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mtuckprimdahl@worldbank.org East Asia remains engine of growth, but credit squeeze and inflation will dampen growth JAKARTA, June 16, 2008 – A new World Bank report says growth for developing countries like Indonesia is easing but still robust in the face of high commodity prices and financial turmoil in high income countries. Global Development Finance 2008 predicts growth in developing countries to slow from an extraordinary 7.8 percent in 2008 to 6.5 percent in 2008. With prudent economic management, East Asia and China are likely to continue to emerge as a center of growth for the world economy, helping to counter the slowing of high-income economies. “Most developing countries have remained resilient despite deterioration in the external environment,” said Joachim von Amsberg, Indonesia Country Director, World Bank. “The world has changed a lot over the last ten years. When you talk about slowdown in economic activity, financial market turmoil, or even rising food prices, it’s more and more the high income countries that are part of the problem, and developing countries that are part of the solution.” Developing country growth in recent years has been powered in part by expanding capital flows, including by foreign banks that have expanded their presence in developing countries through acquisitions and the establishment of local affiliates. As of end-June 2007, foreign claims on developing-country residents held by major international banks stood at $3.1 trillion, up from $1.1 trillion at the end of 2002. Net private capital flows to the region remained strong at $228 billion in 2007, up from $203 billion in 2006, while net official flows continued to be negative. “Foreign banks play an increasingly prominent role in developing countries by offering greater access to credit and financial services, which in turn can spur efficiency and innovation in domestic banks,” said Hans Timmer, Manager of the World Bank’s Development Prospects Group, and co-author of the GDF at the official launch in Indonesia. “However, the ripple effect of shocks from the credit squeeze in the US could impact local financial markets, including in countries like China, Indonesia, and Thailand.” The report warns that countries with heavy external financing needs are potentially most vulnerable to a credit crunch, particularly in cases where private debt inflows into the banking sector have contributed to a rapid expansion of domestic credit, which stokes inflationary pressures. While some low-income countries have recently accessed the international bond market, the bulk of private capital flows to developing countries go to just a few big economies, among them Brazil, Russia, India and China. The poorest nations remain reliant upon official aid, which further declined in 2007. To read more about the World Bank’s support for Indonesia visit: www.worldbank.org/id
The report is available on-line: http://www.worldbank.org/gdf2008
For additional resources, visit: www.worldbank.org/globaloutlook
DETAILED FINDINGS
- A year ago, total developing-country foreign exchange reserves amounted to $3.2 trillion, many countries were posting strong economic growth, emerging equity markets were rallying, and spreads on emerging-market bonds had reached record low levels. With the onset of the sub-prime crisis in the U.S., credit conditions deteriorated markedly. Even though emerging markets have shown considerable resilience so far, the balance of risks has plainly tilted to the downside.
- Nevertheless, despite a downward adjustment, the projected developing-country growth rate of 6.5% in 2009-10 is above the average over the first half of this decade (5.6%) and well above the average of the 1980s and 1990s (3.4 %). This illustrates the sharp rise in the underlying growth potential of developing countries as both structural and macroeconomic polices have improved in recent years.
- High food and energy prices are now the dominant force behind increased inflation across developing countries—and worryingly, they are hitting the poorest people the hardest. Prices of both energy and internationally-traded food increased 25 percent in nominal terms over the second half of 2007. For oil, the increase was mostly due to years of underinvestment and tight supply. For food and agricultural commodities, the big drivers are demand for biofuels in the U.S. and Europe, high prices for fertilizer and energy inputs, and export bans on key staple crops. Such bans exacerbate shortages in global markets in the short term and can curtail supply responses to higher prices in the long term. Poor weather reduced output in some countries, and market speculation also pushed up prices.
- Net FDI inflows to developing and high-income countries continued to surge in 2007, with global inflows reaching an estimated $1.7 trillion, just over a quarter of which went to developing countries. Net FDI inflows to developing countries as a whole increased to an estimated $471 billion. This was led by strong gains in Brazil ($16 billion) and Russia ($22 billion). Between 2000 and 2007, China headed developing countries in terms of their ability to attract FDI, attracting an estimated $84 billion in FDI in 2007. Thailand ranked tenth, attracting an estimated $9.6 billion.
- The presence of foreign banks has increased in developing regions for different reasons: in Sub-Saharan Africa because of the limited reach of local banking infrastructure; in Europe and Central Asia along with regional integration into the European Union; and in Latin America as a way for governments to open up to foreign competition.
- East Asia has relatively low foreign bank presence. Even excluding HSBC, Asian banks account for 40 percent of foreign bank presence in East Asia. In Indonesia, 28 percent of banking assets were held by foreign-controlled banks in 2006, while in Thailand, the share was 5 percent. (Indonesia, the Philippines, and Thailand lowered barriers to banking sector FDI following their 1997-98 financial crises). China, where banking sector FDI has traditionally been strictly limited, has recently taken steps toward liberalization as part of its WTO commitments.
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