World Bank: Developing countries -- Slowest growth since' 82

[Robert Weissman <rob@essential.org>]

DEEPER, MORE PROLONGED CRISIS IN
EMERGING MARKETS LIKELY 
World Bank Report Says Full Recovery Unlikely Before 2001 

World Bank, Press Release, 99/2121/S
http://www.worldbank.org/html/extdr/extme/2121.htm

WASHINGTON, April 7, 1999 — Average growth rates in developing and
transition countries
are likely to fall to just 1.5 percent in 1999, down from 1.9 percent in
1998, and 4.8 percent in 1997,
making it the lowest growth rate since 1982, according to Global
Development Finance 1999,
released today by the World Bank. 

"This sobering forecast reflects declining trade growth, slumping commodity
prices, and
tightened long-term financing, which have hurt most developing countries,"
says World Bank
Chief Economist and Senior Vice President Joseph Stiglitz.

The global financial crisis - which started in East Asia, spread to Russia,
and sent shocks to Brazil -
slowed world trade growth to 4.6 percent in 1998, compared with 10 percent
in 1997. Prices for
primary commodity exports, excluding oil, fell 16 percent. And net
long-term finance dropped by $58
billion, while interest rate spreads for these loans soared. While the
impact of these factors varies
widely among countries, their combined effect may have reduced overall
demand in developing
countries by 3 to 4 percent in 1998 from 1997 levels.



The World Bank report shows that flows to developing countries from
international capital markets
plunged to $72 billion in 1998 compared with $136 billion in 1997, as
investors in bonds, portfolio
equity, and long-term bank loans retreated from emerging markets (see
figure). However, foreign
direct investment (FDI) in developing economies was more resilient, falling
by less than 5 percent
despite the decline in global output and trade growth. Low-income countries
suffered a double hit as
aid flows remained depressed while the prices of their commodity exports
plummeted.

Recovery in developing countries is likely to be slower 

Reflecting interest rate cuts in the industrial countries and major fiscal
stimulus and financial
restructuring packages in Japan, the risk of a deep global recession has
receded in recent months.
However, the crisis is likely to deepen and persist in emerging markets for
longer than had been
predicted earlier. 

Commodity prices are likely to remain low in 1999 and well into 2000, due
to sagging demand and
oversupply of some products, and reflecting technological improvements and
market reforms, as
well as currency depreciation in major exporting countries. The
year-over-year growth in world
trade was near zero in the fourth quarter of 1998, but world trade is
likely to recover gradually over
the course of this year as the Asian crisis countries stabilize or grow. 

External finance will remain tight, with access largely restricted to the
most creditworthy borrowers,
and at much higher interest rates. This will force many developing
countries to pursue restrictive
policies to adjust to their reduced ability to import. Growth rates of
4.5-5 percent are not likely to be
restored in developing countries as a group until 2001.

The deterioration in the external environment has brought into sharper
focus domestic problems
which reduce investor confidence. In countries such as India, Turkey,
Brazil, and Russia, chronic
fiscal deficits persist. Corporate and financial restructuring in the
most-affected Asian countries
remains a major impediment to renewed growth. In Sub-Saharan Africa, among
other regions,
spreading civil and international conflict has also hurt prospects. 

There remain considerable downside risks, with particular uncertainty
attached to the implications of
recent developments in Brazil, the danger of a resurgence of protectionist
pressures, and the
potential for a more severe slowdown in industrial countries. 

The crisis has transformed the environment for private capital flows 

The financial crisis has greatly increased investors’ perceptions of the
risks in emerging markets.
The Russian debt moratorium provoked investors to "flee to quality" in what
they perceived as safer
industrial country bond and equity markets. New bond and loan financing to
developing countries
dropped to only $10 billion a month in August and September, slightly more
than half the average
monthly level in the first six months of the year.

Interest rate spreads for secondary market sovereign debt—a key indicator
of access to the capital
markets—rose to levels unseen since the height of the Mexican peso crisis
in 1995. International
equity issues plummeted to near zero in August and September, and stock
market prices fell in all
major emerging markets. Although financing volumes, spreads and equity
prices have recovered
somewhat in recent months, developing countries’ access to the
international financial markets
remains limited. 

Net flows from international capital markets fell in 1998 to most of the
major developing country
borrowers. Net flows to East Asia declined sharply, although China retained
market access,
reflecting its low external indebtedness, abundant reserves, and current
account surplus. Latin
America suffered the largest drop in net flows from capital markets, as net
debt flows from private
creditors were only $18 billion in 1998, down from $47 billion in 1997. Net
flows to Europe and
Central Asia fell with the crisis in Russia to $23 billion in 1998,
compared to $28 billion in 1997. Net
capital market flows to Sub-Saharan Africa remained marginal, with South
Africa the only major
recipient. By contrast, capital market flows to the Middle East and North
Africa rose from $3
billion in 1997 to $10 billion in 1998. This occurred as some oil exporters
borrowed to limit the impact
of the oil price decline on their expenditures. 

The recovery of capital flows is likely to be slow. While flows from
international capital
markets may recover from their very low year-end levels, they will likely
be lower this year than in
1998. This is due, in part, to the deterioration in credit ratings, with
only 15 developing countries now
considered investment grade, down from 21 before the crisis. The East Asian
crisis has underlined
the threats posed by weak banking systems and high levels of private sector
debt for the
sustainability of capital flows, and the Russian crisis has highlighted the
potential for capital losses on
emerging market investments.

"Many developing countries are trying to borrow more to compensate for
falling exports,"
says Uri Dadush, Director of the World Bank’s Development Prospects Group,
"but even
though world liquidity is abundant, the supply of funds to the countries is
constrained by risk
perceptions. This situation is unlikely to change quickly."


Release continues, see 
http://www.worldbank.org/html/extdr/extme/2121.htm