World Bank predicts global recession and credit squeeze for poor countries

The world economy will shrink overall this year for the first time since the Second World War, the World Bank has predicted, adding that rich nations' stimulus programmes may leave poorer countries struggling for financing.

Many poorer countries have escaped the direct effects of the credit crisis, the World Bank said in a paper published this week in advance of the G20 summit on March 13-14 in London. Their looser links to the global capital markets meant they were less harmed by the sudden drop in liquidity: for example, most banks in sub-Saharan Africa are funded by local or regional borrowing.

But the collapse of international trade and falling commodity prices means poor countries are set to suffer; and there will be little prospect of help from the richer north, either aid or private financing, the paper said.

The economic stimulus programmes underway in many rich countries will be funded by increased issuance of government debt, "crowding out many developing country issuers (private and public)", the World Bank predicted. as a result, "developing countries are likely to face higher spreads and lower capital flows than over the past 7-8 years, leading to weaker investment and slower growth in the future".

Some countries have already seen increases in borrowing costs of more than 200 basis points since the start of the crisis in June 2007, the Bank added.

Developing nations will be unable to roll over maturing debt this year - the result will be "a financing gap of $270-700 billion depending on the severity of the economic and financial crisis", the Bank noted. The problem will be exacerbated by falling commodity prices - many poor countries depend heavily on commodity exports - and by the lack of affordable trade financing.

The Bank said global trade finance was 40% lower in the fourth quarter of 2008 than in 2007, and prices of trade finance instruments had risen by 100-150bp. The economic slowdown would also mean a fall in foreign direct investment.

The lack of investment capital has already been felt in central and eastern Europe - falling currencies and poor economic conditions caused west European parent banks to withdraw capital from the region through their local subsidiaries. Three international organisations, the World Bank, the European Bank for Reconstruction and Development and the European Investment Bank Group, intervened last month to supplement falling credit with €24.5 billion in financing over the next two years.

See also:

€24.5 billion international bailout for eastern Europe