By Lesley Wroughton
WASHINGTON (Reuters) - Global credit turmoil, an economicslowdown in industrial countries and accelerating inflation areset to curb the rapid pace of growth in developing economiesthis year, the World Bank said on Tuesday.
The economic cooling may be welcome relief to countrieswhere economic overheating had become a major concern, the banksaid in its annual review of global financial conditions in thedeveloping world.
Still, the World Bank said the outlook was uncertain andglobal economic conditions could worsen if the financialturmoil and slowdown, brought on by problems in the U.S.housing market, becomes more severe and prolonged.
Until recently, institutions like the World Bank and theInternational Monetary Fund said developing countries may gounscathed by the financial crisis that has rocked major banksin the United States and Europe.
"More than at any other time in recent years, theuncertainty surrounding the outlook is quite pronounced andtilted to the downside," the Bank said.
The Bank's Global Development Finance report said thedeceleration in growth in developing countries would be acrossmost regions, with the largest declines in East Asia and thePacific, and Latin America.
The slowdown in East Asia will mostly be in China wheregrowth is expected to fall by 2.5 percentage points to 9.2percent in 2009, and 9.0 percent in 2010.
In contrast, growth in Sub-Saharan Africa is likely to pickup in 2008, reaching 6.5 percent -- the highest rate in 38years -- then fall to 5.9 percent by 2010, which is still abovethe average over the past five years.
A major worry, the World Bank said, was the doubling ofprices of food staples since 2005, fuelled mainly by risingdemand for food and biofuels.
Inflationary pressures in the developing world, driven byrecord food and fuel prices, are complicating policy efforts toward off broader effects from the slowdown and financialturmoil, it said.
"Across the developing world, inflationary pressurescomplicate the role that monetary and fiscal policy can play inmaintaining macroeconomic stability over the medium term," theWorld Bank said.
"Striking the appropriate balance will vary from country tocountry, but in general policy makers need to recognize thelimitations of activist measures."
The Bank said countries that undertake prudent fiscalplanning and use monetary policy instruments to effectivelymaintain price stability will be better placed to sustaingrowth over the long term.
The World Bank said growth this year in the industrialworld would slow to 2.7 percent from 3.7 percent in 2007. Indeveloping countries, growth in 2008 is set to ease to 6.5percent from 7.8 percent in 2007, which is still above trendfor the past decade.
The slowdown could be harsher in developing countries thatdepend on foreign capital flows, as credit market problemsprompt a tightening in lending conditions.
The World Bank said the downturn in developed marketsshould be relatively short-lived and it forecast a pickup in2009 and a full recovery by 2010.
The Bank said external financial positions in two-thirds ofthe developing world had weakened since the onset of thefinancial turmoil in mid-2007, with the exception of China andmajor oil exporters Algeria, Iran, Russia and Venezuela.
It said half the developing countries ran current accountdeficits in excess of 5 percent of gross domestic product in2007, but many kept piling up foreign exchange reserves, withmost of the increase in Brazil, Russia, India and China.
Countries with large current account deficits and heavyexternal financing needs are particularly vulnerable to anabrupt downturn in the credit cycle, the Bank said. Among theseare countries in Eastern Europe and Central Asia, it added.
It also warned that a weaker U.S. dollar could increaseuncertainty in the international trading system and fuelinflationary expectations, pushing commodity prices higher.
(Editing by Mathew Veedon)
