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14.06.2015 Commodity News

Tough Transitions for Developing Countries in 2015 with Higher Borrowing Costs and Lower Price for Oil and Other Commodities

A disaster for Ghana?
By Abubakari Seidu Ajafor, source from World Bank
Tough Transitions for Developing Countries in 2015 with Higher Borrowing Costs and Lower Price for Oil and Other Commodities
14.06.2015 LISTEN

Impending rise in US interest rates could reduce capital flows, spur financial market volatility in developing countries.

Developing countries face a series of tough challenges in 2015, including the looming prospect of higher borrowing costs as they adapt to a new era of low prices for oil and other key commodities, resulting in a fourth consecutive year of disappointing economic growth this year, says the World Bank Group’s latest Global Economic Prospects (GEP) report.

As a result, developing countries are now projected to grow by 4.4 percent this year, with a likely rise to 5.2 percent in 2016, and 5.4 percent in 2017.

Comparatively, Delore Zimmerman, Ph.D, PRAXIS strategy group noted that Africa is becoming the next Asia with a 4.5 percent of growth of GDP by 2015 and 5.0 percent in 2016.

During his presentation in Ghana, Mr. Zimmerman noted that West Africa will largely experience growth by 5.0 percent and 6.1 percent respectively.

He said this at the first annual international conference on developing local governance capacity to promote partnership and foster entrepreneurship in Accra.

According to the World Bank report, “Developing countries were an engine of global growth following the financial crisis, but now they face a more difficult economic environment,” said World Bank Group President Jim Yong Kim. “We’ll do all we can to help low- and middle-income countries become more resilient so that they can manage this transition as securely as possible. We believe that countries that invest in people’s education and health, improve the business environment, and create jobs through upgrades in infrastructure will emerge much stronger in the years ahead. These kinds of investments will help hundreds of millions of people lift themselves out of poverty.”

With an expected liftoff in U.S. interest rates, borrowing will become more expensive for emerging and developing economies over the coming months. This process is expected to unfold relatively smoothly since the U.S. economic recovery is continuing and interest rates remain low in other major global economies.

However, there are considerable risks around this expectation, the report argues. Just as the initial announcement of U.S. policy normalization caused turmoil in financial markets in 2013 – now referred to as the “taper tantrum” – the U.S. Federal Reserve’s first interest rate increase, or liftoff, since the global financial crisis could ignite market volatility and reduce capital flows to emerging markets by up to 1.8 percentage points of GDP, the report says.

“Slowly but surely the ground beneath the global economy is shifting. China has avoided the potholes skillfully for now and is easing to a growth rate of 7.1 percent; Brazil, with its corruption scandal making news, has been less lucky, dipping into negative growth. With an expected growth of 7.5 percent this year, India is, for the first time, leading the World Bank’s growth chart of major economies. The main shadow over this moving landscape is of the eventual U.S. liftoff,” said Kaushik Basu, World Bank Chief Economist and Senior Vice President. “This could dampen capital flows and raise borrowing costs. This GEP provides a comprehensive analysis of what the liftoff may mean for the developing world.”

This would especially hurt emerging markets with greater vulnerabilities and weakening growth prospects. For commodity-exporting emerging markets that are already struggling to adjust to persistently low commodity prices, or for countries experiencing policy uncertainty, a slowdown in capital flows would add to their policy challenges.

“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’s Director of Development Prospects.

Lower prices for oil and other strategic commodities have intensified the slowdown in developing countries, many of which depend heavily on commodity exports. While commodity importers are benefiting from lower inflation, fiscal spending pressures, and import costs, low oil prices have so far been slow to spur more economic activity because many countries face persistent shortages of electricity, transport, irrigation, and other key infrastructure services; political uncertainty; and severe flooding and drought caused by adverse climate.

Growth in Brazil, held back by weak confidence and higher inflation, is expected to contract by 1.3 percent in 2015, a 2.3 percentage point swing from January, while Russia’s economy, hit by oil price declines and sanctions, is forecast to contract by 2.7 percent. Mexico’s GDP is projected to advance by a more moderate 2.6 percent, as a soft patch in U.S. activity and falling oil prices weigh on growth. In China, the carefully managed slowdown continues, with growth likely to moderate to a still robust 7.1 percent this year. In India, which is an oil-importer, reforms have buoyed confidence and falling oil prices have reduced vulnerabilities, paving the way for the economy to grow by a robust 7.5 percent rate in 2015.

A special analysis in the report finds that low-income countries, many of which depend on commodity exports and investment, are vulnerable in the current environment. During the commodity price boom of the mid-2000s, their economies strengthened considerably with new discoveries of key metals and minerals, resource investment, and expanding commodity exports. The prospect, therefore, of persistently low commodity prices may persuade policy makers to steer their resources away from metals and minerals and into other national economic priorities that will drive growth instead. This puts a premium on policies to build buffers that can ease the transition and reforms that support growth in the non-resource sector.

“After four years of disappointing performance, growth in developing countries is still struggling to gain momentum,” said Franziska Ohnsorge, Lead Author of the report. “Despite auspicious financing conditions, a protracted slowdown has been underway in many developing countries, driven by shortages in agriculture, power, transport, infrastructure, and other vital economic services. This makes the case for structural reforms all the more urgent.”

In high-income countries, in contrast, recovery is gaining momentum, as growth in the Euro Area and Japan picks up and the United States continues to expand, despite a weak start to the year. High-income countries are on course to grow by 2.0 percent this year, 2.4 percent in 2016 and 2.2 percent in 2017. The global economy is likely to expand by 2.8 percent this year, 3.3 percent in 2016 and 3.2 percent in 2017.

Risks to the outlook for emerging and developing economies continue to weigh on growth. As some risks, such as the possibility of persistent stagnation in the Euro Area and Japan, have receded, new ones have emerged. Coinciding with the expected rise in U.S. interest rates, positive credit ratings for emerging markets are fading, especially in oil exporting countries, risks of financial market volatility are increasing, and capital flows are declining. An excessive appreciation of the U.S. dollar could curtail the recovery in the world’s largest economy, with adverse side-effects for U.S. trading partners around the world.

Are there any prove left for Ghana’s survival?

The above financial analyses clearly portrays Ghana’s socio-economic, political and financial crisis over the recent time. Ghana may fall in to this deep financial crisis considering that the private sector, which is the engine of growth is under-performing as a result of the major power crisis causing many companies and industries to exit the market.

In view of the above, the central bank indicated that Ghana’s total public sector debt stock stood at GH88.2 Billion at the end of March 2015, representing 65.3 percent of GDP. Of the total of public debt, domestic debt constituted 41.4 percent and external debt 58.6 percent-financial experts feared that the Ghana’s economic may run into deep shit.

But the Governor of Bank of Ghana (BoG), Dr. Kofi Wampah said continuous fiscal consolidation will give momentum for restoring the economy into sustainable growth and development.

Dr. Wampah added that the Monetary Policy Committee have decided to increase the monetary policy rate from 21 percent to 22 percent but it will continue to monitor the situation and take the appropriate action in consonance with the fiscal consolidation.

Ghana’s Economic Outlook
The reasons being that the April 2015 IMF World Economic Outlook (WEO) update, has projected end-2015 growth at 3.5 percent, in line with earlier forecasts, the Governor noted.

In emerging and developing countries, he said the forecast is for slower growth, reflecting weakening domestic economic conditions in some large emerging markets and oil exporting countries with implications for commodity price trends.

He added that gold prices could come under some pressure in the first half of 2015 as financial markets continue to anticipate the Federal Reserve rate hikes.

Prices are projected to remain within the range of US$1,180 and US$1,250 per ounce, Brent crude oil prices expected to average $59 per barrel in 2015, with prices rising from an average of $62 in the second quarter to $67 per barrel in the fourth quarter while cocoa prices are projected to average US$3,052 per tonne in the second quarter.

Dr. Wampah said the MPC observed that the risk of growth is triggered by challenges in the energy sector, fiscal consolidation, depreciation of the currency as well as the high cost of doing business which could weigh down economic activity.

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