports


High-income Europe imports




Improved access to international debt


markets


Source: World Bank; Dealogic.


Fig ECA.3


0


5


10


15


20


25


30


Jan '12 Apr '12 Jul '12 Oct '12 Jan '13 Apr '13


$ Billions


Bond issuance


Equity issuance


Bank lending




GLOBAL ECONOMIC PROSPECTS | June 2013 Europe and Central Asia Annex


138


rebounded. Despite these improvements, inflows into
the region remain low relative to pre-crisis flows.

Syndicated bank lending to the region, at $37
billion, showed the sharpest improvement,
increasing three folds from its level a year-
ago. Even excluding the mega loans to the
Russian company Rosnefte Gaz for their
large acquisition in 2012, bank lending to the
region was still more than twice as high as in
during the first four months of 2012. The
rebound in syndicated bank lending reflected
a global phenomenon as the acute phase of
Euro Area deleveraging appears to have
passedFN2. The moderation in its pace has
been easing lending conditions in the region
(see the discussion later).


Bond flows to the region were also robust. Several
sovereigns and corporates successfully tapped
international bond markets taking advantage of
strong appetite for higher-yield developing-country
debt, encouraged by low yields in high-income
countries because of quantitative easing. For
example, despite the downgrading of Ukraine’s
sovereign credit rating by Moody’s and S&P in
December 2012, the government and several
companies issued $5.7 billion of combined
international bonds. Regular regional emitters
included Russia ($26 billion), Turkey ($8.7 billion),
Kazakhstan ($3.5 billion) and Romania ($1.5
billion), while infrequent issuers such as Azerbaijan
($1 billion), and Serbia ($1.5 billion) also took
advantage of conditions. Improved access to
international bond markets is particularly important




Increased diversification of exports



Trade has been a central mechanism through which the high-income country debt crisis has affected developing countries in
the Europe and Central Asia region. High-income European countries are particularly important export destinations for Ro-
mania, Lithuania and Latvia, with Albania, Macedonia FYR, and Bulgaria having close trade ties with some of the hardest-hit
high-spread Euro Area economies.


Several countries in the region have managed to diversify their export destinations in recent years. As discussed in the main
text, South-South trade has grown rapidly since 2000, although Europe and Central Asia region exports to other developing
regions has grown at 16 percent per annum on average slightly less rapidly than the 19 percent for all developing countries.
As a result, the share of exports to other developing-countries in total exports of the region rose to 39.8 percent in 2011 from
31 percent in 2000 (box figure).


Today China is the second largest export destination for Russia after the European Union. Turkey has successfully diversi-
fied its export markets over the last two years, exporting more to Middle Eastern economies including Iran, Iraq and the Unit-
ed Arab Emirates, with Iraq share in Turkey’s exports having increased to 9 percent so far in 2013 from 2 percent in 2004.
Similarly, according to estimates in 2013, Romanian exports to other developing countries including to Mexico (mostly tires,
carpets, steel products, optical instruments, accessories), Brazil (cars and car parts, rolling stock, oil equipment) and Turkey
has been growing rapidly. Romania’s exports to Russia increased at a 42.8 percent annualized pace and to Ukraine by more
than 10 percent in the first two months of the year. Similarly, both Latvia and Lithuania have been increasing is 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.








Box ECA.2


Box figure ECA 1.1


Source: World Bank; Comtrade.


0


5


10


15


20


25


30


Within ECA Other developing countries


1996 2003 2011


Share of exports (%)




GLOBAL ECONOMIC PROSPECTS | June 2013 Europe and Central Asia Annex


139


for countries with large external financing needs
(current account deficit and amortization of debt).
This year, this includes Ukraine with financing
needs totaling 42.6 percent of GDP, Bulgaria (39.5
percent of GDP), Turkey (30.8 percent of GDP)
and Romania (27.1 percent of GDP).


…with portfolio investments coming
with their challenges

Several countries in the region also received large
portfolio investment flows (foreign investment in
local stock markets and local currency debt
securities). During the first three months of this
year, flows to local bond markets were particularly
strong in Turkey ($7.3 billion), Romania ($4.7
billion), and Serbia ($1.9 billion) putting upward
pressure on their currencies. As these flows tend to
be volatile, managing the fluctuations can be quite
challenging, and to the extent that countries rely on
these flows to finance current account deficits they
constitute a source of vulnerability.


After the sharp decline in 2012, FDI
inflows to Europe and Central Asia
are expected to rebound this year



Foreign direct investment (FDI) inflows to Europe
& Central Asia region totaled only $109 billion in
2012, a 9 percent decline compared with 2011
(figure ECA.4). The sharp fall in FDI mostly
reflects a 25 percent contraction in direct


investment flows from high-income European
economies— traditionally the region’s main source
of FDI. In a process somewhat akin to the earlier
episode of banking-sector deleveraging,
multinationals from Greece, and the Netherlands
repatriated substantial sums from their foreign
holdings, including investments in the region. In
addition, in contrast to other years, reinvested
earnings were limited due to weak profitability and
intercompany loans slowed down sharply.

Serbia experienced the sharpest (86 percent)
decline in FDI inflows, followed by Macedonia,
FYR (71 percent), Moldova (43 percent), Lithuania
(32 percent) and Turkey (22 percent). In contrast,
FDI increased in oil-exporting economies
Azerbaijan (18.5 percent) and remained high at its
2011 level in Kazakhstan.

Limited high frequency data suggest a mixed
picture so far in 2013. While FDI inflows to Russia
surged in the first quarter because of a special
acquisition deal (for $15 billion) and
methodological changes, flows to other countries
have been weak.FN3 Nevertheless, FDI inflows are
projected to rebound in the second half of the year
for other economies as well. Several countries
including Romania, and Serbia might accelerate
privatization efforts this year. With the sharp
increase in FDI to Russia, FDI inflows to the
region are forecast to increase by 20 percent—
reaching $132 billion in 2013. In 2014, FDI flows
to the region is expected to slow down mainly on
the account of Russia following an adjustment for
the 2013 mega deal. Excluding Russia, FDI flows
are expected to rebound by 6 percent in the region
in 2014. The recovery in FDI, may be particularly
important for countries such as Georgia and
Albania, where FDI accounts more than 30 percent
of gross domestic capital formation.

With strong bond flows, rebounds in bank lending
and FDI flows, net private capital flows (debt flows
net of disbursements and equity flows net of
disinvestments) to the Europe and Central Asia
region are forecast to rebound to $255 billion (6.5
percent of the region’s GDP) in 2013 from an
estimated $208 billion (5.7 percent) in 2012 (table
ECA.1). Going forward, assuming there is no
major set-back in financial markets confidence, net
capital flows to the region are expected to
strengthen along with global growth to reach $279
billion in 2015—around 5.9 percent of region’s




FDI inflows are estimated to have risen


in 2013Q1


Source: World Bank; Haver.


Fig ECA.4


0


5


10


15


20


25


30


35


2010 2011 2012 2013


Quarterly inflows ($ billions)




GLOBAL ECONOMIC PROSPECTS | June 2013 Europe and Central Asia Annex


140


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.


Supply-side credit constraints in the
region have eased along with
improved global financial conditions



As discussed in the January edition of GEP 2013,
credit growth in the region was very weak during
the second half of 2012. Real domestic credit
growth has been negative for Latvia and Lithuania
since early 2009, and sharply declined in Albania,
Bulgaria, Macedonia FYR, and Romania. The
intense deleveraging by European banks over the
last two years has contributed to the tight credit
conditions and weak credit growth, especially in
countries with strong European bank presence
(BIS December 2012). The recent pick up in
international bank flows to the region, likely signals
the end to the most intense phase of Euro Area
deleveraging. While expected to continue, the
slower pace of deleveraging should ease the supply
side constraints when demand for loans picks up
with the economic activity.

Recent data show a modest increase in real credit in
Bulgaria (0.5 percent year-over-year in February)
and Macedonia (2.2 percent) after contacting in
2012, and less rapid declines in Latvia and
Lithuania. The rebound has been more robust for
Turkey, where after slowing due to domestic
monetary policy tightening, real credit growth rose
7.8 percent in the 12 months ending February. A
large part of the increase was funded by foreign
loans, with Turkish banks aggressively seeking
wholesale financing abroad. Although the credit
growth (nominal annualized growth of 20 percent)
is much higher than its central bank’s official target
at 15 percent, the central bank has not yet acted to
restrain it as inflation pressures have subsided.


Remittances flows to Europe and
Central Asia are also expected to
bounce back this year



Remittances are an importance source of foreign
currency and income for several countries in


developing Europe and Central Asia. Remittance
flows to the region are estimated to have fallen by
3.9 percent in US dollar terms to about $40 billion
(1.1 percent of GDP) in 2012 (table ECA.1). The
fall partly reflects the Euro depreciation against the
dollar as remittances declined by a smaller 2
percent in Euro terms. Remittances flows declined
in most countries in the region in USD terms
(Migration and Development Brief 20). The
exceptions were Tajikistan, Kyrgyz Republic,
Moldova and Armenia, where flows increased by
28 percent, 14 percent, 10 percent and 8.5 percent,
respectively as flows were supported by strong
growth in Russia and high oil prices (Migration and
Development Brief 17).

The weakness of the flows in the rest of the region
mainly reflects that the preponderance of their
migrants are in Western Europe, where economic
growth has been weak and unemployment rising.
Remittances to Romania have gyrated in recent
years. They surged after accession into the EU in
2004 but dropped significantly after the crisis in
2008, partly due to increasing numbers of migrants
returning home. Still, migrants are showing
resilience in the face of these dampening effects,
and are nearly sustaining remittances in euro terms.

As economic conditions improve in the European
Union, officially recorded remittances to the region
are expected to keep up with the region’s nominal
GDP growth in 2013-2015, reaching $52 billion
(1.1 percent of GDP) in 2015. Despite the
projected slowdown in Russia (see the discussion
later), still high oil price should continue to support
remittance outflows.



Output gaps and unemployment
represent persistent problems in
many countries with limited policy
space



Since the 2008/09 and European crises, several
countries in the region—particularly developing
Europe, had to deal with declining exports,
European bank deleveraging, and high levels of
external debt. As growth rates sharply declined,
unemployment soared to record levels, as banks
deleveraged and households and firms cut into
spending in an effort to repair damaged balance




GLOBAL ECONOMIC PROSPECTS | June 2013 Europe and Central Asia Annex


141


sheets. Fiscal conditions deteriorated throughout
the region, with severe consequences in a few
countries where public debt levels had risen during the
boom years.

The good news is that growth rate for many of the
hardest-hit countries have recovered to levels close
to their underlying potential output. Unfortunately,
growth so far has not been strong enough to make
significant inroads into existing unemployment and
spare capacity in many countries (figure ECA.5).
Several countries including Romania, Ukraine and
Bulgaria have still large economy-wide output gaps
(3 to 4 percent of their GDP). Several economies
continue to suffer from high levels of
unemployment. The unemployment rate is still in
excess of 10 percent in Albania, Bulgaria, Latvia
and Lithuania. More than 20 percent of the labor
force remain unemployed in Serbia, Kosovo, and
Macedonia FYR. Arguably, these economies have
been caught in a high unemployment equilibrium.
In the short run, policy options have been limited.
Many of these economies are already constrained
by high fiscal deficits. Inflationary pressures of last
year’s bad crop and necessity of restoring banking-


sector balance sheets have constrained the scope of
monetary policies to stimulate growth.

On the contrary, Russia, Turkey and Kazakhstan
remain among the exceptions in the region as their
output gaps are relatively small (or positive). Russia




Net capital and workers’ remittances flows to Europe and Central Asia* Table ECA.1


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


Capital Inflows (official+private) 288.0 98.5 180.9 200.1 206.2 253.9 255.0 277.6


Private inflows, net 276.0 62.9 157.3 194.6 207.9 255.2 257.2 278.8


Equity inflows, net 153.8 96.7 87.2 108.6 113.3 139.0 130.7 143.0


Net FDI inflows 169.0 90.4 88.0 118.7 108.8 132.8 121.3 131.3


Net portfolio equity inflows -15.3 6.4 -0.8 -10.1 4.5 6.2 9.4 11.7


Private creditors, net 122.2 -33.9 70.1 86.0 94.6 116.2 126.5 135.8


Bonds -18.0 2.9 21.3 13.6 34.4 46.4 38.2 30.4


Banks 151.6 -14.3 -5.8 33.2 26.7 37.2 49.4 59.7


Short-term debt flows -16.9 -34.9 45.9 24.5 23.1 25.2 29.7 40.0


Other private 5.5 12.4 8.8 14.7 10.4 7.4 9.2 5.7


Official inflows, net 12.0 35.6 23.5 5.5 -1.7 -1.3 -2.2 -1.2


World Bank 0.7 3.0 3.5 2.4 -0.1


IMF 7.0 20.5 9.4 -1.0 -5.0


Other official 4.3 12.1 10.7 4.1 3.4


Memo item:


Migrant remittance inflows 37.0 38.0 39.0 40.0 43.0 47.0 52.0


Central and Eastern Europe & Turkey 19.8 18.9 16.1 16.7


Commonwealth of Independent States 17.2 19.1 22.9 23.3


Source: The World Bank


Note: e = estimate, f = forecast.


*The regional FDI numbers have been revised historically since some countries including Russia have started to report


their balance of payment data under BMP6 methodology.



Developing Europe grows at potential rate but
output gap remains


Source: World Bank; Datastream; Haver.


Fig ECA.5


-10


-8


-6


-4


-2


0


2


4


6


8


10


12


2000 2002 2004 2006 2008 2010 2012


Annual growth of potential and actual GDP (%),
Output Gap % of GDP


Output Gap


GDP growth


Potential Output growth




GLOBAL ECONOMIC PROSPECTS | June 2013 Europe and Central Asia Annex


142


has been growing at or above its potential growth
rate indicated by its tight labor market and high
capacity utilization. Similarly, Turkey’s current
acceleration in growth has been generating
inflationary pressures, and increasing current
account deficits. For these economies, efforts to
increase growth through monetary and fiscal
stimulus risk being ineffective while adding to debt
or inflationary pressures without any sustained
progress in terms of increased output.


Inflationary pressures have recently
moderated in most economies

Inflation has moderated in most economies due to
declines in food prices following last summer’s
poor crop, and the passing through of earlier
administrative tariff and tax increases (figure ECA.6)
FN4. Further inflation declines are expected among
countries that suffered the biggest food price shocks.
That said inflation remains at high levels in several
middle-income countries. In Russia, inflation
although down was 7.2 percent year-over-year in
April, well above the central bank’s target of 5-6
percent. However, inflation is expected to decline
to within this range as the adverse base effect from
last year’s drought disappears and a better crop
could even cause food prices to decline. In Turkey,
despite the recent easing, pressures are likely to
build in the later part of the year due to robust
domestic demand and supply-side capacity
constraints. In the absence of any significant relief
from global commodity prices (Turkey is an energy
importer) or any local food prices as it did last year,
inflation is expected to rise beyond the central


bank’s target of around 5 percent. Inflation in
Romania remained at 5.7 percent year over year in
February (5.8 percent in January) driven mainly by
foods and services (due to regulatory tariff hikes),
but is expected to go down toward the central
bank’s target rate in the second half of the year.
Inflationary pressures have eased slightly in
Belarus, but inflation remains in double-digits.

In contrast, consumer prices fell in Azerbaijan and
Georgia towards the end of 2012 due to weak
domestic demand; decline in food prices; and due
to the earlier nominal appreciation of Georgian lari
against currencies of its main trading partners.
While inflation has picked up in Azerbaijan,
Georgia's deflation continued in April, the sixth
month in a row with falling prices, with prices
down by 1.7 percent due to the weak economic
activity.


…allowed central banks cut their
policy rates

Against the backdrop of easing inflation, spare
capacity, high unemployment and moderate
growth, several central banks in the region
including Albania, Azerbaijan, Belarus, and Georgia
have cut their policy rates (figure ECA.7). Turkey’s
central bank has been narrowing its interest rate
corridor since last year and recently cut its main
policy rate in April. The rate was cut despite a small
output gap, the acceleration in credit growth, and
persistent inflation in part to support growth and
discourage the inflow of portfolio investment (see
the discussion earlier).




Several countries cut their policy rates


Source: World Bank; Haver.


Fig ECA.7


4


5


6


7


8


9


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


Georgia (monetary policy)


Kazakhstan (refinancing)


Romania (monetary policy)


Russia (refinancing)


Turkey (1-wk repo)


Rate at end of period




The regional inflation momentum has


subsided in recent months*


*Excluding Belarus


Source: World Bank; Datastream; Haver.


Fig ECA.6


0


2


4


6


8


10


12


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


Rate of inflation (%)


CPI (3m/3m saar)


CPI (y-o-y)




GLOBAL ECONOMIC PROSPECTS | June 2013 Europe and Central Asia Annex


143


In contrast, the Russian central bank has kept its
main policy rates unchanged since December 2012
despite weakening growth. Similarly, the monetary
policy in Ukraine remains restricted by its de-facto
currency peg to the dollar. Maintaining the peg
might be increasingly challenging with economic
contraction.



Outlook: A rebound with
increasing differentiation
among countries



Despite the improved global
environment, growth in the region is
expected to rebound only slightly in
2013



Although the global environment has become
less volatile and growth appears to be
strengthening, GDP growth in Europe and
Central Asia is projected to rise only
gradually in 2013 to 2.8 percent from 2.7
percent in 2012 (table ECA.2). Growth
should firm further to 3.8 percent in 2014
and 4.2 percent in 2015 as the fiscal and
financial restructuring that has been a drag on
growth within the region and in the Euro
Area loses intensity. Several domestic factors
including fiscal and monetary policies and
structural issues will generate differentiation
in economic performance among countries.

The apparently anemic acceleration in 2013
mainly reflects the weakness of growth at the
end of 2012. The quarterly profile of growth
during 2013 is stronger than the annual growth rate
because growth in the final quarters of 2012 was
so weak (figure ECA.8). This low base effect
reduces carryoverFN5 into 2013, resulting in
weak annual growth even if quarterly growth
rates are relatively strong. While carry-over
from 2012 is generally low in many economies
in the region, it is negative for Ukraine and
Georgia, and weak for Turkey and Bulgaria.


On the plus side, agricultural production is
expected to be better this year in several countries.
The summer and winter droughts in 2012 cut the
growth rates significantly and generated inflationary
pressures in several countries. Countries including
Albania, Georgia, Kazakhstan, Romania, Russia,
Serbia, and Ukraine will benefit from a higher
contribution of agriculture this year.

Growth in developing Central and Eastern Europe is
expected increase only slightly to 1.9 percent in
2013 from 1.5 percent as most of the factors that
weighed down the growth last year continue to
hinder the economic growth this year, but less
intensively in some countries (see the table ECA.2
for the list of countries; table ECA.3 for individual
country forecast). Monetary policy remains
accommodative in most countries, while the pace
of fiscal consolidation has eased in Romania, Latvia
and Lithuania, reducing the drag on overall
growthFN6. However, major fiscal adjustments are
still needed in several others, including Serbia and
Montenegro. In addition, although there are signs
of improvement, economic growth in high-income
Europe still remains weak and is expected to pick
up only gradually toward the end of the year. Thus
although developing European economies will
benefit from a gradual improvement in high-
income countries and are therefore expected to see
a firming in quarterly growth rates, this will have
only a modest impact on whole-year growth in
2013. As a result, growth is expected slightly
increase in almost all Central and Eastern
European countries. The only exceptions are Latvia
and Lithuania where economic growth is expected
to ease in Latvia after more than 5 percent growth




Growth was weak in 2012Q4


Source: World Bank; Datastream; Haver.


Fig ECA.8


-3


-2


-1


0


1


2


3


4


Georgia Lithuania Latvia Turkey Ukraine Bulgaria


2012Q1 2012Q2 2012Q3 2012Q4


GDP growth (q-o-q, saar)




GLOBAL ECONOMIC PROSPECTS | June 2013 Europe and Central Asia Annex


144


over the last two years, and in Lithuania mainly due
to the base effect from 2012’s exceptionally good
harvest and projected weak growth in main trading
partners including Russia and Latvia.

Going forward, growth in developing Europe is
expected to rise in the medium-term to 3.1 percent
by 2015 but will remain below their 2000-2009
average (table ECA.2). As discussed earlier, several
economies still suffer from high unemployment
rates and spare capacity. 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. Serbia has the widest twin
deficits in the region. While spare capacity remains
in the region, countries must focus on redressing
structural weaknesses if they wish to return to the
relatively robust growth rates of the pre-crisis
period. Areas of focus should include increasing
labor market flexibility, strengthening the business
environment and financial market efficiency.

After the sharper than expected slowdown in 2012,
growth is likely to pick up in Turkey on rising
domestic demand, supported by robust domestic




Europe and Central Asia forecast summary Table ECA.2


Est.


00-09
a


2010 2011 2012 2013 2014 2015


GDP at market prices b 4.2 5.3 5.7 2.7 2.8 3.8 4.2


(Sub-region totals-- countries with full NIA + BOP data)c


GDP at market prices c 4.1 5.4 5.7 2.8 2.8 3.8 4.1


GDP per capita (units in US$) 4.0 4.9 5.2 2.3 2.4 3.4 3.7


PPP GDP 4.3 5.1 5.4 2.8 2.7 3.8 4.1


Private consumption 5.9 4.7 6.9 4.3 4.9 4.5 4.9


Public consumption 2.3 -0.1 2.6 2.3 3.0 2.4 2.2


Fixed investment 6.5 13.6 9.0 2.2 3.0 6.8 6.5


Exports, GNFS d 5.2 7.5 4.7 3.9 2.8 4.6 5.5


Imports, GNFS d 7.0 17.3 15.0 4.7 5.5 6.2 6.6


Net exports, contribution to growth -0.3 -2.7 -3.4 -0.4 -1.0 -0.8 -0.7


Current account bal/GDP (%) 2.3 0.6 0.7 0.6 -0.3 -1.1 -1.7


GDP deflator (median, LCU) 9.2 10.0 8.4 3.9 5.1 5.1 5.3


Fiscal balance/GDP (%) -0.6 -3.0 0.9 -0.3 -1.1 -0.1 -0.7


Memo items: GDP


Transition countries e 4.6 3.9 4.4 3.0 2.5 3.5 3.9


Central and Eastern Europe f 4.1 -0.4 3.1 1.5 1.9 2.5 3.1


Commonwealth of Independent States g 4.7 4.7 4.6 3.2 2.6 3.7 4.0


Russia 4.4 4.3 4.3 3.4 2.3 3.5 3.9


Turkey 3.0 9.2 8.8 2.2 3.6 4.5 4.7


Romania 4.2 -1.6 2.5 0.7 1.7 2.2 2.7


Forecast(annual percent change unless indicated otherwise)


Source: World Bank.


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.




GLOBAL ECONOMIC PROSPECTS | June 2013 Europe and Central Asia Annex


145


credit growth and relatively loose macroeconomic
policies. Nevertheless, the growth in 2013 will be
constrained by the weak carryover from 2012. The
growth rate is expected to rebound to 3.6 percent
from 2.2 percent in 2012. With the economy
operating very close to its potential output growth,
the rising domestic demand and declining tourism
receipts will widen the current account deficit to
6.9 percent of GDP in 2013 from 6 percent in
2012. While access to external financing has been
comfortable so far 2013 with the recent upgrade
of its credit rating to investment grade, the heavy
reliance on portfolio and short-term debt flows is
an important vulnerability. Monetary policy is
expected to remain active in balancing external and
domestic demand while growth picks up with the
forecasted global recovery, reaching 4.7 percent by
2015.

Growth in Russia is expected to slow down to 2.3
percent in 2013 from 3.4 percent in 2012 after
continuously weakening over the last five quarters
(on a year-over-year basis). In addition to
disappointing export growth, domestic demand has
been weak—partly due to increasing prices and
easing in oil prices, which has constrained incomes,
corporate profits and investment. At the same
time, despite the increased capital flows,
investment has not picked considerably. Similar to
Turkey, Russia’s economy is operating close to its
potential and faces high inflation, a tight labor
market, and capacity constraints. But unlike
Turkey, the Russian central bank has pursued a less
accommodative stance keeping its main policy rates
unchanged. However, this stance might change if
inflationary pressures start to ease in the second
half of the year with adverse base effect
disappearing. In addition, starting this year fiscal
policy will be constrained by a newly accepted
budget rule. The rule implies that spending cannot
exceed revenues more 1 percent of GDP, while
revenues are calculated as a function of past long-
term average oil price. Growth is expected to
pick up together with the global economy
only modestly to 3.9 percent by 2015 as the
pace of expansion will be held back by
potential output growth.

Growth in Kazakhstan is expected to remain stable
at 5 percent in 2013 following the weak first
quarter growth. Government consumption is
expected to compensate for moderating private
consumption and the economic slowdown in


Russia. While expected to pick up by 2014 after a
new oilfield becomes operational, medium-term
growth in Kazakhstan will be held back by supply-
side constraints.

Growth in Ukraine is forecast to remain weak at 1.0
percent in 2013, up from 0.2 percent in 2012. The
increase will be supported by robust consumer
demand with increasing retail sales, while industry
continues to contract and global steel prices remain
weak. The overall outlook remains challenging,
with a high fiscal deficit, persistent current account
deficit, high external debt, and the currencies de-
facto peg to the dollar and declining foreign
reserves all sources of concern. Reforms that may
stem from ongoing discussions with the EU/IMF
and Russia will be crucial factors determining the
shape of growth going forward.

Growth rates in Azerbaijan and Kyrgyzstan are
forecast to be higher in 2013 as high public
investment spending boosts domestic demand and
a recovery in Kyrgyzstan’s gold production. On the
other hand, Armenia’s growth is expected to
moderate after the strong growth in 2012, as
prudent fiscal and monetary policies permit the
economy to avoid overheating.



Risks and
vulnerabilities


While risks are less pronounced, the region’s
economic outlook is still subject to various challenges.

Although the risk of a serious Euro Area crisis has
diminished, outturns in developing Europe will
remain sensitive to the speed of the recovery in its
high-income neighbor. Both a significantly stronger
and weaker recovery in high-income Europe would
have significant knock on effects for the region,
including through the financial channel.

The recent easing in commodity prices in response
to growing supply and demand substitution
brought on by high prices, is a further source of
uncertainty as to the pace of decline toward long-
term equilibrium prices. As discussed in the main




GLOBAL ECONOMIC PROSPECTS | June 2013 Europe and Central Asia Annex


146


text and the Commodity Annex, if prices ease more
quickly than the baseline, government revenues,
incomes and current account positions in exporting
countries could come under pressure, even as
lower prices benefitted importing nations.
According to the simulations highlighted in table 5
in the main text, a rapid decline in oil prices might
reduce the growth rate by 0.8 percentage points,
the current account balance by 2.3 percentage
points, and the fiscal balance by 1.8 percentage
points in 2014 from the baseline scenario for oil-
exporters in the region. The impact will be positive
for oil-importers with increasing growth by 0.4
percentage points and improving both the current
account and fiscal balance by 0.8 and 0.2
percentage points, respectively from the baseline
scenario. The scenario for the metal price declines
show smaller impact for the region.

Several countries have accessed international
capital markets this year as cost of bond financing
fell. Nevertheless, a sharp drop in confidence in
financial markets—due to unexpected
developments in Euro Area debt resolution and US
fiscal situation—can lead to a sudden reversal of
global financial conditions and adversely affect
significantly the countries with high external
financing needs (current account deficits and
amortization of external debt).

In the longer term, developing country financial
conditions may become more difficult as high-
income countries step back from quantitative
easing and base interest rates and spreads rise. The
cost of capital in developing countries is likely to
rise amid rising long-term yields in high-income
countries. Initially this could expose vulnerabilities
that have built up during periods of sustained low
borrowing costs, intensifying financial market
pressures in the region and even in a worst case
scenario provoking local crises. Longer-term,
higher borrowing costs would raise the cost of
capital and cause firms and foreign investors to
reduce investment levels with negative
consequences for growth (see main text), capital
flows and FDI (see World Bank, 2010 for an in
depth discussion of channels)


Aside from these global risks for the region’s
economies, banking systems in several countries
have been under pressure by sharp slowdown in
economic activity, weak credit demand and
increase cost of foreign funding have increased
pressures on profits. Non-performing loans (NPL)
remain higher than 10 percent in several countries
including Kazakhstan, Albania, Ukraine, and
Serbia. The high levels of NPL in region’s banking
system may constrain credit growth going forward,
which has already been weak. 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 2012.





GLOBAL ECONOMIC PROSPECTS | June 2013 Europe and Central Asia Annex


147



Europe and Central Asia Country forecasts Table ECA.3


Est.


00-09
a


2010 2011 2012 2013 2014 2015


Albania


GDP at market prices (% annual growth) b 4.9 3.5 3.0 1.6 1.8 2.0 3.0


Current account bal/GDP (%) -8.6 -11.4 -12.0 -10.7 -9.5 -8.3 -7.1


Armenia


GDP at market prices (% annual growth) b 7.7 2.2 4.7 7.2 5.0 5.0 5.0


Current account bal/GDP (%) -7.4 -14.8 -10.9 -10.6 -9.6 -9.4 -9.4


Azerbaijan


GDP at market prices (% annual growth) b 14.4 5.0 0.1 2.2 4.8 4.8 2.9


Current account bal/GDP (%) 2.9 28.4 26.5 21.7 13.6 11.9 9.4


Belarus


GDP at market prices (% annual growth) b 6.6 7.7 5.5 1.5 2.5 2.8 3.0


Current account bal/GDP (%) -4.6 -15.0 -8.5 -2.9 -4.7 -5.6 -6.1


Bulgaria


GDP at market prices (% annual growth) b 4.0 0.4 1.8 0.8 1.2 2.1 3.0


Current account bal/GDP (%) -11.3 -1.5 0.1 -1.0 -1.6 -1.6 -2.5


Georgia


GDP at market prices (% annual growth) b 5.6 6.3 7.2 6.1 4.0 6.3 6.0


Current account bal/GDP (%) -12.6 -10.2 -12.8 -11.5 -9.0 -7.8 -7.4


Kazakhstan


GDP at market prices (% annual growth) b 7.5 7.3 7.5 5.0 5.0 5.3 5.5


Current account bal/GDP (%) -2.0 0.9 6.5 3.8 3.2 3.2 3.1


Kosovo


GDP at market prices (% annual growth) b 5.8 3.9 5.0 2.3 3.1 4.0 4.2


Current account bal/GDP (%) -18.2 -25.9 -26.2 -21.3 -21.0 -18.8 -16.0


Kyrgyz Republic


GDP at market prices (% annual growth) b 4.8 -0.5 6.0 -0.9 7.4 7.5 5.3


Current account bal/GDP (%) -6.0 -6.4 -6.5 -15.3 -8.0 -6.0 -5.6


Latvia


GDP at market prices (% annual growth) b 3.7 -0.3 5.5 5.6 3.6 4.1 3.7


Current account bal/GDP (%) -10.2 3.0 -2.1 -1.7 -2.8 -2.8 -3.6


Lithuania


GDP at market prices (% annual growth) b 4.2 1.3 5.9 3.7 3.0 3.5 4.2


Current account bal/GDP (%) -7.1 1.6 -1.8 -0.9 -1.4 -1.7 -2.0


Moldova


GDP at market prices (% annual growth) b 4.4 7.1 6.8 -0.8 3.0 4.0 5.0


Current account bal/GDP (%) -8.4 -7.7 -11.3 -7.0 -7.4 -7.9 -8.9


Macedonia, FYR


GDP at market prices (% annual growth) b 2.3 1.8 3.0 -0.3 1.4 2.5 3.5


Current account bal/GDP (%) -6.1 -2.2 -3.0 -3.9 -5.0 -5.5 -5.2


Montenegro


GDP at market prices (2005 US$) b - 2.5 3.2 -0.5 0.8 1.8 2.0


Current account bal/GDP (%) -11.4 -22.9 -17.7 -17.9 -19.0 -18.3 -17.0


Romania


GDP at market prices (% annual growth) b 4.2 -1.6 2.5 0.7 1.7 2.2 2.7


Current account bal/GDP (%) -7.6 -4.5 -4.6 -3.8 -3.7 -3.6 -3.6


Russian Federation


GDP at market prices (% annual growth) b 4.4 4.3 4.3 3.4 2.3 3.5 3.9


Current account bal/GDP (%) 9.3 4.8 5.3 3.9 3.0 1.6 0.6


Serbia


GDP at market prices (% annual growth) b 3.6 1.0 1.6 -1.7 2.0 3.1 3.6


Current account bal/GDP (%) -9.7 -6.7 -9.2 -10.9 -9.9 -9.0 -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 -1.2 -4.7 -1.9 -2.2 -2.4 -2.5


Turkey


GDP at market prices (% annual growth) b 3.0 9.2 8.8 2.2 3.6 4.5 4.7


Current account bal/GDP (%) -3.3 -6.4 -9.7 -6.0 -6.9 -7.1 -7.2


Ukraine


GDP at market prices (% annual growth) b 3.9 4.2 5.2 0.2 1.0 3.0 4.0


Current account bal/GDP (%) 2.2 -2.2 -5.5 -8.4 -7.4 -6.8 -6.2


Uzbekistan


GDP at market prices (% annual growth) b 6.1 8.5 8.3 8.2 7.4 7.1 6.7


Current account bal/GDP (%) 7.5 6.2 5.8 1.0 1.1 1.3 2.2


Source: World Bank.


World Bank forecasts are frequently updated based on new information and changing (global)


circumstances. Consequently, projections presented here may differ from those contained in other Bank


documents, even if basic assessments of countries’ prospects do not 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




GLOBAL ECONOMIC PROSPECTS | June 2013 Europe and Central Asia Annex


148


Notes


1. Turkey did not sell any gold to Iran in January as banks and dealers waited until early February for the


implementation of U.S. sanctions that tightened control over precious metal sales. The trade has resumed in


February as the United States has given Turkey a six-month waiver exempting it from sanctions on trade with Iran,


which is now due to expire in July


2. By June 2012, three quarters of European banks had complied with the ECB’s capital ratio requirements.


Moreover, according to the April ECB Bank Lending Survey, Euro Area banks are beginning to loosen credit


standards. Euro Area banks have begun repaying ECB crisis loans and have already started to repay some of the


loans well in advance (See Finance Annex).


3. The regional FDI numbers have been revised up historically since several countries including Russia have started


to report their balance of payment data under BMP6 methodology. FDI flows to Russia surged in the first quarter


of 2013 as the deal between Rosneft and BP around the TNK-BP sale that eventually resulted in the acquisition of


18.5 percent of Rosneft, worth almost $15 billon. Adjusted for this one-off deal, the FDI remained fairly stable


during the first quarter of 2013.


4. The figure excludes Belarus because of its outlier status in terms of 2011 inflation, which reached 108.7 percent,


after almost threefold devaluation of the national currency.


5. Carry over (or statistical overhang) is defined as the rate of growth that would be observed if quarterly GDP in


year t remained unchanged from the level of the fourth quarter of the previous year. It therefore measures the


contribution to annual growth in year t, of the quarterly expansion during the previous year (GEP 2012 June).


6. The EU required adjustment has been completed in Romania, Latvia and Lithuania to reach the 3 percent deficit


target.




GLOBAL ECONOMIC PROSPECTS | June 2013 Latin America and the Caribbean Annex


149




LATIN


AMERICA


and the


CARIBBEAN


REGION


GLOBAL


ECONOMIC


PROSPECTS Annex June 2013




GLOBAL ECONOMIC PROSPECTS | June 2013 Latin America and the Caribbean Annex


151


Overview



After a sharp recovery from the global
economic crisis in 2010, when regional output
expanded by 6 percent, growth in the Latin
America and the Caribbean decelerated
markedly, to an estimated 3 percent by 2012.
Supply side constraints have become apparent
in some of the larger economies, where
output was near or above potential during the
recovery phase, and which contributed to
relatively high inflation and deterioration of
current account balances. Despite a sharp
deceleration in growth, regional output is
only now in line with potential GDP. Cyclical
factors such as lower commodity prices and
generally subdued global activity, in particular
in high-income countries, have also weighed
on growth. Private consumption remained
relatively robust, while the contribution to
growth from investment and exports
weakened considerably.

Outlook for 2013-2015: The factors that
have contributed to the deceleration in
growth in the post-recovery period will
continue to weigh on economic activity over
the short-to-medium term. Growth in the
region is expected to accelerate only modestly
to 3.3 percent in 2013, and to about 3.9
percent over the medium terms. Growth is
expected to firm somewhat from a very weak
pace in Brazil and Argentina, while slowing
down in most of the commodity exporters,
largely on account of weaker commodity
prices. Growth in Venezuela is expected to
decelerate markedly as highly expansionary
policies are reversed. Meanwhile Paraguay
will see one of the sharpest accelerations in
growth this year, on account of normalization
in agriculture output. Growth in Central
America will benefit over the medium term
from firmer growth in the United States and
improvements in terms of trade. Growth in
the Caribbean will be held back by large fiscal
adjustments necessary to bring fiscal deficits
to sustainable levels and help reduce public
debt burdens.


Risks and vulnerabilities: The severe
downside risks to the global economy have
eased significantly compared to last year,
reflecting progress in Euro-area economies
towards reducing fiscal and banking solvency
risks and an easing in fiscal-cliff related risks
in the United States. However, little progress
has been made in setting the US fiscal policy
on a sustainable path and by Japan to reduce
its large general government debt to
sustainable levels, and these continue to
represent sources of risk for the global
economy.

For the Latin America and the Caribbean the
risks stem in part from the challenges of
finding the optimal balance between
macroeconomic policies to st imulate
domestic demand in the short term and
structural reforms to enable faster growth
over the longer run. In addition ample global
liquidity and higher and more volatile capital
flows are complicating the task of conducting
monetary policy and could, if interest rates
are low, lead to rapid credit expansion and
goods and asset price inflation. For
commodity exporters, large fluctuations of
export prices represent a major risk to the
outlook.

Over the longer term as external financial
conditions are likely to become tighter,
higher financing costs could result in reduced
investment spending and growth in the
countries in the region and may also expose
unsustainable positions. If greater progress is
made to implement a wide range of structural
reforms and address supply-side constraints
to growth, economic expansion over the
medium term could be more robust.




GLOBAL ECONOMIC PROSPECTS | June 2013 Latin America and the Caribbean Annex


152


Recent economic
developments




With growth decelerating to slightly
below potential, the positive output
gap nearly closed in 2012…

Growth in the Latin America and the Caribbean region
decelerated an estimated 1.4 percentage points to 3 percent
in 2012 (table LAC.1). In per capita terms growth has
fallen below 2 percent for the first time since the
global crisis. The growth slowdown was partly due to
bottlenecks that constrained growth in some of the larger
economies in the region, partly because of softening in
global activity mid-year due to Euro Area
uncertainty, and partly because of a decline in non-
oil commodity prices. Even with GDP growth
below potential in 2012, the positive output gaps
that opened during the recovery from the 2009
crisis still persist or have only now closed. GDP in
Brazil expanded only 0.9 percent, despite accommodative
monetary and fiscal policies, held back by increasingly
apparent supply side bottlenecks. Despite slow growth,
unemployment remains low and inflation high.
World Bank estimates suggest that the slowdown
has only now opened up a negative output gap of
0.8 percent of potential GDP. Although potential
growth has slowed due to a decline in investment
and slower growth in total factor productivity, at
3.2 percent potential growth was still much higher
than actual GDP.FN1

In other South American commodity exporting
countries growth remained robust, including
Bolivia, Chile, Colombia, Peru, and Venezuela. In
these economies, growth in private consumption
contributed half or more of the total GDP
expansion supported by still high commodity
revenues. In Venezuela very expansionary policies
contributed to a marked acceleration in growth to
5.6 percent and a wide positive output gap with
respect to potential. Growth decelerated markedly only in
Argentina to 1.9 percent from 8.9 percent, as exports
underperformed and investment plunged, subtracting 0.01
and 1.2 percentage points from growth, respectively.
Paraguay is one of only a couple of countries in
Latin America to have recorded a decline in GDP,


due to the impact of a severe drought, and slower
growth in its major trading partners. Mexico
continued to outperform the regional average for a
second consecutive year, expanding close to 4
percent and contributing 1.1 percentage points to the
regional growth, compared to a 0.3 percentage point
contribution by Brazil and Chile. Mexico’s growth
continued to be well balanced, with positive
contributions from all demand components.

In Central America output expanded at a robust
pace of close to 5 percent in 2012, the second
consecutive year of above trend growth. Growth
accelerated in Costa Rica to above 5 percent
boosted by exports and private consumption and
remained very robust in Panama, where exports
and investment have made significant contributions
to growth (in excess of 4 percentage points),
supported by the Panama Canal expansion and
several other large investment projects.

Growth in the Caribbean continued to disappoint,
decelerating to 3 percent in 2012 as growth
decelerated in the Dominican Republic and in
Haiti, while Jamaica’s economy fell into recession.
In most other economies in the region growth fell
below 1 percent, with the notable exception of
Belize’s economy, which expanded more than 5 percent.


Data from the first quarter of 2013
suggests that growth is easing

Growth had decelerated from 3.2 percent
seasonally adjusted annualized (or saar) in the first
quarter of 2012 to 1.6 percent by the third quarter,
before reaccelerating markedly in the last quarter to
a 3.5 pace in line with potential growth, as growth
in the largest economies in the region accelerated
into the year’s end. On an annualized basis fourth
quarter GDP expanded 2.6 percent in Brazil, 4.5
percent in Peru, 2.7 percent in Mexico, more than
7.0 percent in Chile and Colombia. Among the
countries that bucked the regional acceleration
trend in the final quarter of 2012 were Paraguay,
Peru, with GDP contracting in the former and
decelerating in the latter. With relatively strong growth
in the second half of 2012 and/or the fourth quarter of
2012, Chile, Peru, Colombia have strong carryovers for
2013, in excess of 1.3 percentage points, while Brazil’s
carry over is relatively weak at 0.65 percentage points. For
the region the carryover for 2013 growth is about 1
percentage points.




GLOBAL ECONOMIC PROSPECTS | June 2013 Latin America and the Caribbean Annex


153


Regional growth in the first quarter as
approximated by industrial production softened,
with industrial production remaining relatively flat,
after a slight contraction in the fourth quarter
(figure LAC.1). Slower domestic consumption in
conjunction with weak external demand caused
economic activity to slow in many countries in the
region. In Mexico GDP growth eased to a 1.8
percent seasonally adjusted annualized pace as
domestic consumption and external demand
showed signs of weakness. In addition government
spending eased in line with past trends at the
beginning of a new presidential administration.
Similarly in Brazil growth eased to a 2.2 percent
annualized pace in the first quarter of 2013, as
exports contracted and both private and public
consumption showed signs of weakening and
despite an acceleration in investment growth.
Growth decelerated markedly in Chile in the first
quarter, to 2.1 percent quarter-on-quarter
annualized pace, down from 8 percent in the fourth
quarter of 2012 on account of a slowdown in
investment, consumption, and sluggish exports.
Meanwhile economic activity in Venezuela
contracted 2.5 percent quarter-on-quarter (or 9.7
percent annualized pace) as private consumption
slowed dramatically, while exports contracted, and
inventories tumbled.

Similarly, export performance has weakened in the
first months of 2013, with export revenues
declining close to 12 percent annualized rate in the
first quarter of 2013, after a robust performance in
the fourth quarter of 2012 (14.8 percent). The


decline comes even as world imports continued to
expand at a solid pace over this period (10 percent).
The quarterly decline was particularly pronounced
in commodity exporters like Argentina, Brazil,
Chile, Colombia, and Peru. Export revenues also
declined in manufactures exporters like Mexico
(10.7 percent saar).

Meanwhile imports expanded at slower pace of 8.4
percent annualized pace in the first quarter of 2013,
after a strong recovery in the fourth quarter (31.6
percent), pointing to a possible moderation in
domestic demand and rapidly deteriorating trade
balances. Imports continued to rise at a rapid pace
in Argentina, Brazil, and bounced back in
Colombia, while import growth eased in Mexico in
line with weaker exports.


Inflation remains contained



Inflation rates in the region have remained
relatively anchored for the most part, especially
core inflation, although they have remained
stubbornly high or even accelerated in countries
where economic output is at or near potential (e.g.
Brazil, Uruguay). Currency devaluation has
exacerbated local price pressures in Venezuela,
while import restrictions and loose policies
contribute to stubborn inflation in Argentina that
continues to erode real incomes. Inflation
decelerated in Chile, Colombia, and Peru on
account of deceleration in food and energy
inflation, but in some cases also on account of
moderation in domestic demand. Lower food and
energy inflation also contributed to the decline in
inflation in Central American economies, while
inflation in some of the Caribbean economies was
low on account of weak domestic demand.


Monetary policy guided by both
domestic conditions as well as global
liquidity



Conducting monetary policy during the post-crisis
period has been complicated by the very loose
monetary policies pursued by several high-income
countries, most recently Japan.

The benign inflation environment and very easy
policy stances in high-income countries have




Industrial production below trend levels


since the second half of 2012


Source: Datastream and the World Bank staff calculations


Fig LAC.1


60


72


84


96


108


120


Jan '95 Jan '98 Jan '01 Jan '04 Jan '07 Jan '10 Jan '13


Industrial production Trend (HP filter)


Index, August 2008=100




GLOBAL ECONOMIC PROSPECTS | June 2013 Latin America and the Caribbean Annex


154


prompted some central banks in the region to cut
policy rates. The Bank of Colombia cut its policy
rate 200 basis points, as growth slowed since mid-
2012, while Banxico, Mexico’s central bank cut the
overnight rate 50 basis points in March 2013, the
first cut since July 2009. In contrast Brazil’s central
bank raised the Selic rate a cumulative 75 basis
points to 8 percent embarking on what is expected
to be a gradual normalization in its monetary policy
(figure LAC.2).

Sluggish growth in some of the larger economies
has prompted more accommodat ive
macroeconomic policies despite becoming
increasingly apparent that supply potential is lower
than during the recovery from the global crisis in
these economies.

Strong domestic demand in many countries in
the region and in some cases small or positive
output gaps have resulted in a worsening in
current account positions in 2012. For
commodity exporters the decline in non-oil
commodity prices in 2012 has also played a
role, with this group of countries recording
some of the largest deteriorations in current
account positions. One notable exception is
Argentina, where compression in imports due
to tough import controls, made possible an
improvement in the current account balance.
For the region as a whole the current account
deficit deteriorated 0.4 percentage points,
with a median deterioration of 0.1 percentage
points of GDP.


Foreign currency earnings from remittances
increased slightly to an estimated $62 billion, still
below the 2008 peak of $64.5 billion. Remittances
to Mexico (which accounts for 55 per cent of
regional inflows) and Ecuador declined in absolute
terms, while they rose relatively quickly in Brazil,
Guatemala, El Salvador, and Peru.

Expressed as a share of recipient countries’ GDP
they remained flat at 5.3 percent of GDPFN2 in
2012. The weak performance reflected still weak
labor markets in the United States, and
unemployment in Spain (another major destination
for regional migrants) in excess of 25 percent of
the labor force. Indeed, the very high
unemployment rate in Spain and improved growth
prospects in home countries forced many migrants
to return home.


Capital flows



Very loose monetary policies pursued by several
high-income countries, most recently Japan have
contributed to ample global liquidity. With
dramatic shifts in perceptions of risk in high-
income countries there have been episodes of
strong inflows and outflows of capital to
developing countries, putting currencies under
pressure (figure LAC.3). While data for annual
flows do not suggest that capital flows have been
unusually high, several countries have taken
unusual measures – including lowering interest
rates to dissuade foreign capital inflows.




Monetary policy rates


Percentage Points


Source: National central banks and Datastream


Fig LAC.2


0


2


4


6


8


10


12


14


Jan '08 Jan '10 Jan '12


Brazil Colombia Chile Mexico Peru




Real effective exchange rates


June 2008=100


Source: World Bank.


Fig LAC.3


0


20


40


60


80


100


120


Jan '04 Jan '06 Jan '08 Jan '10 Jan '12


Brazil Chile Colombia Mexico Peru




GLOBAL ECONOMIC PROSPECTS | June 2013 Latin America and the Caribbean Annex


155


Net capital inflows rose 19.3 percent in 2012
to about 6.5 percent of GDP, up from 5.5
percent of GDP in 2011, on stronger equity
inflows. Net FDI flows increased by
$17.3billion and net portfolio inflows were up
$16.8 billion in 2012 (table LAC.1). Together
the equity inflows accounted for more than
half of the increase in net capital flows to the


Latin America and the Caribbean region. Net
bond flows increased by an estimated $26.8
billion in 2012, while bank lending declined
$10.3 billion.

Gross capital flows to countries in Latin
America and the Caribbean region were 23
percent higher year-on-year in the first five
months of 2013 (see Finance Annex and
figure LAC.4). Equity placements jumped 154
percent on account of strong issuance by
Brazilian firms, including a record developing
country bond issuance of $11 billion by
Petrobras. Meanwhile bank lending fell more
than 30 percent year-on-year.

Reflecting ample global liquidity and despite
increased costs, frontier-market sovereigns in
the region like Honduras ($500 million) were
able to successfully issue bonds. Bolivia ($500
million), Dominican Republic, El Salvador
($800 million), and Guatemala ($700 million)
also came to the market last year to take
advantage of investors’ search for higher
yields. Costa Rica has managed to issue a
$500-million 12-year bond and a $500-million
30-year bond while Panama issued a $750




Net capital flows to Latin America Table LAC.1


USD, billions


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


Capital Inflows 186.0 179.6 328.5 303.9 362.6 358.5 364.1 379.2


Private inflows, net 179.3 161.6 306.1 299.1 360.7 359.4 364.8 381.6


Equity Inflows, net 127.5 126.5 166.6 165.6 199.8 209.8 212.4 232.0


Net FDI inflows 137.2 84.9 125.3 158.3 175.6 192.2 191.0 206.4


Net portfolio equity inflows -9.7 41.6 41.3 7.4 24.2 17.6 21.4 25.6


Private creditors. Net 51.8 35.1 139.5 133.4 160.9 149.6 152.4 149.6


Bonds 8.9 45.9 72.9 85.2 112.0 89.3 83.1 79.6


Banks 40.8 -1.7 21.7 51.7 41.4 43.6 45.2 51.4


Short-term debt flows 2.6 -8.6 43.8 -3.0 7.3 15.2 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


Source: The World Bank


Note : e = estimate, f = forecast




Gross capital flows to Latin America


and the Caribbean


Source: World Bank.


Fig LAC.4


0


10000


20000


30000


40000


50000


Jan '09 Jan '10 Jan '11 Jan '12 Jan '13


Equity issuance Bond issuance Bank loans


million USD




GLOBAL ECONOMIC PROSPECTS | June 2013 Latin America and the Caribbean Annex


156


million 40-year bond. The long-term dated bonds
issued at surprisingly low rates seem to indicate
that investors’ are comfortable with longer-dated
issuance. Many countries in the region are engaging
in more active debt management to take advantage
of investors’ willingness to buy longer-dated paper
increasing the maturity of their debt, by pre-paying
shorter-term debt. Furthermore the decline in cost
of financing could help some countries in the
region reduce the cost of debt servicing over the
short to medium term.


Economic outlook




Growth is expected to firm gradually

A gradual firming in the global economy, and still
very easy external financing conditions will support
a modest step-up in growth in the region to 3.3




Latin America and the Caribbean forecast summary Table LAC.2


Est. Forecast


00-09
a


2010 2011 2012 2013 2014 2015


GDP at market prices b 2.6 5.9 4.4 3.0 3.3 3.9 3.8


(Sub-region totals-- countries with full NIA + BOP data)
c


GDP at market prices c 2.6 6.0 4.4 3.0 3.3 3.9 3.8


GDP per capita 1.4 4.8 3.2 1.8 2.2 2.8 2.7


PPP GDP 2.7 6.1 4.6 3.0 3.4 3.9 3.8


Private consumption 2.9 5.9 5.1 3.8 3.3 3.7 3.8


Public consumption 2.6 4.2 3.2 3.7 2.8 3.1 3.4


Fixed investment 3.6 10.5 8.9 2.9 5.4 5.9 5.1


Exports, GNFS d 2.8 11.7 6.4 2.6 4.5 5.4 5.8


Imports, GNFS d 3.7 22.0 10.4 3.9 5.3 5.6 6.1


Net exports, contribution to growth -0.2 -2.6 -1.3 -0.5 -0.5 -0.4 -0.4


Current account bal/GDP (%) -0.3 -1.3 -1.3 -1.7 -1.9 -2.1 -2.1


GDP deflator (median, LCU) 6.3 5.2 7.0 5.7 5.7 5.1 5.2


Fiscal balance/GDP (%) -2.4 -3.0 -2.4 -2.8 -2.2 -2.2 -2.4


Memo items: GDP


LAC excluding Argentina 2.5 5.7 4.0 3.1 3.3 4.0 3.9


Developing Central & North America e 1.5 5.2 4.1 4.0 3.5 4.0 3.9


Caribbean f 3.4 4.7 3.8 3.0 2.2 3.3 3.9


Brazil 2.9 7.5 2.7 0.9 2.9 4.0 3.8


Mexico 1.2 5.3 3.9 3.9 3.3 3.9 3.8


Argentina 3.4 9.2 8.9 1.9 3.1 3.0 3.0


(annual percent change unless indicated otherwise)


Source : World Bank.


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. Developing Central & North 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.




GLOBAL ECONOMIC PROSPECTS | June 2013 Latin America and the Caribbean Annex


157


percent (slightly down from our January 2013
projection) from 3.0 percent in 2012 (table LAC.2).
Growth in selected resource exporting countries
will be weaker due to recent declines in commodity
prices. For commodity exporters, further declines
in commodity prices will both reduce government
revenues and foreign exchange revenues, placing
pressure on currencies and government spending in
those countries such as Argentina and Venezuela,
where deficits are already high.

The output gap for the region as a whole more or
less closed in 2012, and with the expected uptick,
GDP in 2013 is projected to expand at roughly the
same rate as potential so there should be no
significant exacerbation of overheating pressures
(figure LAC.5 and 6). However, with growth
expected to accelerate even further in 2014 and
2015, partly due to relatively loose monetary and
fiscal policies, inflationary pressures are expected to
build and current account deficits to rise.

Growth in Brazil is expected to accelerate to 2.9
percent in 2013 and further to close to 4 percent
over the 2014-2015 period, bolstered by spending
on infrastructure and supportive private
consumption. Monetary and fiscal policy are
projected to remain expansionary (the public sector
primary surplus declined below 2 percent of GDP
in Q1 on a 12 months rolling basis). With the
economy arguably operating at potential, the
acceleration in growth will keep inflation near the
upper limit of the targeted inflation range, while


robust domestic demand in conjunction with
relatively soft external demand and lower
commodity prices will keep the current account
balance in deficit at close to 3 percent of GDP by
2015. Over the medium-to-long term efforts by the
government to address the supply side constraints
and reduce the custo Brasil are expected to lift
potential output gradually.

Growth in Argentina is also expected to accelerate
to 3.1 percent in 2013, bolstered by a record
harvest expected this season and by moderately
stronger external demand from Brazil. However,
growth is expected to underperform over the
medium term remaining below potential growth, as
distortions introduced by various policies aimed at
holding back inflation cut into investment and total
factor productivity growth.FN3 Fiscal policy is
expected to tighten due to financing difficulties and softer
commodity prices, which will further weaken growth.

Paraguay will have the fastest growing economy in
the region in 2013, due to appropriately
accommodative monetary and fiscal policies and
the normalization of agricultural output, following
last year’s drought. In contrast, Venezuela will see
one of the most pronounced decelerations in
growth in the region (more than 4 percentage
points to 1.4 percent) due to expected post-election
cuts to government spending, and weak real-
income growth due to high inflation. Similarly
growth in Ecuador is expected to decelerate by
close to 1 percentage point to 3.8 percent.




Growth in Latin America and the Carib-


bean is expected to accelerate only


marginally through 2015


Source: World Bank


Note: 2009 data represents the average for the 2003-2007 period.


Fig LAC.5


0


2


4


6


8


2010 2012 2014 2016


Latin America and the Caribbean


Developing Central and North
America


The Caribbean South America


GDP growth, percent




Output gaps to narrow in Latin America


and the Caribbean in 2013


Source: World Bank


Fig LAC.6


Argentina


Antigua and Barbuda


Belize


Bolivia


Brazil


Chile


ColombiaCosta Rica


Dominica


Dominican Rep.


Ecuador


Guatemala


Guyana


Honduras


Haiti


Jamaica


St. Lucia


Mexico


Nicaragua


Panama


Peru


El Salvador Suriname


Uruguay


St. Vincent and
Grenadines


Venezuela


-4.5


-3.5


-2.5


-1.5


-0.5


0.5


1.5


2.5


3.5


4.5


-4.5 -3.5 -2.5 -1.5 -0.5 0.5 1.5 2.5 3.5 4.5


Speed of gap closure in 2013, percentage points


Size of output
gap (2012)


Gap closing from below Overheating


Gap closing from aboveCrashing




GLOBAL ECONOMIC PROSPECTS | June 2013 Latin America and the Caribbean Annex


158


In Mexico growth momentum will ease only
marginally to 3.3 percent in 2013, before
reaccelerating to close to 4 percent over the 2014-
2015 period. Recent labor and telecommunication
reforms are expected to lift growth in by increasing
total factor productivity and by attracting more
investment to the country. Over the 2014-2015
period the economic recovery in the United States,
and in particular firmer private demand, will also
support stronger Mexican export and remittances
growth.

Growth in Central America is projected to ease
slightly to 4.3 percent as growth decelerates in
almost all the countries in the region, despite terms
of trade gains, as commodity prices, and oil prices
in particular are expected to decline. Costa Rica
remains one of the most competitive economies in
the region, reflected in the strong export
contribution to growth. Similarly export growth
will remain robust in Panama.

The Central American countries, which were
among the most affected in the region by the
2008/2009 global economic crisis, will continue to
struggle to bring down fiscal deficits and public
debt. Over the 2014-2015 period a more upbeat
U.S. economy should help support growth in the
region, boosting external demand for goods and
services as well as remittances.

Growth in the Caribbean will ease slightly to 2.5
percent (table LAC.3), as growth in the Dominican
Republic softens. Elsewhere growth is projected to
remain restrained at around 2.4 percent due to very
high debt levels, and relatively soft remittances and
tourism revenues. Over the medium term large
fiscal adjustments will be necessary to cut fiscal
deficits to more sustainable levels and help reduce
the public debt burden. These adjustments are
likely to have negative consequences for growth in
the short run.

Monetary policies in the inflation targeting
countries are projected to gradually move to a
more neutral stance. The pace of adjustment may
be slower than it would have been in the absence
of very easy monetary conditions in high-income
countries, (in particular in the United States and
Japan) even if inflation rates remain close to the
upper bound of the target range, as some of the
countries in the region may be wary of attracting
excessive capital flows and of appreciating currencies.


Although some (IMF, 2013) argue that inflation
expectations have become more anchored --
inflation in the region remains and is projected to
remain at or above the higher end of the target
range in several of the inflation targeting countries
that are once again running against capacity
constraints. In countries with high inflation and
exchange rate pressures the scope for monetary
policy is very limited.

Exchange rates are projected to appreciate only
slightly in some of the financially integrated
economies in the region, given very easy monetary
policy in the major high-income economies and
better fundamentals in the developing countries
relative to high-income countries. There could also
be an increase in volatility in exchange rates, as in
the shorter term more volatile portfolio inflows are
likely to affect exchange rates in these economies,
as policy makers will be only partially successful in
sterilizing these inflows. Macro prudential measures
and/or capital controls will prove once again
helpful in preserving healthy banking systems in
the context of excessive global liquidity.



Risks and
Vulnerabilities



The global economic environment has stabilized
significantly since July of last year, and the
likelihood and likely magnitude of external risks
have declined and become more balanced, with
upside risks more pronounced than even six
months ago.

A larger-than-expected deceleration in China’s
economic growth, and in particular in investment,
above and beyond the soft landing envisaged in our
base line would undercut growth in the region as
external demand would be much softer with both
price and quantity effects, in particular for South
American commodity exporters. Similarly a steeper
than envisaged fiscal tightening in the United States
would have negative spillovers for the economies
in the region that have strong economic ties with
the United States. The reverse of these situations
represent the upside risks for the region.




GLOBAL ECONOMIC PROSPECTS | June 2013 Latin America and the Caribbean Annex


159




Latin America and the Caribbean country forecasts Table LAC.3


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 1.9 3.1 3.0 3.0


Current account bal/GDP (%) 2.7 0.6 -0.4 0.1 -0.2 -0.3 -0.3


Antigua and Barbuda


GDP at market prices (% annual growth) b 3.4 -8.5 -3.0 1.6 1.9 2.9 3.1


Current account bal/GDP (%) -14.8 -14.8 -10.8 -12.1 -12.1 -12.9 -13.0


Belize


GDP at market prices (% annual growth) b 5.0 2.7 2.0 5.3 2.6 3.0 3.1


Current account bal/GDP (%) -12.9 -2.8 -1.1 -2.6 -3.5 -3.8 -3.7


Bolivia


GDP at market prices (% annual growth) b 3.4 4.1 5.2 5.2 4.7 4.3 4.1


Current account bal/GDP (%) 3.9 3.9 1.4 7.4 6.4 5.6 5.0


Brazil


GDP at market prices (% annual growth) b 2.9 7.5 2.7 0.9 2.9 4.0 3.8


Current account bal/GDP (%) -0.7 -2.2 -2.1 -2.3 -2.7 -3.1 -3.3


Chile


GDP at market prices (% annual growth) b 3.2 5.8 5.9 5.6 4.9 4.5 4.7


Current account bal/GDP (%) 0.8 1.5 -1.3 -3.4 -3.8 -3.8 -4.1


Colombia


GDP at market prices (% annual growth) b 3.7 4.0 6.6 4.0 3.9 4.2 4.3


Current account bal/GDP (%) -1.4 -3.1 -2.9 -3.0 -3.4 -3.2 -2.9


Costa Rica


GDP at market prices (% annual growth) b 3.8 5.0 4.4 5.1 4.0 4.1 4.2


Current account bal/GDP (%) -5.0 -3.6 -5.4 -5.2 -4.4 -4.0 -3.7


Dominica


GDP at market prices (% annual growth) b 2.4 1.2 1.0 0.4 1.4 1.6 2.0


Current account bal/GDP (%) -18.2 -16.2 -12.9 -13.5 -12.4 -11.7 -11.1


Dominican Republic


GDP at market prices (% annual growth) b 4.5 7.8 4.5 3.9 2.5 3.7 4.4


Current account bal/GDP (%) -2.6 -8.4 -7.9 -7.0 -5.5 -4.5 -3.7


Ecuador


GDP at market prices (% annual growth) b 4.2 3.3 8.0 4.7 3.8 3.9 3.8


Current account bal/GDP (%) 1.0 -2.8 -0.2 -0.5 -1.3 -1.5 -1.7


El Salvador


GDP at market prices (% annual growth) b 2.0 1.4 2.0 1.6 1.9 2.1 2.5


Current account bal/GDP (%) -3.8 -2.7 -4.7 -5.2 -5.3 -5.1 -4.8


Guatemala


GDP at market prices (% annual growth) b 3.4 2.9 4.1 3.0 3.5 3.6 3.8


Current account bal/GDP (%) -4.8 -1.6 -3.3 -2.9 -2.9 -3.2 -3.4


Guyana


GDP at market prices (% annual growth) b 2.1 3.6 5.2 3.9 4.7 4.5 4.3


Current account bal/GDP (%) -9.0 -7.2 -8.6 -14.1 -14.3 -15.0 -15.2


Honduras


GDP at market prices (% annual growth) b 3.8 3.7 3.7 3.3 3.5 3.3 3.2


Current account bal/GDP (%) -6.7 -5.4 -8.5 -9.5 -11.2 -8.5 -8.4


Haiti


GDP at market prices (% annual growth) b 0.6 -5.4 5.6 2.8 3.4 4.2 3.9


Current account bal/GDP (%) -6.8 -9.5 -3.7 -4.0 -3.7 -4.0 -4.3




GLOBAL ECONOMIC PROSPECTS | June 2013 Latin America and the Caribbean Annex


160





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 -0.8 0.5 1.5 1.7


Current account bal/GDP (%) -10.2 -6.7 -13.5 -11.7 -11.1 -9.1 -6.7


Mexico


GDP at market prices (% annual growth) b 1.2 5.3 3.9 3.9 3.3 3.9 3.8


Current account bal/GDP (%) -1.5 -0.2 -0.8 -0.8 -0.9 -1.1 -1.2


Nicaragua


GDP at market prices (% annual growth) b 2.8 3.6 5.5 5.2 4.2 4.2 4.4


Current account bal/GDP (%) -17.3 -10.0 -13.2 -12.8 -13.6 -13.2 -12.3


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 -9.9 -10.5 -9.2 -9.5 -9.2 -8.8


Peru


GDP at market prices (% annual growth) b 4.8 8.8 6.9 6.3 6.0 5.9 5.8


Current account bal/GDP (%) -0.7 -2.5 -1.9 -3.6 -2.9 -3.4 -3.6


Paraguay


GDP at market prices (% annual growth) b c 2.3 15.0 4.0 -2.1 10.2 1.7 3.1


Current account bal/GDP (%) 0.1 -3.7 -1.3 -2.6 -1.4 -2.2 -2.8


St. Lucia


GDP at market prices (% annual growth) b 2.1 3.2 0.6 -0.2 1.2 1.7 2.0


Current account bal/GDP (%) -19.6 -17.1 -19.0 -18.1 -15.7 -13.5 -11.6


St. Vincent and the Grenadines


GDP at market prices (% annual growth) b 2.8 1.0 1.5 3.1 1.9 2.5 3.0


Current account bal/GDP (%) -18.8 -30.6 -28.7 -27.8 -26.7 -25.9 -25.0


Suriname


GDP at market prices (% annual growth) b 4.4 4.1 4.7 4.5 4.5 4.5 5.0


Current account bal/GDP (%) 9.8 6.5 5.6 6.2 5.2 3.8 2.1


Uruguay


GDP at market prices (% annual growth) b 2.1 8.9 6.5 3.9 3.8 4.1 4.3


Current account bal/GDP (%) -1.3 -1.9 -2.8 -5.3 -4.2 -4.5 -4.1


Venezuela, RB


GDP at market prices (% annual growth) b 3.3 -1.5 4.2 5.5 1.4 2.4 2.2


Current account bal/GDP (%) 10.0 2.9 7.9 3.0 4.1 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.


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.


c. GDP excluding binational corporations.




GLOBAL ECONOMIC PROSPECTS | June 2013 Latin America and the Caribbean Annex


161


Increasingly risks are domestic in nature, and stem
in part from the challenges of getting the correct
balance between macroeconomic policies to
stimulate demand in the short-term and structural
reforms to spur faster growth over the longer run.

For those larger economies in the region where
growth has slowed in the post-crisis period despite
prolonged efforts at demand stimulus, the evidence
seems to be accumulating that policies to boost
domestic demand will not lead to higher growth if
not accompanied by growth-enhancing policies
that deal with supply side inefficiencies. Failure or
delays in implementing such reforms could hold
growth hostage over the medium term.

Ample global liquidity and higher capital flows has
complicated the task of conducting monetary
policy and there is a risk that relatively low interest
rates in some of the financially integrated
economies might fuel rapid credit growth and
contribute to inflation pressures. In some cases
temporary and transparent capital controls may be
warranted to help manage capital flows and prevent
build up of vulnerabilities in financial systems.

In so far as the overall international environment is
less volatile countries may wish to give greater
weight to the domestic inflationary pressures that
these policies may be generating.


A further risk stemming from the current
environment of easy external financing conditions
and increased search for yield by international
investors is that countries and private agents in the
region may take on too much debt or have large
currency or maturity mismatches. Real credit
growth has expanded rapidly in several countries in
the region, including in Brazil, Mexico, and Peru,
while several Caribbean countries are already
burdened by very high debt levels.

Over the longer term external financial conditions
are likely to become tighter as high-income
countries unwind their long-term positions and as
base rates and spreads start to rise. Higher
financing costs will likely reduce investment
spending and growth in developing countries and
may also expose unsustainable positions made
possible by very easy external financing. Asset
prices that have grown rapidly in the current
environment may reverse course precipitously,
stressing banking systems in the region.




GLOBAL ECONOMIC PROSPECTS | June 2013 Latin America and the Caribbean Annex


162


Notes

1. Potential output is estimated by the World Bank, based on a production function methodology, using an estimate


of total factor product growth based on the average TFP growth between 1995 and 2005, and an estimate of the


capital stock constructed using investment data, the perpetual inventory method and assumed depreciation rate of


7 per cent, and the working-age population as the labor input (consistent with a constant labor force participation


and natural unemployment rates). See Nehru and Dhareshwar (1993) for an earlier attempt at using a similar meth-


odology.


2. Weighted average of remittances as a share of recipient country’s GDP.


3. Price controls in Argentina have helped contain inflation but could lead to shortages of certain goods.












De la Torre, Augusto, Eduardo Levy Yeyati, Samuel Pienknagura. 2013. “Latin America and the Caribbean as Tail-


winds Recede: In Search of Higher Growth.” LAC Semiannual Report, World Bank, Washington, DC..




International Monetary Fund. 2013a. “World Economic Outlook: Hopes, Realities, Risks.” World Economic and Financial


Surveys. Washington, DC: IMF.




Nehru, Vikram and Ashok Dhareshwar. 1993. “A New Database on Physical Capital Stock: Source Methodology and


Results”. Revista de Analisis Economico, Vol 8. No 1., pp. 37-69. June




World Bank. 2013. “Migration and Development Brief 20”. 2013 April.


References




GLOBAL ECONOMIC PROSPECTS | June 2013 Middle East and North Africa Annex


163




MIDDLE


EAST


and NORTH


AFRICA


REGION


GLOBAL


ECONOMIC


PROSPECTS Annex June 2013




GLOBAL ECONOMIC PROSPECTS | June 2013 Middle East and North Africa Annex


165


Overview



More than two years after the Arab Spring began,
economic activity remains weighed down by
elevated political tensions and continued civil strife
in the region. Regional growth accelerated to 3.5
percent in 2012 from minus 2.2 percent in 2011
reflecting mainly a rebound in Libya’s crude oil
production to pre-war levels that doubled real
GDP and a weak growth recovery in Egypt (to 2.2
percent in FY2012 from 1.8 percent in FY2011).
Iran, the region’s largest economy, slipped into
recession, with GDP falling by an estimated 1.9
percent due to international sanctions and lower oil
output while Algeria’s growth remained subdued at
2.5 percent, supported by expansionary fiscal
policy. Domestic demand and exports in Syria
collapsed last year as the civil war intensified, with
spillovers affecting activity in Jordan and Lebanon.
Drought in Morocco reduced growth to 2.7
percent from 5.0 percent in 2011.

Outlook for 2013-15: Regional prospects
depend critically on the evolution of domestic and
cross-border political tensions. Aggregate regional
growth is forecast to slow to 2.5 percent in 2013
mainly due to weakness in the region’s three largest
economies, before recovering to 4.2 percent in
2015 as tensions ebb and the Euro Area, the
region’s main trading partner, recovers.

Within the region, Egypt’s GDP growth is forecast
to slow to 1.6 percent in FY2013 on elevated
political tensions and worsening macroeconomic
imbalances, before recovering to about 4.8 percent
in FY2015 as political tensions recede and reforms
are undertaken, although there remain considerable
downside risks to this forecast. GDP in Iran is
forecast to contract for the second straight year by
1.1 percent due to sanctions and soaring inflation
before recovering to about 1.9 percent in 2015.
Growth in Algeria is expected to rise modestly to
2.8 percent due in part to temporary disruptions to
oil production, before firming to about 3.5 percent
in 2015. Elsewhere, growth in Iraq and Libya is
expected to remain relatively buoyant driven by
their mineral sectors, although rising violence poses
a risk to near term stability in Iraq. Meanwhile
rising farm output in Morocco and strengthening
external demand over the medium term should


help lift growth towards potential in Morocco and
Tunisia. Jordan’s and Lebanon’s GDP growth is
expected to remain subdued in 2013 reflecting
spillovers from Syria.

Risks and vulnerabilities: Political
uncertainty, polarization and
conflict. Prolonged political crises and
conflicts—elections are upcoming in several
economies and conflicts are gaining intensity in
Iraq and Syria—pose risks to near term recovery,
and to long term potential growth rates by
depressing investment and increasing the likelihood
that urgent structural reforms are delayed. More
generally the long term structural challenges facing
the region – which are a source of current volatility
– remain the same as before the Arab Spring. A
failure of political consensus needed to tackle these
structural weaknesses will mean that they will likely
contribute to low growth rates even when calm
returns to the region.

We a k e n i n g m a c r o e c o n o m i c
fundamentals and rising fiscal
sustainability risks. Rising fiscal outlays to
fund difficult-to-reform food and fuel subsidies are
generating serious fiscal and current account
imbalances among oil importers – a situation
exacerbated by rising borrowing costs and
exchange rate depreciation, although the recent
moderation in global food prices could provide
some respite in the near term.

Euro Area and US recovery. Protracted
weakness in the Euro zone would hurt economies
with close trade, investment and financial ties to it.
Any increase in global risk aversion would also
reduce already depressed capital inflows into the
region. On the upside, better-than-expected
economic outcomes in the US and Euro Area
should support growth, particularly in
economies where political tensions are
relatively muted.

Commodity price and geo-political
developments: Oil exporters in the region
could be very vulnerable if the projected gradual
decline in commodity prices occurs more sharply
than in the baseline. While benefitting importers, it
would cut into incomes, government revenues and
foreign currency earnings of oil exporters – forcing
potentially significant adjustments.




GLOBAL ECONOMIC PROSPECTS | June 2013 Middle East and North Africa Annex


166


Recent Developments



Aggregate regional growth picked up in 2012 in the
developing Middle-East & North Africa region to
3.5 percent in 2012, mainly reflecting a recovery
from a 2.2 percent contraction in 2011 due to
social and political unrest in Egypt, and armed
conflict in Libya. Political (domestic and
international) tensions continue to weigh on
economic activity and investment across the region.
International sanctions are contributing to rising
inflation and negative growth in Iran, while
spillovers from the intensifying civil conflict in
Syria, including the disruption of land trading
routes, have cut into economic activity in Lebanon
and Jordan with the latter also affected by energy
shortfalls in Egypt. At the same time, weak
economic conditions in European trading partners
have acted as a drag on non-oil exports and
tourism receipts.

Among oil importers, growth remained subdued
during 2012 reflecting spillovers from conflict
within the region and weak external demand from
Euro Area trading partners. The main exception to
this trend was Tunisia, where GDP growth
accelerated to 3.6 percent in 2012 from just below
2 percent in 2011, supported by a recovery in
tourism and increased domestic demand following
an earlier relaxation of fiscal policy. Egypt’s
economy grew by just 2.2 percent in 2012 in fiscal
year terms, a modest recovery from the 1.8 percent
outturn in 2011, supported by higher government
spending and record remittance inflows. In
calendar terms, the rebound was more substantial –
4.6 percent versus 0.5 percent in 2011 – but
reflected a recovery from a low base.

Elsewhere, Lebanon’s GDP growth is estimated to
have remained flat at 1.5 percent in 2012 as
elevated domestic political uncertainty and
spillovers from the conflict in Syria undermined
tourism and scarce public resources came under
pressure from growing numbers of refugees
(estimated at 1 million plus in a total population of
about 4.3 million). At an estimated 2.8 percent,
Jordan’s growth was only slightly better than the
2.6 percent outturn in 2011, as slower
manufacturing growth reflecting a domestic energy
crisis offset higher public and private sector


spending. However, private consumption in both
Jordan and Lebanon benefited from added demand
associated with a rising influx of Syrian refugees.
Although Morocco has remained relatively free
from political and social tensions, drought hurt
agricultural output, while weak demand among
Euro zone trading partners hit manufacturing and
tourism, with growth slowing to just 2.7 percent
from 5.0 percent in 2011 and the lowest since 2000.

Among oil exporters, growth experiences have
been mixed. Thanks to a post-conflict recovery in
oil production, Libya’s GDP expanded by 105
percent in 2012. Growth in Algeria was subdued at
about 2.5 percent in 2012, supported mainly by
rising government spending financed by relatively
buoyant global energy prices. Post-war increases in
crude oil production helped sustain an 8.4 percent
increase in Iraqi GDP. Output in Iran, however,
shrank an estimated 1.9 percent and inflation
reached over 40 percent this year due to
international sanctions and currency depreciations.
Growth is showing signs of recovering in Yemen,
but remains fragile with GDP barely expanding 0.1
percent in 2012 after contracting 10.5 percent in
2011. Although fraught with uncertainty,
indications are that Syria’s conflict has caused
GDP to shrink by nearly a third – reflecting a
collapse in both domestic demand and exports.


Nascent economic recoveries among
oil importers have suffered repeated
setbacks over the past year



Periodic eruptions of political and social tensions
or renewed weakness in the Euro Area have
repeatedly set back nascent recoveries among
developing oil importing economies in the Middle-
East & North Africa region, with growth turning
increasingly volatile in Egypt and Tunisia. For
instance, since 2011 Egypt has experienced three
separate episodes of a sharp deceleration or
contraction in activity as political and social
tensions erupted, punctuating rebounds in activity.
In Tunisia, a recovery in early 2012 led by tourism
and service sector growth was interrupted by social
unrest in the second quarter and lower demand in
the Euro Area, the country’s main trading partner.

Recent high frequency data up till March show a
recovery in industrial output in Egypt from last




GLOBAL ECONOMIC PROSPECTS | June 2013 Middle East and North Africa Annex


167


years trough, led by manufacturing and construction,
although PMI surveys up till May indicate weak
business conditions. Among other oil importers,
momentum has held up in Jordan, but weakened in
Morocco and Tunisia (figure MENA.1).

Egypt and by extension Jordan, which has relied on
cheap natural gas imports from the former to produce
electricity, have faced severe energy shortfalls over the past
year. In both countries – and indeed elsewhere in the
region – energy demand has soared in recent years
partly due to large subsidies in place. Energy
shortages in Egypt, which is the second largest
natural gas producer in North Africa after Algeria,
reflect a longer term decline in supply, more
conservative drilling plans by some major


producers due to rising domestic uncertainty, and
increasing reliance by Egypt on exports of crude oil to
cover imports and debts, leaving less for refineries to
process for domestic use. Egypt’s natural gas exports to
Jordan have suffered, at first because of sabotage
that targeted the Arab Gas Pipeline in 2011, then
by a temporary suspension of exports last October
in an effort to cover a spike in domestic energy
demand; and most recently in January this year
because of rising social unrest in Egypt.


Export momentum weakened among
some oil importers in the first quarter

Recent seasonally adjusted export earnings data
from Q1 (figure MENA.2) indicate that exports are
stabilizing in Egypt and Lebanon after rebounding
at the end of last year, but contracting sharply once
again in Morocco in Q1. Jordan meanwhile has
been hurt by the closure of land trading routes
through Syria: exports to other countries in the
region – some 50 percent of total exports in 2012
(figure MENA.3) – fell by an annualized 21.7
percent seasonally adjusted pace in the three
months through February. Tunisia’s exports
remained buoyant in Q1 helped by a recovery in
agricultural, textile and some manufacturing exports.


Production in developing MENA oil
exporters continues to contract

Industrial output in the MENA region resumed its
downward trend in the second half of last year as




A recovery in industrial output at the


end of 2012 lost momentum in Tuni-


sia and Morocco in Q1


Source: World Bank; Datastream.


Fig MENA.1


-80


-60


-40


-20


0


20


40


60


80


-15


-10


-5


0


5


10


15


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


% 3m/3m saar % 3m/3m saar


Egypt, Arab Rep.


Oil importers ex Egypt (RHS)


Egypt, Arab Rep. (LHS)


Oil importers ex Egypt (RHS)




The recovery in exports among oil


importers has lost momentum in Mo-


rocco and Jordan


Source: World Bank; Datastream.


Fig MENA.2


90


100


110


120


130


140


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


3-month moving average, 2011=100, LCU, sa


EGYIDX3M


MOMEXEGIDX3M


Egypt, Arab Rep.


Tunisia


Morocco


Jordan


Egypt, Arab Rep.


Tunisia


Morocco


Jordan


Egypt, Arab Rep.


Tunisia


Morocco


Jordan




Jordan, which trades heavily with oth-


er MENA economies, has been hurt by


the closure of land trading routes


through Syria


Source: World Bank; IMF Direction of Trade Statistics.


Fig MENA.3


0


10


20


30


40


50


60


70


80


90


100


Syria Jordan Iran Lebanon Iraq Egypt Algeria Morocco Tunisia


Other Developing China MENA Other Adv USA EMU


Exports by destination (% of total, 2012)




GLOBAL ECONOMIC PROSPECTS | June 2013 Middle East and North Africa Annex


168


the boost from Libya faded. Aggregate regional
production volumes fell by 27.2 percent annualized
in Q4 last year, led by sharp drops of close to 16
percent in both Iran and Algeria.

More recently, aggregate regional production
volumes excluding Libya (figure MENA.4) picked
up in Q1. However this reflected a stabilization in
in output in Iran following sharp declines over the
past year due to crippling US and EU sanctions
that had led to oil production falling to 2.63 mbd in
September - the lowest in 23 years according to
the International Energy Agency (IEA). As per
latest IEA estimates, Iran’s production was about
2.65mbd in May, with the country likely to cut
output going ahead as exports to Asian buyers
dwindle due to a tightening of international
sanctions. Japan for example bought only 8000bd
of Iranian oil in April, down 97 percent from April
2012. Prior to the sanctions, Iran used to produce
about 3.5mbd and export about 2.5mbd of oil.

There have been production setbacks in other
countries too, notably Algeria in the aftermath of
the militant attacks in mid-January on the Amenas
gas plants which account for about 10 percent of
the country’s total gas output. Along with a slow
recovery from these attacks, heightened security
after the attacks also hurt crude oil production
which temporarily fell to 1.14 million bpd in March
from 1.16 mbd in February according to the IEA,
although levels have since recovered.

Iraq surpassed Iran as the second largest oil
producer in OPEC at the end of 2012. However
crude oil production and exports fell slightly at


start of this year reflecting disputes between
Baghdad and the semi- autonomous region of
Kurdistan that led to a halt in exports from the
Kirkuk Ceyhan pipeline and weather-related
disruptions in southern Iraq. Libya’s production
has also fallen in recent months—most recently by
60,000 bpd in March— with reports
suggesting that an ageing infrastructure is
affecting output.

Activity in Syria has collapsed as the conflict
has intensified, and it is likely that the economy
contracted by nearly a third during 2012, possibly
even more. As of December 2012 industrial
production volumes were half their level at end-
2011. Although difficult to gauge the true extent of
economic damage from the conflict, mirror
statistics from trading partners indicate that exports
and imports fell by an unprecedented 85 and 79
percent respectively in 2012.


Current plans by developing oil
exporters to significantly raise
investment may prove optimistic



Given stagnating or declining production levels and
sharply increasing domestic demand, oil exporters
will need to invest heavily in infrastructure,
exploration and production to raise production
levels. However private capital and FDI inflows
may fail to materialize because of security risks,
poor legal environments for investment and
political uncertainty, and, in the case of Iran,
international sanctions.

In Iraq, government estimates count on capital
expenditures of $30 billion per year in energy
infrastructure to meet its production targets. But
progress on this front is likely to be slow due to
payment disputes with the Kurdish Regional
Government, and delays in the passage of a law
that would govern the development of Iraq's oil
and gas wealth (the law was first announced in
2008, but has yet to be passed). Algeria is also
planning to invest significantly in hydrocarbon
exploration, notably in shale gas, and in refineries.
However raising private investment may prove
challenging given political uncertainty generated by
upcoming presidential elections in spring 2014 and
earlier reversals in investor-friendly provisions in
investment laws that may deter investors.




Oil exporters ouput contracted for most of


2011 and 2012, led by declines in Iran, and


recently Algeria


Source: World Bank.


Fig MENA.4


-20


-15


-10


-5


0


5


10


0


10


20


30


40


50


60


70


80


90


100


110


120


130


140


150


Jan '09 Jul '09 Jan '10 Jul '10 Jan '11 Jul '11 Jan '12 Jul '12 Jan '13


%3mma, saar Jan 2011=100


Oil Exporters ex Libya
Libya, RHS


Middle East and North Africa Oil exporters
Libya
Iraq


Algeria


MOX_LBY_IRN3MM


Libya


IRN3MM
Oil exporters ex Libya


Libya


Oil exporters ex Libya


Libya (RHS)


MOX_LBY3MM


Libya (RHS)


MOX_LBY3MM


Libya (RHS)


Oil importers ex Libya (LHS)


Libya (RHS)




GLOBAL ECONOMIC PROSPECTS | June 2013 Middle East and North Africa Annex


169


Inflation pressures built up in 2012,
and persist

The latest CPI data show that price pressures
have remained strong, with annual inflation
rising close to or over 7 percent (y/y) in
Egypt, Tunisia and Jordan and, to over 10
percent (y/y) in Lebanon in the first few
months of 2013 (figure MENA.5). In part
this reflects partial fuel and energy tariff
reforms in some economies (Jordan, Tunisia,
Egypt) to contain soaring fiscal burdens from
subsidies. In Jordan and Egypt, shortfalls in
energy provision slowed production in other
sectors and contributed to inflation pressures,
with the latter also affected by a 13 percent
depreciation of the currency since December.
Growing inflation pressures in Egypt also
likely reflect the negative impact of
prolonged political and social tensions on
absorptive capacity and potential output in
the face of continued sharp increase in
government expenditures (up 30 percent y/y
in the first half of FY 2013).

Similar supply side constraints, combined
with sanctions and a sharp fall in the value of
the Iranian Rial have contributed to rising
inflation in Iran, which (per official
estimates) touched 38.5 percent in December.
The market value of the Iranian currency
dropped to 37,000 Rial per US Dollar in
October from 25,000 in September compared
to an official exchange rate of about 12,000
Rial. With the currency dropping further


since the start of the year, inflation touched
40.7 percent (y/y) in March.

However inflation pressures remain subdued
in several economies, including Morocco and
Iraq, helped by generous food and fuel
subsidies. Inflation in Yemen fell into single-
digits in 2012 to about 7 percent (but has
since accelerated), from a peak of 24.6
percent in October 2011, as improving
security eased supply bottlenecks after the
formation of transition government in early
2012. Inflation in Algeria decelerated to 3.1
percent in April on slower growth in (mostly
imported) food prices.


Tourism-related revenues and jobs
improved slightly in 2012,

Tourism inflows, a key source of foreign
exchange and jobs (figure MENA.6) in the
region, are recovering. According to the
United Nations World Tourism Organization
(UNWTO), aggregate tourist arrivals in North
African economies rose 8.7 percent to 18.5
million in 2012, only slightly below the peak
of 18.8 million visitors in 2010. In Tunisia,
tourism revenues in 2012 reached $2.1
billion, up 30 percent from the previous year,
supporting a strong recovery in the service
sector. In Egypt, tourism revenues stabilized
at around $10bn during 2012, although well
below the $12.5 billion earned in 2010. As a
result, the sector, which employs roughly one
in every eight Egyptian workers (directly and




Inflation remains persistently high in


many economies


Source: World Bank; Datastream.


Fig MENA.5


0


5


10


15


20


25


30


35


40


45


0


5


10


15


20


25


30


35


40


45


IRQ MAR ALG JOR TUN EGY LBN YEM IRN


Latest Inflation Inflation Peak 2012


% y/y % y/y




A significant share of the workforce is


employed by the tourism industry


Source: World Bank; UNWTO; World Travel and Tourism Council.


Fig MENA.6


0


5


10


15


20


25


30


0


500


1,000


1,500


2,000


2,500


3,000


3,500


LBY IRN YMN ALG SYR EGY TUN MOR JOR LBN


Indirect Employment (LHS)
Direct Employment (LHS)
% of total employment


%1000's




GLOBAL ECONOMIC PROSPECTS | June 2013 Middle East and North Africa Annex


170


indirectly), only shed 14,000 jobs per industry
estimates, versus half a million or so tourism
related losses during 2011 (figure MENA.7).

The number of tourists to the Middle East
economies (including high-income economies
in the region) fell at a slightly slower pace in
2012 (-4.9 percent vs -6.7 percent in 2011) to
52.6 million. Jordan, which reported a 15.3
percent increase in earnings in 2012, Morocco
and Iran have benefited from instability in
neighboring countries, attracting visitors
from the GCC economies and Central and
South Asia that otherwise would have headed
to traditional tourist hotspots such as Egypt
and Lebanon.

Recent data however suggest that tourism
related gains in Tunisia and Egypt are likely
to have been lost in the wake of recent social
unrest. Revenues from tourism fell 7.5
percent from a year earlier in Q1 in Tunisia,
hit by security concerns after a political
assassination in February, although the unrest
has since eased. Reports from Egypt indicate
sharp drops in hotel occupancy.


Unemployment rates have eased
slightly, but remain high

High levels of unemployment, one of the catalysts
for the Arab Spring uprisings, have shown modest
signs of improvement in some economies. In
Tunisia, the official jobless rate fell from 18.9


percent in 2011 to 16.7 percent in 2012 helped by a
recovery in tourism. Growing tourism inflows have
also supported a decline in official unemployment
rates in Jordan, Morocco and Iran.

Nonetheless, unemployment remains extremely
high (figure MENA.8), particularly among the
youth and in urban areas. In oil exporting
economies, strong growth in capital-intensive
hydrocarbon sectors has boosted overall growth,
but failed to generate many jobs. For instance, in
Iraq, the oil sector accounts for only 1 percent of
total employment versus a contribution to GDP of
about two-thirds. In addition, large commodity
export inflows contribute to Dutch Disease
pressures, undermining the development of non-oil
sectors that could potentially provide jobs. More
generally, job creation across the region is being
held back by a difficult business climate (figure
MENA.9), and further hampered by political and
economic uncertainty among oil importing
economies.


Remittance inflows rose during 2012



With remittance inflows estimated at $49 billion in
2012, the Middle East and North Africa region
experienced the fastest expansion of remittances in
the world, growing by 14.3 percent in 2012
compared with 2011 (World Bank, 2013). Egypt
received a record US$19 billion (8 percent of
GDP), up from $14.3 billion in 2011, making it the
sixth largest receiver of official remittances in the
world. Although Egypt has a large stock of highly




Unemployment rates have declined


modestly in some countries, but


generally remain high


Source: World Bank.
* range for Yemen


Fig MENA.8


0


2


4


6


8


10


12


14


16


18


20


Egypt Iran Morocco Tunisia Jordan Yemen* Iraq


2009


2011- peak


latest


Unemployment rate, %


na na




A modest recovery in tourism during


2012 has yet to reverse sharp job


losses in the sector during 2011


Source: World Bank; UNWTO; World Travel and Tourism Council.


Fig MENA.7


-50


-40


-30


-20


-10


0


10


20


-700


-600


-500


-400


-300


-200


-100


0


100


200


EGY SYR TUN YMN LBN JOR MOR LBY ALG IRN


Change in Employment in Tourism Sector


Indirect Employment, 2010-12 (change, 1000's)


Direct employment, 2010-12 (change, 1000's)


Change in direct employment, 2012 (% y/y, RHS)




GLOBAL ECONOMIC PROSPECTS | June 2013 Middle East and North Africa Annex


171


skilled expatriates in the US, the UK and other
OECD countries, about two-thirds of its migrants
are working in oil rich countries within the MENA
region, which benefitted from relatively buoyant oil
prices last year. Inflows were up by 10 percent in
Tunisia and 6 percent in Jordan but remained
broadly stable at about US$7.4 billion in Lebanon.


Public finances have deteriorated
sharply raising fiscal sustainability
concerns



Broad structural public finance reforms are needed
in developing MENA economies, to ensure fiscal
sustainability, and to limit vulnerability to adverse
economic shocks. Public expenditures as a share of
GDP tend to be large, and dominated by relatively
rigid wages and entrenched subsidies, with a
narrow revenue base heavily dependent on
revenues from a few key sectors.

Deteriorating public finances during 2012 (figure
MENA.10) in the region reflected a number of
factors. These include: slippage in revenues due to
underlying economic weakness; rising costs of
imported but heavily subsidized food and fuel
commodities; and expansionary fiscal policies
to shore up flagging economies and to
contain social discontent. Government
outlays were up 15 percent and 11 percent
(y/y) in Algeria and Morocco during 2012
and by 30 percent (y/y) in the first half of the
current fiscal year in Egypt.


Rising fiscal deficits and public sector debt have
added to growing fiscal sustainability concerns,
notably in Lebanon and Egypt where spending
pressures exacerbated by rising borrowing costs
have pushed interest expenditures to about 40
percent and 25 percent of total revenues
respectively in these economies. To finance its
revenue shortfalls Egypt has relied heavily on
borrowing from the domestic banking sector, and
grant aid from the Gulf economies. Rising public-
sector borrowing is crowding out private sector
borrowing and increasing the exposure of the
banking sector to sovereign risk. Meanwhile, delays
in tax reforms have delayed the approval of a
US$4.8billion loan from the IMF, and in turn,
assistance from other multilateral and bilateral
partners despite indications that the fiscal deficit
will reach over 12 percent of GDP in FY2013.
Among oil exporters, fiscal surpluses have
shrunk as revenues, despite strong growth,
have failed to keep pace with surging public
expenditures.

A number of economies are attempting fiscal
consolidation in order to manage funding pressures
and risks, with a focus on fuel and food subsidies
given their significantly large share of total
spending. Jordan liberalized fuel prices last year as
part of an IMF $2billion loan program, and a
gradual reform of electricity tariffs is planned this
summer to curb contingent liabilities associated
with rising indebtedness of the state owned
electricity company (which has been forced to sell
power at below cost). Tunisia raised fuel prices by
nearly 7 percent in March, the second hike in six




…In part reflecting a difficult busi-


ness climate made worse by political


uncertainty and social unrest


Source: World Bank.


Fig MENA .9


0


20


40


60


80


100


120


140


160


180


Tu
ni


sia


Eu
ro


pe
&


C
. A


sia


Ea
st


A
sia


&
P


ac


La
tin


A
m


. &
C


ar
.


M
or


oc
co


M
id


dl
e


Ea
st


&
N


A


Jo
rd


an


Eg
yp


t


Le
ba


no
n


Ye
m


en


W
es


t B
an


k
&


G
az


a


Su
b-


Sa
ha


ra
n


Af
.


Sy
ria Ira


n


Al
ge


ria Ira
q


Dj
ib


ou
ti


Ranking in Doing Business Indicators, 2012




Fiscal balances have deteriorated in


the region as have debt levels


Source: World Bank; Datastream; IMF.


Fig MENA.10


-20


-15


-10


-5


0


5


10


15


20


25


0


20


40


60


80


100


120


140


160


Eg
yp


t


Le
ba


no
n


Jo
rd


an


M
or


oc
co


Ye
m


en


Tu
ni


sia


Al
ge


ria Ira
n


Ira
q


Li
by


a


Fiscal Bal (% of GDP 2011, RHS)


Fiscal Bal (% of GDP 2012, RHS)


Public Debt (% of GDP, 2012)




GLOBAL ECONOMIC PROSPECTS | June 2013 Middle East and North Africa Annex


172


month, despite strong domestic opposition as
inflation has increased. Algeria’s 2013 budget plans
support fiscal consolidation of about 2 percent of
GDP in the overall balance led by a decline in
public sector wage expenditures, but worryingly
also predicated on continued buoyancy in
commodity prices and strong external demand
which may not materialize. Lebanon, which posted
a modest primary deficit of 0.4 percent in 2012, its
first in several years, on rising public sector wage
costs and weak revenue growth, is planning 3
percent worth of GDP expenditure cuts during
2013.

However, fiscal reforms have slowed in Morocco,
and Iran. Following a small hike in fuel prices in
June and a cut in the subsidy of imported wheat
last year, Morocco has shifted consolidation efforts
towards cuts in public investment spending (of
about 2 percent of GDP for 2013) despite a
subsidy bill estimated at 6 percent of the GDP.
Although subsidy reforms have been proposed
they remain highly politically contentious. Iran’s
parliament has blocked the second phase of fuel
subsidy reforms, with budget proposals for 2013
projecting about a one-third increase in overall
spending over 2012 levels. Recently Egypt has
taken some tentative steps towards liberalizing fuel
and energy subsidies and tax reforms are also in the
works as the fiscal situation has deteriorated, but
reforms remain difficult given lack of political
consensus and elevated social tensions.


External vulnerability has increased
among oil importers




Rising current account deficits and balance of
payments pressures combined with managed or
fixed exchange rates have resulted in external
financing difficulties, falling foreign exchange
reserves (figure MENA.11), and repeated sovereign
credit rating downgrades in several oil importing
economies in the region. Higher current account
deficits reflected an increasing cost of food imports
compounded by weak European demand for
North African exporters, reaching over 16 percent
of GDP in Jordan and Lebanon (despite
remittances estimated at 18 percent of GDP in the
latter), and 9.6 percent in Morocco and 8.1 percent
in Tunisia. Egypt posted a 3.1 percent of GDP
deficit, with the trade deficit rising to 10.4 percent


led by a sharp drop in merchandise exports and
surging imports.

Trade deficits have shown signs of modest
improvement entering 2013 in Jordan, Lebanon,
Egypt and Tunisia. Foreign exchange reserves have
also been partly bolstered in recent months
reflecting external support from the IMF (Jordan),
support from other regional economies (Jordan,
Morocco and Tunisia), a rebound in foreign direct
investment in Tunisia (up 85 percent during 2012)
and short term private capital inflows in Lebanon.
That said, excepting Lebanon, reserves are down
by roughly a quarter in Tunisia, Jordan and
Morocco compared to January 2011, amounting to
only slightly higher than the critical 3 month
import cover threshold in Tunisia and Jordan.

In Egypt, reserves are down by two-thirds from
January 2011 (figure MENA.11), amounting to less
than 2 months of import cover and the currency
has fallen some 12 percent since late December.
Dwindling reserves have forced the central bank to
hold weekly foreign exchange auctions since
December, and to raise its benchmark rate to 10.25
percent (up 75bp) in March to support the
currency and combat inflation. Reflecting Egypt’s
precarious fiscal and external position, CDS
spreads have widened substantially to close to 700
basis points and the country has received
substantial financing assistance from Qatar and
Libya.

Current account positions among oil importers
improved last year, but are likely to face pressures
this year reflecting lower oil prices, and growing




Foreign exchange reserves have fall-


en sharply in some oil importing


economies


Source: World Bank, Datastream.


Fig MENA.11


0


20


40


60


80


100


120


2011 2011 2012 2012 2013


Jan 2011=100


Egypt, Arab Rep.


Lebanon


Morocco


Tunisia


Jordan




GLOBAL ECONOMIC PROSPECTS | June 2013 Middle East and North Africa Annex


173


import needs as they invest in production and
refining capacities. 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, with the latter
facing difficulty in securing buyers for its oil in Asia
as international sanctions have tightened.


Financial flows to the region
recovered slightly in 2012 but remain
much lower than in 2010



Capital flows to the developing MENA
region recovered modestly in 2012 to an
estimated $17.5 billion after almost halving to
$15.8 billion in 2011. The improvement
reflected an increase in net FDI flows (up 22
percent) to Egypt, Morocco and Tunisia,
although overall levels remain well below pre-
Arab Spring inflows (table MENA.1).
Morocco and Lebanon have also successfully
issued sovereign debt over the last year worth
$1.5billion (in December) and $1.1 billion (in
April, 20 percent of which was bought by
overseas investors) respectively. Other
sovereigns including Jordan and Egypt are
considering debuting sukuk bonds later this
year in international capital markets to
finance fiscal deficits.


Outlook



The outlook for the region as a whole remains
dominated by domestic political developments,
with added risks from external demand,
commodity price and geo-political developments.
Output for the region as a whole is projected to
rise by 2.5 percent in 2013 (table MENA.2), and
gradually firm to 3.5 percent and 4.2 percent in
2014 and 2015, buoyed on the one hand by
stronger demand in the Euro Area and an assumed
easing of regional political tensions, but held back
on the other hand by declining oil prices and an
assumed tightening of macroeconomic policies that
begins to alleviate growing fiscal and inflation
tensions.

In Egypt, the near term outlook remains
difficult reflecting weak investor and
consumer confidence on account of
upcoming elections in the fall, widening fiscal
and current account imbalances and delays in
negotiating an IMF program. Egypt is
expected to import natural gas for the first
time in decades which will further add to
external financing pressures. Official
estimates project a bumper wheat harvest this
year in Egypt, which could reduce food
imports, but these are regarded as too




Net Capital Flows to Middle East and North Africa



Table MENA.1




GLOBAL ECONOMIC PROSPECTS | June 2013 Middle East and North Africa Annex


174


optimistic by some observers. Absent any
major fiscal or balance of payments crisis,
growth is expected to slow to 1.6 percent in
the current fiscal year from 2.2 percent last
year. Conditional upon a subsiding in political
tensions and reforms being undertaken,
growth should firm to about 3.0 percent next
year and to about 4.8 percent in 2015,
although this forecast remains subject to
substantial downside risks (table MENA.3).

Growth is expected to pick up slowly in Tunisia.
Although civil unrest experienced in February has
receded, there remain tensions between
conservative and secular forces. Exports showed


signs of recovery in Q1, but a slow pace of
recovery in Euro zone, its main trading partner,
should temper gains in external demand and
tourism inflows in 2013. Accordingly, growth is
expected to rise to about 3.8 percent, only slightly
higher than 3.6 percent in 2012, and to gradually
pick up further to about 5 percent in 2015 as
the external and internal environment
improves.

Growth in Jordan is forecast to pick up somewhat
to 3.3 percent in 2013 (from 2.8 percent), as
confidence in the economy improves due to
reforms taken as part of the IMF program, and also
reflecting the boost to sentiment and activity from




Middle East and North Africa forecast summary Table MENA.2


Est. Forecast


00-09
a


2010 2011 2012 2013 2014 2015


GDP at market prices b 3.9 4.6 -2.2 3.5 2.5 3.5 4.2


(Sub-region totals-- countries with full NIA + BOP data)
c


GDP at market prices c 4.3 4.9 1.2 -0.3 1.2 2.6 3.5


GDP per capita (units in US$) 2.8 3.3 -0.4 -1.8 -0.3 1.1 2.1


PPP GDP d 4.3 5.2 1.0 -0.4 0.9 2.4 3.4


Private consumption 4.1 4.2 2.8 0.7 2.2 3.0 3.9


Public consumption 3.7 3.6 3.8 2.9 3.5 3.1 3.2


Fixed investment 6.9 3.0 2.7 -0.6 1.3 2.5 3.3


Exports, GNFS e 4.3 5.5 -3.5 -8.1 0.9 3.5 5.0


Imports, GNFS e 7.5 4.8 0.2 0.6 4.8 6.2 5.4


Net exports, contribution to growth -0.6 0.2 -1.3 -3.0 -1.4 -1.2 -0.5


Current account bal/GDP (%) 5.2 1.6 1.5 -1.9 -3.3 -3.4 -3.1


GDP deflator (median, LCU) 5.9 8.4 6.4 4.2 4.2 3.7 3.3


Fiscal balance/GDP (%) -0.5 -2.4 -3.7 -6.5 -6.4 -5.3 -4.7


Memo items: GDP


MENA Geographic Region f 4.1 4.8 3.6 2.5 2.6 3.2 3.8


Selected GCC Countries g 3.8 4.6 6.1 5.3 3.8 3.8 4.0


Developing Oil Exporters 3.6 4.5 -4.4 3.5 2.1 3.1 3.8


Developing Oil Importers 4.5 4.8 1.6 3.5 3.1 4.1 4.7


Egypt 4.4 6.0 0.5 4.6 2.3 3.9 4.9


Fiscal Year Basis 4.3 5.3 1.8 2.2 1.6 3.0 4.8


Iran 4.6 5.9 1.7 -1.9 -1.1 0.7 1.9


Algeria 3.4 3.3 2.4 2.5 2.8 3.2 3.5


(annual percent change unless indicated otherwise)


Source : World Bank.


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.




GLOBAL ECONOMIC PROSPECTS | June 2013 Middle East and North Africa Annex


175



Middle East and North Africa forecast summary





Table MENA.3


Est. Forecast


00-09
a


2010 2011 2012 2013 2014 2015


Algeria


GDP at market prices (% annual growth) b 3.4 3.3 2.4 2.5 2.8 3.2 3.5


Current account bal/GDP (%) 22.3 7.3 10.5 7.7 5.4 4.5 3.9


Egypt, Arab Rep.


GDP at market prices (% annual growth) b 4.4 6.0 0.5 4.6 2.3 3.9 4.9


Fiscal Year Basis 4.3 5.3 1.8 2.2 1.6 3.0 4.8


Current account bal/GDP (%) 1.1 -2.0 -2.3 -3.1 -3.5 -2.8 -2.1


Iran, Islamic Rep.


GDP at market prices (% annual growth) b 4.6 5.9 1.7 -1.9 -1.1 0.7 1.9


Current account bal/GDP (%) 6.4 7.1 5.9 -0.1 -2.5 -3.3 -3.0


Iraq


GDP at market prices (% annual growth) b -1.0 0.8 8.5 8.4 9.0 8.0 8.0


Current account bal/GDP (%) 3.0 12.5 7.0 3.8 3.0 4.0


Jordan


GDP at market prices (% annual growth) b 6.1 2.3 2.6 2.8 3.3 3.4 4.5


Current account bal/GDP (%) -4.4 -7.1 -12.0 -17.3 -15.4 -14.2 -12.7


Lebanon


GDP at market prices (% annual growth) b 4.4 7.0 1.5 1.5 2.0 2.3 4.0


Current account bal/GDP (%) -16.8 -20.4 -12.5 -13.8 -14.7 -13.6 -13.2


Libya


GDP at market prices (% annual growth) b 3.8 3.5 -53.9 104.5 15.0 10.0 8.0


Current account bal/GDP (%) 19.5 9.1 35.8 24.0 18.0 9.0


Morocco


GDP at market prices (% annual growth) b 4.6 3.7 5.0 2.7 4.5 4.8 4.7


Current account bal/GDP (%) 0.2 -4.5 -7.9 -9.5 -9.7 -8.8 -8.0


Syrian Arab Republic


GDP at market prices (% annual growth) b,c 4.6 3.2 -3.2 -30.0 -10.0 -2.0 3.0


Current account bal/GDP (%) 2.7 -0.6 -1.7 -8.2 -8.8 -7.5 -6.7


Tunisia


GDP at market prices (% annual growth) b 4.1 3.0 -1.8 3.6 3.8 4.8 5.1


Current account bal/GDP (%) -2.7 -4.8 -7.4 -8.1 -8.4 -7.4 -6.4


Yemen, Rep.


GDP at market prices (% annual growth) b 3.5 7.7 -10.5 0.1 4.3 4.5 4.6


Current account bal/GDP (%) 1.2 -3.7 -4.0 -1.4 -2.3 -2.8 -2.1


Source : World Bank.


World Bank forecasts are frequently updated based on new information and changing (global)


circumstances. Consequently, projections presented here may differ from those contained in other


Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any


given moment in time.


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.




GLOBAL ECONOMIC PROSPECTS | June 2013 Middle East and North Africa Annex


176


the signing of an $18bn deal with Iraq to build an
oil pipeline from southern Iraq to Aqaba. The
pipeline which is expected to be completed by 2017
should help spur FDI and domestic activity and
help lift growth to over 4 percent by 2015.
However there remain downside risks from the
conflict in Syria. Morocco’s economy should
benefit from the recovery in agricultural sector
output, which should lift growth to about 4.5
percent in 2013 from 2.7 percent in 2012 and to
remain buoyant at just under 5 percent in the
medium term supported by the recovery in the
Euro Area.

Aggregate growth among oil exporters should slow
in the near term reflecting a stabilization of
production to a more sustainable pace in Libya,
recession in Iran and production and export
setbacks in Algeria and Iraq. Algeria’s growth is
expected to pick up modestly to about 2.8 percent
in 2013 (from 2.5 percent) in 2013 and gradually
firm thereafter. Iran’s economy is expected to
remain weak until some sort of resolution with
Western governments over its nuclear issues can be
reached. Until then domestic investment and
private consumption should remain subdued with
growth projected at about 1.9 percent in 2015, well
below its average growth of 4.5 percent between
2000 and 2009.

Although a tentative agreement on oil payments
between the Iraqi government and the Kurdish
semi-autonomous region was reached in early May,
longer term plans to raise Iraq's oil output to about
3.3 million bpd (from nearly 3 million bpd
currently) may prove challenging given the recent
history of tensions between the two and also given
the scale of infrastructure investment needed to
realize the higher output. Accordingly medium
term growth is projected to remain at close to last
year’s outturns of about 8.5 percent. Near
term risks have increased, however, given the
escalation in conflict in recent months.

Capital inflows are expected to recover gradually in
the region, rising to about US$30 billion in 2015,
led mainly by growing FDI inflows as political
tensions ease and reflecting infrastructure
investment opportunities in both oil importing and
exporting economies, including Algeria, Iraq and
Jordan. Private capital flows to Egypt are likely to
remain weak in the near term due to continued
uncertainty there. However inflows should pick


up, including inflows from GCC economies
into construction and tourism sectors which
have been diverted elsewhere into the region.
For the region, equity inflows are also
expected to recover but should remain
modest compared to the pick up in bond
inflows.



Risks and Challenges




The main risks and challenges facing the region are
domestic. While a weaker outturn in the Euro
Area would certainly impact the region, its likely
influence pales compared with the potential impact
of increased social and political tensions, or
compared with the likely impact of a failure to
address growing macroeconomic imbalances,
including fiscal deficits bloated to unsustainable
levels by fuel and food subsidies that amount to
over a fifth of government revenues in several
economies (figure MENA.12) and rising debt levels that
threaten long-term fiscal sustainability, and for oil
exporters the potential impact of a more pronounced
than projected decline in commodity prices.

Political tensions and security risks
remain elevated and there are growing signs
of domestic political polarization in several
economies. Elections are due in a number of
countries this year or early next year, making
for a challenging reform environment at a time of
domestic unrest and persistently high levels of




Subsidy reforms are crucially needed


to improve fiscal sustainability


Source: World Bank, IMF (2013).


Fig MENA .12


0


2


4


6


8


10


12


14


0


10


20


30


40


50


60


DJI MAR MRT TUN IRQ LBN JOR LBY YMN ALG EGY IRN


Natural Gas Subsidy (LHS)
Electricity Subsidy ( LHS)
Petroleum Subsidy (LHS)
Total Fuel subsides as % of GDP, RHS


% of total revenues % of total GDP




GLOBAL ECONOMIC PROSPECTS | June 2013 Middle East and North Africa Annex


177


unemployment. Already heightened tensions in
Iraq and Lebanon could be further worsened by
spillovers from Syria, with potentially destabilizing
effects for these economies.

Over the longer term, the structural challenges
facing the region—and which are currently a
source of ongoing social and political tensions—
remain much the same as before the onset of the
Arab Spring. Consequently, unless progress is made
on building political and social consensus needed
to undertake the necessary structural reforms, then
it is very likely that the developing Middle East and
North Africa region will continue to lag other
developing regions and that growth rates will
remain relatively low even when calm is eventually
restored to the region.

Much of the region faces very real
challenges on the fiscal front, due in
part to increased social spending to assuage
tensions that have arisen in the context of the Arab
Spring, but also because of high fuel and food
prices that have sharply increased the cost of
subsidy programs (figure MENA.12). Dealing with
this would be difficult enough at the best of times,
but is particularly challenging in the current slow
growth and socially volatile period. Still, with such
expenditures at some 6 percent of GDP in many
countries, inaction does not appear to be an option.
Experience from other countries suggests that
explicitly combining a reduction in subsidies with a
reinforcement of targeted assistance of the very
poor can make such a reform more politically
acceptable and minimize the negative poverty
effects – while still reducing fiscal deficits.

Inaction risks a fiscal crisis, where markets
refuse to finance additional deficits forcing a
much sharper, less acceptable and more
damaging cut in government spending. This is
particularly the case for economies running
low on foreign exchange reserves, with
slowing of domestic reform efforts further
undermining fiscal solvency and investor
confidence, both domestic and overseas. 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 and undermine
confidence in the banking sector which has
high levels of exposure to sovereign debt.


Commodity price and demand/
supply risks: The economies of oil exporters
are particularly vulnerable to a shift in the price of
oil. As discussed in the main text, global supply has
responded to the higher prices of the past 10 years,
and as a result large gaps have been generated
between hydrocarbons in North America and the
rest of the world. As existing bottlenecks
increasingly allow this new supply (and that coming
from Sub-Saharan Africa and elsewhere) to reach
global markets, prices could decline much more
quickly than in the baseline. In such an instance
government revenues and current account balances
would come under pressure.

Simulations discussed in the main text show the
effects of a fall in real oil prices to $80 per barrel by
mid-2014. They suggest that developing oil
exporters in the Middle East and North Africa
region (along with exporters in sub-Saharan Africa)
would be hardest hit by such a decline, with GDP
declining by 1.4 percent relative to the baseline,
government balances deteriorating by as much as
2.1 percent of GDP and current account balances
by 3.5 percent in 2014. For countries, like Algeria
or Iran, where fiscal balances are already under
pressure this could force sharp adjustments in
demand, policy and exchange rates. Conversely, oil
importers with stressed fiscal and balance of
payments positions would benefit from such a
decline, with GDP 0.5 percent higher relative to
the baseline on average, and current accounts and
fiscal balances improving by 0.5 and 0.2 percent of
GDP respectively in 2014.

In the current environment, regional oil exporters
will no longer be able to rely on high and rising
prices, but will increasingly need to rely on
increased output. This in turn necessitates reforms
that would allow them to invest heavily in
infrastructure, and exploration to raise current
production levels which have stagnated or been
steadily declining in recent years. However, private
capital and FDI inflows may fail to materialize
because of security risks, poor legal environments
for investment and political uncertainty to varying
degrees in Algeria, Iraq, Libya and Yemen and
international sanctions in the case of Iran.

Economic developments in the
Eurozone: The Eurozone (and to a lesser
extent the US) account for the bulk of the region’s
manufacturing, service and hydrocarbon exports.




GLOBAL ECONOMIC PROSPECTS | June 2013 Middle East and North Africa Annex


178


Any setback to the ongoing recovery there could
undermine exports and tourism in oil importing
economies and export and fiscal revenues in
Algeria and Iraq. Heightened risk aversion could
also reduce already depressed capital inflows into
the region and dent confidence, particularly in
countries with large macroeconomic imbalances,
high levels of debt and severely depleted fiscal and
reserve buffers. On the upside, a faster than
expected recovery in the Euro Area could provide
positive tailwinds to these economies, reducing
balance of payment and exchange rate pressures.






GLOBAL ECONOMIC PROSPECTS | June 2013 Middle East and North Africa Annex


179




World Bank. 2013. “Migration and Development Brief 20”, April 2013.




IMF. 2013. “Energy Subsidy Reform: Lessons and Implications”, January 2013.


http://www.imf.org/external/np/pp/eng/2013/012813.pdf


References





GLOBAL ECONOMIC PROSPECTS | June 2013 South Asia Annex


181




SOUTH


ASIA


REGION


GLOBAL


ECONOMIC


PROSPECTS Annex June 2013





GLOBAL ECONOMIC PROSPECTS | June 2013 South Asia Annex


183


Overview



South Asia’s regional GDP growth slipped to 4.8
percent in 2012, following a robust recovery in the
years after the 2008 global financial crisis. A
weakening global economy, coupled with domestic
difficulties (including policy uncertainties, structural
capacity constraints, and a poor harvest)
contributed to weaker regional growth in 2012. The
bulk of this regional slowdown reflects a continued
deceleration in India (to 5 percent in the 2012 fiscal
year ending in March 2013), but growth also
slowed in other regional economies. Sri Lanka’s
growth slowed sharply, by nearly 2 percentage
points in 2012. Bangladesh, Pakistan, and Nepal are
expected to experience less marked slowdowns in
their respective 2012-13 fiscal years, although
actual growth rates in Pakistan and Nepal are much
lower than in other countries in the region. In
contrast, Afghanistan experienced double digit
growth in 2012.

The regional trade balance deteriorated in 2012 due
to weakening exports and rising demand for crude
oil and other imports. India’s current account
deficit widened sharply, but robust remittance
inflows bolstered current account positions in
Nepal, Bangladesh, and Pakistan.

More recently, activity in South Asia has picked up
from its mid-2012 slump, with industrial output
rising at different paces in India, Pakistan and
Bangladesh in the second half of 2012 and in the
first quarter of 2013 - while in Sri Lanka industrial
production stabilized in the fourth quarter of 2012.
South Asia’s exports (and imports) are also increasing, in
line with strengthening global trade and output.

Inflation has moderated in several countries,
helped in part by the easing of international
commodity prices. But in general, consumer price
inflation in the region remains higher than the
average for the group of middle-income developing
countries, and inflation expectations are still very
high in India. In addition, some countries have
stepped up the reform agenda, seeking to contain
fiscal deficits (including reduction of subsidies, by
raising end-user fuel and electricity prices), and in
the case of India, opening the economy further to
international investment.


Outlook for 2013-15


Economic activity in South Asia is projected to
strengthen during the course of 2013, buoyed by a
gradual strengthening of external demand; a less
volatile external environment; lower crude oil
prices; reduced fiscal pressures due to lower fuel
prices and lower subsidies; an improved crop
(following last year’s weak monsoons); and
continued remittance inflows. However, even as
quarterly GDP accelerates, the sharp deceleration
of growth in 2012 implies that whole year growth
in 2013 will be a relatively weak 5.2 percent.
Looking further ahead, the stronger underlying
momentum in 2013, coupled with firming external
demand and improvement in investment spending
(assuming policy and fiscal reforms are sustained),
should help to accelerate the region’s growth to 6.0
percent in 2014 and then 6.4 percent in 2015.
Growth in India is projected to rise to 5.7 percent
in the 2013 fiscal year, and accelerate to 6.5 percent
and 6.7 percent in FY2014 and FY2015.


Risks and vulnerabilities



Risks to the outlook for the region are broadly
balanced.

External risks are diminishing but remain
External risks from the Euro Area and of fiscal
sustainability in the United States have diminished.
But the region’s vulnerability to a deterioration in
financial flows has picked up due to rising current
account deficits, notably in India. A more rapid
than expected decline in commodity prices would
help outturns by reducing current account and
fiscal deficits, and by easing inflationary pressures
and boosting domestic incomes.

Domestic challenges are gaining prominence
Domestic issues, including continued progress in
fiscal consolidation; the quality of this year’s rice
crop; and success in reversing the earlier increase in
inflationary expectations will contribute to
determining the pace of recovery going forward.
Perhaps most importantly, will be continued
progress in implementing reforms that relieve
supply-side constraints, such as reducing energy
supply bottlenecks, labor market reforms,
improving the business climate, and investing in
education, health and infrastructure.





GLOBAL ECONOMIC PROSPECTS | June 2013 South Asia Annex


184


Recent economic
developments



GDP in South Asia decelerated sharply during 2012,
extending a slowing trend following the rapid recovery
from the financial crisis in 2008. Regional growth
slowed from 10 percent in 2010 to 7.3 percent in
2011, and further to 4.8 percent in 2012 (figure SAR.1).

The slowdown in 2012 mainly reflects a continuing
steep deceleration in India, which represents about
four-fifth of the region’s GDP, to 5.0 percent in
the 2012 fiscal year (April 2012-March 2013) from
6.2 percent in FY2011 and 9.3 percent in FY2010.
But growth also slowed in other regional
economies. Growth in Sri Lanka slowed sharply, by
almost 2 percentage points in 2012. Fiscal year
growth in Bangladesh, Pakistan, and Nepal is
estimated to have slowed less markedly in their
respective 2012-13 fiscal years, although actual
growth rates in Pakistan and Nepal are much lower
than in other countries in the region. Afghanistan
was unique among the larger economies in the
region, recording double digit growth in 2012.


A worsening external environment amid
intensification of Euro Area debt tensions in mid-
2012 caused a severe weakening of exports across
the region. Regional exports fell by 4 percent (y/y)
in US dollar terms in 2012 (-4.1 percent y/y
excluding India), after two consecutive years of
more than 30 percent increases. The Euro Area
economy, South Asia’s largest export market,
contracted by 0.5 percent in 2012, and although
policy actions in high income countries stabilized
financial markets, global trade only began firming
in the fourth quarter. South Asia’s US dollar
imports continued to rise in 2012, but at a much
slower pace (4 percent y/y) compared with a 32
percent increase the previous year.

In consequence, trade balances as a share of GDP
either deteriorated or trade deficits remained high
in the region (figure SAR.2). India’s worsening
trade deficit was reflected in a sharp widening of its
current account deficit, which reached 6.7 percent
of GDP in the fourth quarter of 2012. Sri Lanka’s
current account deficit had widened even more
earlier (to 7.8 percent of GDP in 2011) together
with an overheating economy. Policy tightening
measures curbed import demand, but weak exports
meant that Sri Lanka’s trade deficit remained high,
and its current account deficit declined only
modestly to 6.6 percent of GDP in 2012. In
Bangladesh, although exports declined in 2012 in
line with the regional trend, imports fell even
faster—in part due to a 10 percent depreciation of
the taka relative to the US dollar, compared with
the previous year—causing its trade deficit to
narrow during the 2012 calendar year. Together




A sharp slowdown in post-financial crisis


GDP growth in South Asia, led by India


Note: Fiscal years for Bangladesh, Nepal and Pakistan span almost


equally across two calendar years, with data for FY2011-12 shown in


2012 in the chart. For India, where the fiscal year runs from April to


March, data for FY2012-13 is shown in 2012. GDP growth rates are


shown in factor cost terms for India and Pakistan, and in market price


terms for other countries. South Asia’s GDP growth rate for calendar


years are based on country-level averages of fiscal year GDP growth


rates (see Table.SAR.2).


Source: World Bank; Datastream, Haver.


Fig SAR.1


0


1


2


3


4


5


6


7


8


9


10


2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013f


South Asia Pakistan
India Bangladesh
Nepal Sri LankaGDP growth



Trade deficits as share of GDP have
widened in India, Pakistan and Sri Lanka


Source: World Bank; Datastream.


Fig SAR.2


-20


-18


-16


-14


-12


-10


-8


-6


-4


-2


0


2005 2006 2007 2008 2009 2010 2011 2012


India


Pakistan


Bangladesh


Sri Lanka


Trade balance/GDP (Percent)





GLOBAL ECONOMIC PROSPECTS | June 2013 South Asia Annex


185


Figure SAR.3 Industrial production is picking up, al-
beit at different paces in South Asian countries
Source: World Bank.


-30


-20


-10


0


10


20


30


40


50


Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13


India


Pakistan


Bangladesh


Sri Lanka


Developing excl. South Asia


Industrial production, 3m/3m seasonally-adjusted annualized rate (Percent)


Figure SAR.2 Trade balances in India, Bangladesh
and Sri Lanka deteriorated sharply in 2012 as exports
slowed
Source: World Bank.


-20


-18


-16


-14


-12


-10


-8


-6


-4


-2


0


2005 2006 2007 2008 2009 2010 2011 2012


India


Pakistan


Bangladesh


Sri Lanka


Trade balance/GDP (%)


with increased remittances, this resulted in an
improved current account position. Despite
growing trade deficits in Pakistan and Nepal in the
2012 calendar year, their current account positions
were bolstered by robust migrant remittances
inflows (see box SAR.1), and also by official
transfers in the case of Pakistan.

Below-average monsoon rains and a poor regional
harvest in 2012 (agriculture constitutes about a fifth
of South Asia’s GDP and over half of employment) also
contributed to weaker growth across the region. In
addition, structural capacity constraints and domestic
policy uncertainties, as well as security concerns and social
unrest in some countries, played a significant role in the
slowing of regional GDP growth.

India’s GDP measured in factor-cost terms grew at
a decade-low 5.0 percent in FY2012 (figure SAR.1).
The aforementioned weakening of external
demand and below-average monsoons exacerbated
a domestic slowdown that was already underway, as
building capacity constraints and bottlenecks kept
growth in check despite sustained fiscal stimulus.
This stimulus had helped the economy recover
quickly after the financial crisis in 2008, and was
gradually withdrawn in subsequent years.
Uncertainty about the reform agenda, along with
monetary policy tightening in 2010 and 2011 in
response to rising inflationary pressures, led to a
sharp slowing of investment growth and an
increase in stalled projects (figure SAR.3). Weaker
investment activity added to existing supply-side
constraints and negatively impacted overall growth.FN1

GDP growth in Pakistan and Nepal has remained
well below the regional average in recent years.
Pakistan, South Asia’s second-largest economy,
appears to have settled into a relatively low-growth
path of about 3-4 percent in recent years mainly
due to unfavorable domestic factors, including
security uncertainties, unreliable delivery of natural
gas and electricity to firms, and weak investment
rates. In Nepal, political uncertainties in recent
years, and an adverse investment climate, played a
role in its relatively poor economic performance.
Nepal’s GDP growth had risen to 4.9 percent in
the 2011-12 fiscal year (ending in mid-July 2012) on
the back of a good harvest. However, a poor
harvest in 2012, high inflation, weakening external
demand, and slowing growth in India (its largest
trade partner) weighed negatively on economic
activity in Nepal during the 2012-13 fiscal year.


GDP growth in Bangladesh and Sri Lanka has been
around 6 percent or higher in recent years (figure
SAR.1). Bangladesh’s exports have benefited in
part from preferential access to European Union
and US markets, while domestic demand and its
current account position were partly cushioned by
remittances (see Box SAR.1). However, weakening
external demand, domestic supply constraints
(including unreliable electricity provision), and
social unrest resulted in growth slowing to 6.2
percent in FY2011-12 from 6.7 percent the
previous fiscal year, with a further slowdown
expected for FY2012-13. Bangladesh’s relatively
fast growth during 2010-12, together with
international commodity price increases and
expansionary macroeconomic policies, resulted in
inflationary pressu es. Subsequent macroeconomic
tightening and intensified domestic constraints,
combined with disruptions caused by political unrest,
contributed to the projected slowdown in FY2012-13.

Sri Lanka’s economy enjoyed a post-conflict
rebound, growing at 8 or more percent in both
2010 and 2011. Growth has since slowed to a more
sustainable 6.4 percent in 2012, in response to
policy efforts to reduce overheating (amid rising
domestic supply constraints), a drought, and weaker
global demand for Sri Lanka’s exports.

Afghanistan’s robust 11.8 percent GDP growth in
2012, the highest in the region, was mainly due to
an exceptionally good harvest and continued strong
foreign aid inflows. In addition, mining activity
also picked up. However, governance issues and an
uncertain security situation present persistent challenges



New investment project announcements
in India declined and resources tied up in
stalled projects rose sharply since 2011


Source: Center for Monitoring Indian Economy.


Fig SAR.3


0


200


400


600


800


1000


1200


0


1,000


2,000


3,000


4,000


5,000


6,000


Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013


New investment projects announced


Stalled projects [Right]


Investment projects in India
(2-quarter moving average, billions of constant 2006 rupees)





GLOBAL ECONOMIC PROSPECTS | June 2013 South Asia Annex


186


for the economy. Bhutan’s economy grew strongly in
recent years mainly due to hydropower generation and
electricity sales to India—these revenues together with
budgetary grants allowed it to finance a current account
deficit exceeding a fifth of GDP. High credit growth
and supply constraints resulted in an overheated
economy and inflation rates rising to over 10
percent (in line with cost of imports from India).
But policy tightening in 2012 moderated credit growth,
while delays in new projects coming on-stream caused
GDP growth to slow to an estimated 7.6 percent in the
2012-13 fiscal year from 9 percent in FY2011-12.

The Maldives, however, experienced political
uncertainty, double-digit fiscal deficits (the highest
in the region - see below), current account deficit
of over a quarter of GDP, falling reserves (well
below the critical 3 months of imports), and a
halving of GDP growth to 3.4 percent in 2012.
Tourism, a mainstay of the economy, was also
adversely affected by slower growth in high income
countries, and was only partly compensated for by
an increase in Asian tourist arrivals.


Regional industrial production growth
picked up in late 2012 and early
2013, but business sentiment
weakened in India

Industrial activity has begun picking up from a mid
-2012 slump at different paces across South Asian
countries. India dominates the regional trend, with
industrial production expanding at a 4.1 percent
annualized pace during the three months ending in
March (3m/3m, saar) (figure SAR.4). Available data
show industrial production rose even more
decidedly in Pakistan and Bangladesh—at a 22.6
percent annualized pace during the three months
ending in March 2013 (3m/3m, saar) in Pakistan
and at a 21.3 percent annualized pace in the three
months ending in January in Bangladesh.
Industrial production momentum in Sri
Lanka stabilized by the end of 2012 after
registering steep declines during the second
half of the year (figure SAR.4).


Box SAR.1


Box figure SAR.1a Remittances have risen as a share
of GDP in South Asian countries


0


0.05


0.1


0.15


0.2


0.25


2000 2002 2004 2006 2008 2010 2012


Remittances as a share of GDP


Bangladesh


India


Nepal


Pakistan


Sri Lanka


Box figure SAR.1b Remittances inflows mostly offset
trade deficits in Nepal, Bangladesh and Pakistan


-30


-20


-10


0


10


20


30


India Pakistan Bangladesh Sri Lanka Nepal


Trade balance


Remittances


Current account balance/GDP


Percent of GDP




Migrant remittances shielded current account positions in several South Asian countries




Remittances to the South Asia region are estimated to have increased by 12.3 percent in 2012 (the second-highest growth


among developing regions) to reach $109 billion. This follows growth averaging 14 percent in the previous two years. India is


the largest recipient among developing countries ($69 billion), while Bangladesh, and Pakistan ($14 billion each) are among


the top ten developing-country recipients of remittances. Remittance flows to Bangladesh and Pakistan have been particularly


robust in US dollar terms, although Nepal and Sri Lanka recorded the largest increases as a share of GDP in 2012 (Box figure


SAR.1a), helped in part by strong income growth in the Gulf Cooperation Council (GCC) countries. A steady increase in US


dollar remittance inflows in recent years has helped to offset trade deficits in Nepal, Bangladesh and Pakistan, and to a small-


er extent in Sri Lanka and India (Box figure SAR.1b).


























Source: World Bank, Migration and Development Brief 20.


Remittances have risen as a share
of GDP in South Asian countries


0


0.05


0.1


0.15


0.2


0.25


2000 2002 2004 2006 2008 2010 2012


Remittances as a share of GDP


Bangladesh


India


Nepal


Pakistan


Sri Lanka


Box SAR.1


Box figure SAR.1b Remittance i fl tl ff t
trade deficits in Nepal, Bangla-
desh and Pakistan


-30


-20


-10


0


10


20


30


India Pakistan Bangladesh Sri Lanka Nepal


Trade balance


Remittances


Current account balanc


Percent of GDP





GLOBAL ECONOMIC PROSPECTS | June 2013 South Asia Annex


187


Business sentiment in India, however, weakened
markedly between March and May, with the
Purchasing Managers’ Index for manufacturing
recording its lowest reading in four years in May -
although still slightly above the 50 mark, indicating
expansion. This in part reflects still difficult
domestic and external demand conditions (despite
recent strengthening) and persistent electricity
shortages. In contrast, the services sector index
picked up in May on stronger demand, with
increased optimism about the future among
services firms.


South Asian exports have also
started to recover from their 2012
slump

South Asia’s exports have also started to recover
from their mid-2012 slump. Regional export
volume growth picked up to a 12 percent
annualized pace in the fourth quarter of 2012 from
6.5 percent (annualized) in the third quarter, and
further to a robust 15.7 percent annualized pace in
the three months to April (3m/3m, saar) (figure
SAR.5). While India dominates the regional trend,
Bangladesh’s export volume growth accelerated as
a result of strengthening demand for its garment
exports (although recent factory accidents could
moderate the pace of increase going forward).

In Pakistan, following a relatively strong pickup in
the second half of 2012, the momentum of export


volume growth weakened in Q1 2013, in part as
natural gas and electricity shortages cut into
activity. The pace of decline, however, appears to
have slowed in March and April. Available data
suggest that the pace of earlier decline in Sri
Lanka’s exports slowed in the second half of 2012
and momentum of export volume growth
improved in recent months (figure SAR.5),
although on a year-on-year basis, exports in US
dollar terms were still 2.8 percent lower in March
compared to the same month in 2012.


Inflation in South Asia shows signs of
moderating, but price pressures remain

Regional consumer price inflation accelerated in
the three months to February partly due to a surge
in food prices and upward adjustments to regulated
fuel prices. However, inflation shows signs of
moderating, helped in part by easing of
international commodity prices. India’s benchmark
wholesale price index (WPI) inflation fell to a 3-
year low of 4.9 percent (y/y) in April 2013—
although consumer price index (CPI) inflation and
core inflation (CPI excluding food and energy)
were both above 8 percent (y/y) in April. In Sri
Lanka, inflation moderated to 6.4 percent (y/y) in
April, its lowest in almost a year, but rose to 7.3
percent in May.

Year-on-year inflation rates can however be
influenced by base effects. Quarterly inflation
provides a better measure of recent movements



Momentum of export volume growth is
rising across South Asia


Source: World Bank.


Fig SAR.5


-60


-40


-20


0


20


40


60


80


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


India


Pakistan


Bangladesh


Sri Lanka


Developing excl. South Asia


Export volumes, 3m/3m seasonally-adjusted annualized rate (Percent)



Industrial production growth momen-


tum has picked up at different paces in
South Asian countries


Source: World Bank.


Fig SAR.4


-30


-20


-10


0


10


20


30


40


50


Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13


India


Pakistan


Bangladesh


Sri Lanka


Developing excl. South Asia


Industrial production, 3m/3m seasonally-adjusted annualized rate (Percent)





GLOBAL ECONOMIC PROSPECTS | June 2013 South Asia Annex


188


(figure SAR.6). According to this measure, the
momentum of CPI inflation remains strong in
Bangladesh and India—although moderating
slightly in Bangladesh—suggesting that price
pressures continue to remain high in these
countries. However, inflation has moderated
markedly in Pakistan. Inflation momentum had
been weakening earlier in Sri Lanka, but increase in
regulated electricity prices caused inflation to rise in
May.

The generally high CPI inflation rates in South
Asian countries compared with the average for
middle-income developing countries reflect supply-
side production constraints, entrenched inflationary
expectations, and the persistence of food inflation.
Households’ inflation expectations in India remain
stubbornly high, partly because of a steady upward
trend in inflation over the past 7 years (figure
SAR.7). Food inflation has remained persistently
high in the region, partly reflecting agricultural
production constraints and logistics bottlenecks.
Despite the moderation in overall consumer price
inflation, food inflation in India was over 10
percent (y/y) in April, and in Bangladesh and Sri
Lanka was 8.4 percent and 7.9 percent,
respectively, in May. In Pakistan, despite a
moderation in headline inflation to 5.1 percent (y/
y) in May, food inflation was a higher 6.5 percent.
Moreover, core inflation (CPI excluding food and
energy) in Pakistan remains above 8 percent, in
part because of escalating costs due to energy
bottlenecks and security concerns.


Private capital flows to South Asia
have picked up since mid-2012

Private capital flows to South Asia have increased
robustly since mid-2012 (figure SAR.8). Overall,
net private capital inflows to the South Asia region
rose from $73 billion in 2011 to $87 billion in 2012
(table SAR.1).

Following reform efforts in India since September
2012, private capital flows to India grew robustly
led by portfolio equity inflows and bank lending.
The increase in private inflows since mid-2012 was
also a consequence of abundant global liquidity
that resulted from financial market stabilization and
accommodative monetary policies in high income



Gross capital flows to South Asia re-
bounded in the second half of 2012


Source: World Bank; Datastream.


Fig SAR.8


0


1000


2000


3000


4000


5000


Jan '12 Apr '12 Jul '12 Oct '12 Jan '13 Apr '13


US$ millions


Equity issuance


Bond issuance
Bank lending



Inflation momentum is moderating
across South Asia, but still strong in
India and Bangladesh


Source: World Bank.


Fig SAR.6


-5


0


5


10


15


20


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


India Pakistan Bangladesh Sri Lanka Nepal


Inflation, 3m/3m seasonally adjusted annualized rate (Percent)



Inflation expectations in India are still
very high


Source: World Bank; RBI.


Fig SAR.7


0


2


4


6


8


10


12


14


16


Q4-2006 Q1-2008 Q2-2009 Q3-2010 Q4-2011 Q1-2013


Current perceived


1-year Ahead


Actual


Linear (Current perceived)


Linear (1-year Ahead)


Linear (Actual)


Mean inflation rates in India for given survey quarter (Percent)





GLOBAL ECONOMIC PROSPECTS | June 2013 South Asia Annex


189


countries. Foreign direct investment (FDI) received
by India, however, declined by 22 percent (y/y)
during the 2012 calendar year. As part of reform
efforts (and given the need to finance a larger
current account deficit), India undertook several
measures to boost private capital inflows. These
included raising limits on FDI in retail,
broadcasting and aviation sectors; reducing
withholding taxes on interest earnings on foreign
investment in domestic bonds; faster clearances for
large investment projects (including those with
foreign participation); and in general, efforts to
clarify tax and other regulations relevant for foreign
investors. Gross capital inflows, however,
moderated in recent months, in part due to growth
concerns and further deterioration of India’s
current account position in the fourth quarter of
2012.

In Sri Lanka, private debt inflows have risen as the
government successfully issued several sovereign
bonds in international markets. By contrast, in
Pakistan, foreign investment inflows have been on
a declining trend in recent years due to domestic
uncertainties, an adverse investment climate, and
energy shortages. This decline, together with
repayment of official debt to the IMF, have added
to pressures on Pakistan’s balance of payments
position, with international reserves falling below 2
months of imports.


Medium-Term Outlook



Following a steep deceleration in South Asia’s
GDP growth to 4.8 percent in 2012, regional
growth is projected to improve during 2013-15
(Table SAR.2). This recovery in regional growth
will be helped by gradual improvements in both
external and domestic conditions.

A stabilization of the global economic environment
and a gradual recovery in global demand will
provide something of a tailwind for South Asia’s
GDP growth. However, output in the Euro Area
economy, South Asia’s largest export market, is
forecast to contract for the second year in a row in
2013, and growth will remain subdued in 2014 and
2015 (see GEP June 2013 main text). Economic
activity in the United States, however, is more
robust and projected to strengthen further. Much
of the additional external demand for South Asia is
projected to come from other developing countries, which
have become increasingly important destinations of
South Asian exports. South Asia’s exports to developing
countries, including within the region, have risen from 19
percent of overall exports in 2000 to 35 percent in
2011 (14 percent and 26 percent for South Asia
excluding India—see figure SAR.9).


Table SAR.1


Net capital flows to South Asia


Source: World Bank.


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


Capital Inflows 64.7 89.8 100.4 78.3 89.5 92.4 100.5 110.1


Private inflows, net 55.9 78.9 90.7 72.5 86.9 90.6 99.3 109.5


Equity Inflows, net 35.0 63.4 60.3 30.9 47.8 52.8 57.2 67.5


Net FDI inflows 50.8 39.3 30.4 35.7 27.7 36.7 40.0 48.2


Net portfolio equity inflows -15.8 24.1 29.9 -4.8 20.1 16.1 17.2 19.3


Private creditors. Net 20.8 15.5 30.4 41.6 39.1 37.8 42.1 42.0


Bonds 1.7 1.9 10.1 0.7 2.8 4.3 2.5 3.4


Banks 11.2 10.9 8.6 18.4 17.4 15.4 17.8 19.2


Short-term debt flows 8.0 2.7 11.8 22.5 19.1 18.2 21.7 19.3


Other private 0.0 -0.1 0.0 0.0 -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 .. .. ..


Table SAR.1





GLOBAL ECONOMIC PROSPECTS | June 2013 South Asia Annex


190


An expected normal agricultural season and
increase in rural disposable incomes, together with
lower crude oil prices and moderation in inflation,
and continued remittance inflows (in countries
where they are important relative to GDP), will
support an improvement in activity in the
South Asia region from mid-2013 onwards.

Although quarterly GDP is expected to pick
up over the course of 2013, the sharp
deceleration of growth in the previous year
implies that whole year growth for the South
Asia region in 2013 will be a relatively weak
5.2 percent. In the subsequent two years,
South Asia’s regional GDP growth is


projected to accelerate to 6.0 percent in 2014
and 6.4 in 2015, as a result of strengthening
external demand and with gradual success in
alleviating some of the domestic structural
constraints that have held back growth.

Regional growth will be driven mainly by a
projected pickup in India, whose GDP in factor
cost terms is projected to grow 5.7 percent in the
2013 fiscal year (ending in March 2014), and then
accelerate to 6.5 percent and 6.7 percent in FY2014
and FY2015, respectively. Exports and private
investment, which slowed sharply in 2012, are
projected to strengthen during 2013-15 and
provide a boost to growth. However, how robust



South Asia regional forecasts




Table SAR.2


Est. Forecast


00-09
a


2010 2011 2012 2013 2014 2015


GDP at market prices b,f - 10.0 7.3 4.8 5.2 6.0 6.4


GDP per capita (units in US$) 4.4 8.5 5.8 3.3 3.8 4.6 5.0


PPP GDP d 5.9 10.1 7.3 4.7 5.2 6.1 6.4


Private consumption 5.4 7.4 7.3 6.6 5.7 6.0 6.2


Public consumption 5.7 9.9 7.6 6.5 5.7 5.9 6.0


Fixed investment 8.9 16.6 5.9 2.7 4.2 6.0 6.8


Exports, GNFS e 11.5 14.5 15.9 1.4 5.6 8.6 9.8


Imports, GNFS e 9.6 16.0 17.0 7.3 6.2 7.3 8.4


Net exports, contribution to growth -0.3 -1.3 -1.4 -2.0 -0.7 -0.4 -0.5


Current account bal/GDP (%) -0.6 -2.6 -3.1 -4.5 -3.5 -3.1 -2.8


GDP deflator (median, LCU) 6.5 9.2 8.0 6.1 7.2 6.9 6.7


Fiscal balance/GDP (%) -7.5 -8.4 -7.6 -7.0 -7.1 -6.9 -6.8


Memo items: GDP at market prices f


South Asia excluding India 4.6 4.9 5.2 4.9 4.7 4.9 5.0


India at factor cost 7.6 9.3 6.2 5.0 5.7 6.5 6.7


Pakistan at factor cost 4.9 3.1 3.0 3.7 3.4 3.5 3.7


Bangladesh 5.2 6.1 6.7 6.2 5.8 6.1 6.3


(annual percent change unless indicated otherwise)


Source: World Bank.


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 presented in calendar years (CY) terms for Bangladesh, Bhutan, Nepal, India and


Pakistan are 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, Bhutan, and Pakistan, from July 16 through July 15 in Nepal, and April 1


through March 31 in India. Due to reporting practices, Bangladesh, Bhutan, Nepal, and Pakistan


report FY2010/11 data in CY2011, while India reports FY2010/11 in CY2010.





GLOBAL ECONOMIC PROSPECTS | June 2013 South Asia Annex


191


that recovery will be, will depend on the pace of
policy and fiscal reforms, and remains subject to
significant uncertainty and downside risks. Some
upside risks to the outlook include a faster than
projected pickup in global demand and a larger
than expected decline in commodity prices (see
Risks and Vulnerabilities section below).

GDP growth in Pakistan is projected to only slowly
accelerate from an estimated 3.4 percent in FY2012
-13 to 3.7 percent in FY2014-15, with output
being held back by a wide range of structural
problems, including: weak investment (down a
third since 2008 when expressed as a percent of
GDP—see figure SAR.10), security uncertainties,
unreliable energy inputs, and monetization of large
fiscal deficits, among others. Balance of payments


pressures have risen with reserves falling below 2
months of imports, notwithstanding robust
remittance inflows. Policy actions to address the
underlying adverse structural factors are critical to
raising Pakistan’s longer-term growth potential.

Bangladesh’s growth slowed to an estimated 5.8
percent in the 2012-13 fiscal year ending in June.
But growth is projected to pick up modestly to 6.1
percent in FY2013-14 and 6.3 percent in FY2014-
15, as external demand strengthens gradually, and
agricultural output returns to more normal levels.
Several domestic weaknesses, including
infrastructure gaps (electricity, roads) and social
unrest are expected to hold back a firmer recovery.

In Sri Lanka, growth is expected to pick up to 6.5
percent in 2013 and 6.7 percent in 2014, aided by
normal agricultural harvests, strengthening demand
for exports, robust capital inflows, increase in
infrastructure and other investments, and a revival
of tourism (Table SAR.3). The relatively modest
pickup in growth represents a return to underlying
potential growth rates after rapid demand-fueled
growth in 2010-11 opened up positive output gaps
and resulted in inflation and current account
pressures.

Some domestic uncertainties in Nepal appear to be
easing and the political situation normalizing after
formation of an interim government in March.
This political normalization, expected timely
monsoon rains, and continued increase in
remittances should be favorable for economic
activity in 2013 and beyond. However, private


Fig SAR.10


Fig SAR.9



A sharp decline in investment-to-GDP
ratio in Pakistan


Source: World Bank; Datastream; Haver.


i .


10


15


20


25


30


35


40


1
9


9
0


1
9


9
2


1
9


9
4


1
9


9
6


1
9


9
8


2
0


0
0


2
0


0
2


2
0


0
4


2
0


0
6


2
0


0
8


2
0


1
0


2
0


1
2


Pakistan India


Bangladesh Nepal


Sri Lanka


Fixed investment as pecent of GDP



South Asia’s exports benefited from stronger developing-country growth, with exports to developing
countries outpacing overall exports during 2000-2011


Note: Export shares calculated using trade partner data on imports from South Asian countries.


Source: World Bank; UN COMTRADE.


0


20


40


60


80


100


2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


Other high income USA


EU27 Within South Asia


Other developing regions East Asia and Pacific


China


Share of Indian exports (Percent)


0


20


40


60


80


100


2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


Other high income USA


EU27 Within South Asia


Other developing regions East Asia and Pacific


China


Share of South Asia excluding India exports (Percent)





GLOBAL ECONOMIC PROSPECTS | June 2013 South Asia Annex


192



South Asia country forecasts




Table SAR.3


Est. Forecast


00-09
a


2010 2011 2012 2013 2014 2015


Calendar year basis b


Afghanistan


GDP at market prices (% annual growth) c - 8.4 7.0 11.8 3.1 4.9 6.3


Current account bal/GDP (%) -0.3 2.8 2.2 3.9 1.6 0.5 -0.3


Bangladesh


GDP at market prices (% annual growth) c 5.2 6.4 6.5 6.0 6.0 6.2 6.3


Current account bal/GDP (%) 0.6 1.8 0.2 1.3 1.1 1.0 0.9


Bhutan


GDP at market prices (% annual growth) c 7.7 9.6 9.5 8.3 7.9 8.4 8.6


Current account bal/GDP (%) -0.1 -19.1 -25.5 -20.7 -20.9 -19.2 -18.4


India


GDP at factor cost (% annual growth) c 7.4 9.1 7.0 5.3 5.5 6.3 6.6


Current account bal/GDP (%) -0.5 -3.2 -3.5 -5.4 -4.2 -3.7 -3.3


Maldives


GDP at market prices (% annual growth) c 6.3 7.1 7.0 3.4 3.7 3.9 4.0


Current account bal/GDP (%) -1.1 -9.2 -21.4 -26.5 -28.0 -26.0 -25.0


Nepal


GDP at market prices (% annual growth) c 3.4 4.1 4.2 4.3 3.8 3.9 4.1


Current account bal/GDP (%) -0.9 -2.5 0.2 0.1 -0.1 -0.3 -0.5


Pakistan


GDP at factor cost (% annual growth) c 4.9 3.1 3.4 3.5 3.4 3.6 3.7


Current account bal/GDP (%) -1.4 -0.7 -1.0 -0.9 -0.4 -0.3 -0.3


Sri Lanka


GDP at market prices (% annual growth) c 4.4 8.0 8.2 6.4 6.5 6.7 6.5


Current account bal/GDP (%) -3.7 -2.2 -7.8 -6.6 -5.9 -5.4 -4.8


Fiscal year basis b


Bangladesh


GDP at market prices (% annual growth) c 5.2 6.1 6.7 6.2 5.8 6.1 6.3


Bhutan


GDP at market prices (% annual growth) c 7.7 9.3 10.0 9.0 7.6 8.1 8.6


India


GDP at factor cost (% annual growth) c 7.6 9.3 6.2 5.0 5.7 6.5 6.7


Nepal


GDP at market prices (% annual growth) c 3.4 4.8 3.4 4.9 3.7 3.8 4.1


Pakistan


GDP at factor cost (% annual growth) c 4.9 3.1 3.0 3.7 3.4 3.5 3.7


Source: World Bank.


World Bank forecasts are frequently updated based on new information and changing (global)


circumstances. Consequently, projections presented here may differ from those contained in other


Bank documents, even if basic assessments of countries’ prospects do not significantly differ at any


given moment in time.


a. GDP 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, Bhutan, and Pakistan, from July 16 through July 15 in Nepal, and


April 1 through March 31 in India. Due to reporting practices, Bangladesh, Bhutan, Nepal, and


Pakistan report FY2010/11 data in CY2011, while India reports FY2010/11 in CY2010. GDP figures


presented in calendar years (CY) terms for Bangladesh, Bhutan, Nepal, India and Pakistan are


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.





GLOBAL ECONOMIC PROSPECTS | June 2013 South Asia Annex


193


sector industrial activity is likely to continue to
remain lackluster. Overall, following an estimated
3.7 percent GDP growth in FY2012-13, Nepal’s
growth is projected to remain broadly stable at 3.8
percent in FY2013-14 and improve modestly to 4.1
percent in FY2014-15. To do better, the
government will need to make energy provision
more reliable, invest further in the skills and quality
of Nepal’s workforce, enhance the predictability
and transparency of the regulatory and tax regimes,
while also strengthening the overall business
environment.

Afghanistan’s economy remains dependent on
agricultural performance and external aid.
Moderate rainfall is projected to reduce growth to
around 3 percent in 2013. The withdrawal of
coalition forces, which have been a major source of
demand, is likely to create challenges for sustaining
growth. To assist in this transition, donors have
pledged significant aid in the coming years.
Although the security situation remains difficult,
services and natural resource extraction are starting
to contribute to economic activity. Growth will
also be helped by continued rebuilding of
infrastructure and essential services, foreign
assistance, and foreign investment in natural
resource sectors. Afghanistan’s GDP growth is
forecast to accelerate to about 6 percent by 2015.

In Bhutan, hydropower projects coming on steam
in coming years are likely to keep overall GDP
growth high at about 8-9 percent annually in 2013-
15. But lack of economic diversification poses
challenges to generating employment and inclusive


growth. In Maldives, in addition to deteriorating
macroeconomic fundamentals discussed earlier, the
country faces severe challenges in diversifying its
economy beyond tourism. The economic outlook
remains clouded by political uncertainty leading up
elections in 2013/14 and by limited success in
controlling fiscal outcomes.

An easing in global fuel prices (Brent crude oil
prices fell 15 percent between mid-February and
early-June - see figure SAR.11), together with
expected normal monsoon rains, will help to curb
price pressures. Modestly lower crude prices in
2013 and 2014 will also provide some relief to
current account and fiscal positions. Lower crude
oil prices will help regional governments in
narrowing existing gaps between international
prices and domestic administered prices, and lower
the subsidy burden and reduce overall fiscal
pressures.

But inflation pressures will still remain in the
region. Ongoing and planned increases in
administered fuel and electricity prices will add to
headline price pressures in the near term, but as
long as the higher inflation does not get ingrained
into expectations, this should not result in a
permanent increase in inflation. More importantly,
supply side constraints in agricultural, energy and
other sectors will continue to exert upward price
pressures.



Risks and
vulnerabilities



Global uncertainties have receded since mid-2012
and both the severity and likelihood of downside
risks from high income countries has diminished
(see June 2013 GEP main text). Domestic policy
and weather risks have now gained in importance
for the South Asia region.

A key risk to the gradual acceleration in growth
envisaged in the baseline scenario, is the success
with which planned and announced reform policies
are actually implemented during 2013-15. Based on
backward looking indicators, growth could well be



Sharp crude oil price declines have often
corrected in the past, but on average,
prices are forecast to be 2.5 percent
lower in 2013 than in 2012


Source: World Bank; Datastream.


Fig SAR.11


80


90


100


110


120


130


Jan '12 Apr '12 Jul '12 Oct '12 Jan '13 Apr '13


USD per barrel


Brent


Dubai





GLOBAL ECONOMIC PROSPECTS | June 2013 South Asia Annex


194


between 0.3 and 0.5 percentage points slower than
in the baseline.

Political obstacles to passing and implementing
reform legislation pose downside risks to the
outlook. Reforms to the process of land acquisition
for industrial projects and labor market reforms
could prove contentious. In countries either exiting
(Pakistan) or entering electoral cycles (Bangladesh,
India, Nepal), spending pressures associated with
elections could boost fiscal expenditure, adding to
inflationary pressures and both internal and
external imbalances. Risks in the post-election
period include the possibility that past reforms are
reversed or implementation delayed.

Weaker than expected monsoon rains present
another downside risk for South Asia. A second
poor monsoon in a row would adversely affect
rural incomes and employment, contribute to
persistence of food inflation (and in turn, overall
inflation) and could reduce overall GDP growth.
by 0.5 percentage points or more. Moreover,
weaker rural income growth would put
greater demands on public spending (through
automatic stabilizers and social welfare programs),
which could make it difficult to achieve fiscal targets.

A weakening of reserve coverage of imports in
Pakistan and the Maldives to below 2 months of
imports suggests that their balance of payments
positions could come under stress from
unanticipated shocks. However, the reserve
position of Bangladesh has improved in the most
recent period, from robust remittance inflows and
a recent improvement in trade. Sri Lanka’s reserves
have also risen in line with an increase in private
capital inflows.

A greater dependence on foreign investment
inflows to finance India’s significantly larger
current account deficit compared to the past has
increased its vulnerability to a sudden reversal of
investor sentiment. Several factors could result in a
slowing or reversal of investment inflows—an
unanticipated monetary tightening in some high
income countries; resurgence of debt tensions;
escalation of geopolitical conflict; and even
disenchantment with the pace or nature of
domestic reforms. Moreover, the sharply relaxed
monetary policy in Japan could result in strong and
disruptive private capital flows.


Revival of business sentiment remains a key
element for South Asia’s regional growth. As
discussed earlier, business sentiment in the
manufacturing sector in India weakened to a four-
year low in May (although the services sector index
picked up). If business sentiment were to remain
weak in coming months, this could adversely
impact investment and growth.

An upside risk to South Asia’s growth outlook
includes a significant decline in commodity prices
compared to the baseline. If crude oil prices were
to fall to an average level of $80 per barrel by mid-
2014 due to additional supplies coming on stream
in international markets, South Asia’s GDP would
be 0.9 percent higher than in the baseline by 2014,
current account deficit would be 1.4 percent of
GDP lower, and fiscal deficit 0.7 percent of GDP
lower (see table 5 in June 2013 GEP main text).
Other upside risks include a more rapid resolution
of structural constraints to growth than envisaged
in the baseline, and faster than projected global
growth during the forecast period.


Despite recent efforts at fiscal
consolidation, relaxation of monetary
policies and still large fiscal deficits
pose risks

Central banks in South Asia cut interest rates
sharply during the global financial crisis of
2008/09, but rates were appropriately raised
subsequently as inflationary pressures rose (figure
SAR.12). With the slowing of growth in 2012 and
the recent moderation in year-on-year inflation,
monetary policy in the region shifted toward a
more accommodative stance. Policy rates in
Pakistan were cut by 250 basis points in the second
half of 2012, while Bangladesh, India and Sri Lanka
cut policy rates in the first half of 2013. Sri Lanka’s
central bank cut its policy rate by 25 basis points in
late 2012 and again by 50 basis points in May after
inflation moderated in the previous two months.
The Reserve Bank of India reduced its key policy
interest rate by a cumulative 75 basis points
between January and May of 2013 as its benchmark
wholesale price inflation declined, notwithstanding
high CPI inflation.

Although inflation rates have moderated across
several countries in the region, consumer price





GLOBAL ECONOMIC PROSPECTS | June 2013 South Asia Annex


195


inflation still remains high compared to the average
for middle-income developing countries. India’s
steep growth deceleration mostly closed a large
positive output gap that had opened up in the post-
financial crisis period. And notwithstanding either
slower or weak growth in 2012, several other South
Asian countries also appear to be operating either
close to or above full capacity. Given lags in
monetary policy transmission, an easing of
monetary policies (together with still large fiscal
deficits) could add to strengthening activity already
underway in the countries operating at full capacity,
resulting in additional inflationary and current
account pressures, without much payoff in
additional GDP growth.

The high fiscal deficits in the region also pose risks
to the outlook, despite recent efforts at
consolidation (see below). Large government
borrowing programs can result in crowding out of
private investment, and importantly, reduce
available policy buffers to counter external or
domestic shocks. Moreover, when underlying
inflationary pressures are already high, the
additional spending can further exacerbate
inflation.

General government deficits exceeded 6 percent of
GDP on average in 2012 in the region (figure
SAR.12). India’s central government's fiscal deficit
fell to 4.9 percent of GDP in the 2012 fiscal year,
below the 5.2 percent initially estimated, and down
from 5.8 percent in FY2011.FN2 The government
has pledged to further reduce it to 4.8 percent in
FY2013 and 4.2 percent in FY2014. Despite the


recent consolidation, India’s general government
deficit (including state government fiscal deficits) is
more than 7 percent of GDP. Pakistan’s general
government deficit is estimated to have risen
sharply in recent years to above 7 percent of GDP
(figure SAR.13). Maldives’ fiscal deficit is
significantly higher than the regional average, and
rose further in 2012.

Several South Asian countries undertook fiscal
reforms during the last year, particularly to their
subsidy regimes. Fuel and food subsidies typically
account for the bulk of subsidies, with subsidies in
India and Sri Lanka at more than 2 percent of
GDP, and over 3.5 percent of GDP in Bangladesh.
Reforms to subsidy regimes have involved
introducing more frequent adjustments to
administered fuel and electricity prices, and
measures to improve targeting of government
benefits to the poorest beneficiaries. For instance,
administered diesel prices in India are being raised
at close to monthly frequency to gradually narrow
the gap between international and domestic prices,
while quotas have been imposed on subsidized
provision of liquefied petroleum gas (LPG) for
domestic use. Sri Lanka raised electricity prices in
April 2013 in order to curb the (quasi-fiscal) losses
of the state electricity company. India has also
undertaken an ambitious direct cash transfer
program (based on Aadhar digital unique
national identification numbers, already
provided to nearly 400 million Indians) in
order to better target government benefits
and services, and to reduce leakages from the
public distribution system.



South Asian central banks (with exception
of Nepal) cut policy interest rates
following a mid-2012 slump in activity
and moderation of inflation


Source: World Bank; Datastream.


Fig SAR.12


0


2


4


6


8


10


12


14


16


Jan-08 Sep-08 May-09 Jan-10 Sep-10 May-11 Jan-12 Sep-12 May-13


Bangladesh
India
Nepal
Pakistan
Sri Lanka


Policy interest rate (Percent)



Fiscal deficits remain higher than pre-
financial crisis levels in general in
South Asia


Note: Only deficits shown in chart. f = forecasts for 2013.


Source: IMF (2013a and 2013b).


Fig SAR.13


0


5


10


15


20


25


Maldives India Pakistan Sri Lanka Bangladesh Nepal Afghanistan


2007


2009


2011


2012


2013f


General government deficit (Percent of GDP)





GLOBAL ECONOMIC PROSPECTS | June 2013 South Asia Annex


196



Despite progress made in recent months, there are
still challenges to moving towards market-based
pricing of fuel and electricity tariffs in the region.
Regulated fuel and electricity prices are often
insufficient for energy producers to fully recover
costs. These not only add to quasi-fiscal losses of
public sector firms, but can also deter private
investment in the critical energy sector.

Mobilizing sufficient tax revenues to fund social
development and infrastructure investment remains
a major challenge for the region. Tax revenues as a
share of GDP are in general lower in South Asian
countries when compared with the average for
middle and low income developing countries
(figure SAR.14). For sustained deficit reduction,
expenditure restraint and better targeting of
subsidies has to be combined with revenue
mobilization (including measures to simplify the
tax code, broaden the tax base, and improve
compliance), so that necessary expenditure on
education, health, and infrastructure do not suffer
and impair future growth.



Conclusions


The South Asia region faces a number of longer-
term economic challenges. Despite impressive
gains in development outcomes in recent years (the
region is on track to achieve three Millennium


Development Goals by 2015 – halving extreme
poverty, reducing maternal mortality, and providing
access to safe water), South Asia will still be home
to almost 400 million of the developing world’s
970 million poor in 2015, according to the World
Bank’s Global Monitoring Report (see also Chen
and Ravallion (2012) and Ravallion (2013)).

The sharp economic slowdown experienced in the
post-financial crisis period exposed structural
vulnerabilities and has made the task of reviving
growth in a sustainable manner even more urgent.
But with India’s positive output gap mostly closed
after its steep growth deceleration, and given
capacity constraints in most South Asian countries,
policymakers need to remain vigilant against relying
on short-term demand stimulus in order to avoid
overheating (inflation and current account)
pressures. South Asian countries should continue
to rebuild their fiscal buffers to be able to deal with
future crises.

Deepening supply-side reforms is critical to
improving the efficiency of investment and raising
the longer-term growth potential of the region.
These include eliminating bottlenecks in project
implementation and easing energy input constraints
for firms, as well as labor market reforms, clarity in
tax and business regulations for both foreign and
domestic investors, and improving the overall
business climate. Raising the quality of human
capital through appropriate investments in
education and health can boost productivity in
South Asian countries over the longer term.
Investment in infrastructure will help the formal
private sector by reducing transportation and
logistics costs, and also the poor in gaining access
to markets and opportunities.



Tax revenues are in general a smaller
share of GDP than the average for
middle- and low-income countries


Source: World Bank; IMF.


Fig SAR.14


0


2


4


6


8


10


12


14


16


18


20


India Nepal Bangladesh Sri Lanka Pakistan Afghanistan Middle
income


countries


Low income
countries


Tax revenue (Percent of GDP)





GLOBAL ECONOMIC PROSPECTS | June 2013 South Asia Annex


197








Chen, Shaohua, and Martin Ravallion. 2012. “More Relatively-Poor People in a Less Absolutely-Poor World.” Policy


Research Working Paper 6114, World Bank: Washington, DC.




GOI (Government of India). 2013. “Review of the Indian Economy 2012/13.” Report of the Economic Advisory Council to


the Prime Minister of India, April. (http://eac.gov.in)




IMF (International Monetary Fund). 2013a. Fiscal Monitor, April. Washington DC.




_____. 2013b. World Economic Outlook, April. Washington DC.




Rajan, Raghuram. 2013. “Why India Slowed.” Project Syndicate, April 30.




Ravallion, Martin. 2013. “How Long Will It Take to Lift One Billion People Out of Poverty?” Policy Research Working Paper


6325, World Bank: Washington, DC.




Subbarao, Duvvuri. 2013. “India’s Macroeconomic Challenges: Some Reserve Bank Perspectives.” 5th I.G. Patel Lecture,


London School of Economics, March 13.




World Bank. 2013a. Global Monitoring Report 2013: Rural-Urban Dynamics and the Millennium Development Goals. South


Asia Regional Brief.




World Bank. 2013b. South Asia Economic Focus: Regaining Momentum. April 2013.






References


Notes

1 See GOI (2013), Rajan (2013), and Subbarao (2013) for some of the reasons behind India’s growth slowdown and


the macroeconomic and structural challenges that the country faces in reviving growth.


2 The World Bank’s estimates of India’s central government fiscal deficit are slightly higher at 6.0 percent in FY2011


and 5.1 percent in FY2012. The difference is mostly accounted for by receipts from disinvestment in public sector


enterprises. World Bank estimates excludes these (and any other one time receipts) from the government's revenue.




GLOBAL ECONOMIC PROSPECTS | June 2013 Sub-Saharan Africa Annex


199




SUB-


SAHARAN


AFRICA


REGION


GLOBAL


ECONOMIC


PROSPECTS Annex June 2013




GLOBAL ECONOMIC PROSPECTS | June 2013 Sub-Saharan Africa Annex


201


Overview



Strong domestic demand allowed Sub Saharan
African economies to continue their robust growth
trajectory in 2012, despite subdued global demand
conditions. On aggregate the region grew at 4.4 per
cent in 2012 (this includes South Sudan whose
GDP recorded a double digit contraction).FN1
Excluding South Africa, the region’s largest
economy, the rest of the region grew 5.4 percent,
with close to a third of economies growing faster
than 6 percent (figure SSA.1).

Much of this growth was supported by investments
in both the resource and non-resource sectors. Net
foreign direct investment inflows to the region are
expected to reach about $40 billion in 2013, up
from $32.1 billion in 2012. Still high commodity
prices (even if easing) is supporting investments in
the natural resource sectors in several economies in
the region. But the growth dynamism has not come
only from the resource sector as investments (both
domestic and foreign) have also flowed to the non-
resource sector, in particular the service sub-sectors
such as finance and banking, telecommunication,
transportation and retail trade. Indeed, in several
economies growth in the non-resource sector was
stronger than the resource sector.

Better weather conditions and associated improved
harvests, decelerating inflation, relaxation of earlier
interest rate hikes and increased remittance inflows
($33 billion in 2013, up from $32 billion in 2012)
broadly supported the resilience in household
spending, albeit with differences across countries in
the region. Fiscal policy for most economies in the
region remains expansive with several governments
rightly emphasizing the need to address
infrastructural weaknesses. Debt levels also remain
low. However, compared to 2008 levels, fiscal
buffers in the region are yet to be restored, and in a
number of countries the expansionary fiscal policy
may actually be hitting against capacity constraints.

While the overall growth story for the region has
been robust, not all countries are enjoying this
robust growth. Indeed, growth in 2012 was weaker
in countries that encountered conflict or political
instability (e.g. South Sudan, Central Africa
Republic, Mali, Guinea Bissau), major labor unrests


(South Africa) sharp fiscal adjustments (Swaziland)
and those impacted by severe adverse weather
conditions .

Medium-Term Outlook. Going forward,
the robust domestic demand factors that have
underpinned Sub-Saharan Africa’s growth
performance in recent years and the projected
strengthening of global demand are expected to
support the region’s medium term growth
trajectory. Regional GDP is projected to pick up to
4.9 in 2013, 5.2 percent in 2014, and 5.4 percent in
2015. Excluding, the region’s largest economy,
South Africa, GDP growth for the rest of the
region is expected to increase by 6.2 percent in
2013 and 2014, and further strengthen to 6.4
percent in 2015. Net private capital inflows are
projected to reach $77.5 billion in 2015 from $48.3
billion in 2012. Household spending will be
supported by rising incomes, increased remittance
flows, and a stable macroeconomic environment.
Although the gradual strengthening of the global
economy and increased capacity in mineral exports
will support export growth over the medium term,
the net exports contribution to growth is expected
to be modest or even negative, on account of
strong import demand (especially capital
equipment).

Risks to growth prospects. Nonetheless,
there exist downside risks that could derail the
projected robust growth outlook. While external
risks to the outlook from the Euro Area crisis, or
fiscal sustainability in the United States and Japan
have diminished, new domestic and external risks
and challenges have gained in prominence. Notable
among these is the possibility that the recent easing
in international commodity prices intensifies. Our
simulations suggest that, while a 25 percent decline
in oil prices will be beneficial to the oil importers in
the region, oil exporters would experience a cut in
growth by some 1.4 percentage points, with similar
impacts for metal exporters in the event of a sharp
decline in industrial metal prices. Domestic risks
include the possibility of overheating in economies
operating close to capacity; adverse weather
shocks; and political unrest. On the upside growth
could be stronger if high-income countries recover
more quickly than envisaged or if ongoing
infrastructural investments improve competitiveness
and help unlock new sources of growth.




GLOBAL ECONOMIC PROSPECTS | June 2013 Sub-Saharan Africa Annex


202


Recent Developments



Investment f lows continue to
underpin growth in Sub Saharan
Africa. Gross fixed capital formation in Sub
Saharan Africa has steadily increased from about
16.4 per cent of GDP in 2000 to about 20.4 per
cent in 2011. The pick up in investment has not
only contributed to growth directly, but it has also
helped boost potential output in the region by
raising the amount of capital with which
labor has to work, albeit concentrated in
specific sectors.

Data for 2012, suggest that this capital deepening
process has continued. Imports of capital
equipment, used as a proxy for domestic
investment activity, have expanded at a robust
33.6% annualized pace in value terms during the


fourth quarter of 2012, although this follows a
sharp slump (-38.2%) in Q3 2012, when global
economic activity was weaker (figure
SSA.2).FN2 Fourth quarter capital goods
imports were particularly strong in Angola,
Cote D’Ivoire, Ethiopia, Ghana, Nigeria,
Tanzania and Zambia - all economies where
real GDP grew by an estimated 6.5 per cent
or more in 2012.

High commodity prices have
supported investment flows to
minerals sector. With the region’s vast
potential of unexplored mineral and hydrocarbon
reserves and still high commodity prices
(notwithstanding recent declines) foreign direct
investment continues to flow to the natural
resource sectors across the breadth and length of
the region’s economies (see table SSA.1). Net
foreign direct investment inflows to the region
reached an estimated $33.4 billion in 2012, and are
projected to rise a further 21% in 2013 (table SSA. 2)




Fastest Growing Economies in Sub


Saharan Africa (2012)


Source: World Bank.


Fig SSA.1


0 2 4 6 8 10 12 14 16


Brazil


Russia


India


Nigeria


Dem. Rep. of Congo


Zambia


Tanzania


Angola


Ethiopia


Eritrea


Mozambique


Rwanda


China


Burkina Faso


Ghana


Cote D'Ivoire


Niger


Sierra Leone 18.2%




Capital equipment imports picked up in


Q4 following weakness in Q3


Source: World Bank; ITC.


Fig SSA.2


-60


-40


-20


0


20


40


60


80


100


Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12


All imports Capital equipment



Selected major ongoing explorations in the natural resource sector in Sub Saharan African economies


Source: Africa Mining


Table SSA.1


Sub-regio n Oil and Gas M etal and M ineral


West A frica
Ghana, Cote d’ Ivoire, Sierra Leone,


Liberia, Chad
Sierra Leone (iron ore), Guinea (iron ore)


East A frica Tanzania, Uganda, Kenya Eritrea (gold), Ethiopia (gold) Tanzania (gold, uranium)


So uthern A frica Angola
M ozambique (coal, iron ore), Zambia (copper), Botswana (copper),


M adagascar (nickel), M alawi (uranium)


C entral A frica Cameroon
Gabon (manganese), Cameroon (iron ore), Democratic Republic of


Congo (copper, cobalt, gold)




GLOBAL ECONOMIC PROSPECTS | June 2013 Sub-Saharan Africa Annex


203


The non-minerals sector has also
benefitted from increased investment
flows, thereby supporting the
dynamic growth of that sector.
Although the natural resources sector is the
pre-eminent destination for foreign direct
investment inflows, increasingly non-minerals
sectors, notably the services sector, is
attracting the interest of foreign investors.
Sectoral breakdown of cross-border merger’s
and acquisition for the Africa region shows
that over the 2010-2011 period the services and
manufacturing sectors attracted an average of 53.4
per cent and 33.5 per cent respectively of all M&A
purchases in the region.FN3 The primary sector
accounted for only 13.2%. Similarly, the services
and manufacturing sector attracted some 33.6 per
cent and 41.2 per cent of all green field FDI into
Africa.

Rising disposable incomes, an increasing
work force, and the fact that many economies
are growing from a low base have spurred on
investments in telecommunications, retail and
banking. For instance, the International
Telecommunications Union estimates that


mobile subscriptions in Sub-Saharan Africa
grew 14.4 per cent in 2012 (higher than the
developing country average of 8.1%). Indeed,
in the region services sector growth well
exceeds that of resource sector growth, even
in long-standing resource rich economies (see
box SSA.1).

The mining sector tends to require higher capital
outlays and specialized technology than other
sectors and therefore attracts a higher percentage
of foreign investors. Domestic capital, on the other
hand, plays a more significant role in service-sector
growth. Thus, despite the increasing contribution
of foreign direct investment flows to capital
deepening in the region, FDI accounts for about
only a fifth of the regions gross fixed capital
formation (19.6 percent in 2010). Domestic credit
growth figures attest to the rising importance of
domestic intermediation. Year-over-year real
credit grew 23.4 percent in Botswana
(February 2013); 31.4 percent in Ghana
(September 2012); 16.6 percent in Kenya
(January 2013); 12.9% in Uganda (February
2013); 8.1 percent in Nigeria (March 2013);
and 9.7 percent in South Africa (April 2013).



Net capital flows to Sub-Saharan Africa ($ billions) Table SSA.2


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


Capital Inflows 43.4 47.0 61.1 66.9 58.8 67.5 73.8 82.6


Private inflows, net 38.4 37.1 47.8 55.4 48.3 58.0 66.5 77.5


Equity Inflows, net 33.4 43.2 42.7 46.8 41.4 49.5 57.5 65.4


Net FDI inflows 39.1 32.5 26.7 38.5 32.1 39.8 46.2 52.0


Net portfolio equity inflows -5.7 10.7 16.0 8.4 9.3 9.7 11.3 13.4


Private creditors. Net 5.0 -6.2 5.1 8.6 6.9 8.5 9.0 12.1


Bonds -1.6 2.0 1.4 6.0 6.8 8.4 6.4 7.1


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


Source: The World Bank


Note : e = estimate, f = forecast




GLOBAL ECONOMIC PROSPECTS | June 2013 Sub-Saharan Africa Annex


204


But not all economies are benefitting
from the investment flows. While
strong on average, investment growth (both
foreign and domestic) has been weaker in
several other countries. Political instability is
hurting investment, thereby curtailing
economic growth in Central African
Republic, Guinea Bissau, Madagascar, and
Mali. Madagascar’s crisis for instance, is
estimated to have cost it some $6.3 billion in
lost growth over the 2009-2012 period,
according to World Bank estimates. This
contrasts with post-conflict economies such
as Cote D’Ivoire and Comoros which are
witnessing increased investment flows and a
rebound in economic activity.

Fiscal deficits deteriorated in 2012
and fiscal policy is generally
expansive in the region. In general,
government expenditures in Sub Saharan Africa
have been growing at par with GDP since 2009,


and have stayed steady at about 30 per cent of
GDP in the post-crisis period — about one
percentage point higher than in 2008. Revenues,
however, have not kept pace, and as a result,
overall fiscal balances have deteriorated by about
2.6 percent of GDP since 2008.

For the region as a whole, fiscal policy appears to
have eased in 2012, with cyclically adjusted
balances having deteriorated by about 0.3
percentage points overall, with the largest
deterioration occurring among oil exporters (figure
SSA.3). Nevertheless, average structural (cyclically
adjusted) deficits remain low. Moreover, although
the region’s government gross debt to GDP ratio is
rising it remains relatively low at 33.4 percent of
GDP in 2012 (versus 29% of GDP in 2008).
Nonetheless, there remain significant differences
among countries in the region, hence while debt
profiles remain sustainable for most countries in
the region, it is a rising concern for a few
economies.



Growth in the non-resource sector in several Sub Saharan African countries, including resource
rich ones, was higher than that of the resource sector in 2012.



In Botswana, where GDP expanded by 3.7 per cent in 2012, mining output contracted 8.1 per cent, whereas non-mining
GDP growth was positive, with notable contributions from construction (14.4), financial and business services (9.7 per cent)
and transport and communications (9.1 per cent).


Ghana, one of the new oil exporting economies in the region, grew at an estimated 7.9 percent in 2012, with the mining
and quarrying sector (including crude oil) growing at 5.0 percent, whereas the services sector grew at 10.2 per cent. The
fastest growing sectors were the information and communication sector (23.4 per cent), financial and insurance activities
(23.0 per cent), real estate and other professional services (13.1 percent) and hotel and restaurants (13.0 percent).

In Kenya, where economic activity picked up to 4.7 per cent in Q3 2012, mining and quarrying picked up by 1.8 per cent,
with much of the pick-up coming from a 6.9% expansion in the agriculture sector, a 6.8 percent increase in financial inter-
mediation, a 13.7 percent increase in electricity and water output and a 5.2 percent rise in transport and communication
services.


In Nigeria Q1 2013 GDP growth was 6.7 per cent with crude petroleum and natural gas contracting at 0.5 percent, while
non-oil growth was at 7.9 percent. The lead growth sectors were telecommunications (24.5 percent), hotel and restaurants
(13.6 percent) construction (15.7 percent) and real estate (13.6 per cent).

In Rwanda, where GDP grew by 8.7 percent in Q4 2012, the agriculture sector grew by 3 percent and contributed 1.1 per-
centage points to the overall GDP growth; the industrial sector grew by 11 percent and contributed 1.7 percentage points to
the GDP growth; and the services sector increased by 12 percent and contributed 5.4 percentage points to the GDP
growth.

In South Africa, where GDP increased by 1.9 per cent in Q1 2013 the mining and quarrying industry, finance and real
estate and business services each contributed 0.7 percentage points (ppt). The growth in mining followed two quarters of
negative growth. Wholesale, retail & motor trade, and transport, storage & communication each contributed 0.2 percentage
points to GDP growth.


In Tanzania, where output expanded by an estimated 6.8 percent in 2012, the mining and quarrying sector expanded by
1.2 per cent in the first three quarters of the year, whereas there was double digit expansion in the real estate (10.1 per-
cent), transport and communications (16.5 percent) and wholesale and retail sectors (16.1 percent).


Box SSA.1




GLOBAL ECONOMIC PROSPECTS | June 2013 Sub-Saharan Africa Annex


205


Most government spending plans for countries in
the region (e.g. Uganda, Ethiopia, Zambia, Niger,
Namibia, Tanzania, South Africa, Ghana, Nigeria)
are rightly targeting infrastructure spending
(particularly power generation, transportation
routes and port facilities), which remains a critical
binding constraint to improving the
competitiveness of economies in the region.
Increasingly such infrastructure projects are being
financed from new funding sources including from
some large developing countries (in particular
China but also India, Brazil and Russia) and from
international capital markets.

Indeed, over the past several years countries in the
region have taken advantage of low interest rates
and investor interest in the high-income world to
tap international bond markets, sometimes for the
first time. For example Rwanda raised $400 million
in April 2013 in it’s maiden Eurobond issuance.FN4
And, other Sub Saharan African sovereigns
(Angola, Kenya, Ghana, Nigeria, Tanzania) have
plans to borrow from international capital markets
in coming months. A Bloomberg report estimates
that excluding South Africa, sub Saharan African
sovereigns will issue some $7 billion in
international debt in 2013 – the highest level since
2007.

Large positive output gaps in a
number of economies suggest
further expansionary fiscal policy
could actually be counterproductive.
Nonetheless, with demand in many Sub Saharan
African countries closing in on their supply
potential, output gaps (an estimate of the


difference between demand and supply) are small
or even positive (implying demand in excess of
supply, figure SSA.4). For these countries, an expansion
of fiscal policy could be counterproductive as it could
induce macro instability, with negative impacts on
the investment environment and growth.

The challenge will be for policymakers to ensure
that the hard earned gains of the past 15 years in
terms of macroeconomic and fiscal stability are
preserved, while at the same time continuing to lay
the foundation for long-term growth by investing
in areas of structural weakness, including
infrastructure, education and health. A number of
countries show signs of overheating, including
rising inflationary pressures, increased current
account deficits, suggesting that aggregate demand
was pushing up against capacity constraints. For
these economies, some tightening of policy may be
needed. In many countries, where overall tax rates
are low and structural deficiencies high this might
be most efficiently achieved by raising revenues,
while maintaining growth enhancing investments in
education, health and infrastructure.

Consumer spending has in general
been supportive of growth, though
differences exist among countries.
Consumer spending accounts for some 60% of
GDP in Sub Saharan Africa, and a major
contributor to overall demand growth. With real
per capita incomes increasing by 2.3 per cent per
annum over the past decade, rising household
incomes have supported consumer demand in the
region and contributed to its resilient and robust
growth in recent years.




Fiscal deficits deteriorated in 2012


Source: World Bank.


Fig SSA.3


-0.60


-0.50


-0.40


-0.30


-0.20


-0.10


0.00


0.10


0.20


0.30


Sub Saharan Africa Oil Importers Oil exporters


2011 2012


(Structural budget balances as share of GDP, %)




A number of Sub Saharan African countries


are operating with an output gap above


1 percent of GDP


Source: World Bank.


-5


-4


-3


-2


-1


0


1


2


3


4


-10 -5 0 5 10 15


Output gap


Inflation (3m/3m, saar)


BDI


GHA


Fig SSA.4




GLOBAL ECONOMIC PROSPECTS | June 2013 Sub-Saharan Africa Annex


206


More recent developments point to much
heterogeneity in the strength of consumer demand
across countries in the region. Where quarterly
national accounts data exist, sectors with strong
participation of consumers grew strong in Nigeria
(9.6 per cent in retail sector in Q3 2012), Tanzania
(16.1 per cent retail sector growth in first three
quarters of 2012) and in Ghana (real estate sector
expanded at 13.1 per cent in 2012). However where
growth was weaker whole sale and retail sales
growth decelerated in South Africa to 1.9 per cent
in Q1 2013 (from 3.2 per cent in Q1 2012) and in
Kenya due to a credit squeeze at the time, the
wholesale and retail sector expanded by 4.9 per
cent in Q3 from 5.6 per cent the previous quarter).
Affected by ongoing fiscal consolidation, in
Botswana, household consumption grew at a below
trend rate of 2.7 per cent in 2012. However, for the
vast majority of countries in the region this data
does not exist. Nonetheless, indirect measures
point to steady outturns in private consumption,
including: favorable weather conditions and
decelerating inflation. In general weather
conditions were particularly more favorable in the
West African (Burkina Faso, Benin, Chad, Gambia,
and Togo) and East African sub-regions (Kenya,
Uganda) relative to a year earlier, thus supporting
agricultural household incomes there. Nonetheless,
flooding in selected parts of Nigeria and
Mozambique impacted agricultural household
incomes there. Although there was an up-tick in
February, inflation for the region (on a GDP-
weighted basis) fell to 6.9 per cent in February
2013 from 9.4 per cent (y/y) in January 2012
(figure SSA.5). Further, remittance inflows to the
region increased by $1 billion to $31 billion in 2012
and are projected increase to $33 billion in 2013.


Recent global developments
impacted the various commodity
exporter types in the region
differently. Among oil exporters, export
volumes for 2012 were some 3.2% higher
than in 2011, mostly due to an increase in
exports from Angola, as export volumes in
Nigeria and Sudan contracted. Reflecting the
coming on stream of past investments in
existing and new mines in several countries in
the region, including Sierra Leone,
Mozambique, Niger, and Zambia, export
volumes from the predominantly metal
exporters in the region expanded by 5.2%,
notwithstanding subdued demand in the
global economy and a 15% decline in the
World Bank metal prices index. Export
volumes of agricultural exporters expanded
the most in the region (12.8%), due to weak
base effects, improved rains in East Africa
compared to a year earlier, and the lower
c y c l i c a l s e n s i t i v i t y o f a g r i c u l t u r a l
commodities to global business cycles.

However, in line with developments in the
global economy, exports from Sub Saharan
Africa have been volatile, in particular
industrial metals and oil exporters, which are
more sensitive to global business cycles.
Indeed, in the Q3 2012, as global imports
plunged, so did export volumes in the region,
in particular that of the region’s metal (-43
percent, 3m/3m saar) and oil (-36.8 percent,
3m/3m saar) exporters (figure SSA.6).
However, along with the recovery in global
import demand by the Q4 2012 Sub Saharan
African export volumes rebounded, with the




Inflation has decelerated in recent months


Source: World Bank; International Financial Statistics; IMF.


Fig SSA.5


4.0


5.0


6.0


7.0


8.0


9.0


10.0


11.0


12.0


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


Oil Importers Oil Exporters Sub Saharan Africa


(inflation, y/y)



Growth in Sub Saharan African export-
ers by predominant export group


Source: World Bank.


Fig SSA.6


-60


-40


-20


0


20


40


60


80


100


Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13


All Agriculture Metal Oil


(volumes, seasonally adjusted and annualized 3m/3m growth)




GLOBAL ECONOMIC PROSPECTS | June 2013 Sub-Saharan Africa Annex


207


expansion in exports being sustained through
Q1 2013. Indeed, for the first two months of
2013, export volumes are up 8.8 percent
compared with the same period a year ago.

Trends in services trade, particularly tourism,
are an increasingly 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
percent (y/y) in 2012, compared with a global
average of 3.8 percent (figure SSA.7). Sub
Saharan African countries that recorded
strong growth in tourist arrivals included
South Africa, Sierra Leone, Madagascar and
Cape Verde.

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 in 2012 (largest source market) fell by
2.6 percent, but arrivals from China rose 38.0
percent, and those from Russia by 58.9
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 fared
less well, for instance the conflict in Mali led
to a sharp decline in tourist arrivals there.


Medium Term Growth
Prospects



Medium term GDP growth prospects for Sub
Saharan Africa remain strong, with robust
investment, resilient consumer demand, public
investment in infrastructure and increased exports
expected to continue to underpin the region’s
growth performance, albeit with variations across
countries. Regional GDP is projected to expand by
5.2 percent per year on average during 2013
through 2015, 4.9, 5.2, and 5.4 percent for 2013,
2014 and 2015 respectively (table SSA.3).
Excluding, the region’s largest economy, South
Africa, GDP growth for the rest of the region will
be stronger at 6.2 percent in 2013 and 2014 and
further strengthening to 6.4 percent in 2015. This
strong growth will not be uniform, with countries facing
political instability and serious labor unrests expected to
significantly underperform. (see table SSA.4 for detailed
country forecasts).

Domestic demand will be the major
driver of growth. Investments to the natural
resources sector in the region will continue to
remain an important growth driver, with FDI in
the natural resource sector increasingly being
buttressed by investment in other sectors,
particularly, rapidly growing, and underserved,
domestic market especially in those economies with
a rising middle-class, relatively larger populations and
political stability (Nigeria, Kenya, Ghana, Tanzania etc).

Overall foreign direct investment flows to the
region are projected to increase to $53.6 billion by
2015, from $33.4 billion in 2012. However not all
economies in the region will benefit from rising
investment inflows. Lingering political uncertainty
(Madagascar, Central African Republic, Guinea,
Guinea Bissau), persistent labor unrests (South
Africa) and macroeconomic instability will sour the
investment climate in a number of countries.

Domestic demand (both domestic investment and
consumption) is expected to continue to benefit
from the low interest rate and inflation
environment, while household incomes should
benefit from an expected increase in remittance


Fig SSA.7




Growth in tourist arrivals in SSA has


been above average in recent years,


albeit from a low base


Source: 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


i .7




GLOBAL ECONOMIC PROSPECTS | June 2013 Sub-Saharan Africa Annex


208


flows from $31 billion in 2012 to $39 billion in
2015.

Though exports are expected to rise
over the forecast horizon, the
contribution to growth from net
exports will be marginal, on account
of strong import demand. Exports from
Sub Saharan Africa, are expected to strengthen
over the forecast horizon. The pickup is a result of
strengthening global demand, particularly from the
Euro Area (it’s largest trading partner), and a
structural re-orientation of trade toward faster
growing regions, notably Asia, and rising intra-
regional trade. Export volumes in the extractive
industries sector are expected to rise due to
significant investments in productive capacity in
recent years that are expected ( Burkina Faso -
gold, Mozambique - coal, Niger - uranium,


Cameroon - oil, Sierra Leone – iron –ore etc.).
Improving global conditions also bodes well for
tourism to the particular benefit of the region’s
main tourist markets (Gambia, Mauritius, Kenya,
Tanzania, South Africa, Seychelles etc).

Despite the strong projected export growth, the
contribution of net exports (exports less imports)
to growth is expected to be modest or even
negative, due to strong demand for foreign capital
goods to meet infrastructure and other investment
needs, as well as consumer durables and imported
oil.

Overall, the regional current account deficit is
projected to increase 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.



Sub-Saharan Africa forecast summary Table SSA.3


Est. Forecast


00-09
a


2010 2011 2012 2013 2014 2015


GDP at market prices b 4.3 5.0 4.7 4.4 4.9 5.2 5.4


(Sub-region totals-- countries with full NIA + BOP data)
c


GDP at market prices c 4.3 5.0 4.7 4.4 4.9 5.2 5.4


GDP per capita (units in US$) 2.0 2.5 2.1 1.8 2.4 2.7 2.8


PPP GDP c 4.6 5.3 4.9 3.8 5.7 5.5 5.7


Private consumption 4.9 8.3 5.1 5.0 4.3 5.0 5.6


Public consumption 5.3 5.2 4.9 9.3 3.6 2.4 4.5


Fixed investment 8.9 -1.3 12.1 8.2 7.0 7.6 5.9


Exports, GNFS d 4.4 7.1 8.2 1.3 6.6 7.9 7.6


Imports, GNFS d 5.0 8.7 11.3 6.4 6.4 7.1 7.1


Net exports, contribution to growth -0.5 -0.7 -1.3 -2.1 -0.2 -0.1 -0.1


Current account bal/GDP (%) 0.0 -2.5 -1.7 -3.8 -4.3 -4.2 -4.2


GDP deflator (median, LCU) 6.7 7.3 9.2 5.0 5.9 5.4 5.3


Fiscal balance/GDP (%) -0.5 -3.7 -1.6 -2.7 -2.9 -2.7 -2.4


Memo items: GDP


SSA excluding South Africa 5.0 6.2 5.5 5.4 6.2 6.2 6.4


Oil exporters e 5.6 6.2 5.2 5.3 6.4 6.3 6.5


CFA countries f 3.8 4.5 2.8 4.9 5.9 5.5 5.4


South Africa 3.2 2.9 3.1 2.5 2.5 3.2 3.3


Nigeria 5.6 8.0 7.4 6.5 6.7 6.7 7.0


Angola 10.7 3.4 3.4 8.1 7.2 7.5 7.8


(annual percent change unless indicated otherwise)


Source : World Bank.


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.




GLOBAL ECONOMIC PROSPECTS | June 2013 Sub-Saharan Africa Annex


209


However, for some oil exporters (Angola, Congo),
net exports will continue to make a positive
contribution to growth.

Notwithstanding the robust growth
outlook, significant development
challenges remain. Though Sub Saharan
Africa has made progress in alleviating poverty
(poverty levels in the region are forecast to fall to
42.3 per cent of the population by 2015 from 56.5
per cent in 1990), it still remains the only
developing region not on track to attain the
millennium development goal of halving extreme
poverty by 2015 (Global Monitoring Report, World
Bank 2013).

Part of the reason is because, most of the
investment activity has created value in capital
intensive sectors with limited backward linkages
(e.g. mining), while labor intensive sectors have
not been able to attract sufficient capital
investment to increase productivity and
employment. Hence the relatively limited flow of
investment to existing labor-intensive sectors such
as the agriculture sector and or low-skilled
manufacturing sectors serves as a limitation to
translating the robust growth the region is
benefitting from to rapid job creation. This is all
the more important given that the region has the
youngest and fastest growing working age population.


Risks


Risks to the forecast are more balanced than in the
recent past, and are increasingly local rather than
external in nature.


External risks



Fragile global economy. External risks to
the outlook (Euro Area, fiscal sustainability in the
United States and Japan) are familiar, but the
likelihood of them materializing has diminished as
has the likely severity of the impacts. Moreover,
upside risks — potentially stemming from a firmer
than projected recovery in the United States, a
reversal or easing of the currently pervasive
pessimism in Europe — are more pronounced.


New or more prominent risks include
overheating in some countries in the region, a more
rapid easing in commodity prices than outlined in
the baseline.

End of commodity price supercycle.
The significant decline in global metals prices, in
response to increased supply and substation on the
demand side, raises the specter of an even more
pronounced easing of prices over the projection
period as market expectations about future demand
and supply adjust.FN5 Commodity prices are cyclical
by nature (Global Economic Prospects, World
Bank, 2009, pg 55), and while specifying the timing
of turning points is extremely difficult, it would be
imprudent to assume that current high prices will
remain indefinitely or that only a smooth
adjustment to long-term prices as in the baseline is
the only likely outturn.

A more rapid adjustment which would see crude-
oil prices decline to their estimated long-term
equilibrium level of 80 (2012 dollars) within a two
year horizon and a 25 per cent decline in metal
prices would have significant consequences for Sub
Saharan African commodity exporters, most of
whom have undoubtedly benefitted from the
recent high commodity price levels.

In the oil price decline simulation, Sub Saharan
African would be the hardest hit of developing
regions, with oil exporters in the region
experiencing a deterioration of their current
account balances by 4.5 per cent of GDP and fiscal
balances by 2.9 percent of GDP by 2014 and real
GDP growth would also be cut by some 1.4
percentage points compared to the baseline



Impact on Selected Sub Saharan African
Countries of an oil price shock


Source: World Bank.


Fig SSA.8


-6.0 -4.0 -2.0 0.0 2.0 4.0


Angola


Sudan


Nigeria


Ghana


Kenya


Ethiopia


Mauritius


Rwanda


(cumulative percentage point decline in GDP growth relative to
baseline projections)




GLOBAL ECONOMIC PROSPECTS | June 2013 Sub-Saharan Africa Annex


210


forecasts. Similarly, under the metal price scenario,
where metal prices gradually decline by a
cumulative 20% by June 2014, GDP growth for
the regions metal exporters deteriorates by 0.7
percentage points in 2014 and an additional 0.5
percentage points in 2015. Nonetheless there will
be differentiated effects across countries in the
region as non-exporters of these commodities in
the region could stand to benefit from positive
terms of trade (especially the oil importers, when
the price of oil declines, see figures SSA.8 and SSA.9).

For those economies that would be adversely
impacted from the negative terms of trade impacts,
the weaker commodity prices could lead to rapid
depreciation of currencies, higher inflation outturns
and weaker growth in less diversified economies
with weaker domestic policy and external buffers.
With the appropriate policy space and
diversification of economies a sharp adjustment
needn’t occur. Indeed, as observed in the 2009
period when commodity prices plunged, real GDP
growth in sub Saharan Africa (excluding South
Africa) expanded at a healthy 4.1 per cent, with the
more economically diversified economies being hit
less harder.

However unlike in 2008 when fiscal balances in the
region were in a relatively stronger position, fiscal
buffers for several countries in the region have yet
to be fully rebuilt, thus limiting the ability of
governments in the region to respond in a
countercyclical way were a sharp decline in
commodity prices to lead to weakening of private
demand (investment and consumption). Indeed,
under this scenario, access to international capital
markets would likely become more restricted, and


raising domestic debt could be expensive (i.e. if
inflation goes up on account of weaker currencies
and higher costs of imports) and with the
unlikelihood of increased aid inflows given fiscal
challenges in high-income countries, governments
in the region with limited fiscal space could be
forced to cut spending in a procyclical fashion,
thereby reducing short-term growth prospects.



Domestic risks


With the steady strengthening of the global
economy expected over the forecast horizon, the
risks to Sub Saharan Africa’s growth being derailed
are increasingly shifting from global to domestic
sources.

Macroinstability. As noted in the recent
development section, with rising inflation rates and
deteriorating current account balances in a number
of countries in the region, fiscal and monetary
stimulus measures may fuel inflationary pressures,
and add to debt levels without adding to output.
The resulting macroinstability will inevitably be
deleterious to long-term growth prospects.

Nonetheless, a prudent line needs to be drawn
between fiscal austerity (which, under certain
circumstances could also prove to be
counterproductive) and governments carrying out
the needed investments (education, health and
infrastructure) that lay the foundation for medium
to long-term sustainable growth. To sustain a
robust durable growth trajectory over the medium
to long term, economies operating close to capacity
(as characterized by high and rising inflation and
twin deficits) would benefit from building their
external and domestic policy buffers.

This is all the more important given the possibility
of exogenous shocks to government revenues from
possible declines in commodity prices or even aid
cuts (for more fragile economies in the region).
Although of a different nature, the sharp fiscal
consolidation in Swaziland (due to lower SACU
revenue transfers) contributed to the contraction in
that economy in 2012 (-1.5 per cent) and serves as
a reminder of the importance of building policy
buffers and diversifying economies.


Fig SSA.7




Impact of metal price shock on selected


Sub Saharan Africa countries


Source: World Bank.


Fig SSA.9


-6.0 -5.0 -4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0


Ghana


Mali


South Africa


Mauritania


Mozambique


Uganda


Botswana


Namibia


Swaziland


Lesotho


Senegal


Seychelles


Malawi


Mauritius


Cape verde


Kenya


Gambia


(cumulative percentage point decline in GDP growth relative to
baseline projections)




GLOBAL ECONOMIC PROSPECTS | June 2013 Sub-Saharan Africa Annex


211


Other downside risks include weather-related and
political risks. With the agricultural sector being
the largest employer in most economies in the
region, even if not the largest contributor to GDP,
and with most of the sector remaining rain
dependent, output and incomes in the sector
remain vulnerable to drought, floods and other
forms of inclement weather. Poor harvests also
threaten macroeconomic stability as food accounts
for over 40% of the consumer price index basket
for many economies in the region. Thus far
weather long-term projections suggest a “normal”
crop year in 2013, but weather conditions are more
of an unknown in the outer years of the forecast.

While significant progress has been made on
political stability over the past decade, there still
remain elements of fragility in a few countries in
the region that could compromise investment and
growth, if not contained. These include the conflict
in Mali as well as terrorist activity in certain parts of
Nigeria; political paralysis in Madagascar; and
political uncertainty in Guinea- Bissau. These and
potentially new conflicts could hinder investment
flows and derail growth prospects in these
countries and their neighbors.


Entering manufacturing global value
chains. On the upside, however, the rising wage
costs in China is providing opportunities for other
developing countries (e.g. Vietnam) to become
more competitive in the global light manufacturing
production chains. Sub Saharan Africa may also
have an opportunity to increase its involvement in
these chains. Doing so would contribute to
structural transformation, helping create higher
productivity jobs, improving incomes and
reducing poverty. Hindered by ongoing high cost
of doing business relative to other developing
countries, we do not include this possibility in our
medium-term projections.


Nonetheless, isolated examples of this kind of
development exist. For instance, in 2012, Huajian
Group, a Chinese foot wear manufacturer set up
shop in Ethiopia producing shoes for exports and
with plans to foster a new global shoe making hub,
with an investment plan of $2 billion over the next
decade. Further, in February 2013, Toyota
announced that it would start assembling trucks
and buses in Kenya. These examples appear to be
the exception rather than the norm. For these
examples to become more widespread and a
regional source of growth, significant additional
efforts are needed to reduce existing impediments
to investment in light manufacturing including:
improving weak or absent infrastructure (especially
power and transportation), unburdening
cumbersome regulations that contribute to a high
transactions cost environment, and eliminating
trade barriers, in particular those stifling intra-
regional integration.





GLOBAL ECONOMIC PROSPECTS | June 2013 Sub-Saharan Africa Annex


212



Sub-Saharan Africa Country forecasts Table SSA.4


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 (%) 3.9 9.3 11.2 6.7 5.1 4.9 2.4


Benin


GDP at market prices (% annual growth) b 3.7 3.0 3.1 4.0 4.2 4.1 4.3


Current account bal/GDP (%) -8.4 -9.4 -9.2 -9.4 -9.7 -8.8 -7.9


Botswana


GDP at market prices (% annual growth) b 3.4 7.0 8.1 6.1 5.0 5.1 5.2


Current account bal/GDP (%) 8.3 0.3 8.6 4.8 4.9 3.8 3.9


Burkina Faso


GDP at market prices (% annual growth) b 5.2 7.9 4.2 9.0 7.0 7.0 7.0


Current account bal/GDP (%) -13.1 -7.4 -8.2 -8.6 -6.3 -4.2 -2.0


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 -14.2 -16.0 -15.4 -14.5 -13.5


Cape Verde


GDP at market prices (% annual growth) b 5.5 5.2 5.0 4.3 4.0 5.0 5.4


Current account bal/GDP (%) -11.3 -13.0 -15.2 -14.2 -11.5 -9.6 -10.6


Cameroon


GDP at market prices (% annual growth) b 3.0 2.9 4.2 4.7 4.8 5.0 5.1


Current account bal/GDP (%) -2.4 -3.8 -3.6 -3.6 -3.1 -3.4 -3.5


Central African Republic


GDP at market prices (% annual growth) b 0.7 3.0 3.3 3.8 3.0 3.5 3.7


Current account bal/GDP (%) -8.6 -10.5 -7.8 -6.8 -6.4 -4.7 -4.1


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 (%) -11.8 -27.9 -16.7 -6.9 -7.5 -7.4 -6.8


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 -4.7 -2.9 -3.6 0.6 36.1


Congo, Rep.


GDP at market prices (% annual growth) b 3.8 8.8 3.4 4.9 5.6 5.4 5.0


Current account bal/GDP (%) -2.0 -28.0 0.5 2.5 2.1 1.3 0.9


Cote d Ivoire


GDP at market prices (% annual growth) b 0.8 2.4 -4.7 9.8 8.0 8.0 8.1


Current account bal/GDP (%) 1.9 2.0 -5.6 -3.3 -3.0 -2.9 -3.4


Equatorial Guinea


GDP at market prices (% annual growth) b 17.0 -0.5 7.8 -2.1 6.6 3.6 3.4


Current account bal/GDP (%) 13.5 -22.0 6.9 2.4 9.1 9.9 14.1


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 -5.5 -0.6 -0.6 0.8 2.5 4.2


Ethiopia


GDP at market prices (% annual growth) b 7.4 9.9 7.3 8.5 7.0 6.9 7.4


Current account bal/GDP (%) -5.8 -4.0 0.5 -5.9 -7.5 -6.5 -6.2




GLOBAL ECONOMIC PROSPECTS | June 2013 Sub-Saharan Africa Annex


213



Est. Forecast


00-09
a


2010 2011 2012 2013 2014 2015


Gabon


GDP at market prices (% annual growth) b 1.6 6.6 7.0 6.1 5.5 5.1 4.8


Current account bal/GDP (%) 14.8 4.2 8.3 12.2 3.3 2.3 1.3


Gambia, The


GDP at market prices (% annual growth) b 3.2 6.5 -4.3 -3.9 10.7 5.5 5.3


Current account bal/GDP (%) -3.6 2.2 -1.9 -16.7 -18.4 -14.0 -12.1


Ghana


GDP at market prices (% annual growth) b 5.0 8.0 14.4 8.1 7.8 7.4 7.3


Current account bal/GDP (%) -6.5 -8.2 -8.5 -12.3 -13.0 -9.8 -6.6


Guinea


GDP at market prices (% annual growth) b 2.4 1.9 3.9 3.9 4.5 5.2 5.3


Current account bal/GDP (%) -7.2 -7.0 -19.5 -37.6 -28.9 -40.9 -41.5


Guinea-Bissau


GDP at market prices (% annual growth) b 0.9 3.5 5.3 -1.5 5.0 4.6 5.1


Current account bal/GDP (%) -9.0 -12.0 -6.2 -6.0 -7.1 -6.2 -6.0


Kenya


GDP at market prices (% annual growth) b 3.6 5.6 4.3 4.6 5.7 5.9 5.5


Current account bal/GDP (%) -2.4 -7.5 -10.0 -11.3 -10.0 -10.2 -9.8


Lesotho


GDP at market prices (% annual growth) b 3.2 5.6 5.8 4.0 5.2 5.3 5.0


Current account bal/GDP (%) 2.9 -20.2 -21.4 -23.0 -6.8 -5.8 -4.6


Madagascar


GDP at market prices (% annual growth) b 2.5 1.6 1.0 2.7 4.1 4.8 5.4


Current account bal/GDP (%) -12.4 -10.7 -6.3 -7.3 -5.0 -4.3 -3.5


Malawi


GDP at market prices (% annual growth) b 3.8 6.5 4.3 1.9 4.4 4.8 5.5


Current account bal/GDP (%) -10.8 -17.3 -13.0 -13.1 -11.7 -11.2 -10.4


Mali


GDP at market prices (% annual growth) b 5.1 5.8 2.7 -1.2 4.8 5.9 6.0


Current account bal/GDP (%) -8.1 -12.6 -6.2 -4.4 -5.4 -7.6 -8.7


Mauritania


GDP at market prices (% annual growth) b 4.5 5.2 3.9 6.4 5.2 4.9 4.8


Current account bal/GDP (%) -10.9 2.3 -6.5 -12.2 -9.3 -5.9 -7.0


Mauritius


GDP at market prices (% annual growth) b 3.4 4.1 3.8 3.2 3.4 4.0 4.2


Current account bal/GDP (%) -2.7 -10.4 -12.6 -10.6 -10.9 -10.4 -9.6


Mozambique


GDP at market prices (% annual growth) b 7.1 6.8 7.3 7.4 7.0 8.5 8.5


Current account bal/GDP (%) -14.0 -17.2 -24.3 -36.9 -39.8 -41.1 -41.5


Namibia


GDP at market prices (% annual growth) b 4.0 6.0 4.9 5.0 4.3 4.4 4.9


Current account bal/GDP (%) 3.5 -1.6 -2.5 -0.5 -4.7 -4.7 -4.1


Niger


GDP at market prices (% annual growth) b 3.7 8.0 2.3 11.2 6.2 6.1 5.0


Current account bal/GDP (%) -9.7 -21.0 -18.9 -25.3 -23.5 -20.7 -21.1


Nigeria


GDP at market prices (% annual growth) b 5.6 8.0 7.4 6.5 6.7 6.7 7.0


Current account bal/GDP (%) 14.4 1.5 5.8 3.5 2.0 1.6 1.4


Rwanda


GDP at market prices (% annual growth) b 7.2 7.2 8.3 8.0 7.0 7.5 7.2


Current account bal/GDP (%) -6.0 -7.5 -7.4 -11.4 -8.5 -8.4 -8.7




GLOBAL ECONOMIC PROSPECTS | June 2013 Sub-Saharan Africa Annex


214



Est. Forecast


00-09
a


2010 2011 2012 2013 2014 2015


Senegal


GDP at market prices (% annual growth) b 3.6 4.1 2.6 3.7 4.0 4.6 4.7


Current account bal/GDP (%) -8.0 -4.7 -7.6 -9.3 -8.0 -7.1 -7.4


Seychelles


GDP at market prices (% annual growth) b 1.5 6.7 5.0 2.7 3.5 3.9 4.2


Current account bal/GDP (%) -14.1 -19.7 -22.4 -22.8 -22.9 -21.1 -19.2


Sierra Leone


GDP at market prices (% annual growth) b 9.0 4.9 6.0 18.2 17.1 14.1 12.1


Current account bal/GDP (%) -14.1 -34.2 -57.3 -20.2 -8.6 -8.4 -5.9


South Africa


GDP at market prices (% annual growth) b 3.2 2.9 3.1 2.5 2.5 3.2 3.3


Current account bal/GDP (%) -3.0 -2.8 -3.4 -6.2 -6.6 -6.7 -6.4


South Sudan


GDP at market prices (% annual growth) b 4.1 3.9 5.0 -20.0 24.0 7.0 8.0


Current account bal/GDP (%) 11.8 30.1 17.4 -4.7 4.3 7.6 11.2


Sudan


GDP at market prices (% annual growth) b 6.4 5.1 4.7 -1.0 1.0 3.0 2.5


Current account bal/GDP (%) -5.9 -0.5 -1.0 -7.8 -8.6 -7.9 -8.4


Swaziland


GDP at market prices (% annual growth) b 2.1 2.0 1.3 -1.5 0.8 0.1 0.5


Current account bal/GDP (%) -2.6 -10.5 -8.5 -2.1 6.5 3.3 1.0


Tanzania


GDP at market prices (% annual growth) b 6.2 7.0 6.4 6.7 7.0 7.1 7.4


Current account bal/GDP (%) -9.1 -12.8 -19.7 -19.6 -19.8 -19.9 -20.1


Togo


GDP at market prices (% annual growth) b 1.8 4.0 4.9 5.6 5.5 5.1 5.0


Current account bal/GDP (%) -9.2 -6.3 -4.6 -8.0 -10.2 -8.1 -6.7


Uganda


GDP at market prices (% annual growth) b 6.8 5.9 6.7 3.4 4.8 6.2 7.0


Current account bal/GDP (%) -5.2 -10.8 -12.4 -12.0 -12.4 -13.3 -13.7


Zambia


GDP at market prices (% annual growth) b 4.8 7.6 6.8 7.3 7.0 7.2 6.8


Current account bal/GDP (%) -10.9 5.7 0.3 0.9 1.0 0.6 0.5


Zimbabwe


GDP at market prices (% annual growth) b -5.9 9.6 9.4 4.4 2.5 3.5 3.7


Current account bal/GDP (%) -12.2 -23.0 -39.7 -29.9 -24.8 -19.0 -15.8


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 .


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.




GLOBAL ECONOMIC PROSPECTS | June 2013 Sub-Saharan Africa Annex


215


Notes:


1. South Sudan’s contraction in GDP was due to the stoppage of oil exports arising from its dispute with Sudan.


Previous editions of the Global Economic Prospects did not include South Sudan. Excluding South Sudan, GDP


growth in 2012 was 4.6 percent, and excluding South Africa as well as South Sudan, GDP growth was 5.8 percent


for the rest of the region.


2. The measure of capital equipment used is the aggregation of machinery and transport equipment imports .


3. This includes North Africa hence distorts the picture. FDI flows to North Africa are about a-third of the total to


the Africa region.


4. The bond was over subscribed some seven times, in part reflecting the loose monetary policy in high-income


countries in search of higher yielding securities.


5. Following a pattern where the supply responds to a lag in current prices since it takes time for investments to


come on stream.




Global Economic Prospects



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