East Asia and Pacific Region prospects

East Asia and Pacific Region prospects GDP increased by an estimated 8.3 percent in the developing East Asia & Pacific region in 2004, somewhat stronger than the 8.0 percent pace recorded in 2003. Regional growth over the past two years was Contributions to GDP growth East Asia & Pacific region the strongest since the 1997-98 financial crisis. 12 Net exports The expansion was particularly robust in 10 China, where the economy increased by 9.5 Fixed investment 8 percent, but the pickup was widespread. Most of the economies in the region participated in 6 the acceleration, including middle-income 4 countries like Indonesia, Malaysia and the 2 Philippines, as well as low-income ones like 0 Lao PDR, Vietnam, Papua New Guinea and Government consumption Private consumption -2 Mongolia. Overall, this strong growth is 2002 2003 2004 2005 2006 2007 estimated to have reduced the proportion of Source: World Bank. East Asians living in extreme poverty (less than $2 a day) from 50 to 34 percent between 1999 and 20041. Very high and rapidly rising levels of investment contributed to strong growth, A supportive external environment and reflects past successes. characterized by a record expansion in Overall investment increased by 18.4 percent world trade, regional current account in 2004, continuing a trend that has pushed surpluses and rising foreign reserves has investment to GDP ratios in the region from 32 bolstered investor confidence in many to 42 percent between 1999 and 2004. While economies. very robust investment growth has been These factors, plus low interest rates in the recorded for several years in fast growing global economy were reflected in an accelerating trend in portfolio capital flows and economies like China and Vietnam, the rebound was most marked among the middlecontributed to large gains in stock market prices and lower debt-servicing charges in most and high-income economies of the region, where investment had been erratic and weak in economies. Spreads in Indonesia declined by the wake of the 1997-98 financial crisis and around 200 basis points in the second half of the 2001 high-tech crash. 2004 as confidence surged in the wake of the successful parliamentary and presidential Export growth in excess of 23 percent was another driver of this strong performance. 1 Developments in China, where some 418 million Foreign sales were boosted by strong global poor people live (two thirds of the East Asian total) demand on the one hand and a large rebound in dominate the regional picture. Poverty at the $2-athe global high-tech industry during the first day level in China is estimated to have fallen to part of the year. This led to a surge in intraabout 32 percent in 2004, driven by significant recent gains in rural income. These in turn reflected regional trade, led by booming exports from increased agricultural output, a more than 30 percent the rest of East Asia to China. Overall, high increase in grain prices, the introduction of direct productivity growth, low costs and market subsidies to farmers, and a reduction in agricultural opening helped the region increase its world taxes. Outside of China, the bulk of recent poverty market share by 0.7 percentage points in 2004. reduction in terms of absolute numbers of poor has occurred in three other economies, Indonesia, Thailand and Vietnam. elections. Public sector debt also trended lower or has been stable in most economies, the Philippines being a notable exception here. Policy efforts to foster financial and corporate sector restructuring and reform have continued, although at an uneven pace in some countries. Firms too have used this exceptionally favorable climate to reduce excessive debt and improve profitability. East Asia and Pacific forecast summary (annual percent change unless indicated otherwise) 90-00 1 GDP at market prices (1995 USD) GDP per capita (units in USD) PPP GDP 3 2 Est. 2002 7.7 6.4 8.4 6.8 7.9 9.0 12.0 11.2 0.4 0.4 7.5 -1.2 Forecast 2005 7.4 6.5 7.7 7.2 4.2 12.5 14.9 18.6 -1.1 3.0 2.2 -2.4 2006 6.9 6.0 7.1 7.0 3.7 6.5 11.1 11.1 0.2 3.4 3.6 -2.2 2007 7.2 6.4 7.4 7.7 3.9 12.1 9.9 11.1 -0.4 2.8 2.9 -2.1 8.3 7.4 8.7 6.9 4.2 2003 8.0 7.0 8.4 5.8 5.3 18.7 21.2 23.5 0.1 3.9 3.6 -2.8 2004 6.9 6.0 7.4 5.4 7.5 13.3 14.8 15.9 0.4 3.5 3.9 -3.3 Private consumption Public consumption Fixed investment Exports, GNFS Imports, GNFS 4 4 18.4 23.1 23.5 0.7 3.5 5.3 -2.4 Net exports, contribution to growth Current account bal/GDP (%) GDP deflator (median, LCU) Fiscal balance/GDP (%) Memo items: GDP East Asia excluding China deflator are averages. 4.6 4.6 5.4 6.0 5.4 5.9 6.2 Notes: 1. Growth rates over intervals are compound average; growth contributions, ratios and the GDP 2. GDP measured in constant 1995 U.S. dollars. 3. GDP measured at PPP exchange rates. 4. Exports and imports of goods and non-factor services. Source: World Bank Growth in developing East Asia is expected to ease modestly to just under 7½ percent in 2005. High oil and other commodity prices and rising interest rates in developed economies have already triggered a slowing in the global economy and in demand for East Asian exports. GDP growth eased in the second half of 2004 in Malaysia, Philippines and Thailand (as well as in high income economies such as Japan, Singapore and Taiwan, China). In addition, investment growth in China has slowed substantially -- from over 40 percent year-on-year (yoy) in the first quarter of 2004 to an estimated 13 percent in the fourth quarter. This rapid deceleration followed the introduction of administrative measures to constrain growth in certain sectors after concerns arose towards the end of 2003 about overheating and the misallocation of resources. This slowdown is also expected to reduce demand for capital goods inputs from the rest of East Asia, which has been a major driver of regional export growth over the last 3 years. These factors, plus the normal maturation of the business cycle in this fast growing region are expected to reduce the pace of growth. Nevertheless, expand by more than output in China and Vietnam should remain above 8 and 7 percent respectively, while the middleincome economies in South East Asia are expected to increase by between 5 and 6 percent. Among net commodity importers like China, Cambodia, Korea, Lao PDR, the Philippines, Taiwan (China) and Thailand, income losses due to terms of trade changes could range from 0.5 – 1.5 percent of GDP. Commodity exporting economies like Indonesia, Malaysia, Papua New Guinea and Vietnam will continue to benefit from strong incomes due to high prices. However, because their weight in regional GDP is relatively small, high prices are a negative factor for the region as a whole. High-tech cycle and East Asian tech exports World semiconductor sales, East Asian tech exports, U.S. dollars percent change: 3mma/3mma, saar 80 60 40 20 0 -20 -40 -60 Jan97 Oct97 Jul98 Apr99 Jan00 Oct00 Jul01 Apr02 Jan03 Oct03 Jul04 East Asia exports Semiconductor sales Source: Semiconductor Industry Association, World Bank In addition to the more generalized slowing of world trade flows, the high-tech sector, which is particularly important for the region, entered a downward phase in the second half of 2004 and is likely to depress activity levels into 2005 before demand picks up once again. The main downside risk facing the region arises from the possibility that interest rates in the United States rise sharply due to concern over the sustainability of the U.S. current account deficit and fears of a dollar depreciation. For the region, the main impacts would come in the form of reduced demand for its products and therefore slower growth. In addition, a significant depreciation of the dollar would have large negative fiscal impacts for countries, like China, that have accumulated substantial U.S. dollar reserves. Estimates presented in this year’s Global Development Finance (World Bank, 2005) suggest that for China, such costs could represent as much as 1.1 percent of Chinese GDP (in real terms2). A second risk, which would appear to have diminished recently, is of an overheating in China that would require a significant policy response. Although both incomes and investment growth have slowed, persistently strong demand for a number of commodities make it difficult to evaluate whether the slowdown is restricted to those sectors where controls have been put in place or whether it is more broadly based. If the former, a resurgence in demand and the kind of rapid pick up of inflation observed in the fall of 2004 cannot be ruled out. An overheating in China followed by an abrupt slowdown would spillover throughout the region. 2 If the Reminbi were to follow the dollare down, there would be no impact as a share of Chinese GDP, although measured with respect to the predepreciation value of the currency the cost would be about 1.1 percent of GDP. underpinning, for example, a 7.6 percent increase in Russian consumption and a 13.6 percent rise in import demand. Moreover, high oil revenues boosted both current account and general government balances in Russia, Real GDP growth in developing Europe and triggering an upgrade of its debt to investment Central Asia is estimated to have accelerated quality. to 6.8 percent in 2004 from 5.9 percent in Strong demand has spilled over into oil2003 and continues to outpace the global importing countries in the region, supporting average. rapid export and investment growth in 2003 This growth reflects a number of factors, and 2004. including: Europe and Central Asia Regional Prospects A supportive international trade and capital flows environment. • The positive impact of high commodity prices in the CIS. • EU accession process in beneficial spinoffs from Central Europe and the Baltics; • Past reforms, including improvements in investment climate and governance across much of the region; • Progress with candidacy for membership in the EU in Bulgaria, Croatia, Romania and Turkey; and • Continued political stability in South Eastern Europe; Very strong world energy demand spurred growth among regional oil-exporters, notably Russia, where GDP increased by 7.1 percent in 2004. High oil prices coupled with increased output boosted incomes in these countries, • Europe and Central Asia forecast summary (annual percent change unless indicated otherwise) 90-00 1 GDP at market prices (1995 USD) 2 GDP per capita (units in USD) PPP GDP 3 High FDI inflows, linked to the May 2004 accession of eight countries in the region to the European Union, helped to boost both activity and capacities among Central and Eastern European countries, which grew by 5.0 percent. Elsewhere, growth in Turkey was particularly buoyant at 8.2 percent, following an unexpectedly sharp decline in inflation that spurred real domestic demand. On the downside and notwithstanding a 16.1 percent increase in exports, Turkey’s current account jumped from 2.8 percent of GDP in 2003 to 4.8 percent in 2004. Est. 2002 4.6 4.6 4.8 5.7 2.6 3.0 7.9 8.9 -0.2 0.7 4.2 -3.7 2003 5.9 5.9 6.3 6.7 2.2 9.9 12.0 14.5 -0.8 0.3 5.4 -3.1 2004 6.8 6.8 7.2 7.1 1.4 12.8 15.3 13.6 0.9 0.9 6.8 -2.1 2005 5.5 5.4 5.7 6.3 1.4 7.9 9.4 11.3 -0.8 0.3 6.2 -2.5 -1.4 -1.6 -2.1 -0.2 -0.8 -7.0 1.3 -1.7 1.2 -0.7 90.7 -3.2 Forecast 2006 4.9 4.9 5.1 5.1 2.0 7.1 9.0 9.4 -0.1 0.2 3.4 -2.1 2007 5.0 5.0 5.2 4.8 2.0 7.0 9.2 9.0 0.2 0.1 3.1 -2.0 Private consumption Public consumption Fixed investment Exports, GNFS Imports, GNFS 4 4 Net exports, contribution to growth Current account bal/GDP (%) GDP deflator (median, LCU) Fiscal balance/GDP (%) Memo items: GDP Transition countries Central and Eastern Europe Commonwealth of Independent States deflator are averages. 1.7 1.0 -4.2 4.3 2.9 5.0 4.5 4.0 7.6 6.0 5.0 7.7 4.8 4.5 6.2 4.7 4.5 5.2 5.2 4.9 4.9 Notes: 1. Growth rates over intervals are compound average; growth contributions, ratios and the GDP 2. GDP measured in constant 1995 U.S. dollars. 3. GDP measured at PPP exchange rates. 4. Exports and imports of goods and non-factor services. Source: World Bank Slowing industrial production Percent change, 3 month moving average, annual rate 20 18 16 14 12 10 8 6 4 2 0 Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Turkey Russia Europe and Central Asia 2003 2004 Source: World Bank A combination of rising interest rates, emerging capacity constraints and slowing world demand triggered a weakening of economic activity in the second half of 2004. Industrial production in the region was growing at a 10.6 percent rate (year-over-year) in April of 2004 before tighter monetary conditions, both as a result of currency appreciations and higher interest rates, and weaker external demand slowed production growth to 4.7 percent rate by the end of the year. Signs of accelerating inflation Inflation, percent change, year-on-year 8 7 6 5 4 3 2 1 0 1999 Strong growth and high tax collections brought down government deficits in several central and eastern European countries3. However, despite strong growth, fiscal positions deteriorated in several other countries, notably Hungary, Latvia and Lithuania. Providing further evidence of a break with past patterns, Turkey maintained a primary fiscal surplus (excluding outlays for interest payments on its government debt) of 6 percent of GDP, advancing its program of fiscal adjustment and underpinning a new three-year stand-by agreement with the IMF. The pace of the expansion in developing Europe and Central Asia is expected to moderate, with GDP growth slowing to 5.5 percent in 2005 and stabilizing at around 5 percent in 2006-07. This projected deceleration is, in large part, the extension of the slowdown that began during the second half of 2004 and has continued into the first quarter of 2005. It reflects weakening external demand, continued high oil prices, and rising international interest rates, as well as a tightening of monetary conditions because of higher domestic interest rates and the real appreciation of many currencies in the region. The impact of these factors on growth will be mitigated by the continued integration of the region into the world economy. Prospects for central and eastern European countries are somewhat better than the regional average, with growth expected to slow in 2005 before picking up in 2006 and 2007. Those countries that recently acceded to the European Union should continue to benefit from robust investment in flows, as increasing shares of European production are transferred to these relatively low-wage sites. Meanwhile, Bulgaria, Romania and Croatia, are expected to see similar benefits as their own accession dates approach. For the moment, the timing of Turkey's eventual accession is unclear.4 3 Europe & Central Asia Developing countries High-income countries 2000 2001 2002 2003 2004 2005 Source: World Bank The rapid pace of activity in the first half of the year, in combination with high oil prices and EU-accession related price hikes, lifted median consumer price inflation in the region from 5.4 percent in 2003 to 6.8 percent in 2004. However, the subsequent slowdown reversed this trend and inflation ended the year at a more modest 4.6 percent. In Turkey, inflation has fallen below 10 percent and, there appears to have been a real shift in expectations aided by the introduction of a new currency, issued at 1 million times the face-value of the old Lira. Among which, Poland, the Czech and Slovak Republics. 4 Bulgaria, Croatia and Romania may join the EU as early as 2007 or 2008. Although talks with Turkey have begun, most observers expect that accession will have to wait a significant time. The break up of the Yukos conglomerate and the slow pace of structural reforms in Russia have weakened investor confidence and could generate some oil supply disruptions5. As a result, notwithstanding Russia’s improved financial market ratings, a deceleration in its investment growth is anticipated—including a fall-off in the recent strong inflows of FDI. Investment growth in the Commonwealth of Independent States group, is projected to slow throughout the projection period, expanding by 4.9 percent in 2007. This slower growth, a continued tendency for currencies in the region to appreciate in real effective terms and the gradual projected weakening of commodity prices should see inflation pressures weaken in 2005 and 2006. Downside risks to this projection predominate. A faster than expected fall in oil prices would slow growth in oil-exporting countries, but also in neighboring economies due to lower exports and FDI inflows from oil-rich countries. Although continued strong growth in the Central and Eastern Europe economies will support budget positions there, high government deficits remain a concern and further fiscal reforms are required. Delays in implementing planned reforms, such as those stipulated in the convergences programs for new EU member countries, could provoke an increase in risk premia and eventually a tightening of fiscal policy that would slow growth. Finally, a reduction in capital inflows needed to finance Turkey’s large current account deficit or a pickup of inflation could result in a rise in interest rates or an adjustment to the exchange rate. 5 Franssen, Herman. “Oil Market Outlook 2004-08: Oil Market Fundamentals Versus Geopolitical Developments” MEES VOL. XLVII, No 06, 9February-2004. Latin America and Caribbean regional prospects GDP grew an estimated 5.7 percent in 2004 in the Latin American and Caribbean region, the highest rate since 1997 and well above the 3.3 percent average recorded during the 1990s This strong growth is partly attributable to several countries (Argentina, Uruguay, and Republica Bolivariana de Venezuela) simultaneously rebounding from deep recessions. However, even excluding these countries from the regional aggregates, growth was a strong 4.6 percent. In contrast with the past two decades, participation in this expansion has been widespread, with most countries in the region recording positive growth rates (with Haiti forming a notable exception). Strong world demand both for commodities and other goods and services played a role. Trade volumes expanded by a near record 11.9 percent, with large commodity exporters such as Chile and Venezuela recording particularly strong increases in exports. economies in the region actually fell more in real terms during this period and as a result suffered little in the way of a competitive loss. However, since 2003 many have appreciated, suggesting that conditions going forward will be less benign than they were in 2003. Real and real-effective exchange rate changes Percent change, positive value appreciation between Feb. 2002 and Jan. 2005 60 40 20 0 -20 -40 -60 Ve ne z Ar uela ge nt Ur ina ug ua M y ex ic Bo o liv Ja ia m Co aic sta a R Pa ica ra g H uay on El dur Sa as lva do r Pe Ec ru ua do r Br Co azil lo m bi a Do Ch Gu m ile in ica atem n Re ala pu bl ic Real exchange rate Real effective exchange rate Source: World Bank. Low interest rates and high international liquidity also played an important role, contributing to the resurgence in investment and household demand (up 11.4 and 5.0 percent respectively) and increased capital inflows. Countries in the region benefited from low interest rates in high-income countries (shortterm interest rates in the U.S.A., Europe and Japan were negative or close to zero in real terms) and from a substantial reduction in Est. Forecast 2005 4.3 2.9 4.2 3.4 3.6 8.4 6.1 9.5 -0.7 0.4 4.0 -1.6 2006 3.7 2.4 3.7 3.5 2.8 7.0 6.8 8.1 -0.2 -0.4 4.0 -1.6 2007 3.7 2.3 3.7 4.0 2.1 6.4 7.2 8.6 -0.3 -0.7 4.0 -0.9 5.7 4.2 5.4 4.6 1.7 11.4 11.9 11.0 0.4 1.2 4.0 -1.4 Latin America and Caribbean forecast summary (annual percent change unless indicated otherwise) 90-00 1 GDP at market prices (1995 USD) GDP per capita (units in USD) PPP GDP 3 2 2002 3.3 1.6 3.3 4.1 2.1 4.1 8.7 2003 1.7 0.3 1.7 1.2 1.5 0.6 4.8 1.3 0.8 0.1 8.4 -2.8 2004 -0.8 -2.3 -0.2 -1.9 -0.3 -7.0 1.9 -6.2 1.8 -0.9 6.4 -3.0 Private consumption Public consumption Fixed investment Exports, GNFS Imports, GNFS 4 4 10.8 -0.3 -2.8 15.4 -2.4 Net exports, contribution to growth Current account bal/GDP (%) GDP deflator (median, LCU) Fiscal balance/GDP (%) Memo items: GDP LAC excluding Argentina Central America Caribbean deflator are averages. 3.1 4.5 4.1 0.9 2.3 3.2 0.6 3.4 2.8 5.2 3.0 2.2 4.0 3.2 3.4 3.7 2.9 4.6 3.6 2.9 4.1 Notes: 1. Growth rates over intervals are compound average; growth contributions, ratios and the GDP 2. GDP measured in constant 1995 U.S. dollars. 3. GDP measured at PPP exchange rates. 4. Exports and imports of goods and non-factor services. Source: World Bank investor’s perceptions of the risk associated with countries in the region. Spreads on Latin American bonds fell 100 basis points (1 percentage point) during 2004 and, at 431 basis points in February 2005 are well below their average level for the period 2000-03 of 798 basis points. While a global liquidity glut was partly responsible for these declines, trade liberalization, the adoption of more flexible exchange rates, and more prudent fiscal management in addition to falling debt to GDP ratios also underpinned these declines in risk premia. Bond spreads Average difference between the yield on a regional and US dollar bond. 1400 1200 1000 800 600 400 200 0 1998 consequence of the inevitable realignment of post-crisis countries towards more normal growth rates. Excluding Argentina, Uruguay and Venezuela from the area aggregate (GDP grew by 8.6, 11.9 and 17.1 percent in these countries respectively), growth will ease less markedly declining from 4.6 percent in 2004 to to 3.7 percent by 2007 or, assuming better than projected as much as 4.2 percent. The expected slowing will be less than otherwise, in part because of an expected modest upturn in government spending in advance of elections scheduled for 2005 in several countries. Contributions to GDP growth Latin America & Caribbean region 7 6 5 4 3 2 1 0 Net exports Government consumption 1999 2000 2001 2002 2003 2004 2005 -1 -2 -3 -4 Private consumption Fixed investment Source: JP Morgan. Despite intense activity levels and high oil prices, inflation in most countries in the region remains under control. Although, price inflation accelerated in several central American countries (Costa Rica, the Dominican Republic, El Salvador, Guatemala, Jamaica and Honduras) as well as Argentina, Bolivia and Peru, it remains relatively low in most countries. Moreover, inflation has declined recently in the Dominican Republic and Jamaica where the pickup in inflation partly reflected hurricane damage. Overall, inflation for the region eased in the fourth quarter and now stands at 5 percent, well below the 6.3 percent recorded in January 2003. As elsewhere in the global economy, economic activity in the Latin America and Caribbean region is expected to slow in 2005 through 2007. Area wide GDP is projected to expand by some 4.3 percent in 2005 before easing further to 3.7 percent in 2007. However, there is a risk that the region surprise on the upside as it has done in the recent past. In this case growth of as much as 4 percent in 2007 might also be possible. The expected slowdown is partly a 2002 2003 2004 2005 2006 2007 Source: World Bank. Higher interest rates are expected to reduce liquidity moderating the very fast pace of investment growth. Regional interest rates have risen following hikes in policy rates in the U.S.A., and a tightening of monetary policy in a number regional economies, notably Brazil where the SELIC rate has already been raised to 17.5 percent. Nevertheless, interest rates are low as compared with the past, and notwithstanding these anticipated increases are expected to remain so. Low interest rates have contributed to global liquidity. This has been reflected in strong foreign direct investment inflows to the region. These are expected to increase further, reaching some $40 billion in 2005, up from $26 billion in 2004. Private equity and bond financing inflows are also projected to rise, with the bulk of the additional financing accruing to Brazil and Mexico, both of whose credit rating was recently upgraded. Such inflows to Brazil are projected to rise by about 1 billion dollars, reaching some 34 billion in 2005. The stabilization of commodity prices in 2005 and their subsequent decline will slow the pace of income growth and contribute to the slowdown. While revenues will remain high, sustaining elevated levels of activity, their contribution to growth will diminish and the regional current account surplus of about 1 percent of GDP in 2004 will turn into a small deficit of about -0.7 percent of GDP by 2007. Indeed, a less rapid expansion in world demand in general and for commodities in particular is projected to trigger Finally, the baseline assumes that the prices of metals and minerals remain firm through much a significant slowing in exports from 11.9 of 2005 before declining gradually in response percent growth in 2004 to 6.1 by 2007 to lower world demand and increased supply. The greatest risk to the outlook is that However, should demand levels surprise on the persistent global imbalances might cause upside, as they did in 2004, incomes and interest rates in the United States to rise and growth among important exporters (Chile, investors to reevaluate risks, resulting in Jamaica, and Peru) could be significantly higher even interest rates and increased higher than projected. The balance or risks is spreads on emerging-market debt. more negative for producers of agricultural Countries in the region have made significant products (Argentina, Bolivia, Brazil, Ecuador, progress in restructuring their debt and the and Paraguay) because the run-up in these likelihood of default linked to over-exposure to prices in 2003-04 mainly reflected supply short-term debt and the U.S. dollar has been shortages, and prices are already falling with greatly reduced. Nevertheless and despite increased production. progress in reducing debt burdens, the level of debt remains high in many countries. Higher interest rates could trigger a significant reversal in currently very low debt-servicing ratios potentially threatening recent progress in fiscal consolidation – especially if it were accompanied by a substantial slowdown in world growth. In a worst-case scenario, where a 200 basis point additional increase in US interest rates is accompanied by a significant wealth effect and a reversal in the reduction in emerging market risk-premia (see the scenarios elaborated in the main risks section), growth in the LAC region can be expected to slow dramatically. The most significant impacts are likely to be felt in highdebt countries such as Brazil, Uruguay and Colombia where higher interest rates would generate large additional fiscal costs, that could require spending cuts elsewhere in the budgets of these countries, exacerbating the slowdown. The region will also remain sensitive to developments in China. China which represents an important and growing market for commodity exporters and is a significant competitor in the manufactures sector. Mexico in particular has an export structure that is very similar to that of China’s. Mexico's ability to withstand competition from China will depend importantly on the degree to which key structural reforms, including infrastructure and labor market upgrades succeed in boosting productivity growth towards the very high rates of increased observed in China. Middle East and North Africa regional outlook GDP increased by 5.1 percent in 2004 in the Middle East and North Africa region, following a ten-year high advance of 5.8 percent the year earlier. High oil prices and a 6 percent increase in hydrocarbons production sustained output growth among developing country oil exporters at a 5.5 percent pace. For the geographic region (including high-income countries6 in the region), the combination of high prices and increased output yielded nearly $200 billion or 13.5 percent of GDP improvement in the current account position of oil exporters (compared with 2002) and a 60 percent rise in fiscal revenues. This, in turn, allowed aggregate fiscal positions to improve from a 1 percent of GDP deficit to a 7.7 percent of GDP surplus over the same period. After rising to anticipated to reach $42/bbl on average for 2005 before easing to $33/bbl by 2007. Very strong regional growth Middle East and North Africa region Real GDP, percent change Forecast 8 All countries Oil exporters Resource-poor, labor-abundant 6 4 2 0 1990 1992 1994 Source: World Bank. 1996 1998 2000 2002 2004 2006 $38/bbl during 2004, oil prices are Middle East and North Africa forecast summary (annual percent change unless indicated otherwise) 90-00 1 GDP at market prices (1995 USD) 2 GDP per capita (units in USD) PPP GDP 3 Private consumption Public consumption Fixed investment Exports, GNFS 4 Outturns for the resource poor, labor abundant countries of the region were only somewhat less positive. GDP growth reached 4.3 percent in 2004, up from 4.1 percent the year before despite weak growth in Western Europe (the destination for 70 percent of exports). In some Est. 2002 2003 5.8 3.9 5.7 4.8 4.4 6.1 9.4 5.0 1.4 8.7 3.6 -0.6 2004 5.1 3.1 5.2 3.6 5.1 8.0 5.9 5.7 0.2 14.4 4.2 0.0 2005 4.9 2.9 5.0 3.8 5.1 7.5 4.0 4.8 -0.1 13.4 4.0 -0.5 Forecast 2006 4.3 2.4 4.6 4.0 4.6 6.2 4.2 5.2 -0.1 9.8 4.0 -0.9 2007 4.3 2.4 4.5 4.0 4.4 5.9 4.5 4.9 0.0 8.1 4.0 -1.1 3.3 1.2 3.5 2.0 2.1 3.4 4.8 1.9 0.9 -1.9 5.9 -0.8 3.1 1.3 4.0 3.1 1.7 5.6 -2.9 1.6 -1.3 4.9 2.0 -3.0 Imports, GNFS 4 Net exports, contribution to growth Current account bal/GDP (%) GDP deflator (median, LCU) Fiscal balance/GDP (%) Memo items: GDP MENA Geographic Region 5 Resource poor- Labor abundant 6 Resource rich- Labor abundant 7 Resource rich- Labor importing 8 deflator are averages. 3.6 3.8 3.4 3.5 2.9 3.0 6.1 0.5 6.1 4.1 6.3 7.2 5.2 4.3 6.0 5.2 4.9 4.6 5.5 4.8 4.4 5.2 5.0 3.6 4.4 5.1 4.7 3.8 Notes: 1. Growth rates over intervals are compound average; growth contributions, ratios and the GDP 2. GDP measured in constant 1995 U.S. dollars. 3. GDP measured at PPP exchange rates. 4. Exports and imports of goods and non-factor services. 5. Geographic region includes high-income countries: Kuwait and UAE. 6. Egypt, Jordan, Morocco and Tunisia. 7. Algeria, Iran, Syria and Yemen. 8. Bahrain, Kuwait, Oman, Saudi Arabia and UAE. Source: World Bank 6 Specifically, Bahrain, Kuwait and the United Arab Emirates are included in the geographic region. respects, there was less pass-through of growth stimulus from oil exporters to non-oil economies than during previous episodes of high prices. Oil import bills increased 5 percent in 2004, widening the oil deficit by some 0.7 percent of GDP for these countries. However, higher prices have slowed economic activity by only 0.1 or 0.2 percent, partly because of worker remittance receipts, which are projected to increase by $750 million between 2003 and 20077. reduced in the near term. As a result, the contribution of the oil-sector to growth should weaken. Moreover, because oil prices are projected to stabilize and eventually decline, the associated rising trend in private sector incomes is likely to slow. This could be supplemented by increases in government spending if the the authorities decide to spend the recent revenue windfall. However, unless this is accompanied by structural expenditure reform and adds to the productive capacity of these economies, the increase in GDP is The indirect impacts of war in Iraq have unlikely to sustained. Prospects for the been mixed. resource-poor countries in the region are also The most widespread indirect effects have been generally favorable, with output accelerating a in the form of higher oil prices and negative bit, reaching slightly over 5 percent in 2006foreign investor- and tourism sentiment toward 07. The projected strengthening of demand in the region. Conflict-related uncertainty has Europe should maintain growth in the been reflected in a sharp fall in both tourist and Maghreb at fairly high levels, despite the business visits to the region, particularly among potentially adverse export effects of the Europeans. This was offset by a pickup in elimination of textile quotas in the MFA. intra-regional travel, partly in response to Oil exporters enjoy budgetary windfalls restrictions on travel to the United States and to parts of Europe. As a result, following a very % annual Change, % of GDP weak year in 2003, tourism arrivals rebounded, 8 Forecast growing nearly 24 percent in the Middle East 6 MENA oil exporters (17 percent in North Africa) – well above the GDP growth 4 global average 12 percent gain for 2004. Tourism revenues in the resource poor, labor 2 abundant countries were up 5.2 percent, with 0 Morocco and Tunisia recording 9.5 and 8 1995 1997 1999 2001 2003 2005 2007 percent gains respectively. At the same time, -2 Fiscal balance countries neighboring Iraq, such as Jordan, -4 have benefited from increases in transit trade Source: World Bank. and the establishment of headquarters activities The region's heavy reliance on there by NGOs and other groups. hydrocarbons makes it especially vulnerable Growth in the region is projected to slow to to shifts in demand. 4.3 percent by 2007. While abundant oil and gas reserves among the Among developing oil-exporting economies, resource-rich countries represent a boon, GDP is projected to slow to about 4 percent, related revenues tend to appreciate currencies partly because world demand for oil is in real terms to the detriment of the expected to increase by only 1.5-2 percent per competitiveness of non-oil activities. In this year (in contrast to the near record 3.4 percent regard, the appreciation of oil-exporters' hike in 2004), and partly because the scope for currencies represents a significant challenge, increasing production levels further is greatly especially given the need to generate 7 The increase in remittance flows would likely have employment for a burgeoning and youthful been even higher, except increasingly the oil-rich labor force. If the increase in oil revenues is countries in the region are turning to guest workers “permanent” rather than “temporary”, the from South and South-East Asia. The bulk of appreciation could be prolonged in nature, regional remittances now originate in Western emphasizing the need for structural reforms. Europe where employment and wage increases have been limited by weak growth. Future prospects will depend importantly on the extent to which the authorities' succeed in exploiting the recent hydrocarbon “windfall”, estimated at $90 billion accumulated over 2004-04, so as to develop sustainable sources of non-oil growth for the future. Here the political challenge will be to resist demands to channel funds into transfers that finance current spending instead of saving these resources or channeling them into reforms and investments that enhance capacity. South Asian Regional Prospects Real GDP in South Asia is estimated to have grown a robust 6.6 percent in 2004. While this is down from the 7.8 percent growth posted in 2003, the deceleration mainly reflects a poor crop in India, the region’s largest economy (accounting for some 75 percent of total output). Below normal rainfalls yielded poor harvests, which slowed household income growth in the agricultural sector, resulting in less vigorous private consumption growth. However, strong world trade growth underpinned Indian exports which increased 13.9 percent in real terms during 2004. This contributed to an 8.3 percent expansion of India’s industrial sector and to 6.8 percent GDP growth, well above the 1990s average of 5.5 percent. external demand and an 8.5 percent increase in regional industrial activity, up from up from 6.8 percent in 2003. Services represent an increasing share of output Sectoral share in value added in South Asia 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1990 1992 1994 1996 1998 2000 2002 Agriculture Source: World Bank. Services Industry Better macroeconomic policies, increased global integration, and an improved business climate have strengthened competitiveness. As a result, growth has been broadly based. Regional growth excluding India firmed While exports have performed well, the somewhat to 5.9 percent in 2004 up from 5.7 domestic sector has expanded rapidly and percent in 2003. services share in total output has been Good weather, past reforms and solid industrial increasing. This diversification has helped the production underpinned growth in excess of 6 region reduce its vulnerability to natural percent in Pakistan. This was bolstered in 2004 disasters. This may help explain, why by credit expansion, strong notwithstanding the horrific human cost of the South Asia forecast summary (annual percent change unless indicated otherwise) 90-00 1 GDP at market prices (1995 USD) GDP per capita (units in USD) PPP GDP 3 2 Est. 2002 5.2 3.3 5.3 4.2 5.2 6.0 11.1 10.0 0.0 -1.6 8.4 -8.8 Forecast 2005 6.2 4.6 6.2 5.1 7.7 7.5 12.4 11.7 0.4 -0.9 7.2 -8.3 2006 6.4 4.8 6.4 5.4 6.8 8.7 12.0 11.3 0.4 -0.7 5.9 -7.4 2007 6.7 5.2 6.7 5.6 6.6 9.3 12.4 12.1 0.4 -0.6 5.0 -7.1 6.6 4.9 6.6 6.0 7.6 7.9 2003 7.8 6.1 7.9 7.8 7.6 9.0 13.0 12.3 0.3 1.3 4.7 -7.9 2004 4.6 2.9 4.6 3.9 3.3 8.4 18.3 5.5 2.0 1.4 3.6 -9.1 Private consumption Public consumption Fixed investment Exports, GNFS 4 Imports, GNFS 4 13.3 13.7 0.2 -0.4 4.4 -8.3 Net exports, contribution to growth Current account bal/GDP (%) GDP deflator (median, LCU) Fiscal balance/GDP (%) Memo items: GDP South Asia excluding India deflator are averages. 4.4 4.5 5.7 5.9 5.8 5.9 6.0 Notes: 1. Growth rates over intervals are compound average; growth contributions, ratios and the GDP 2. GDP measured in constant 1995 U.S. dollars. 3. GDP measured at PPP exchange rates. 4. Exports and imports of goods and non-factor services. Source: World Bank December 2004 Tsunami, its overall economic cost is expected to be modest (see box). Notwithstanding a less benign external environment, regional growth is projected Sustained high oil prices and emerging to expand by about 6.5 percent a year capacity constraints led to a more rapid rise through to 2007. in inflationary pressures during 2004 and The more balanced growth that characterized into 2005. the region in 2004 is expected to continue with The median consumer inflation rate for the domestic consumption and investment region rose to 5.4 percent in 2004, up from 4.9 providing the largest contributions to growth. percent in 2003 and 3.5 percent in 2002. In Sri While high oil prices could cut growth in Lanka inflation rose to an average of 11 percent India by as much as 1 percent and raise the in 2004 up from 6.6 percent the year before. current account deficit by 0.6 percent of GDP, The Tsunami has only added to these pressures a resumption in normal rainfalls will help in early 2005. Pakistan also experienced an sustain domestic demand. inflationary surge, with monthly inflation rising from 5.1 percent at the beginning of 2004 to Finally, several factors should contribute to 8.5 percent in early-2005. In contrast, inflation solid investment growth. has remained moderately stable in India, partly • The lifting of ceilings on foreign investor participation in the financial and telecoms due to a pre-emptive interest rate hike by sectors is projected to increase FDI inflows India’s central bank in late-2004. Higher oil in India. prices are expected to continue to put upward • Continued reforms and the privatization of pressure on inflation throughout the region in a number of large-scale enterprises should 2005. increase FDI inflows in Pakistan. Signs of accelerating inflation • Reconstruction in the wake of the Tsunami Inflation, percent change, year-on-year crisis is projected to generate a fillip to 18 Sri Lanka investment growth in Sri Lanka and the 16 14 Maldives. 12 • A rise in regional investment should also be Pakistan 10 facilitated by an easing of inflationary 8 6 pressures as the impacts of oil price hikes India 4 begin to dissipate in 2006 and 2007. 2 0 -2 2003 APR JUL OCT 2004 APR JUL OCT 2005 Nepal Source: World Bank High oil prices, combined with strong domestic demand, are also leading to a rise in current account deficits in energyimporting countries. As a share of GDP, regional current account balances shifted from a surplus of 1.3 percent in 2003 to a deficit of 0.4 percent. The degree of deterioration was held in check by strong export volume growth, driven by high external market demand which increased by 10 percent in volume terms in 2004, up from 8 percent the year before. Strong market penetration supported a 13 percent increase in goods and services exports, while merchandise trade rose more than 14 percent. Slower world tradein 2005 should be partly compensated for by increased intra-regional trade. This has grown 11 percent per annum in dollar terms over the past 3 years, and the region is expected to earn a larger share of trade with East Asia. In addition, lower oil prices and the completion of the phase-out of quotas under the Agreement on Textiles and Clothing (ATC) will boost activity. India and Pakistan are especially likely to benefit because significant productivity-enhancing investments have been made and labor costs remain low. In Bangladesh and Sri Lanka, however, textile exports are expected decline in the face of greater competition. Bangladesh appears especially exposed. Roughly threefourths of its exports are in textiles, clothing or ready-made garments, and these exports have been largely dependent on the quota system. Similarly, Sri Lanka’s preparation for the phase-out has been insufficient to sustain their market share. Box: The 2004 Tsunami Despite its appalling human toll, the overall economic impact of the Tsunami on regional GDP is expected to be relatively small. Coming as late in the year as it did, the Tsunami’s economic impact in 2004 was negligible. Its impact in 2005 and in the future is difficult to judge. However, because damage was limited to coastal areas, its impact on aggregate growth for large economies such as India is expected to be difficult to perceive. For smaller economies like Sri Lanka and the Maldives, which were proportionately more severely hit, the impact is expected to be more pronounced. Beyond the great human loss, the net economic costs are difficult to gauge. Previous localized disasters like this have been characterized by an initial drop in activity due to the destruction of productive capacity, followed by a surge as reconstruction efforts get underway. In this particular instance, given the magnitude of the international response to the disaster, this second effect may well dominate, especially during 2005 and 2006-actually resulting in a positive fillip to growth. External risks center on the possibility of higher interest rates or an abrupt weakening of the dollar. Higher global interest rates would lead to weaker external demand, complicate debt management, compress domestic growth outcomes, and contribute to a tighter monetary conditions. Significantly higher oil prices would lead to a larger regional current account deficit and increase inflationary pressure. Overall, however, the regional economies are well-placed to absorb the negative growth impacts of lower external demand and higher oil prices, with relatively low inflation rates, strong growth and robust international liquidity positions. The abolition of ATC textile quotas could have stronger than anticipated consequences for the textile exporting economies in the region, on the upside (e.g., India) or downside (e.g., Bangladesh). Possible natural disasters and a deterioration in political stability also pose downside risks. Substantial segments of the region's population remain vulnerable to the vagaries of weather patterns and natural disasters. Building capacity to mitigate their impacts, without distorting economic incentives, should be a priority. Many people are also vulnerable to regional political instability. A potential deterioration in intra-regional political relationships continues to present downside risks to growth outcomes and poverty reduction. However, recent progress towards strengthening intra-regional peace (such as between India and Pakistan) and cross country economic links (such as between Bangladesh and India) have helped to mitigate these risks. Ongoing civil strife—such as in Nepal and Sri Lanka, in addition to the recent rise political violence in the run up to the 2006 elections in Bangladesh—also remains a concern. Further deterioration in these situations would likely lead to lower growth outcomes. Sub-Saharan Africa Regional Prospects8 Economic activity in Sub-Saharan Africa expanded by an estimated 3.8 percent in 2004, the best performance for the region since 1996 and the eleventh straight year of positive growth. Indeed, the economies of a large number of countries are estimated to have increased by 5 or more percent in 20049. Part of this good performance can be attributed to the strong expansion in world trade in which the region participated fully. Overall, regional trade volumes increased 8.7 percent, one of the best outturns of the past quarter of a century. The relative absence of important conflicts in the region during 2004 (with the notable exception of Cote d’Ivoire, Zimbabwe whose economies contracted10 and the Sudan) also contributed to the strength of aggregate growth. Similarly, the absence of major droughts or other natural disasters played a role – particularly in the Central African Franc zone. The locust invasion in Mauritania, Senegal, Mali and Niger had less of an impact than originally feared, although widespread breeding occurred over the summer and there are indications that a further infestation could pose problems in 2005. Strong oil and other commodity prices contributed to this robust performance. Their impact was both direct, through strong sales of these goods, and indirect through increased incomes, which have supported higher levels of consumption and investment. Among oil-exporters, growth slowed in 2004 to 4.1 percent (down from 8.1 percent the year before) as capacity constraints prevented output from rising as fast as in 2003. In particular, GDP in Nigeria is estimated to have decelerated from a torrid 10.7 pace in 2003 to a relatively calm 3.7 percent rate of growth in 2004. Among oil-importing countries, the expansion was less robust at 3.7 percent but was on an accelerating path, up from 2.3 percent in 2003 – boosted by high agricultural and metal prices. Growth in South Africa, which accounts for about 1/3 of area GDP, reached 3.7 percent as the impacts of the Rand’s 40 percent effective appreciation since 2002 began to wane and as high non-oil commodity prices boosted incomes and output. Robust growth in Angola, which now accounts for almost 7 percent of regional GDP will also be a contributing factor. Other oil-importing countries represent more than two-thirds of the population of the subcontinent but less than one-third of GDP. Their output rose by an estimated 3.9 percent, up sharply from 1.2 percent in 2003. Reforms underpin rising trend GDP growth GDP growth, percent 7 6 5 4 3 2 1 0 -1 -2 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 Source: World Bank Sub-Saharan Africa, ex. Forecast South Africa High-income countries The recent 18 percent fall in cotton prices had little impact on GDP in 2004. For producers in Mali, Chad and Benin, short-term impacts are expected to be small because controlled farmgate prices have been left at relatively high levels. However, these subsidized prices are projected to fall beginning in 2005. Strong 8 This note and the forecast have benefited from close metal prices benefited a number of countries, cooperation with the OECD's development centre. notably South Africa. On aggregate, however, 9 Growth is estimated by the World bank to have oil-importing Sub- Saharan countries exceeded 5 percent in Angola, Burundi, Cap Verde, (excluding South Africa) suffered a 0.5 percent Chad, The Congo Democratic Republic, Ethiopia, of GDP terms-of-trade loss, as the negative Gambia, Ghana, Madagascar, Mozambique, SAO income effect of elevated oil prices more than Tome and Principe, Senegal, Sierra Leone, Sudan, Tanzania, Uganda and [Zambia. 10 Economic growth in Sudan was strong despite unrest there. Sub-Saharan Africa forecast summary (annual percent change unless indicated otherwise) 90-00 1 GDP at market prices (1995 USD) 2 GDP per capita (units in USD) PPP GDP 3 Est. 2002 2.3 -0.3 2.6 2.2 2.5 3.5 4.9 5.3 -0.1 -1.5 #N/A -4.1 Forecast 2005 4.1 2.1 4.6 4.0 4.2 5.6 8.4 7.2 0.1 0.2 4.0 -3.0 2006 4.0 2.0 4.4 3.7 3.5 5.2 8.1 7.2 0.1 -0.5 4.0 -2.9 2007 4.1 2.1 4.4 4.2 3.1 5.4 8.0 7.9 -0.2 -0.3 4.0 -2.6 3.8 1.7 4.3 4.9 5.9 6.3 7.3 2003 3.4 1.2 4.1 -0.4 7.4 3.7 5.7 7.6 -0.7 -0.9 8.2 -2.7 2004 2.8 0.7 3.3 8.2 1.0 10.2 -0.4 4.2 -1.4 -0.3 6.5 -2.7 Private consumption Public consumption Fixed investment Exports, GNFS Imports, GNFS 4 4 10.1 -1.1 0.5 4.1 -2.9 Net exports, contribution to growth Current account bal/GDP (%) GDP deflator (median, LCU) Fiscal balance/GDP (%) Memo items: GDP SSA excluding South Africa Oil exporters CFA countries deflator are averages. 2.9 2.8 2.3 2.0 2.6 0.9 4.0 8.1 1.6 4.0 4.1 1.9 4.8 5.6 2.3 4.7 5.2 1.7 4.7 5.0 2.0 Notes: 1. Growth rates over intervals are compound average; growth contributions, ratios and the GDP 2. GDP measured in constant 1995 U.S. dollars. 3. GDP measured at PPP exchange rates. 4. Exports and imports of goods and non-factor services. Source: World Bank offset the positive effect of higher agricultural and metal prices11. Overall, per capita incomes grew by 1.7 percent. As a consequence, in contrast to the 1990s when per capita incomes were falling, the average material conditions of individuals living in the sub-continent were improving. Indeed, while aggregate growth is subject to large fluctuations, regional GDP has been on an upward trend over the past two decades. While the region has frequently recorded faster growth rates, growth during the recent period has been more consistently robust. This good performance reflects a number of factors, including structural reforms undertaken over the preceding decades in a number of countries. These have seen fiscal deficits for the region as a whole brought below 3 per cent of GDP and helped maintain inflation at low levels. In addition, trade liberalization, which has seen average tariffs fall from some 30 per cent in the 1980s to less than 10 today, has played an important role. Nevertheless, growth was faster 11 almost everywhere else in the world and, as a result, rather than catching up, the region fell further behind both developed and other developing economies. Implications for poverty Real GDP per capita, annual average percentage change 7 6 5 4 3 2 1 0 -1 -2 -3 HighEast Asia South Asia income and Pacific Europe Latin Middleand American East and Central and North Asia Caribbean Africa SubSaharan Africa 2006-15 2000-05 1990s Source: World Bank Taken as a whole, sub-Saharan GDP is projected to strengthen somewhat, increasing by about 4 percent during the period 2005-07. High oil, metals and minerals prices, which are projected to persist in 2005 before moderating gradually in 2006 and 2007 are forecast to boost investment demand, which should increasingly be a growth driver for countries in the region. Growth should strengthen once again among oil exporters as new capacity comes on line in response to past investments. Among oil importers, growth should remain at Including South Africa Sub-Saharan African oilimporting countries actually experienced a positive terms of trade effect of almost 1 percent of GDP thanks to a 1.5 percent positive effect from metals and minerals. current levels, with the boost to incomes from high non-oil commodity prices only partially offsetting the additional cost of high oil prices. Planned reforms in a number of countries, including Ethiopia, Kenya Madagascar, Mozambique, Rwanda, Tanzania and Uganda should are expected to contribute positively to both the medium- and longer-term regional outlook. Overall, inflation is projected to remain broadly stable. The easing of oil prices should improve the current account position of oil importers and reduce the surplus among exporters. Continued strong economic performance faces several challenges. Recent improvements in economic performance reflect significant progress in terms of macroeconomic management and development of social and physical infrastructure within the region. Further progress will be essential if the region is to reach or exceed this projected growth performance. This is especially the case given the formidable obstacles faced by the region: a pattern of disruptive civil strife, repeated climate-related disruptions, the limited quantity and quality of infrastructure and human capital, and especially the HIV/AIDS epidemic. In the past, these have been major factors underlying poor performance. Per capita income levels fell substantially in conflict zones during the 1980s and 1990s, while HIV/AIDS has ravaged the population of many African countries. High mortality and invalidity rates among working-age adults are important factors holding back growth. Moreover, given the possibility of weaker commodity prices and slower growth, and considering the highly indebted nature of some of these countries, budgetary policy should be based on prudent macroeconomic assumptions. Fiscal deficits for the region as a whole have declined. However, much of the recent improvement has occurred in oil-exporting countries and would be very sensitive to a decline in oil prices. Allowing for such contingencies in budgetary plans would not only help prevent disruptive swings in program spending, it would also help prevent spending from following a pro-cyclical path.