Eurasia Press & News
As the World Bank issues its latest report which forecasts the first global recession since World War II, the chill winds of economic slowdown are increasingly being felt in the Balkans.
The current unprecedented economic downturn has forced the World Bank to adjust its estimates and warn that the recession that could continue into 2011. The report forecasts that the global economy will contract by 1.7 per cent this year, with GDP projected to decline by 3 per cent in Organisation for Economic Development and Co-operation member countries and by 2 per cent in other high-income economies.
“Financial stress is highest among several Central and Eastern European countries which had drawn in foreign capital to feed domestic lending,” reads the World Bank report, Global Economic Prospects 2009, Forecast Update, which was published simultaneously across the world on Tuesday.
The World Bank’s baseline forecast predicts growth will turn weakly positive in 2010 as financial-sector consolidation, lost wealth and the knock-on effects from the financial crisis continue to dampen economic activity. However, the pace and timing of the recovery is still highly uncertain, it notes.
The bank expects world growth to increase to a modest 2.3 per cent in 2010, but if a balance of payments crisis were to emerge within a developing region, it would prove difficult to contain and would hamper global recovery.
Another risk is that the recovery in credit markets may proceed more slowly due to continued financial sector problems, which would prolong the period of capacity adjustment in the real sector and extend the global downturn, the bank warns.
“Even if global growth turns positive again in 2010, output levels will remain depressed, fiscal pressures will mount, and unemployment levels will rise further in virtually every country well into 2011,” explained Hans Timmer from the World Bank’s Development Prospects Group.
The bank expects trade in goods and services to fall a historic 6.1 per cent in 2009, with prices facing continued pressure downwards. It expects oil prices to be more than 50 per cent below their 2008 levels, with non-oil prices some 30 per cent lower than in 2008.
The bank forecasts that fiscal balances will deteriorate sharply especially in developing countries in response to weaker revenues, higher borrowing costs, and larger transfers to maintain social safety nets. This could be particularly worrisome in developing Europe and Central Asia, where trade and production have severely contracted, the private sector is highly vulnerable, and social safety nets have broad coverage, the bank says.
Its estimates for Europe’s GDP, which it says dropped from a 4.8 per cent increase in November to a 2 per cent decline in the report published on Tuesday, is the “the sharpest revision among developing regions”.
The developing world’s need for external financing is likely to increase to $1.3 trillion in 2009, including current account deficits and principal repayments on private debt coming due. With declining capital flows, this would generate a financing gap of between $270 and $700 billion, the bank said. The largest funding gaps will be in Europe and Central Asia, Latin America, and Sub-Saharan Africa.
And while in absolute terms the global recession will affect the most the most developed countries, the worst impact will be felt in developing or underdeveloped countries, which are less prepared, have weaker institutional and legal capacities and knowledge to deal with a crisis of such proportions.
“Across the developing world, we see that conditions of recession are affecting the poorest people, making them even more vulnerable than before to sudden shocks—but also reducing opportunities available to them, and frustrating their hopes,” said Justin Yifu Lin, World Bank Chief Economist and Senior Vice President. “This could reverse years of progress,” he added.
These problems are becoming increasingly obvious across the Balkans, as governments intervene to support their currencies, foreign investment remains on hold, demand for exports decline and countries are finding it harder to access credit to finance their deficits. Some countries in the Balkans have already turned to the International Monetary Fund, IMF, and the World Bank and seek their help.
The IMF and other lenders recently in principle agreed to lend 20 billion euro to Romania and 3 billion euro to Serbia. But while the loans came as a relief and covers the countries’ financing gap, some analysts in Serbia have doubted their government’s ability to adhere to the rigid fiscal discipline the lenders require.
Mijat Lakicevic, an economist, told the Balkan Insight that the very fact of taking on new loans will pose a problem in the future. “In two to three years we will have to pay back debts that they may cause a dramatic fall in the value of the national currency. It will have an unbearable impact on national industry and trade,” he said.
According to Serbia’s National Service for Employment, the number of unemployed people has increased by 31,000 in the last four months. The head of the IMF mission to Serbia Albert Jaggeraid said last week that this year Serbia can expect falling growth.
Bosnia and Herzegovina has been harder hit still. It is yet to launch negotiations with the IMF, but economic experts predict that the country, especially its Bosniak (Bosnian Muslim)-Croat dominated entity, will not be able to meet requirements and curb excessive spending on social benefits.
As a result, several local officials predict that the Bosniak-Croat dominated entity’s budget and government will collapse within the next five months. The IMF has predicted that GDP growth rate in 2009 will at best remain flat.
Croatia’s economy is also poised for a serious downturn this year, analysts have warned, although the country’s statistic bureau still reported a year-on-year quarterly rise of 0.2 per cent in the last quarter.
After meeting an IMF delegation on Monday, Governor of Croatia’s National Bank Zeljko Rohatinski warned that the Croatian government should immediately curb public spending and take care of a worrisome trade deficit.
Although closer to EU membership that some other Balkan countries, Croatia is also amongst the most indebted. Rohantinski said that only in this year the Croatian government, firms and citizens will have to service their foreign loans to the amount of 12 billion euros.
Forecasts are worse for Bulgaria. London based research firm Capital Economics expects the economy to shrink by five per cent as exports and inbound investment flows fall, putting pressure on the money supply and forcing the government to drain fiscal reserves to restore liquidity.
Such a strategy may buy the government a year or so, but then the reserves will be exhausted and the government may be forced to knock on the IMF’s door for help. The IMF last week forecast a slowdown of three per cent for the Bulgarian economy in its worst-case scenario scene.
“The entire region is likely to enter recession this year, with little prospect of a swift recovery,” Capital Economics’ economists Roger Bootle, Jonathan Loynes and Neil Shearing said.
