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World Bank warns emerging economies to 'fasten seatbelts'

The World Bank warned emerging economies around the world on Wednesday of a rocky road ahead as the US moves toward tightening monetary policy and the dollar strengthens.

[WASHINGTON] The World Bank warned emerging economies around the world on Wednesday of a rocky road ahead as the US moves toward tightening monetary policy and the dollar strengthens.

But the development lender's chief economist also urged the US Federal Reserve to put off any rate hikes until next year so as to give more breathing room to the slow-growing global economy.

In an update of the prospects for world growth, the World Bank trimmed its forecast for 2015 to 2.8 per cent, compared to the 3.0 per cent expansion predicted in January.

That downgrade was due mainly to the US contraction in the first quarter, slow turnarounds in Europe and Japan and China's deceleration.

But it has increased the challenges for emerging and poor economies, many hit by low commodity prices and capital outflows.

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And though the plunge in oil prices has lowered costs for net energy importers, because of the stronger dollar the benefits of cheaper oil have not registered deeply on their economies, according to the World Bank report.

These challenges could become tougher as the US economy rebounds and the Fed mulls raising interest rates, it said.

As that happens, there will be more volatility in global markets and weaker economies will suffer, the report said.

Those economies will pay more to borrow and incoming investment will be harder to attract, effectively adding more downward pressure on currencies that have already fallen significantly against the dollar over the past year.

"We are advising nations, especially emerging economies, to fasten seat belts," said Kaushik Basu, the World Bank economist.

Mr Basu took the view of his counterparts at the International Monetary Fund that the US and global economy would be better off if the Fed holds its benchmark federal funds rate at the zero level until early next year.

"If I were advising the US Fed, I would recommend that this happens next year instead of late this year," he said.

The Bank was relatively optimistic beyond 2015, sticking to its forecast for 3.3 per cent world growth in 2016.

For this year, it cut its forecast for the United States by a half-percentage point to 2.0 per cent; raised its outlook for the euro to 1.5 per cent; trimmed Japan to 1.1 per cent and held its China view stable at 7.1 per cent.

The South Asia region got a 1.0 percentage point upgrade to 7.1 per cent, but for developing countries as a whole, the outlook was cut by 0.4 per cent of a point to 4.4 per cent.

The prospect of greater market volatility and higher financing costs requires vulnerable countries to strengthen their finances, diversify from dependence on commodities and build their competitiveness and efficiency through reforms, the Bank said.

"Unless emerging markets have taken the prudent policy steps to be fiscally and externally resilient, they may face significant challenges dealing with the turbulence and other fallout that could be associated with a Fed tightening," said Ayhan Kose, the World Bank Director of Development Prospects.


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