In recent weeks, more developing countries are turning to the World Bank to help ease the effects of the global credit squeeze, World Bank President Robert Zoellick said on Tuesday, a sign that a larger number of countries are now being hit by the financial crisis.
Zoellick said the World Bank is now estimating that global trade, the lifeblood of economies, will drop next year for the first time since 1982 due to the global credit strains. "It is our estimate that trade could actually fall, not grow more slowly or have growth fall, but actually fall next year, for the first time since 1982," Zoellick said in an interview with Reuters ahead of a meeting of world leaders.
"What we are seeing is that the falloff is not just due to slip in demand, although that will happen, but our rough estimate is that some 80 percent of the decline is due to problems of credit," he added. He pointed at the Baltic Dry Index, a good gauge for supply and demand for basic shipping materials, has fallen some 90 percent to 92 percent since the summer.
Emerging market economies have come under pressure in recent months as investors unwind funding positions amid worries about a global recession. The problem for many of them is they cannot quickly access the credit they need because banks are hoarding money and refuse to lend to each other. The bleaker outlook for growth in the developing world is reflected in the World Bank's sharp cut in its growth forecast for developing countries to 4.6 percent for next year, from 6.4 percent projected in June.
It also forecast that advanced economies will contract 0.1 percent next year, cutting its previous forecast, which projected growth of 2 percent. It said the world economy would not likely slow to 1 percent in 2009. Zoellick said the World Bank expected its lending this year to increase sharply to $35 billion compared to $13.5 billion last year.
"We're trying to provide resources, but we're trying to target them at particular needs, whether it be infrastructure, social development, trade finance, and that is also a way of drawing in donors," he added. Asked whether he'd seen signs of more borrowing, Zoellick replied, "Hugely.
We probably would have increased our $13.5 billion lending by a few billion dollars before ... but what we have seen over the course of the last month, literally over the last few days, is that we're having big countries come to us." He said countries such as Mexico, Indonesia and Colombia, worried about access to credit to finance development projects, were tapping the World Bank's contingency financing fund.
The World Bank's improved Deferred Drawdown Option, also known as the DDO, provides borrowers with greater certainty that the funds will be available when needed. Overall, Zoellick said the World Bank was ready to increase new lending to emerging economies of up to $100 billion over the next three years to counter the effects of the crisis.
It could also provide up to $42 billion in grants and low-interest loans to poorer countries, which may not be directly hit by the financial crisis, but will feel the impact of a slowing global economy, he added. Zoellick also underlined plans by the World Bank's private-sector lender, the International Finance Corp, to increase its trade financing to $3 billion from $1.5 billion to assist developing countries hard hit by tighter global credit markets.
He said new and expanded IFC funds could see lending of around $30 billion to assist the private sector in developing countries, including through recapitalization of banks and help to develop infrastructure projects. As 20 world leaders meet this weekend in Washington to shore up the global financial system, Zoellick played down expectations the meeting will come up with concrete answers.