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Prospects Weekly: Net capital flows to developing countries are projected to increase over the 2013-2014 period, global trade growth is projected to accelerate in 2013, real food prices reached record levels in 2012

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Supported by increased global liquidity, low interest rates and relatively higher growth prospects among developing countries, net capital flows to developing countries are projected to increase over the 2013-2014 period. After a relatively subdued global trade expansion in 2012, global trade growth is projected to accelerate in 2013, led by developing countries. Real food prices reached record levels in 2012, but are projected to marginally ease in 2013. Nonetheless, supply side pressures on food prices imply risks are weighted on the upside.

Capital flows to developing countries are projected to increase over the medium term. With conditions in global financial markets having eased significantly during the last months of 2012, and under the assumption that there will be no major loss of confidence in the global financial markets going forward, net private capital flows are projected to increase to $1.12 trillion (4.15 percent of developing-country GDP) in 2013. In an environment characterized by excessive global liquidity and low interest rates in major high-income countries, developing countries will continue to attract capital flows with their higher growth prospects and improving risk profile vis-à-vis high income countries. That said, growth in private debt flows to developing countries will be constrained by tighter regulations and gradual policy tightening after 2014 in developed countries. Foreign direct investment (FDI) flows to developing countries are expected to increase due to their large and growing consumer base, natural resources, still low labor costs, and rising FDI flows between developing countries (“South-South FDI”).

Global trade growth will accelerate in 2013. Supported by a modest pickup in global economic activity, global trade is projected to grow at 5.8 percent in 2013, up from the dismal 3.8 percent estimated for 2012, but still below its ten-year average of 6.8 percent. Reflecting the relative strength of their domestic economies, developing country import demand (7.6%, y/y) is projected to rise faster than that of high income countries (5.0%, y/y). Further, trade among developing countries (so-called “South-South trade”) will continue to be the fastest growing segment of global trade contributing to the rising share of developing countries in global trade. Indeed, over the past two decades, the share of developing countries in global trade has doubled from about 15.9 percent to 31.5 percent, with an average annual increase in market share of some 0.7 percentage points.

Food prices are expected to ease marginally in 2013. In 2012 the World Bank’s real food prices index rose by 2.7% reaching its highest level since 1974. However, real food prices are projected to ease by 3.2% in 2013, assuming normal weather conditions and lower input prices. Nonetheless, most risks are on the upside. The 2012/13 stocks-to-use ratio for maize is expected to be at its lowest since the early 1970s; though wheat is better supplied, its stocks-to-use ratio is still low by historical standards. The rice market’s stocks-to-use ratio is however well within historical norms. Crude oil and fertilizer prices, both key inputs to food production, are expected to ease marginally as well (down 2.9% and 5.6%, respectively). However, in view of the tight supplies, a spike in energy prices and/or some adverse weather event could induce sharp increases in food prices.

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