It may take five to 15 years for the world to recover ground lost during the recession of 2008, according to the World Bank, which says the sharp recovery in the global economy is likely to lose momentum.
However, its Global Economic Prospects (GEP) report, released yesterday, identifies an opportunity for developing countries to make more progress than their developed counterparts, if they strengthen their financial markets, Business Report newspaper says. Global growth is forecast at 2.7% this year, while that of emerging economies is put at 5.2%.
However, South Africa’s outlook was more in line with that of advanced economies because it was more closely integrated with the global economy, said Andrew Burns, the leader of the World Bank’s global macroeconomic trends team. The report did not give a separate figure for South Africa but in January the International Monetary Fund (IMF) forecast growth of 2% for South Africa. However, Alfredo Cuevas, the IMF representative in South Africa, said recently the IMF was updating the forecast, “probably upward”, Business Report adds.
Burns and Cristina Savescu, the leader of a team assessing prospects for the global economy, presented their findings in Johannesburg yesterday. Burns highlighted the positive impact of sound financial management in most emerging markets prior to the financial market crisis, which started in 2007 and triggered the global recession. In the boom years leading up to 2007, credit extended by banks internationally had increased twice as fast as nominal (not adjusted for inflation) gross domestic product (GDP), Burns said. As a result credit became cheap, “feeding an investment boom in developing countries”.
In contrast to the practice in previous periods of expansion, many developing countries had reinvested the benefits of the surge in developing country finance, expanding their capital base and increasing their productive potential, Burns said. Although they are still vulnerable to cyclical downswings in the US and other advanced economies, they are less dependent than previously, according to Burns.
One measure of their achievement is that trade between developing countries has risen relative to trade with developed regions. In that sense, they have partially decoupled from advanced economies. But cheap capital is no longer available. The GEP report says capital inflows to developing countries last year fell 20% compared with 2008 and 70% from their high in 2007.
To make continued progress, developing countries will have to find ways of reducing their cost of capital, including by improving the efficiency of their financial markets. At present, local borrowing costs are often more than 10 percentage points higher than in high-income countries. One measure of efficiency of financial markets is banks’ net interest margin – the gap between interest paid to savers and interest earned by the banks on loans.
The GEP says that the net interest margin of banks in sub-Saharan Africa is 7.2 percentage points – about twice the level of 3.57 percentage points in high-income countries. According to Johan van den Heever, the Reserve Bank deputy chief economist, South Africa’s figure is about 3.5 age points.
Sandeep Mahajan, the lead World Bank economist at the institution’s Pretoria office, pointed out the South African government had last week raised $2 billion (R14.8 billion) “at very good terms”. Treasury director-general Lesetja Kganyago announced last week that the Treasury raised the money at a historically low rate from 320 different investors.