By Lesley Wroughton
WASHINGTON, June 12 (Reuters) - Developing countries should
brace for a long period of financial market volatility and
weaker growth as tensions rise over a worsening euro zone debt
crisis, the World Bank said on Tuesday.
Warning the situation in Europe could worsen, the World Bank
said in a report that developing nations should prepare for
tougher times by reducing short-term debt, cutting budget
deficits and moving to a more neutral monetary stance so that
policies can be loosened quickly if needed.
"Global capital market and investor sentiment are likely to
remain volatile over the medium term - making economic policy
setting difficult," said Hans Timmer, director of development
prospects at the World Bank.
He said policymakers in developing countries should "move
away from fire fighting to strengthen underlying growth
potential" by focusing on reforms and infrastructure investment
instead of reacting to day-to-day events in the world economy.
The Global Economic Prospects report forecast that growth in
developing countries is likely to slow to 5.3 percent in 2012
from 6.1 percent last year. The World Bank said it expects it to
strengthen to 5.9 percent in 2013 and to 6 percent in 2014.
The forecast was little changed from January.
The World Bank said the global economy, which grew 2.7
percent last year, would likely expand 2.5 percent this year,
accelerating to 3 percent in 2013 and 3.3 percent in 2014 -
unchanged from its January outlook.
Timmer warned a serious financial crisis was still possible
even though a "muddle through scenario" was more likely.
Financial markets are already on edge, with investors
flocking to the safety of German and U.S. government bonds out
of fear an election in Greece on Sunday could open the door to
Athens leaving the euro zone.
On Saturday, the European Union agreed to the bailout of up
to 100 billion euros ($125 billion) for troubled Spanish banks,
while Cyprus strongly hinted on Monday it may also need an
Timmer said resolving Europe's problems was a long-term
"There is no silver bullet. You cannot solve problems over a
weekend. There are structural changes needed to really restore
growth potential in Europe and in other high-income countries,"
The updated World Bank forecasts project that the euro zone
economy will contract by 0.3 percent this year before resuming
growth of 0.7 percent in 2013 and 1.4 percent in 2014. It grew
1.6 percent last year.
Despite increased global financial strains, about 60 percent
of developing countries are operating at or above potential, the
World Bank said. In the developing world, eastern and central
Europe and the Middle East and North Africa have been hit the
The bank forecast that China's economic growth will moderate
to 8.2 percent this year from 9.2 percent in 2011, before
recovering to 8.6 percent in 2013.
"In our view that slowdown is something that brings China to
a much more sustainable path," said Timmer. "China was one of
the countries where you could argue that they had reached
capacity constraints," he added.
In eastern and central Europe, the shedding of assets by
European parent banks is set to slow growth in the region to
3.3 percent this year from 5.6 percent in 2011 before a modest
recovery begins next year to 4.1 percent, the bank said.
It projected that growth in Latin America and the Caribbean
would ease to 3.5 percent this year, firming to 4.1 percent and
4.0 percent in 2013 and 2014, respectively. The region grew 4.3
percent in 2011. Brazil's economy would likely operate below
potential at 2.9 percent in 2012 before picking up 4.2 percent
next year, it added.
In sub-Saharan Africa, growth is expected to strengthen to 5
percent in 2012 and 5.3 percent in 2013, up from 4.7 percent in
For the Middle East and North Africa, growth is expected to
slow to a tepid 0.6 percent in 2012, the World Bank said, down
from 1 percent last year, mainly due to the impact of Western
sanctions on Iran and a drop in economic activity in Syria and
(Editing by Neil Stempleman)
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