World Bank Report Bearish on Recovery

The annual Global Development Finance report was released today by the World Bank, and it forecasts a 2.9% drop in global GDP in 2009. One of the core concerns expressed in the report is the impact of the financial crisis on capital flows to developing countries. Corporations in particular will face serious difficulties in raising capital and meeting their debt obligations:

The implications of these unfolding events for investment flows to developing countries have already been dramatic: total private capital flows in 2008 dropped to $707 billion (4.4 percent of total developing-country GDP), reversing the strong upward surge that began in 2003 and reached a pinnacle of $1.2 trillion in 2007 (8.6 percent of GDP). For 2009 the most likely scenario is that as global equity markets regain momentum and credit markets heal, net private flows to developing countries will remain positive—barely. But they will drop to $363 billion, approximately the level of 2004 and a decline of 5 percentage points of GDP from 2007. The magnitude of the decline is troubling for its macroeconomic consequences and for vulnerability to further shocks, particularly in countries in which banks and firms have high levels of external debt. Much of the $1.2 trillion external debt raised by emerging market banks and firms between 2003 and 2007 is now maturing, putting pressure on the borrowers’ finances at the time when the average cost of external borrowing has increased to 11.7 percent, compared with 6.4 percent in the pre-crisis years when the debt was contracted.

GDP growth in developing countries is expected to drop from 5.9 to 1.2 percent. Excluding China and India, growth will retract by 1.6 percent. The FT, WSJ, and Bloomberg discuss the immediate impact of the report, including a drop in commodities and a bounce for the dollar.