Thursday, April 17, 2014
Developing countries should build buffers amid debt crisis
Xinhua | September 25, 2011 13:07
By Agencies
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With escalating market jitters and slower global economic growth pace, experts believe that developing countries should get ready to tide over further waning of external demand and market shocks.


Emerging economies like those in Europe and Central Asia have felt the chill from sagging economic growth of advanced economies and financial markets gyration, they said.


"The sovereign debt problems in Western Europe pose challenges to the sustainability of this relatively tepid recovery. The Eastern Europe and Central Asia region is especially dependent on Western Europe as an export market and a source of finance and migrant remittances, so slower growth in the West will hurt," said Philippe Le Houerou, World Bank Vice President for the Europe and Central Asia region.


Most countries in emerging Europe and Central Asia have recovered from the global economic crisis, but growth has returned at lower rates than pre-crisis trends in most of the region. The region is expected to record a real growth rate of 4.3 percent in 2011, which is one of the lowest of any developing region, Le Houerou cautioned.


World Bank's chief economist Justin Yifu Lin and the Bank's six chief economists who represent the six main developing regions of the world, said Wednesday at a roundtable discussion that with the rising fiscal and financial uncertainties from developed countries, developing countries should "hope for the best and prepare for the worst."


Although developing countries have more fiscal policy firepower than most advanced economies, some experts held that the fiscal policy room for developing countries is less than that of several years ago after they rolled out a string of massive stimulus steps.


Emerging economies' space to respond to high uncertainties and slower economic growth on the fiscal side is limited compared to where it was in 2007 and 2008, Zoellick said Thursday in response to questions from Xinhua at a press conference prior to the annual meetings of the World Bank and the International Monetary Fund (IMF).


In the aspect of monetary policy, emerging countries have this very sensitive line to walk where a number of countries were worried about overheating, and they still face the dangers of food price inflation, but now they have to manage the risk of a possible broader downturn in demand, Zoellick said.


The World Bank chief noted that developing countries should keep their eyes on the drivers of long-term growth, which vary by countries.


"I think it is wise that China starts to be looking at the structure of a different growth model and moving away from export-led and investment-led growth. This will create a better context for balancing both the Chinese economy and the global economy," Zoellick said.


The world should pay close attention to the vulnerability of developing countries, the key driver of this round of global economic recovery, Lin said. If growth slows in developing countries, challenges such as rising non-performing loans may emerge, cautioned Lin, who is also the bank's senior vice president.


Lin contended developing countries should build buffers by taking such measures as enhancing their financial sector's risk resistance capacity and identifying new sectors with good growth momentum.


Policymakers in many emerging market economies need to be vigilant against excess and financial imbalances that can exacerbate future downswings by taking measures including dampening domestic credit growth that is above trend and increasing capital cushions for banks and strengthening macroprudential measures such as targeted reserve requirements and increased risk weightings on bank capital, IMF economist Sun Tao told Xinhua.


These countries should also promote the flexibility of exchange rates to cushion the rampant capital inflows and control liquidity and currency mismatches of local borrowers, develop resilient local financial markets and infrastructure, and strengthen domestic financial stability framework to control incentives for excessive risk-taking.


The annual meetings of the Washington-based World Bank and IMF are scheduled to run from Sept. 23 to 25, featuring seminars, press conferences and related events.

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