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17 January 2015

GOOD NEWS FOR OIL-IMPORTING DEVELOPING COUNTRIES – ANALYSIS

By J C Suresh


A decline in oil prices, a stronger U.S. economy, and continued low global interest rates will help fuel the growth of the world economy in 2015, says anew study issued by the World Bank Group on January 13.

The Global Economic Prospects report, published every two years, predicts a global economic expansion of 3 per cent for 2015, 3.3 per cent for 2016, and 3.2 per cent in 2017 – a boost following last year’s disappointing 2.6 per cent growth.

At the same time, the report adds, developing countries are expected to surge from last year’s 4.4 per cent growth to 4.8 per cent in 2015 and then strengthen to a more robust 5.4 per cent by 2017.

The developing world and large middle-income countries are, in fact, expected to benefit from lower oil prices. In Brazil, Indonesia, South Africa, and Turkey, the fall in oil prices will help lower inflation and reduce current account deficits. Meanwhile, exporting countries, such as Russia, can expect their economies to contract as a result, prompting opportunities for wide-scale structural reforms.

“Lower oil prices will lead to sizeable real income shifts from oil-exporting to oil-importing developing countries,” said Ayhan Kose, Director of Development Prospects at the World Bank.

“For both exporters and importers, low oil prices present an opportunity to undertake reforms that can increase fiscal resources and help broader environmental objectives.”
But the World Bank President Jim Yong Kim cautioned in a news release marking the report’s launch: “In this uncertain economic environment, developing countries need to judiciously deploy their resources to support social programs with a laser-like focus on the poor and undertake structural reforms that invest in people.”

“It’s also critical for countries to remove any unnecessary roadblocks for private sector investment,” Kim continued. “The private sector is by far the greatest source of jobs and that can lift hundreds of millions of people out of poverty.”

Despite the positive developments, the report paints a largely mixed picture depicting both the growing momentum of economic activity in the U.S. and Britain amid healing labour markets and a stuttering recovery in the Eurozone and Japan.

In addition, a number of risks continue to overshadow the potential of full global recovery, particularly weak global trade, possible financial market volatility, the strain low oil prices will place on oil-producing countries, and the risk of prolonged stagnation or deflation in the Eurozone or Japan.

“Worryingly, the stalled recovery in some high-income economies and even some middle-income countries may be a symptom of deeper structural malaise,” cautioned Kaushik Basu, World Bank Chief Economist and Senior Vice President. “As population growth has slowed in many countries, the pool of younger workers is smaller, putting strains on productivity.”

Nevertheless, Basu added, there are “some silver linings behind the clouds.”

“The lower oil price, which is expected to persist through 2015, is lowering inflation worldwide and is likely to delay interest rate hikes in rich countries. This creates a window of opportunity for oil-importing countries, such as China and India,” he said, noting the World Bank’s expectations for India’s growth to rise to 7 per cent by 2016.
Moderate pick up in Asia-Pacific growth

Another UN report forecasts that developing countries in Asia and the Pacific will grow at an average of 5.8 per cent this year, up from 5.6 per cent in 2014, spurred by decreased inflation and a steep decline in oil prices, according to a new United Nations report that indicates that structural reforms and lower oil prices can boost grown for sustainable development.

Growth in the region is being driven by improved economies in Bangladesh, India, Indonesia, Papua New Guinea, Republic of Korea and Thailand, reports the UN Economic and Social Commission for Asia and the Pacific (ESCAP) in its Survey of Asia and the Pacific 2014: Year-end Update. The report also found that growth in the region still remains below pre-crisis levels.

“Despite improved prospects, many developing economies in the region face structural constraints which have kept them from realizing their growth potential,” ESCAP Executive Secretary Dr. Shamshad Akhtar said in Bangkok as she unveiled the report on January 13.

“Infrastructure shortages remain acute and growth has not translated into enough decent jobs,” she added. Structural reforms in India and Indonesia are projected to help increase growth to 6.4 and 5.6 per cent, respectively, from 5.5 and 5.2 per cent, respectively, in 2014. Growth in China is forecast to hover around 7 per cent in 2015.

The Year-end Update also estimates that for energy-importing countries, a $10 per barrel drop in the price of oil in 2015 would translate into an increase in GDP growth of up to 0.5 percentage points. However, reduced growth in Russia could deprive neighbouring Central Asian countries of $1.7 billion in remittances.

Among the growth drivers in the region, Thailand’s economy, after the sharp slowdown to 0.8 per cent in 2014, is forecast to grow by 3.9 per cent due to increased short-term consumer and investor confidence following the end of the protracted political instability.

However, likely capital volatility in 2015, triggered by developed world monetary policies could slash Asia-Pacific GDP growth by up to 0.7 percentage points, ESCAP estimates, advocating sound macroeconomic management and macroprudential policies to address this.

On the domestic front, developing countries in the region need to bridge physical and social infrastructure gaps that need an annual investment of $815 billion, according to the Year-end Update. It outlines ways to increase infrastructure financing and recommends labour market reforms to increase decent job opportunities.

Meanwhile, declining global oil prices could reduce fuel subsidies that account for a large share of national budgets in many countries in the region. ESCAP estimates that savings from those subsidies could, for example, finance the provision of income security to the elderly and persons with disabilities as well as universal access to health and education.

“This is a particularly critical and opportune time to decrease subsidies,” the ESCAP Executive Secretary said, noting that this would not only reduce budgetary strains but also prepare governments for the near future when global financing may be even more challenging to secure.

“Reducing subsidies can raise significant public financial resources for productive investment in the region and could make needed funds available for financing sustainable development,” Dr. Akhtar concluded.

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