News Release No. 99/2121/S
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Contacts: Phillip Hay (202)
473-1796
Christopher Walsh (202) 458 2710
TV/Radio Cynthia McMahon (202) 473-2243
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- DEEPER,
MORE PROLONGED CRISIS IN EMERGING MARKETS LIKELY
- World Bank Report Says Full
Recovery Unlikely Before 2001
WASHINGTON,
April 7, 1999Average 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 crisiswhich started in East Asia,
spread to Russia, and sent shocks to Brazilslowed
world trade growth to 4.6 percent in 1998, compared with
10 percent in 1997. Prices for primary commodity exports,
excluding oil, fell 176 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 conside rable 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 debta key indicator of access to the
capital marketsrose 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 Banks
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.
- Net long-term flows to
developing countries, 1990-98
- (billions of US dollars)
|
1990 |
1991 |
1992 |
1993 |
1994 |
1995 |
1996 |
1997 |
1998 |
Net long-term resource flows |
100.8 |
123.1 |
152.3 |
220.2 |
223.6 |
254.9 |
308.1 |
338.1 |
275.0 |
Official flows |
56.9 |
62.6 |
54.0 |
53.3 |
45.5 |
53.4 |
32.2 |
39.1 |
47.9 |
Private flows |
43.9 |
60.5 |
98.3 |
167.0 |
178.1 |
201.5 |
275.9 |
299.0 |
227.1 |
From international capital markets |
19.4 |
26.2 |
52.2 |
100.0 |
89.6 |
96.1 |
149.5 |
135.5 |
72.1 |
Private debt flows |
15.7 |
18.6 |
38.1 |
49.0 |
54.4 |
60.0 |
100.3 |
105.3 |
58.0 |
Commercial banks |
3.2 |
4.8 |
16.3 |
3.3 |
13.9 |
32.4 |
43.7 |
60.1 |
25.1 |
Bonds |
1.2 |
10.8 |
11.1 |
37.0 |
36.7 |
26.6 |
53.5 |
42.6 |
30.2 |
Others |
11.4 |
3.0 |
10.7 |
8.6 |
3.7 |
1.0 |
3.0 |
2.6 |
2.7 |
Portfolio equity flows |
3.7 |
7.6 |
14.1 |
51.0 |
35.2 |
36.1 |
49.2 |
30.2 |
14.1 |
- Source: World Bank, Debtor Reporting
System
- Note: Although Korea is a high-income
country, it is included in the developing country
aggregate since it is a borrower from the Bank.
Foreign direct investment proved resilient
Foreign direct investment remained
high despite the deterioration of the global economic
environment and growing investor concerns over emerging
market risk. FDI flows to developing countries totaled
$155 billion in 1998, down only marginally from the 1997
peak of $163 billion. Some of the East Asian crisis
countries actually saw increases in FDI despite severe
recessions, as FDI was attracted by the collapse in
domestic asset prices, massive exchange rate
depreciation, and a more welcoming stance towards foreign
investment. Mergers and acquisitions activity is
increasing in some of these countries, as domestic
companies seek greater access to finance and assistance
with restructuring in the wake of the crisis. FDI is
likely to remain the largest source of finance to
developing countries for the foreseeable future. However,
the financial crisis has reduced the medium-term
prospects for growth in FDI flows, reflecting the
slowdown in global output and trade and its effects on
profitability.
Aid flows remained depressed
Concessional assistance to developing
countries remained at $33 billion in 1998, or one-third
below the 1990 level in real terms. Official development
assistance from the OECD countries has fallen to only
0.22 percent of their combined GNP (see figure), compared
to 0.35 percent in 1990. Despite some positive
developments in 1998notably the agreement among donors
on funding for the International Development Association
(the soft loan window of the World Bank) and the African
Development Bank and progress in reducing the debt burden
of the poorest, most heavily indebted countriesthe
prospects for aid remain bleak.
The decline in aid is particularly
unfortunate at a time when policy improvements in several
low-income countries are strengthening their ability to
use aid effectively, says William Shaw, Task
Manager for Global Development Finance 1999.
ODA from major
countries, 1990-97
Source: OECD Development Assistance
Committee
Looking Ahead
According to Global
Development Finance 1999, global output is
forecast to slow further in 1999, increasing by 1.8
percent, compared with a 1.9 percent increase in 1998.
Growth may slow in Europe. Several large developing
countries, including China, India, and Mexico, are
expected to weather the difficult conjuncture relatively
well. However, several Latin American economies,
countries of the Former Soviet Union, and Middle Eastern
and African oil exporters face stagnation or declines in
output. Thus, global growth rates are unlikely to return
to historical trends before 2001.
The full report
and background material will be available as of March 30,
1999, on a password-protected website. To obtain a
password, please register online at this address (http://www.worldbank.org/prospects/gdf99/)
or send an email to CEysenck@worldbank.org.
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