Global Economic Environment For Emerging Nations

By M. Isi Eromosele

Net private capital inflows to emerging and developing economies increased to about $575 billion in 2011, up by about $90 billion from 2010 levels.

The recovery in capital inflows from their precipitous decline during the global financial crisis continued until the middle of 2011 but suffered a strong setback with the sharp deterioration in global financial markets in the third quarter of the year.

The current level of inflows remains well below the pre-crisis peak registered in 2007. As a share of GDP of developing countries, net capital inflows are at about half of their peak levels. The outlook for external financing will be subject to uncertainty owing to counteracting forces during 2012 and 2013.

On the one hand, continued sovereign debt distress in developed economies will sustain the present uncertainty and volatility in global financial markets and this will likely deter portfolio capital flows to emerging economies.

Uneven Private Capital Flows

Deepening of the sovereign debt crisis may lead to more capital being pulled back for deleveraging of financial institutions in developed countries or in a search for safe havens (such as dollar or Swiss franc denominated assets), as was the case during the financial turmoil of the third quarter of 2011.

On the other hand, higher growth prospects for most emerging economies (despite the downgraded forecast) will likely attract more foreign direct investment (FDI), while interest rate differentials will continue to favor lending to emerging economies even if the risk premiums for some of these economies rise further, a trend already visible in the second half of 2011.

Short-term portfolio equity flows to developing countries went declined in the second half of 2011. As a result, net inflows of portfolio equity to emerging economies in 2011 registered a decline of about 35 per cent from 2010 levels, exhibiting vivid proof of the high volatility these flows are subjected to.

International bank lending to emerging and developing economies continued to recover slowly from its sharp decline in 2009. In 2011, bank lending had recovered to only about 20 per cent of its pre-crisis peak level, as international banks headquartered in developed countries continued to struggle in the aftermath of the financial crisis.

Nonbank lending has been more vigorous, as both private and public sectors in emerging economies managed to increase bond issuance, taking advantage of low interest rates in global capital markets.

Net FDI remained the largest single component of private capital flows in 2011, reaching $429 billion, up by more than $100 billion from its 2010 level. Asian emerging economies received most (about 45 per cent) of the FDI inflows, followed by Latin America.

These estimates are net of FDI from emerging market economies, which continued to increase. China and a few other Asian developing countries further increased investments in Latin America and Africa, primarily destined towards sectors producing oil, gas and other primary commodities.

On balance, however, financial resources continue to flow out of the emerging and developing economies in large quantities as their accumulation of foreign exchange reserves have increased further. In 2011, emerging economies and other developing countries are estimated to have accumulated an additional $1.1 trillion in foreign exchange reserves, totaling about $7 trillion.

Volatility In Commodity Prices

Global prices of oil and other primary commodities continued to rise in early 2011, but declined in the third quarter. The pattern resembles that of 2008, although the reversal has not been as drastic.

Nonetheless, average price levels of most commodities for 2011 remained well above those in 2010, by between 20 and 30 per cent. The reversals since mid-2011 have been driven by four key factors: a weaker global demand for commodities resulting from bleaker prospects for the world economy, positive supply shocks in a number of markets, a sell-off in markets for financial commodity derivatives that occurred in concert with the downturn in global equity markets and an appreciation of the United States dollar.

In the outlook, the prices of most primary commodities are expected to moderate by about 10 per cent in both 2012 and 2013, consistent with the forecast of weaker global economic growth. It is to be expected, however, that commodity price volatility will continue to remain high.

Brent oil prices averaged $111 per barrel in the first half of 2011, compared with an average of $79 for 2010 as a whole (figure I.7). The surge was mainly driven by the political unrest in North Africa and Western Asia which caused disruptions in oil production, especially in Libya.

However, oil prices dropped sharply in the third quarter of 2011 amidst weakening global demand, the anticipated resumption of oil production in Libya as well as a rebound of the exchange rate of the United States dollar.

In the outlook for 2012, demand for oil is expected to weaken because of slower economic growth in developed countries. Yet, total demand is expected to remain sustained because of the increased energy needs of developing countries, as well as the restocking of oil inventories.

Oil production is expected to resume progressively in Libya, while Saudi Arabia may keep its production at the current level. However, the continued geopolitical instability in North Africa and Western Asia is likely to keep the risk premium on oil prices elevated.

The Brent oil price is expected to decline by 6 per cent to $100 per barrel in the baseline forecast for 2012 and to continue to fluctuate around that level in 2013. Nonetheless, price uncertainty and volatility will remain high because of the influence of financial factors.

These include, in particular, fluctuations in the value of the United States dollar and unpredictable trends in financial derivatives’ trading in commodity markets.

After sliding considerably in the first half of 2010, world food prices have risen sharply, peaking around February 2011. Despite subsequent falls, prices remain comparatively high.

The average price of cereals during the first nine months of 2011 was about 40 per cent higher than that recorded over the same period of 2010. Despite similar swings, meat, vegetable oils and sugar prices have also been on the rise.

The impact on food-dependent developing countries has been considerable, but variable. A famine caused by prolonged droughts was declared in the Horn of Africa, but other countries in Africa enjoyed good harvests of maize and sorghum.

Generally speaking, however, higher food prices have been an important factor in the high inflation of many developing countries, or a cause of additional fiscal burdens where the impact was mitigated by food subsidies.

In the outlook, food prices may moderate somewhat with the global downturn and expected good harvests for a number of key crops (including wheat). Yet, prices are likely to remain volatile as food markets remain tight and any adverse supply shock could induce strong price effects. Continued uncertainty in financial markets can also be expected to exacerbate commodity price volatility.

World Trade Growth

World trade continued to recover in 2011, albeit at a much slower pace than in 2010. After a strong rebound of more than 14 per cent in 2010, the volume of world exports in goods decelerated visibly to 7 per cent in 2011.

The level of total world exports had fully recovered to its pre-crisis peak by the end of 2010, but it is estimated to be still below the long-term trend level by the end of 2011. As has been the case with the recovery of WGP, developing countries, particularly Asian economies with large shares in the trade of manufactured goods led the recovery.

While the level of trade in volume terms has already far surpassed the pre-crisis peak for developing countries as a group, the trade volume for developed economies has yet to recover fully from the global crisis.

Commodity-exporting emerging countries experienced a strong recovery in the value of their exports in the first half of 2011, owing to the upturn in commodity prices, but saw little growth of export volumes. Some of the value gains were lost again in the second half of the year with the downturn in key commodity prices.

In the outlook, the volume growth of world trade is expected to moderate to about 5.0 per cent in 2012-2013. The dichotomy between a robust growth in trade in emerging economies and a weak one in developed economies will continue.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

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