Caribbean facing negative economic growth this year -World Bank Report

External financing climate dismal

The World Bank’s recent gloomy review of the current global financial and economic crisis has pinpointed Latin America and the Caribbean as being among regions that will face “a dismal external financial climate” in 2009 resulting in negative growth this year.

Last Monday the World Bank released its most recent assessment of the state of the global economy in a document titled Global Development Finance: Charting a Global Recovery in which it cited considerably reduced investment flows to developing countries and continued loss of external markets as factors that will continue to impact on economic growth in Latin America and the Caribbean among other regions.

Describing the reduction of investment flows to developing countries as “dramatic” the World Bank report notes that total private capital flows to developing countries last year dropped to US$707 billion or 4.4 percent of total developing-country GDP reversing what is described as “the strong upward surge that began in 2003” which took private capital flows to developing countries to a peak of $1.2 trillion, or 8.6 percent of GDP in 2009. The Bank’s “most likely scenario” for this year is that as global equity markets in developed countries begin to regain momentum and credit markets heal, net private capital flows to developing countries will  drop to $363 billion, approximately the level of 2004 and a decline of 5 percentage points of GDP from 2007. And according to the World Bank report “the magnitude of the decline is troubling” given its macroeconomic consequences and the circumstance of vulnerability to further shocks which it creates for developing countries, particularly those  “in which banks and firms have high levels of external debt.”

Meanwhile, the report predicts further headaches for low-income developing countries arising out of what it says is the likelihood of further deterioration in their capital inflows from exports, remittances, and foreign direct investment. The report says that the decline in private capital will impact directly on the capacity of developing countries to meet their external financing needs, estimated at $1 trillion, $600 billion higher than in 2003 at constant 2009 prices.

And the World Bank’s assessment of the outlook for developing countries in the prevailing conditions of economic and financial turmoil notes that in the current circumstances “the amount of development assistance available to low-income countries will not fully cover their external financing needs in 2009, while the outlook for donor countries to increase aid significantly is bleak, given the intense fiscal pressures they face because of the crisis.” More bad news for exports from developing countries also arises out of what the Bank says is “uncertainty about future demand” which it says has resulted from delayed investments and caused a collapse in demand for durable goods. This, according to the report, has resulted in a sharp contraction in the production of and global trade in manufactured goods.

During the fourth quarter of last year  world industrial production declined by an unprecedented 5 percent  and according to the World Bank output continued to decline during the first quarter this year  reducing the level of industrial production in high income countries by 17.3 percent in March 2009, relative to its level a year earlier. The World Bank report notes that  in developing countries industrial production shrank by 2.3 percent relative to March 2008. “The collapse in industrial production is truly global, with major producers of advanced capital goods particularly hard-hit,” the report says.

Meanwhile, the World Bank’s assessment of likely overall GDP growth in developing countries this year projects that while growth is expected to “start positive” it could slow sharply, moving from 5.9 percent in 2008 to 1.2 percent this year.