South Asia (SAR) has been marked down to 3.7 percent growth for 2009 from 5.4 percent anticipated earlier—and down from 5.6 percent registered in 2008. Though terms of trade have moved in favor of the region with the falloff in oil prices, weakening demand in export markets (including burgeoning Indo-Sino trade) is being felt sharply, as is a tempering of services exports from India’s high-tech centers, as capital spending wanes globally. Remittances are anticipated to ease as conditions in host countries falter, albeit with some lag. Capital inflows have diminished, contributing to falloff in investment growth, notably in India. Fiscal support for slowing economies may face constraints in already quite high budget deficits.
External financing requirements for developing countries as a group are anticipated to increase to $1.3 trillion in 2009, comprised of current account deficits ($330 billion) and principal repayments on private debt coming due ($970 billion). With a decline in capital flows to developing countries underway, this would generate an estimated financing gap of between $270-$700 billion, depending on the size of roll-over risks and the magnitude of capital flight. Regions with the largest funding gaps are Europe and Central Asia, Latin America, and Sub-Saharan Africa. In the current projections, 84 of 109 developing countries would face financing gaps, in most cases too large to cover by drawing down reserves alone. This suggests that in the absence of sufficient international support, countries could be forced into generating a sharp reversal in current account balance, implying further decline in domestic demand and imports.
Debates regarding the possible “shape” of recovery from the current downturn continue. But there is little question that the outlook for 2010 in particular, is surrounded by extreme uncertainty across a wide array of policy- and other variables that will eventually bring about a revival in economic activity. The pronounced cycle in worldwide investment could have sufficient dynamic to carry global growth back to positive territory by 2010, as the pace of decline in investment moderates, and postponed demand for durable consumer goods begins to catch up. Together with the effects of monetary and fiscal stimulus this results in the modest global recovery in the baseline forecast presented here.
However, continued banking problems or even new waves of tension in financial markets could lead to stagnation in global GDP or even to another year of decline in 2010. In all cases, the estimated output gap1 would increase in 2010 because (in the baseline as well), growth falls well short of potential (figure 1.e). This implies that unemployment and fiscal deficits will increase further into 2010, in high-income and developing countries alike, while disinflationary conditions could persist well into the year.
World Economic Prospects 2009