World Bank slashes growth forecast for emerging economies

Lower oil prices and looming US interest rate rise lead to downgrades for countries including Nigeria, Angola and Brazil, while India bucks trend

The World Bank has cut its forecasts for growth across emerging economies this year, warning that they face a double whammy from rising US interest rates and lower commodity prices. “Developing countries were an engine of global growth following the financial crisis, but now they face a more difficult economic environment,” said the bank’s president, Jim Yong Kim, as the anti-poverty body published its twice-yearly Global Economic Prospects document.

Growth in emerging economies is expected to be 4.4% in 2015, down from the 4.8% the World Bank was expecting in December.

The World Bank’s senior economist, Franziska Ohnsorge, explained that while the crash in the global oil prices since last year has hit government revenues and undermined growth in exporting countries, it has so far not provided the expected boost to oil importers.

Some of the largest downgrades are for oil-exporting countries, including Nigeria, Angola and Brazil, with South America’s largest economy expected to contract by 1.3% this year. However, the document reserved some praise for India, describing the country as a “shining star” for tackling its economic problems.

The World Bank warned that developing countries must also brace themselves for a rise of US interest rates from their record low of 0%-0.25%, a long-planned move that many analysts expect to take place later in 2015.

Higher interest rates in the US are likely to raise borrowing costs for emerging economies. The World Bank does not expect a repeat of the “taper tantrum” in 2013, when the Federal Reserve said it intended to start phasing out quantitative easing. The announcement sent bond yields shooting up and currencies plunged in countries including Turkey and India.

However, the World Bank said the process of raising rates will be risky, and countries should be “hoping for the best, preparing for the worst”. “Turkey, South Africa and other countries that rely heavily on foreign capital inflows could be negatively affected by rising borrowing costs,” the report warned.

The analysis suggested that capital flows to emerging economies could be reduced by up to 1.8 percentage points of GDP as the cost of borrowing rises. Kim said: “We’ll do all we can to help low- and middle-income countries become more resilient so that they can manage this transition as securely as possible.”

India is one of the few countries where the World Bank has upgraded its forecast. Ohnsorge said it had benefited from “both good policies and luck”. Narendra Modi’s government has taken advantage of cheap oil to phase out costly fuel subsidies and banked the proceeds; and its central bank governor, Raghuram Rajan, has sought to establish a more credible inflation-fighting regime. The World Bank expects India to be the fastest-growing major economy in 2015, expanding by 7.5%, and to continue outpacing China in 2016 and 2017. “It’s our shining star,” said Ohnsorge. “Low oil prices have really benefited India.”

With oil prices expected to remain low – and volatile – Kim said emerging economies should prepare themselves for a future beyond cheap money and the commodities boom by investing in infrastructure. “We believe that countries that invest in people’s education and health, improve the business environment, and create jobs through upgrades in infrastructure will emerge much stronger in the years ahead,” he said. “These kinds of investments will help hundreds of millions of people lift themselves out of poverty.”

The World Bank has also downgraded its growth forecast for the UK this year, from 2.9% to 2.6%, after weak GDP data for the first quarter.


Heather Stewart

The GuardianTramp

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