World Bank sees inflation threat to poor nations
Thursday, 12 June 2008
Chris Bryant, FT Syndication Service
WASHINGTON: Developing economies have proved resilient to credit market turmoil, but soaring food and energy prices pose a significant threat, says a World Bank study.
In its annual report on global development finance, the bank trimmed its economic growth forecast for developing countries to 6.5 per cent this year from 7.8 per cent last year. While developing countries would continue to expand, "the balance of risks has plainly tilted to the downside".
The World Bank said many developing countries were imperilled by soaring consumer price inflation. Particularly vulnerable were economies that attracted big private debt inflows, which triggered a rapid expansion of domestic credit, stoking inflationary pressures.
These price increases posed a disproportionate threat to poor people in emerging markets because food and energy costs represented a larger part of a consumer's spending.
The price of food staples in nominal dollar terms has more than doubled since 2005 although the impact is smaller when adjusted for domestic inflation and exchange rates.
"A combination of much higher interest rates and slowing growth would definitely be bad news for emerging markets down the road," said Uri Dadush, director of international trade at the World Bank. "For these reasons we need to be very, very aware of inflationary implications."
The World Bank expects global economic growth to slow by a percentage point to 2.7 per cent this year, revised lower from a previous estimate of 3.3 per cent.
Although developing economies will expand more robustly, this is expected to moderate as tighter credit slows private capital flows to emerging markets.
These capital flows reached a record 7.3 per cent of gross domestic product, or $1,030bn, last year, helped in part by the rapid establishment of foreign bank branches in developing countries, but this figure is expected to drop to 5.0 per cent or $850bn in 2009.
Under the bank's worst-case scenario, capital flows to developing countries could decline more abruptly, to 3.5 per cent of GDP ($550bn). Countries dependent on international interbank markets for funding, including Hungary, Turkey, Ukraine and Russia, were most vulnerable to external financial shocks.
Although economists feared the presence of international banks might transmit domestic financial shocks to developing economies, the World Bank said this would not be enough to derail broader economic growth and instead emphasised the positive effects of these institutions.
WASHINGTON: Developing economies have proved resilient to credit market turmoil, but soaring food and energy prices pose a significant threat, says a World Bank study.
In its annual report on global development finance, the bank trimmed its economic growth forecast for developing countries to 6.5 per cent this year from 7.8 per cent last year. While developing countries would continue to expand, "the balance of risks has plainly tilted to the downside".
The World Bank said many developing countries were imperilled by soaring consumer price inflation. Particularly vulnerable were economies that attracted big private debt inflows, which triggered a rapid expansion of domestic credit, stoking inflationary pressures.
These price increases posed a disproportionate threat to poor people in emerging markets because food and energy costs represented a larger part of a consumer's spending.
The price of food staples in nominal dollar terms has more than doubled since 2005 although the impact is smaller when adjusted for domestic inflation and exchange rates.
"A combination of much higher interest rates and slowing growth would definitely be bad news for emerging markets down the road," said Uri Dadush, director of international trade at the World Bank. "For these reasons we need to be very, very aware of inflationary implications."
The World Bank expects global economic growth to slow by a percentage point to 2.7 per cent this year, revised lower from a previous estimate of 3.3 per cent.
Although developing economies will expand more robustly, this is expected to moderate as tighter credit slows private capital flows to emerging markets.
These capital flows reached a record 7.3 per cent of gross domestic product, or $1,030bn, last year, helped in part by the rapid establishment of foreign bank branches in developing countries, but this figure is expected to drop to 5.0 per cent or $850bn in 2009.
Under the bank's worst-case scenario, capital flows to developing countries could decline more abruptly, to 3.5 per cent of GDP ($550bn). Countries dependent on international interbank markets for funding, including Hungary, Turkey, Ukraine and Russia, were most vulnerable to external financial shocks.
Although economists feared the presence of international banks might transmit domestic financial shocks to developing economies, the World Bank said this would not be enough to derail broader economic growth and instead emphasised the positive effects of these institutions.