Bush is an ASSHOLE..........
World Bank warns on dollar 'risk' for poor nations
World Bank warns on dollar 'risk' for poor nations
By Andrew Balls in Washington
Published: April 6 2005 15:14 / Last updated: April 7 2005 01:09
Developing countries that have amassed large US dollar reserves face a growing threat of big losses from a sudden decline in the dollar, the World Bank warned on Wednesday.
In its 2005 Global Development Finance Report, the bank identified the “gravest risk” for emerging markets as a deep and disorderly dollar decline that would create financial market volatility and push up interest rates.
A dollar collapse, below what the bank's economists see as its long-term equilibrium level, could also result in “a costly restructuring of world industry that would have to be undone in following years as the dollar returned to its equilibrium level,” the bank said.
But even in the event of a steady decline in the dollar, the bank warned that countries with big dollar reserves faced capital losses, following the pattern of the past two and a half years.
Foreign reserves held in developing countries, up $292bn (€227bn) in 2003, rose a further $378bn last year, the bank said. Asia, and particularly China, accounted for much of this accumulation, but 101 of 132 developing countries increased their reserves last year.
“A sharp depreciation of the dollar could result in large capital losses in local-currency terms for developing countries with substantial dollar reserves,” the bank said.
The enormous build-ups in foreign exchange reserves also make it harder for countries to manage their domestic economies, the bank said, owing to potential inflationary impacts and fiscal costs.
At the end of last year, developing countries held $1,600bn of foreign exchange reserves, with China accounting for almost 40 per cent of the total. The bank estimates that 70 per cent of those reserves are held in dollar assets. Countries have run current account surpluses and built up reserves in part to protect themselves against swings in international financial markets.
Asian countries are also reluctant to allow their currencies to appreciate against China's currency, which is pegged to the dollar. Many economists see a stronger renminbi as central to an adjustment in Asia towards more domestic-led growth and a reduction in global current imbalances. There are also concerns about rising protectionism, in the US, as a result of its record trade deficit.
In its report, the World Bank called for a “managed appreciation” of key Asian currencies. This would complement the US's efforts to rein in its fiscal deficit, and efforts to promote faster growth in Japan and the eurozone, it said.
Strong global growth last year, driven by the US and China, contributed to the fastest growth in developing countries in three decades, the bank said. However, the global economic cycle peaked in the second half of last year, the bank said. Higher interest rates in the US and the stubbornly high oil price would damp growth this year, it predicted, and although developing countries have improved their economic management there could be a decline in investor risk appetite, it said.
Its warning was echoed by the International Monetary Fund, the bank's sister organisation, on Wednesday.
World Bank’s full report: Click here
LINK: news.ft.com |
