Commodity exporters gradually recovering from recent low prices

The World Bank forecasts that global economic growth will strengthen to 2.7 percent in 2017 as a pickup in manufacturing and trade, rising market confidence, and stabilizing commodity prices allow growth to resume in commodity-exporting emerging market and developing economies.

According to the World Bank’s June 2017 Global Economic Prospects report, growth in advanced economies is expected to accelerate to 1.9 percent in 2017, which will also benefit the trading partners of these countries. Global financing conditions remain favorable and commodity prices have stabilized. Against this improving international backdrop, growth in emerging market and developing economies as a whole will pick up to 4.1 percent this year from 3.5 percent in 2016.

Growth among the world’s seven largest emerging market economies is forecast to increase and exceed its long-term average by 2018. Recovering activity in these economies should have significant positive effects for growth in other emerging and developing economies and globally.  

Nevertheless, substantial risks cloud the outlook. New trade restrictions could derail the welcome rebound in global trade. Persistent policy uncertainty could dampen confidence and investment. Amid exceptionally low financial market volatility, a sudden market reassessment of policy-related risks or of the pace of advanced-economy monetary policy normalization could provoke financial turbulence. Over the longer term, persistently weak productivity and investment growth could erode long-term growth prospects in emerging market and developing economies that are key to poverty reduction.

“For too long, we’ve seen low growth hold back progress in the fight against poverty, so it is encouraging to see signs that the global economy is gaining firmer footing,” World Bank Group President Jim Yong Kim said. “With a fragile but real recovery now underway, countries should seize this moment to undertake institutional and market reforms that can attract private investment to help sustain growth in the long-term. Countries must also continue to invest in people and build resilience against overlapping challenges, including climate change, conflict, forced displacement, famine, and disease.”

The report highlights concern about mounting debt and deficits among emerging market and developing economies, raising the prospect that an abrupt rise in interest rates or tougher borrowing conditions might be damaging. At the end of 2016, government debt exceeded its 2007 level by more than 10 percentage points of GDP in more than half of emerging market and developing economies and fiscal balances worsened from their 2007 levels by more than 5 percentage points of GDP in one-third of these countries.

“The reassuring news is that trade is recovering,” said World Bank Chief Economist Paul Romer. “The concern is that investment remains weak. In response, we are shifting our priorities for lending toward projects that can spur follow-on investment by the private sector.”

 A bright spot in the outlook is a recovery in trade growth to 4 percent after a post-financial crisis low of 2.5 percent last year. The report highlights a key area of weakness in global trade, trade among firms not linked through ownership. Such trade through outsourcing channels has slowed much more sharply than intra-firm trade in recent years. This is a reminder of the importance of a healthy global trading network for the less integrated firms that account for the majority of enterprises.

“After a prolonged slowdown, recent acceleration in activity in some of the largest emerging markets is a welcome development for growth in their regions and for the global economy,” said World Bank Development Economics Prospects Director Ayhan Kose. “Now is the time for emerging market and developing economies to assess their vulnerabilities and strengthen policy buffers against adverse shocks.”

» Download: Global Economic Prospects: A Fragile Recovery, June 2017 (PDF, 9.05 MB)

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Regional outlook: Sub-Saharan Africa

Recent developments

Growth in Sub-Saharan Africa is recovering, supported by modestly rising commodity prices, strengthening external demand, and the end of drought in a number of countries. Security threats have subsided in several countries. Several factors are preventing a more robust recovery. In Angola and Nigeria, tight foreign exchange liquidity conditions, reflecting distortions in the foreign exchange market, constrain activity in the non-oil sector. In South Africa, political uncertainty and low business confidence are weighing on investment.

In contrast to oil and metals prices, cocoa prices have plummeted, reducing exports and fiscal revenues in Côte d’Ivoire, Ghana, and other cocoa producers. The drought in East Africa has continued into 2017, adversely affecting economic activity in Kenya, and contributing to famine in Somalia and South Sudan.

Regional inflation is gradually decelerating from a high level, although it remains elevated in Angola, Nigeria, and Mozambique. Inflationary pressures increased in East Africa, due to drought.

Outlook

Growth in Sub-Saharan Africa is forecast to pick up to 2.6 percent in 2017 and to 3.2 percent in 2018, predicated on moderately rising commodity prices and reforms to tackle macroeconomic imbalances. Per capita output is projected to shrink by 0.1 percent in 2017 and to increase to a modest 0.7 percent growth pace over 2018-19. At those rates, growth will be insufficient to achieve poverty reduction goals in the region, particularly if constraints to more vigorous growth persist.

Growth in South Africa is projected to rise to 0.6 percent in 2017 and accelerate to 1.1 percent in 2018. A rebound in net exports is forecast to only partially offset weaker-than-previously-forecast growth of private consumption and investment, as borrowing costs rise after the country’s sovereign-debt ratings downgrade. Nigeria is forecast to go from recession to a 1.2 percent growth rate in 2017, gaining speed to 2.4 percent in 2018, helped by a rebound in oil production, as security in oil producing regions improves, and by an increase in fiscal spending. Growth is forecast to jump to 6.1 percent in Ghana in 2017 and 7.8 percent in 2018 as increased oil and gas production boosts exports and domestic electricity production.

Growth in non-resource intensive countries is anticipated to remain solid, supported by infrastructure investment, resilient services sectors, and the recovery of agricultural production. Ethiopia is forecast to expand by 8.3 percent in 2017, Tanzania by 7.2 percent, Côte d’Ivoire by 6.8 percent, and Senegal by 6.7 percent, all helped by public investment. However, some countries need to contain debt accumulation and rebuild policy buffers.

Risks

The regional outlook is subject to significant internal and external risks. A sharp increase in global interest rates could discourage sovereign bond issuance, which has been a key financing strategy for governments. Weaker-than-expected growth in advanced economies or major emerging markets could reduce demand for exports, depress commodity prices and curtail direct foreign investment in mining and infrastructure in the region. Proposed cutbacks to U.S. official development assistance will be a concern to some of the region’s smaller economies and fragile states.

On the domestic front, countries including Angola, Mozambique and Nigeria need to implement significant fiscal adjustment policies to sustain macroeconomic stability and nurture economic recovery. Increased militant activity is a risk in Nigeria. Weather-related risks are elevated in East Africa. Worsening drought conditions will severely affect agricultural production, push food prices higher, and increase food insecurity in the sub-region.

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Special focus – Debt Dynamics in Emerging Market and Developing Economies: Time to Act?

Since the global financial crisis, rising private sector debt and deteriorating government debt dynamics have made some emerging market and developing economies (EMDEs) more vulnerable to financing shocks. Specifically, at end-2016, government debt exceeded its 2007 level by more than 10 percentage points of GDP in more than half of EMDEs and the fiscal balance worsened from its 2007 level by more than 5 percentage points of GDP in one-third of EMDEs. Although many EMDEs have strengthened their monetary policy frameworks and accumulated significant reserve buffers over the past two decades, they now need to shore up their fiscal positions to prevent sudden spikes in financing cost from forcing them into fiscal tightening.

Introduction

As growth becomes more durable and inflation rates get closer to central banks’ targets, monetary policy in advanced economies is expected to normalize. While this normalization is likely to proceed smoothly, there is a possibility that it could stir financial market volatility with adverse implications for EMDEs. In many EMDEs, both public and private sector vulnerability to financing cost spikes has risen since the global financial crisis.

Government debt dynamics in EMDEs have deteriorated since the global financial crisis. On average across EMDEs, government debt has risen by 12 percentage points of GDP since 2007 to 47 percent of GDP by 2016, and fiscal deficits have widened to about 5 percent of GDP in 2016 from a surplus of roughly 1 percent of GDP in 2007. At end-2016, government debt exceeded its 2007 level by more than 10 percentage points of GDP in more than half of EMDEs. In addition, the fiscal balance worsened from 2007 levels by more than 5 percentage points of GDP in one-third of EMDEs.

Benign financing conditions have contributed to shifts in the composition of government balance sheets, but not always to strengthen its resilience. In the median EMDE, for example, the share of short-term components of debt securities held by nonresidents has been smaller since 2007. However, the share of nonresident-held debt itself has risen and the maturity of government debt has been on a declining path. The share of government debt in foreign currency has increased in the median EMDE since the late 2000s.

In addition, private sector debt in EMDEs has risen sharply since 2007, reflecting a combination of financial deepening and credit booms. Since 2007, domestic bank credit to the private sector has risen by 12 percentage points of GDP to 52 percent of GDP in 2016 (excluding China) and by more than 20 percentage points of GDP in one-fifth of EMDEs. Firm-level data also suggest that the corporate sector has become more financially fragile since the global financial crisis as solvency positions weakened. During episodes of severe financial stress, private sector debt may become a contingent liability for the public sector. For example, before 2008, some EMDEs suffered systemic banking crises that required governments to provide substantial financial support. Though typically not fully reflected in deficits, such outlays significantly increased public debt above and beyond increases attributable to an accumulation of fiscal imbalances. As these experiences show, the fiscal space implicit in low debt levels can shrink rapidly during periods of elevated financial stress.

Long-term government debt dynamics depend on debt and deficits but also on the macroeconomic context, especially the paths of GDP growth and interest rates. This Special Focus examines the evolution of EMDE fiscal positions since the global financial crisis as well as during typical episodes of financial stress. To do so, it combines fiscal indicators and macroeconomic factors into a single measure of government debt dynamics: the fiscal sustainability gap, defined as the difference between the actual fiscal balance and the debtstabilizing fiscal balance.