Most De­vel­op­ing Coun­tries will ben­e­fit from Oil Price Slump, says World Bank Group

The Star (St. Lucia) - - LOCAL -

from low oil prices can be sub­stan­tial for de­vel­op­ing-coun­try im­porters if sup­ported by stronger global growth, says a World Bank Group anal­y­sis of the oil price de­cline, con­tained in the lat­est edi­tion of Global Eco­nomic Prospects.

The de­cline in oil prices re­flects a confluence of fac­tors, in­clud­ing sev­eral years of up­ward sur­prises in oil sup­ply and down­ward sur­prises in de­mand, re­ced­ing geopo­lit­i­cal risks in some ar­eas of the world, a sig­nif­i­cant change in pol­icy ob­jec­tives of the Or­ga­ni­za­tion of the Pe­tro­leum Ex­port­ing Coun­tries (OPEC), and ap­pre­ci­a­tion of the U.S. dol­lar. Although the rel­a­tive strength of the forces driv­ing the re­cent plunge in prices re­mains un­cer­tain, sup­ply re­lated fac­tors ap­pear to have played a dom­i­nant role.

Soft oil prices are ex­pected to per­sist in 2015 and will be ac­com­pa­nied by sig­nif­i­cant real in­come shifts from oil-ex­port­ing to oil-im­port­ing coun­tries. For many oil-im­port­ing coun­tries, lower prices con­trib­ute to growth and re­duce in­fla­tion­ary, ex­ter­nal, and fis­cal pres­sures.

How­ever, weak oil prices present sig­nif­i­cant chal­lenges for ma­jor oil-ex­port­ing coun­tries, which will be ad­versely im­pacted by weak­en­ing growth prospects, and fis­cal and ex­ter­nal po­si­tions. If lower oil prices per­sist, they could also un­der­mine in­vest­ment in new ex­plo­ration or de­vel­op­ment. This would es­pe­cially put at risk in­vest­ment in some low-in­come coun­tries, or in un­con­ven­tional sources such as shale oil, tar sands, and deep sea oil fields.

“For pol­i­cy­mak­ers in oilimport­ing de­vel­op­ing coun­tries, the fall in oil prices pro­vides a win­dow of op­por­tu­nity to un­der­take fis­cal pol­icy and struc­tural re­forms as well as fund so­cial pro­grams. In oil­ex­port­ing coun­tries, the sharp de­cline in oil prices is a re­minder of sig­nif­i­cant vul­ner­a­bil­i­ties in­her­ent in highly con­cen­trated eco­nomic ac­tiv­ity and the ne­ces­sity to rein­vig­o­rate ef­forts to di­ver­sify over the medium and long term,” said Ay­han Kose, Di­rec­tor of De­vel­op­ment Prospects at the World Bank.

The anal­y­sis on oil prices in Global Eco­nomic Prospects is com­ple­mented by two spe­cial fea­tures on how trends in global trade and re­mit­tance flows are im­pact­ing de­vel­op­ing coun­tries.

Global trade ex­panded by less than 3.5 per­cent in 2012 and 2013, well be­low the pre­cri­sis av­er­age an­nual rate of 7 per­cent, hold­ing back de­vel­op­ing coun­try growth in re­cent years.

Weak de­mand, mainly in in­vest­ment but also in con­sumer de­mand, is one of the main causes of the de­cel­er­a­tion in trade growth. With high-in­come coun­tries ac­count­ing for some 65 per­cent of global im­ports, the lin­ger­ing weak­ness of their economies five years after the cri­sis sug­gests that weak de­mand con­tin­ues to ad­versely im­pact the re­cov­ery in global trade. How­ever, long-term trends have also slowed trade growth, in­clud­ing the chang­ing re­la­tion­ship be­tween trade and in­come. Specif­i­cally, world trade has be­come less re­spon­sive to changes in global in­come be­cause of slower ex­pan­sions of global sup­ply chains and a shift in de­mand from tradein­ten­sive in­vest­ment to less trade-in­ten­sive pri­vate and pub­lic con­sump­tion.

The anal­y­sis finds that th­ese long-term fac­tors af­fect- ing trade will also shape the be­hav­ior of trade flows in the years ahead—in par­tic­u­lar, that the ex­pected re­cov­ery in global growth is not likely to be ac­com­pa­nied by the rapid growth in trade flows ob­served in the pre­cri­sis years.

A sec­ond spe­cial fea­ture re­ports that re­mit­tance flows to many low- and mid­dle-in­come coun­tries are not only sig­nif­i­cant rel­a­tive to GDP but also com­pa­ra­ble in value to for­eign di­rect in­vest­ment (FDI) and for­eign aid. Since 2000, re­mit­tances to de­vel­op­ing coun­tries have av­er­aged about 60 per­cent of the vol­ume of to­tal for­eign di­rect in­vest­ment flows. For many de­vel­op­ing coun­tries, re­mit­tances are the sin­gle largest source of for­eign ex­change.

The study finds that, in ad­di­tion to their con­sid­er­able vol­ume, re­mit­tances are more sta­ble than other types of cap­i­tal flows, even dur­ing episodes of fi­nan­cial stress. For ex­am­ple, dur­ing past sud­den stops, when cap­i­tal flows fell on av­er­age by 14.8 per­cent, re­mit­tances in­creased by 6.6 per­cent. The sta­ble na­ture of re­mit­tance flows, the anal­y­sis con­cludes, means that they can help smooth con­sump­tion in de­vel­op­ing coun­tries, which of­ten ex­pe­ri­ence macroe­co­nomic vo­latil­ity.

The price of oil con­tin­ued its pre­cip­i­tous fall on the world mar­ket, a trend

an­a­lyst say could con­tinue well into 2015.

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