Countries with strong reliance on external remittances, tourism, commodities or with high levels of short-term debt or medium-term financing requirements are likely to be hardest hit.
Remittances to developing countries could decline by 5 percent or more, representing as much as 3 or more percent of GDP decline in incomes among countries heavily dependent on remittances.
Tourism, especially from high-income Europe would be impacted with significant implications for countries in North Africa and the island economies of the Caribbean.
Many countries have reduced short-term debt exposures, partly because of Euro Area deleveraging. Nevertheless, many countries continue to have high levels of short-term debt and could be forced to cut sharply into both government and public spending if global finance were to freeze up as it might do in the case of a severe crisis (see discussion below).
In the instance of a serious recession, commodity prices could fall precipitously, cutting into government revenues. For example, a 20% fall in oil prices could reduce fiscal balances by 1.2 percent of GDP in oil exporting countries, but help to cushion the blow among oil importing economies (see discussion below).
A disorderly unwinding of sovereign debt obligations could force a much accelerated process of bank-deleveraging in Europe with economies in Europe and Central Asia, and to a lesser degree Latin America, among the hardest hit.
Macroeconomic buffers have been depleted since 2007, increasing developing country vulnerabilities
Table 4. Macroeconomic vulnerabilities have increased on balance
Source: World Bank
Unlike 2008/09, growth in developing countries would probably not bounce back as quickly because economies enter into this crisis in much weaker positions than in 2008/09. On average developing country government deficits are 2.5 percent of GDP higher than in 2007— suggesting they will be less able to respond to a downturn with fiscal stimulus (table 4). Their external vulnerability has increased as well. Developing country current account deficits have deteriorated by an average of 2.8 percent of GDP, with most of the deterioration having been among oil importing and non-oil commodity exporters. Especially if international financial markets close up, in an acute crisis countries may find themselves unable to respond as forcefully as they did in 2008/09 and may find themselves forced to cut back on government spending and or imports in a way that they did not at that time.
Currency reserves remain elevated at the aggregate levels, suggesting that most countries will be able to deal with short-term fluctuations in capital flows. However, in several countries they are low both with respect to imports and short-term debt. Eleven developing countries for which data exist have short-term debt levels that exceed 50 percent of their reserves and in 10 of these short-term debt to reserve ratios have been increasing (figure 17).
Figure 17 High levels of short-term debt make countries vulnerable to a freezing of international capital flows Short-term debt as share of international reserves, percent
Source: World Bank and Bank for International Settlements.