The World Bank’s latest Global Economic Prospects (GEP) 2012 published today warns of a coming year of “uncertainties and vulnerabilities.” They note gross capital flows to developing countries plunged to $170 billion in the second half of 2011, which was only 55 percent of the $309 billion in the same period of 2010. In addition, they are forecating developing country growth for 2012 to be 5.4 percent, the second lowest over the past 10 years.
Here is the GEP lead author Andrew Burns warning EM economies to prepare for further shocks. It’s well worth your three minutes and we generally share the Bank’s macro view of the world in the coming year. After all, we got our start at the World Bank working on the first two Structural Adjustment Loans (SALs) for Chile in the mid-1980’s. How cool was it to help the country set up their copper stabilization fund, which later became the model for the Mexico and Venezuela Brady bond oil warrants or value recovery rights.
That said, “sometimes an economist is just an economist” as nobody knows the future for certain and markets can behave au contraire to the real economy often longer than traders can remain solvent.
Furthermore markets can sometimes change fundamentals. This is especially true with respect to sovereign risk, which is largely, within certain bounds, a function of confidence. It’s certainly going to be an interesting year. The Year of the Dragon!
(click here if video is not observable)