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Global
Economic
Prospects
South Asia
June 2014 Andrew Burns
Main Messages
• 2014 Global forecast has been downgraded, mainly
reflecting one-off factors
• Financing conditions have eased temporarily, but are
expected to tighten once again– carrying with them risks
• Medium-term outlook is for growth to remain flat in 2014
and to rise moderately in 2014 and 2015.
• Growth in South Asia has been disappointing, and
although vulnerabilities are declining they remain
• Inflation, fiscal sustainability and the pace of structural
reform are central challenges
First quarter GDP data in high-income
countries was mixed
-2
-1
0
1
2
3
4
5
6
7
Euro Area Japan United States
2013Q1 2013Q2 2013Q3 2013Q4 2014Q1
United States: Weather sharply lowered growth
Source: World Bank, Haver Analytics.
Percent quarterly GDP growth, annualized pace
Euro Area: Stable but weak growth
Japan: Sharp uptick in advance of April
VAT hike
Despite first quarter, business confidence in
high-income countries remains strong
45
50
55
60
Jan '12 Jul '12 Jan '13 Jul '13 Jan '14
Other high-income
Euro Area
Source: World Bank, Markit, Haver Analytics.
Purchasing Managers, indexes (50 or more indicates expansion)
Developing countries
• Real data still positive for most countries, but confidence
measures have weakened– perhaps because of Ukraine
• Financial turmoil has eased, borrowing costs are up, but
remain low
• Forecast is for modest pickup in growth
• Growth has been disappointing in some regions
First quarter growth in most developing
countries about the same as 2013Q4
-15
-10
-5
0
5
10
15
20
Jan '11 Jul '11 Jan '12 Jul '12 Jan '13 Jul '13 Jan '14
China
Other developing (ex China, India)
Industrial production growth, 3m/3m saar
Source: World Bank, Haver Analytics.
-15
-10
-5
0
5
10
15
20
Jan '10 Jul '10 Jan '11 Jul '11 Jan '12 Jul '12 Jan '13 Jul '13 Jan '14
Regional industrial production
appears to be stabilizing
South Asian Industrial production growth, 3m/3m saar
Source: World Bank, Haver Analytics.
Financial conditions have loosened since
January in contrast to earlier expectations
• Most developing countries not affected by turmoil
• Capital flows have recovered
• Developing country yields have returned to fall levels,
and are actually 55 basis points lower than before the
crisis
• Market remains volatile, in part because rising rates will
change portfolio decisions
• Vulnerabilities have declined but remain
Rather than rising further, developing country
borrowing have declined
0
200
400
600
800
1000
1200
1400
2005 2006 2007 2008 2009 2010 2011 2012 2013
Developing Yield
USA 10 year yield
Developing yields Levels Change April 2013 467 0 Peak 667 200 Today 522 55
Yields on sovereign debt, basis points
Source: World Bank, JPMorgan, Haver Analytics.
Capital inflows declined abruptly in February,
but recovered in March & April
Source: World Bank, Dealogic.
Gross capital flows, billions USD
0
10
20
30
40
50
60
70
80
Jan '12 Jul '12 Jan '13 Jul '13 Jan '14
Syndicated Bank loans Bond Issuance Equity Issuance
0
1
2
3
4
5
6
7
8
9
10
Jan '12 Apr '12 Jul '12 Oct '12 Jan '13 Apr '13 Jul '13 Oct '13 Jan '14 Apr '14
Equity issuance Bond issuance Syndicated bank lending
Gross capital flows to South Asia have also recovered
Source: World Bank and Dealogic
Gross capital flows, $ billions
Local currency valuations of stock markets
have recovered from last summer
Source: World Bank and Dealogic
60
70
80
90
100
110
120
130
140
150
160
Jan '13 Apr '13 Jul '13 Oct '13 Jan '14 Apr '14
India Pakistan Sri Lanka
India (USD) Pakistan (USD) Sri Lankla (USD)
Stock market valuations (USD, LUC), indexes, Jan 1. 2013=100
Tailwinds to support growth
• High-income acceleration will double their contribution to global import demand growth
• Growth impact of eventual tightening of financial
conditions has been postponed
• Commodity prices are stable or falling (good for importers, modest headwind for exporters)
Contribution of high-income countries to
global trade growth will more than double
-15
-10
-5
0
5
10
15
2000 2002 2004 2006 2008 2010 2012 2014 2016
Developing High-income
Contributions of imports from group to growth of global trade volumes
Contribution to annual growth of global trade
Source: World Bank.
Commodity prices are critical to region and
expected to remain stable or decline
40
60
80
100
120
140
160
180
Jan '05 Jan '06 Jan '07 Jan '08 Jan '09 Jan '10 Jan '11 Jan '12 Jan '13 Jan '14
Metals and Minerals
Food
Energy
USD price of internationally traded commodities, index 2010=100
Source: World Bank.
Outlook
• Projected pick up in growth to be led by high-income countries
• Developing-country growth in line with underlying potential
• Regional growth shows strengthening or stability going forward
• Slower growth in middle-income countries may reflect weaker than thought potential
A gradual pick up in growth, led by high-
income countries
-4
-2
0
2
4
6
8
10
2000 2002 2004 2006 2008 2010 2012 2014 2016
World
High
Income
Developing
Percent annual GDP growth
Source: World Bank.
Regional Outlook
Source: World Bank
• Medium-term outlook for the region is for growth to remain flat in 2014 and
pick up moderately in 2015 and 2015.
• Growth is projected to remain weak in South Africa, owing to tight monetary
policy, tense labor relations, and electricity constraints.
• Excluding South Africa, outlook is for growth to remain robust in the rest of
the region, with FDI flows in the natural resources sector, public investment
in infrastructure, expansion in agriculture, and firming external demand as
key drivers of growth.
• Mozambique’s GDP is projected to grow faster than the regional average,
supported by strong investment and production in the coal sector.
Despite slowdown, South Asia continues
to outperform developing country average
2
3
4
5
6
7
8
9
10
11
12
2005 2007 2009 2011 2013 2015
South Asia
Developing
Percent annual GDP growth
Source: World Bank.
Despite slowdown South Asia continues
to outperform developing country average
2
3
4
5
6
7
8
9
10
11
12
2005 2007 2009 2011 2013 2015
South Asia
Developing
India
Percent annual GDP growth
Source: World Bank.
Despite slowdown South Asia continues
to outperform developing country average
2
3
4
5
6
7
8
9
10
11
12
2005 2007 2009 2011 2013 2015
South Asia
Rest of South Asia
Developing
India
Percent annual GDP growth
Source: World Bank.
Risks
• Today’s loose financial conditions could regenerate vulnerabilities (longer term they will tighten, increasing weaker financial flows, higher capital costs).
• Fiscal conditions have deteriorated
• External financing requirements have risen
• A key near term risk for the region is weak monsoon rains due to El Nino weather conditions.
• Longer term growth has to come from structural reforms: improving education quality; health and infrastructure.
Financial vulnerabilities have
declined but remain
% of reserves % of GDP
Source: World Bank
0.0
50.0
100.0
150.0
200.0
250.0
300.0
0.0
10.0
20.0
30.0
40.0
50.0
60.0
Mal
aysi
a M
old
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Jo
rdan
B
razi
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dia
R
om
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H
un
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Ky
rgyz
Rep
ub
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Ind
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C
ost
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ica
Do
min
ica
Ken
ya
Alb
ania
N
iger
Ta
nza
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M
on
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M
adag
asca
r Ja
mai
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Paki
stan
El
Sal
vad
or
Nic
arag
ua
Gh
ana
Ukr
ain
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Turk
ey
Kaz
akh
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B
elar
us
Mo
zam
biq
ue
Estimated external financing need in 2014 (% of international reserves)
Estimated external financing need in 2014 (% of GDP, LHS)
Partly as a result, developing country debt
to GDP ratios have been rising
0
2
4
6
8
10
12
14
16
# of countries
Source: World Bank.
Rising debt to GDP ratio
-12
-10
-8
-6
-4
-2
0
2
4
2005 2006 2007 2008 2009 2010 2011 2012 2013
India Pakistan Bangldesh Nepal Sri Lanka
Fiscal deficits have declined
but remain high
General government balance, % of GDP
Source: World Bank
Inflation in India has eased somewhat,
but remains high
Source: World Bank, Haver, national sources
Inflation y/y, percent
0
2
4
6
8
10
12
14
Jan '00 Jul '01 Jan '03 Jul '04 Jan '06 Jul '07 Jan '09 Jul '10 Jan '12 Jul '13
Stressed loans (including restructured loans) are more than 10
percent of total loans in four South Asian countries
Source: IMF and World Bank estimates based on national sources
0
2
4
6
8
10
12
14
Nepal Sri Lanka Afghanistan India Bangladesh Bhutan Pakistan
Restructured loans
Non-performing loans
Stressed loans as percent of total loans (H2 2013)
Structural policies will be key for
sustaining stronger growth
Source: World Bank
-4
-2
0
2
4
6
8
10
12
2000 2002 2004 2006 2008 2010 2012 2014 2016
Model estimate of output gap
1: Initial output gap allows GDP growth in excess of potential
Potential GDP growth
2: But output gap closes, inflation rises, and GDP slows
Actual GDP growth
3: Policy tries to stimulate again, but generates overheating
India GDP growth, output gap (%)
4: Forecast of growth rising above potential growth closes output gap by 2016
0
2
4
6
8
10
12
1990 1995 2000 2005 2010 2015
Actual Potential Contribution to potential growth Growth rate
Decomposing potential output GDP and potential Growth, and contributions to potential, percent
Source: World Bank.
0
2
4
6
8
10
12
1990 1995 2000 2005 2010 2015
Labour Actual Potential Contribution to potential growth Growth rate
Decomposing potential output GDP and potential Growth, and contributions to potential, percent
Source: World Bank.
0
2
4
6
8
10
12
1990 1995 2000 2005 2010 2015
TFP Labour Actual Potential Contribution to potential growth Growth rate
Decomposing potential output GDP and potential Growth, and contributions to potential, percent
Source: World Bank.
Investment growth in India slowed sharply since 2012, dragging
down the investment rate (as % of GDP) and overall GDP growth
Note: Investment excludes acquisition of valuables such as gold
15
20
25
30
35
40
-10
-5
0
5
10
15
20
25
30
2002Q1 2004Q1 2006Q1 2008Q1 2010Q1 2012Q1 2014Q1
India investment growth
India Industrial Production growth
India inv./GDP 2Q-m.a. [Right]
Percent (y/y) Percent of GDP
0
2
4
6
8
10
12
1990 1995 2000 2005 2010 2015
Capital TFP Labour Actual Potential Contribution to potential growth Growth rate
Decomposing potential output GDP and potential Growth, and contributions to potential, percent
Source: World Bank.
Concluding remarks
• Downgrade in 2014 growth mainly explained by weak first quarter and situation in Ukraine
• Looser than expected financial conditions now could mean faster tightening in the future
• Developing country growth has disappointed for 3 years running – reinforcing the need to focus on structural policies to speed growth
• Vulnerabilities have declined but remain, macro cushions should be gradually rebuilt
Global
Economic
Prospects
South Asia
June 2014 Andrew Burns
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