Slowdown hits capital inflows to developing countries: WB

Written by fe Bureau | Chennai | Updated: Jun 27 2009, 03:51am hrs
Amidst global economic recession and market fragility, net private capital inflows to developing countries fell to $707 billion in 2008, a sharp drop from a peak of $1.2 trillion in 2007.

International capital flows are projected to fall further, to $363 billion, in 2009. The World Bank's latest report, Global Development Finance 2009, has found that the world is entering into an era of slower growth that will require tighter and more effective oversight of the financial system.

Developing countries are expected to grow by only 1.2% this year, after 8.1% in 2007 and 5.9% in 2008. Excluding China and India, GDP in the remaining developing countries is projected to fall 1.6%, causing continued job losses and throwing more people into poverty. Global growth is also expected to be negative, with an expected 2.9% contraction of global GDP in 2009.

Global GDP growth is expected to rebound to 2% in 2010 and 3.2% by 2011. In developing countries, growth is expected to be higher, at 4.4 % in 2010 and 5.7 % in 2011.

The need to restructure the banking system, combined with emerging limits to expansionary policies in high-income countries, will prevent a global rebound from gaining traction, said Justin Lin, World Bank chief economist and senior vice president (development economics). Developing countries can become a key driving force in the recovery, assuming their domestic investments rebound with international support, including resumption in the flow of international credit, he added.

While the authors note that extraordinary policy responses by a number of big economies have prevented systemic collapse, they stress the importance of concerted global action while the crisis is still underway. To prevent a second wave of instability, policies have to focus rapidly on financial sector reform and support for the poorest countries, said Hans Timmer, director of the bank's Prospects Group.

Global integration and the expanding role of private sectors in international finance have brought huge benefits, but have also widened the scope for turmoil. Today, developing countries rely heavily on private inflows and many countries are being hit by a collapse in corporate finance, with big companies and banks that were powering growth now in distress.

Many corporations will be hard-pressed to service their foreign currency liabilities with revenues earned in depreciating domestic currencies at the time when export demand has plummeted, noted Mansoor Dailami, manager of International Finance in the Prospects Group and lead GDF author.

The risk of balance-of-payments crises and corporate debt restructurings in many countries warrant special attention, the report cautions.