Developing countries urged to strengthen domestic fundamentals to weather global economic turmoil

ISLAMABAD: Developing countries should prepare for a long period of volatility in the global economy by re-emphasizing medium-term development strategies, while preparing for tougher times, says the World Bank in the newly-released Global Economic Prospects (GEP), June 2012.

A resurgence of tensions in high-income Europe has eroded the gains made during the first four months of this year, which saw a rebound in economic activity in both developing and advanced countries and an easing of risk aversion among investors.

Since May 1st, increased market jitters have spread. Developing and high- income country stock markets have lost some 7 percent, giving up two-thirds of the gains generated over the preceding four months, it said.

Most industrial commodity prices are down, with crude and copper prices down by 19 and 14 percent, respectively, while developing country currencies have lost value against the US dollar, as international capital fled to safe-haven assets, such as German and US government bonds.

So far, conditions in most developing countries have not deteriorated as much as in the fourth quarter of 2011.

Outside of Europe and Central Asia and the Middle-East and North Africa, developing country credit default swap (CDS) rates, a key indicator of market sentiment, remain well below their maximums from the fall of 2011.

According to the report, increased uncertainty will add to pre-existing headwinds from budget cutting, banking-sector deleveraging and developing country capacity constraints.

As a result, the World Bank projects that developing country growth will slow to a relatively weak 5.3 percent in 2012, before strengthening somewhat to 5.9 percent in 2013 and 6.0 percent in 2014.

Growth in high-income countries will also be weak, 1.4, 1.9 and 2.3 percent for 2012, 2013 and 2014 respectively - with GDP in the Euro Area declining 0.3 percent in 2012 whereas overall, global GDP is projected to rise 2.5, 3.0 and 3.3. Using purchasing power parity weights, global growth would be 3.3, 3.9 and 4.2 percent for 2012, 2013 and 2014, respectively percent for the same period.

This baseline scenario remains the most likely outcome, however, should the situation in Europe deteriorate sharply no developing region would be spared.

Developing Europe and Central Asia is especially vulnerable because of its close trade and financial ties with high-income Europe, but the world's poorest countries will also feel the fall out - especially countries that are heavily reliant on remittances, tourism or commodity exports or that have high-levels of short-term debt.