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Prospects Weekly: Industrial output in developing countries continued to strengthen, External funding requirements exceed foreign currency reserves, Remittance flows to developing countries were estimated at $404 billion in 2013

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Industrial output in most developing countries continued to strengthen in the first two months of 2014, despite weakness in China and India. Developing countries that rely on portfolio capital flows to meet their large external funding needs may be vulnerable to abrupt changes in global financial conditions and country risk perceptions. In line with a projected strengthening of the global economy, remittance flows to developing countries are forecast to rise at an average 8.4 percent annual pace in US dollar terms between 2014 and 2016, remaining broadly stable as a share of developing-country GDP.
The momentum of industrial activity in most developing countries other than China and India strengthened further during 2014Q1. Overall developing-country industrial production grew at a 4.8% annualized pace in the three months ending in February (3m/3m saar), a rate that was well below its 7.6% average between 2000 and 2013. However, slower growth in China and weakness in India masks a strengthening in other developing countries. Chinese industrial production growth has slowed sharply from a 13.2% annualized pace in 2013Q3 to 5.8% during the three months ending February, with the slowing reflecting policy tightening and rebalancing of the economy away from investment and exports towards services and household demand. Industrial production in India has been quite volatile and is currently 2% lower than a year earlier. Although developing countries outside of China and India have faced headwinds from declining commodity prices and monetary policy tightening, industrial production has actually continued to strengthen since the summer of 2013, and is now growing at a 4.1% annualized pace, which is close to the long-term average for these countries.
External funding requirements exceed foreign currency reserves in 17 developing countries.  Projected ex-ante financing needs (EFN) in 2014 (expected current account deficit plus scheduled repayment on private external debt) exceed 100% of foreign currency reserves in 17 countries and are more than 10% of GDP in 38 countries. For countries that rely on relatively stable forms of financing such as FDI (e.g., Mozambique) or remittances (e.g., El Salvador, Nicaragua), attracting foreign currency to meet these obligations will be easier than for countries that rely more heavily on short-term debt and portfolio flows. If financial conditions deteriorate these countries will be more vulnerable, especially if they do not have sufficient reserves to act as buffers, as it is the case for Pakistan. Risks are particularly acute for countries that combine large current account deficits, high short-term debt, and low foreign reserves, as it is the case for Turkey. Belarus, Kazakhstan, Ghana and Ukraine are also among the countries where EFNs are more than 150% of foreign currency reserves, and may be relatively more vulnerable to abrupt shifts in global financial market conditions and changes in country risk perceptions.

Remittance flows to developing countries were estimated at $404 billion in 2013 and are projected to rise robustly in 2014-16 as the global economy strengthens. Slower global growth in recent years adversely affected the pace of increase in remittances sent by migrants from developing countries to their family and friends back home. The USD value of remittances grew only 4% annually on average during 2012 and 2013 compared with an 11% average annual increase in the preceding five years. Expressed as a percent of developing country GDP, annual flows have fallen from from 2.0% in 2007-11 to 1.7% in 2012-13. Remittances have been particularly important in supporting consumption and external balances in smaller and poorer countries such as Tajikistan, Nepal, Haiti and Gambia, where they account for more than a fifth of imports (remittances are about 7% of overall developing-country imports). However, together with a projected strengthening of global growth and improvement in employment conditions in the source countries of remittances, developing-country remittance inflows are forecast to rise robustly at an 8.4% pace in nominal dollar terms between 2014 and 2016 – remaining broadly stable as a share of developing-country GDP.

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