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WB warns developing countries against long period of economic volatility

Developing countries should prepare for a long period of volatility in the global economy by re-emphasizing medium-term development strategies, while preparing for tougher times, the World Bank said Tuesday in its Global Economic Prospects (GEP).

According to the report, a resurgence of tensions in high-income Europe has eroded the gains made during the first four months of 2012, which saw a rebound in economic activity in both developing and advanced countries and an easing of risk aversion among investors.

“Since May 1st, increased market jitters have spread. Developing and high-income country stock markets have lost some 7 percent, giving up two-thirds of the gains generated over the preceding four months,” the Bank said.

“Most industrial commodity prices are down, with crude and copper prices down by 19 and 14 percent, respectively, while developing country currencies have lost value against the US dollar, as international capital fled to safe-haven assets, such as German and US government bonds.”

So far, however, conditions in most developing countries have not deteriorated as much as in the fourth quarter of 2011.

Outside of Europe and Central Asia and the Middle-East and North Africa, developing country credit default swap (CDS) rates, a key indicator of market sentiment, remain well below their maximums from the fall of 2011.

“Global capital market and investor sentiment are likely to remain volatile over the medium term – making economic policy setting difficult. In this environment, developing countries should focus on productivity-enhancing reforms and infrastructure investment instead of reacting to day-to-day changes in the international environment,” said Hans Timmer, Director of Development Prospects at the World Bank.

The Bank’s report pointed out that increased uncertainty would add to pre-existing headwinds from budget cutting, banking-sector deleveraging and developing country capacity constraints.

As a result, the World Bank projects that developing country growth will slow to a relatively weak 5.3 percent in 2012, before strengthening somewhat to 5.9 percent in 2013 and 6.0 percent in 2014.

Growth in high-income countries will also be weak, 1.4, 1.9 and 2.3 percent for 2012, 2013 and 2014 respectively – with GDP in the Euro Area declining 0.3 percent in 2012.

Overall, global GDP is projected to rise 2.5, 3.0 and 3.31percent for the same period. This baseline scenario remains the most likely outcome.

However, should the situation in Europe deteriorate sharply no developing region would be spared.

Developing Europe and Central Asia are especially vulnerable because of their close trade and financial ties with high-income Europe, but the world’s poorest countries will also feel the fallout – especially countries that are heavily reliant on remittances, tourism or commodity exports or that have high-levels of short-term debt.

“Where possible, developing countries need to move to reduce vulnerabilities by lowering short-term debt levels, cutting budget deficits and returning to a more neutral monetary policy stance. Doing so will provide them with more leeway to loosen policy, should global conditions take a sharp turn for the worse,” said Andrew Burns, Manager of Global Macroeconomics and lead author of the report.

The Bank’s report explained that uncertainty, volatility, and political change continue to characterize conditions in the Middle East and North Africa region where aggregate GDP grew by 1 percent in 2011, down from 3.8 percent in 2010.

The region’s growth is projected to remain weak at 0.6 percent for 2012, mainly reflecting the influence of sanctions on growth in Iran, and continued GDP declines in Syria and Yemen.

As these elements fade in importance, growth for the region should step up to 2.2 percent in 2013 and 3.4 percent in 2014.

Egypt’s economy is projected to move out of negative territory to 1.4 percent growth in 2012, rising to 4.6 percent in 2014.

Meanwhile, economic growth in Sub-Saharan Africa remained robust in 2011 at 4.7 percent.

Excluding South Africa, growth in the rest of the region was stronger, at 5.6 percent, making it one of the fastest growing developing regions.

Higher commodity prices and improved macroeconomic and political stability in recent years have supported increased private investment flows to the region, with promising prospects in the medium term.

As global demand firms and domestic demand remains robust, the report said that the sub-Sahara African regional growth is expected to strengthen to 5 percent in 2012, 5.3 percent in 2013 and 5.2 percent in 2014.

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