Prospects for Development

Global Economic Prospects 2013

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Africa

Prospects Weekly: Flows into the bond and equity funds of developing countries rallied in the second half of this year

Flows into the bond and equity funds of developing countries rallied in the second half of this year amid stabilization of financial markets and quantitative easing in high income countries. Following a weak second quarter due to financial market tumult, growth has picked up in the developing world, notably in China – although output growth slowed in India and South Africa due to country-specific factors. The strengthening of developing-country activity (and imports) has been reflected in a modest improvement in high income country growth, but the continuing weakness in the Euro Area, fiscal uncertainties in the United States, and weak Japanese sales to China have limited the overall improvement.
Foreign portfolio flows to developing countries rallied in the second half of 2012. Capital flows into emerging market bond and equity funds have picked up since July, in line with the general improvement in global financial conditions. After $9.6 billion exited equity funds in May/June, some $10 billion flowed in during September-November. Overall, net inflows for 2012 through end November reached $22 billion. This is a marked improvement from $41.2 billion outflow during the first 11 months of 2011, but only a third of the inflows in 2010. In comparison, flows to emerging-market fixed-income (bond) funds were relatively stable in the May/June period. Inflows into bond funds have totaled $61.6 billion in the year to date, more than twice the $25.7 billion in 2011 and surpassing the $60.2 billion received during the same period in 2010.
GDP growth for developing countries as a whole picked up in the third quarter, but weakened in a few due to country-specific factors. Partly as a result of stimulus measures and bolstered by improving US growth (see below), GDP growth in China picked up to a 9.1% annualized rate in the third quarter, up from 8.2% in Q2 and 6.1% in Q1. Russia’s growth also picked up to 2.3% in Q3, supported by a rise in crude oil prices (itself reflecting the strengthening of global activity). The pace of expansion in Brazil also improved, but remained modest at 1.3% (versus 0.8% in Q2). In contrast, mining tensions caused South Africa’s growth to slow from 3.4% in Q2 to 1.2% in Q3. In India, annualized GDP growth slowed from 5.8% to 3.8% as a result of delayed monsoon rains and weak industrial activity. In other developing countries, output growth accelerated from 3.7% in Q2 to 4.3% in Q3. Overall, GDP growth in developing countries remains 4 percentage points higher than in high income countries.
Following several quarters of deceleration, growth in high income countries has also started to improve, partly in response to an increase in developing country imports. Reflecting both weak Euro Area domestic demand and accelerating developing country imports, rising net exports moderated the annualized pace of GDP decline in the Euro Area from –0.7% in the second quarter to –0.2% in the third quarter. In the US, GDP growth strengthened to 2.7% in Q3, from 1.3% in Q2, as the housing sector started to rebound after years of consolidation. The recovery would have been stronger had uncertainty over fiscal policy not contributed to a decline in investment spending. In Japan, an end to earlier stimulus measures plus weak demand from China (in part due to island-related disputes) led to a 3.5% contraction in Q3 GDP. In other high income countries GDP growth picked up modestly to 1.5% in Q3 from 0.4% in Q2.

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Prospects Daily: Year-to-date global corporate bond sales rose to $3.43 trillion

Financial Markets…Year-to-date global corporate bond sales rose to $3.43 trillion, already surpassing 2011’s full year total of $3.29 trillion, as further stimulus from global central banks pushed yields to record lows. Funding costs for the riskiest to the most creditworthy corporates are plunging as the persistent low-yield environment spurred unprecedented investor demand.

Perceived default risk of US corporate debt climbed for a third consecutive day, with the benchmark Markit CDX North America Investment Grade Index rising 3.6 basis points to 108 bps, amid growing concerns that the so-called US fiscal cliff could push the world largest economy into deep recession.

Ghana’s 3-month borrowing costs, which fell to a five month low last week, are gearing for further decline today after the central bank issued record volume of domestic bonds, lowering its financing needs in near-terms. The 3-month yield on Ghana’s Treasury bills dropped 69 bps to 22.33% last week, but they are still the highest among African countries.

In its November update released earlier today, the US Department of Agriculture reported marginal increases in global grain supplies (compared to the October update) for the 2012/13 crop year ending in May 2013. Yet, stock-to-use ratio for corn—and less so for wheat—remain at historical low levels. The rice market is well-supplied with trade expected to surpass 38 million tons in 2012—a record high.

High-income Economies…France's industrial production posted the biggest monthly drop since December 2009, falling 2.7% (m/m) in September (-2.1% y/y), with both manufacturing production and construction contracting. The Bank of France said the economy may shrink in the fourth quarter.

Italy’s industrial production fell by 1.5% (m/m) in September (-4.8% y/y), the most in five months, suggesting the country remained in recession in the third quarter.

Greece’s industrial production fell 7.3% (y/y) in September, resuming its downward trend after rising temporarily by 2.5% in August.

Sweden’s industrial production fell 5% (y/y) in September, following a 2.7% increase the previous month.

Germany’s annual consumer price inflation on a EU-harmonized basis remained at 2.1% (y/y) in October, the same rate as September (+0.1% m/m). A 5.5% (y/y) increase in domestic gas and diesel prices and increases in some food items prevented inflation from falling.

UK’s goods trade deficit fell to 8.4bn pounds in September from 10bn pounds in August, as exports rose 1.1% (m/m), while imports fell a larger 3.9% (m/m) because of lower imports of fuel and manufactured goods.

US consumer confidence continued to improve for the fourth month in November, with the Thomson Reuters/University of Michigan consumer sentiment index climbing to 84.9 (a five-year high) from 82.6 in October as the labor market showed signs of improvement.

Hungary’s industrial output rose 0.6% (m/m) in September, following 1.8% increase in August. Despite the monthly increases, industrial output in September was 3.8% lower than the same month the previous year.

Developing Economies…China’s retail sales rose 14.5% (y/y) in October slightly faster than 14.2% in September, while consumer price inflation dropped to its weakest level in nearly three years to 1.7% (y/y) in October from 1.9% in September on declining food inflation.

Growth in China's industrial production accelerated to 9.6% (y/y) in October from 9.2% in September China’s producer prices fell at a slower pace of 2.8% (y/y) in October compared to a 3.6% fall in September. China's total fixed asset investments were 20.7% higher during the January-October period compared to the same period last year.

Malaysia's exports grew 2.6% (y/y) in September, recovering from a 4.5% contraction in August on strong demand from ASEAN, the US, India and Taiwan, while exports to the European Union decreased 12.5%. Import growth accelerated to 9.6% (y/y) in September from 2.8% in August.

The central bank of Peru held its benchmark interest steady at 4.25%. Peru's inflation rate fell to 3.25% (y/y) in October from 3.74% in September, but remains above the central bank's targets inflation of 2.0% (+/- 1). An acceleration of inflation in September was related to a weather conditions-related temporary supply side factor.

Russia's central bank held its benchmark refinancing rate steady in October. Inflation declined in October slightly to 6.5% (y/y) from 6.6% in September, but remains above the Bank of Russia's target of 5-6 percent inflation range. The bank noted that inflation is stabilizing due to a moderation in food prices which had experienced a temporary upswing related to a supply shock associated with a bad harvest.

Prospects Daily: European stocks slipped on Friday with the benchmark index falling to a three-week low

Financial Markets…European stocks slipped on Friday with the benchmark index falling to a three-week low as early optimism on Spain’s new austerity measures was short-lived.

Spanish 10-year bond yield rose back above 6% amid uncertainty over its troubled banks before stress test results, fading optimism on the country’s debt cutting plan, and a looming Moody’s rating review which may cost the country its investment grade rating. 

South Africa's rand weakened against the dollar after Moody's cut the government's bond rating by one notch to Baa1 from A3, but bonds were supported by their imminent accession to Citi's World Government Bond Index (WGBI) on October 1.

High-income Economies…France’s government announced its 2013 budget that includes a package of tax hikes, including a 75% tax rate for people earning more than 1 mn euros, aimed at narrowing the deficit to 3.0% of GDP in 2013 from 4.5% this year.

Euro Area consumer price inflation accelerated to 2.7% (y/y) in September from 2.6% in August according to a Eurostat flash estimate, driven mainly by an increase in Spain’s inflation to 3.5% (y/y) from 2.7% in August after the government increased its value added tax (VAT) from 18% to 21%.

German retail sales edged up by 0.3% (m/m) in real terms in August (-0.8% y/y) after a 1% drop in July (-1.6% y/y), giving rise to hopes that private consumption will prop up the economy.

Canada's GDP rose 0.2%(m/m) in July (+1.9% y/y) compared to 0.1% (m/m) rise in June, as strength in manufacturing and utilities sectors offset weakness in crude oil extraction.

Japan’s industrial production fell 1.3% (m/m) in August as a slowdown in China and Europe weighed on exports, raising risks of a GDPcontraction this quarter.

South Korea’s industrial production fell 0.7% (m/m) percent, from weakness in trade partners and also due to a strike at Hyundai Motor Co.


Developing Economies…The Central Bank of Brazil increased its 2012 inflation forecast to 5.2% from 4.7%, while cutting only marginally its 2013 forecast to 4.9% from 5.0%.

Chile’s manufacturing output rose 6.8% (m/m) in August (3.6% y/y) as copper production rose by 11.3% from July. Retail sales growth accelerated to 11.3% (y/y) in August from 7.9% in July.

Democratic Republic of Congo’s central bank lowered its benchmark interest rate by 1.5 percentage points to 6%, citing macro-economic stability and inflation of close to 6% in August, lower than the targeted 9.9% for 2012.

The Central Bank of the Dominican Republic kept its monetary policy rate unchanged at 5.0% following interest rate cuts in June and August with a total reduction of 125 basis points this year.

Turkey's merchandise trade deficit declined significantly to US$5.86 bn in August from US$8.43 bn in August 2011 as goods export grew 14.5% (y/y) while imports declined 4.8% (y/y).

Thailand's industrial production index fell 11.3% (y/y) in August, declining for three consecutive months.

South African producer price inflation hit two year low level of 5.1% (y/y) in August, down from 5.4% in July.

Prospects Weekly: Renewed concerns earlier in the week about the Greek bail-out plan

Renewed concerns earlier in the week about the Greek bail-out plan and the possibility of a credit rating downgrade for several European economies drove borrowing costs up. The European Central Bank’s (ECB) announcement on Thursday to defend the Euro has helped ease concerns somewhat. As inflationary pressures abate and the global economy slows down, more developing countries are cutting interest rates, however, where inflationary pressures remain high, policy tightening continues. Notwithstanding the pick-up in tourism arrivals in the first four months of 2012, the recent slowdown in economic activity is likely to dampen tourism flows in the second half of 2012.

 
Borrowing costs for high-spread Euro Area governments rise. Renewed worries about Greece being able to reach set fiscal targets; Moody’s negative credit outlook for Germany, the Netherlands, and the European Financial Stability Mechanism; and increasing concerns related to regional finances in some countries caused bond yields to rise for Euro Area governments earlier this week. Ten-year Spanish government bond yields rose to fresh record highs at 7.621% and Italian bonds hit a 2012-high of 6.597%. Comparable yields also increased for French and even German bonds, albeit slightly. In contrast, U.S. government bonds yields touched record lows as investors sought safe haven. However, the announcement on Thursday by the ECB that it would defend the Euro has helped to push Spanish and Italian bond yields further down from earlier highs.

 
Interest rate cuts in developing countries continue. As inflationary pressures abate and the global economy slows down, interest rate cuts among developing countries have continued, unlike in large high-income countries where the policy space for interest rate cuts remains limited. In recent months some of the larger developing countries (Brazil, China, the Philippines, South Africa and Vietnam) have cut nominal policy rates, although real interest rates may be higher due to sharper declines in inflation. In contrast, policy tightening has occurred in developing countries where domestic factors (rapid credit growth, poor harvests, currency depreciation) are putting pressure on prices: Peru and Uruguay increased reserve ratios and Malawi increased its policy rate. Nonetheless, most developing countries continue to keep their interest rates on hold at relatively low levels, in a bid to balance the need to keep a lid on inflation and stimulate domestic demand.

 

  
The pick up in global tourist arrivals observed so far in 2012, is likely to slowdown in latter half of the year. The tourism sector remains an important source of revenue and job creation for several developing countries (accounting for up to 32% of GDP in Maldives, see chart). Data released by the United Nations World Tourism Organization shows international tourist arrivals increased by 5% in the first four months of 2012 (compared to 4.5% for same period in 2011). Among developing regions, the increase was strongest in the Middle East and North Africa, bouyed on by a strong rebound in Tunisia (48%, y/y) and Egypt (29%, y/y) – thanks to the ongoing stabilisation of the situation there. However, with the global economy slowing down, and consumer confidence weakening in major tourist-origin countries, the pace of increase in tourist flows is likely to slow down in the second half of 2012.

 

  

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Prospects Daily: Crude oil prices fall from 9-week high

Important developments today:

1. Crude oil prices fall from 9-week high

2. German producer price inflation falls to lowest in two years

Prospects Daily: Financial market volatility is at its lowest since 2007

Important developments today:

1. Financial market volatility is at its lowest since 2007

2. US manufacturing activity remains resilient amid contraction in Eurozone

Prospects Daily: Bank deposits are moving out of riskier European countries

Important developments today:

1. Bank deposits are moving out of riskier European countries.

Prospects Daily: Portuguese government bonds advance following successful short-term debt auction

Important developments today:

1. Portuguese government bonds advance following successful short-term debt auction.

2. Deceleration in Eurozone manufacturing activity slows.

Prospects Weekly: Global GDP growth forecast is significantly downgraded in latest World Bank Global Economic Prospects report

Global Economic Prospects report. Though the slowdown in high-income economies will be sharper, developing countries will also be affected. Downside risks related to the loss of markets confidence in the ability of one or more high-income countries to repay their debt remains a serious concern. Since August credit default swap rates in both high-income and developing countries have increased significantly. Sub-Saharan Africa was one of the fastest growing developing regions in 2011, but remains vulnerable to outturns in the global economy.
Global GDP growth forecast is significantly downgraded in latest World Bank Global Economic Prospects report. The global economy is now expected to expand 2.5 and 3.1 percent in 2012 and 2013 versus the 3.6 percent projected in June for both years. High-income country growth is now expected to come in at 1.4 percent in 2012 and 2 percent in 2013, versus forecasts in June of 2.7 and 2.6 percent for 2012 and 2013 respectively. Growth in developing countries has been revised down to 5.4 and 6.0 percent versus 6.2 and 6.3 percent in June. While developing countries are in much better shape than high-income countries, they remain vulnerable to significant downside risks. If global conditions were to deteriorate sharply, then low- and middle-income countries, would also likely be affected. Indeed, in contrast to 2008/09, they have much less fiscal space available to respond to a new crisis
Developing country Credit Default Swaps (CDS) rates move higher since August. The resurgence of market concerns about fiscal sustainability in Europe and the exposure of banks to stressed sovereign European debt pushed CDS rates of most countries (including developing countries) upwards beginning in August 2011. By early January 2012, emerging-market bond spreads had widened by an average of 117 bps from their end-of-July levels, and developing-country stock markets had lost 8.5 percent of their value. Since October, however, the median CDS rates of developing countries with relatively good credit histories have declined to 162 points and developing country sovereign yields have eased from 672 to 616 basis points. Further, notwithstanding the recent downgrades to the credit rating of nine Eurozone countries, CDS rates in developing countries have held steady. 

Growth in Sub-Saharan Africa remained robust, inching up from 4.8% in 2010 to 4.9% in 2011, remaining just shy of its pre-crisis average of 5%. Excluding South Africa, which accounts for over a third of the regions GDP, growth in the rest of Sub Saharan Africa was even stronger at 5.9% in 2011, making it one of the fastest growing developing regions. Higher investment flows, rising consumer spending, the coming on stream of new mineral exports in a number of countries, and the rebound to growth in Cote’d’Ivoire, should support Sub-Saharan Africa’s growth acceleration to 5.3% in 2012 and 5.6% in 2013. Nonetheless, risks to growth prospects remain weighted on the downside as heightened uncertainty from the Eurozone debt crisis could shave growth in Sub-Saharan Africa by up to 1.7 percentage points in 2012, as merchandise exports, tourism receipts, commodity prices, foreign direct investment, and remittances -important growth drivers - remain susceptible to the turn of events in the Eurozone.

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Prospects Daily: Eurozone growth projected to slowdown sharply in 2012

Important developments today:

1. Eurozone growth projected to slowdown sharply in 2012

Eurozone growth projected to slowdown sharply in 2012. Battered by the spreading sovereign-debt crisis in member states, waning consumer and business confidence which could impinge on durable and investment goods spending, ongoing fiscal austerity, and a slowdown in global trade, the recently released European Commission Autumn economic forecasts points to a significant slowdown in GDP growth in the EU. Annual GDP growth in 2012 for the 17-bloc Eurozone is projected at 0.5%; and 0.6% for the 27-member EU.  Though picking-up in 2013, growth is still expected to remain lack-lustre, rebounding to 1.3% and 1.5% for the Eurozone and EU respectively. The risks to the forecasts are noted to be tilted to the downside with the possibility of further negative dynamics of slower growth affecting sovereign debtors, which could in turn deteriorate bank balance sheets, thereby reducing their ability to support growth and thus leading to a recession.

Among Emerging Markets

In East Asia and the Pacific, Malaysia’s central bank kept the key interest rate unchanged at 3% at the latest monetary policy meeting. Despite pressures on domestic consumer prices from food shortages after recent floods, the bank announced plans to maintain the current interest rate in view of external economic slowdowns.

In Central and Eastern Europe, Turkey’s industrial production grew 6.9% in September, gaining 12% on the year, beating all market forecasts as broad based expansion in manufacturing (12.8%), utilities (9.9%) and mining (2.2%) boosted the headline figure. The pace of growth in industrial output is the highest since February, underscoring the fast momentum of growth in the economy.

In South Asia, India’s industrial output growth slowed sharply to 1.9% in September, a two-year low, as the central bank’s string of interest rate hikes took effect on the economy. While manufacturing production grew modestly by 2.1%, output of key capital equipment and consumer goods shrank, raising concerns that the overall pace of growth may slow. The Reserve Bank has raised interest rates 13 times since March 2010 to control inflation, which remained high at 9.72% in the last reading, and signaled that it may pause interest rate tightening after last month’s 25 basis point increase.

In Sub-Saharan Africa, Ethiopia’s annual inflation was recorded at 39.8% in October, easing slightly from 40.1% recorded in September. Month-on-month inflation has been slowing in the country, at 1.9% in October from 2.6% in September, however a poor agricultural year and surging food costs are likely to keep inflationary pressures a concern this year.

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