World Bank issues emerging market recession warning
A Lehman-type event in Europe or the US could shave more than 4% off GDP growth in developing nations, the World Bank has warned
Ouch. The World Bank pulled no punches in warning of the downside risks to the outlook for emerging market economies in its latest Global Economic Prospects report, released today.
While most sell-side look-aheads to 2012 have acknowledged that developing nations would be far from immune to the fallout of a major escalation of the eurozone debt and banking crisis, even under worst-case scenarios, most analysts have continued to predict EM growth in the region of 4-5% in 2012.
Not so the World Bank. While its base-case forecast for developing country growth 5.4% in 2012 and 6.0% in 2013 are broadly in line with consensus, it warned developing countries to prepare for the worst, predicting that a Lehman-style event centred in Europe and the US could plunge many emerging market economies into outright recession this year.
To quote from the report:
|The world could be thrown into a recession as large or even larger than that of 2008/09.
Although such a crisis, should it occur, would be centered in high-income countries, developing countries would feel its effects deeply. Even if aggregate developing country growth were to remain positive, many countries could expect outright declines in output. Overall, developing country GDP could be about 4.2 percent lower than in the baseline by 2013 with all regions feeling the blow.
Furthermore, the development bank warned that emerging market policymakers have much less policy space to launch a countercyclical policy response than in 2008/9, thereby prolonging and deepening a potential global growth crisis.
The countries most at risk
In common with most analyses, the World Bank warned that countries with the largest direct trade and financial links to the eurozone those in Central and Eastern Europe as well as Central Asia are most vulnerable.But it also warned countries with external financing needs (maturing short- and long-term debt and current account deficits) in excess of 10% to seek to pre-finance these needs now, in order not to be hit with exorbitantly high borrowing costs should the economic situation deteriorate later in the year.
Heres the list of countries with external financing needs in excess of 10%:
Included on the list are some usual suspects in terms of countries thought of as at risk. But the list also includes a number of countries that are generally perceived as EM model students Chile, for instance, and Ghana.
Commodity producing nations on this list may be particularly at risk. The Bank warns that they would be particularly affected by a renewed and deep global recession:
Oil and metals prices could fall by 24 percent causing current account positions of some commodity-exporting nations to deteriorate by 5 or more percent of GDP.
It adds that overall global trade volumes could decline by more than 7%.There is plenty to chew over in the 160-page report the full version of which can be downloaded here.
But the headline message is clear: prepare for the worst.