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

Global Macroeconomics Team's picture
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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