World Bank warns of more economic volatility

As the global economic instability continues to soar, the World Bank has said that countries should re-emphasise their medium term development strategies to avert the anticipated long spell of volatility.The bank says that countries should restrain from reacting to day to day global effects and refocus on enhancing reforms that would help to avert the long term volatility effects. Global capital market and investor sentiment are likely to remain volatile over the medium term – making economic policy setting difficult,” said Hans Timmer, Director of Development Prospects at the World Bank in a statementHe adds, “In this environment, developing countries should focus on productivity-enhancing reforms and infrastructure investment instead of reacting to day-to-day changes in the international environment”. In its newly-released Global Economic Prospects (GEP) for this month, the World Bank says a resurgence of tensions in high-income Europe has eroded the gains made during the first four months of this year. Where possible, developing countries need to move to reduce vulnerabilities by lowering short-term debt levels, cutting budget deficits and returning to a more neutral monetary policy stance,” said Andrew Burns, Manager of Global Macroeconomics. Burns adds, “Doing so will provide them with more leeway to loosen policy, should global conditions take a sharp turn for the worse”. Increased uncertainty will add to pre-existing headwinds from budget cutting, banking-sector deleveraging and developing country capacity constraints.Developing Europe and Central Asia is especially vulnerable because of its close trade and financial ties with high-income Europe.But the statement warns that the worlds poorest countries will also feel the fall out – especially those that are heavily reliant on remittances, tourism or commodity exports or that have high-levels of short-term debt.“This baseline scenario remains the most likely outcome. However, should the situation in Europe deteriorate sharply, no developing region would be spared,” the statement readsThis, according to the statement, saw a rebound in economic activity in both developing and advanced countries and an easing of risk aversion among investors. “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,” the statement readIn this regard, 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.Again, growth in high-income countries will also be weak at; 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. Overall, global GDP is projected to rise 2.5, 3.0 and 3.3 (1) percent for the same period.Moreover, most industrial commodity prices are down, with crude and copper prices down by 19 and 14 percent, respectively, as currencies in developing countries have lost value against the US dollar.This has resulted into international capital fleeing to safe-haven assets, such as German and U.S. government bonds.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.But conditions in most developing countries have not deteriorated as much as in the fourth quarter of 2011.Moreover, Rwanda has taken stringent measures to contain the spillovers of global volatility rate through control of inflation and stable foreign exchange, a move that has helped its economic keep afloat. Indeed the bank had to refine its tools it uses in terms of implementing the monetary policy so that it is transmitted into the whole system, a move that kept inflation in single digits.

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World Bank warns of more economic volatility