Investment slows in uncertain times: report 

Economy January 11, 2017 11:35

By The Nation 

Investment in emerging market and developing economies is likely to decline further, posing new obstacles to growth these countries have faced, according to the World Bank’s January 2017 Global Economic Prospects report.

The obstacles include low oil prices (for oil exporters), slowing foreign direct investment (for commodity importers), and more broadly, private debt burdens and political risk.

Investment growth in these economies fell to 3.4 per cent in 2015 from 10 per cent on average in 2010, and likely declined another half per centage point last year, the report said. These economies account for one-third of global GDP and about three-quarters of the world’s population and the world’s poor. 

During 2010-15, East Asia and Pacific which includes Thailand accounted for almost one-half of the growth in global investment, and

one-quarter of the global level. Investment growth has steadily declined from 12.1 per cent in 2010 to 6.5 per cent on average in 2015-16 - well below the double-digit rates of 2003-2008.  Long-term forecasts suggest continued weakness in investment growth, while sizable

investment needs remain in infrastructure. The low quality of education in Thailand is mentioned in the report.

"Confidence in the business environment is central to encouraging private investment. Measures to improve the environment include cutting red tape, clarifying laws and regulations, allowing greater market access to foreign companies, opening more investment areas to private enterprise (especially in services sectors), and cutting financing costs. Reforms to deepen capital markets and to strengthen banking systems (for example, through faster and more effective insolvency procedures) can encourage private financing," the report said.

In the updated report, Thailand's economy is expected to maintain steady growth rate of 3.2 per cent in 2017 after the forecast 3.1 per cent growth rate in 2016, supported by improved confidence and accommodative policies.

Global economic growth is forecast to accelerate moderately to 2.7 per cent in 2017. Growth in advanced economies is expected to edge up to 1.8 per cent. Fiscal stimulus in major economies - particularly in the United States - could generate faster domestic and global growth than projected, although rising trade protection could have adverse effects. Nevertheless, the outlook is clouded by uncertainty about policy direction in major economies. A protracted period of uncertainty could prolong the slow growth in investment that is holding back low, middle, and high income countries, the report said.

Throughout the East Asia and Pacific region, growth slowed to an estimated 6.3 per cent in 2016. Excluding China, the region grew at a 4.8 per cent pace. Strong domestic spending, supported by generally benign financing conditions for most of 2016, largely counterbalanced weak export growth. Narrowing domestic and external imbalances and stronger policy buffers, coupled with solid growth, helped improve resilience to external headwinds. 

The region's growth this year is projected to ease to 6.2 per cent as slowing growth in China is moderated by a pickup in the rest of the region. Excluding China, growth in the region is expected at 5 per cent.

The report warned that risks have tilted further to the downside since mid-2016 and include heightened policy uncertainty in advanced economies (Europe and the United States) amid a rise in support for trade protection. Financial market disruption and weak growth in advanced economies would pose further risks to growth. Rising political opposition to trade has contributed to a post-crisis high in new trade restrictions in the past year. The imposition of trade barriers by major trading partners would disproportionately affect the relatively more open economies of East Asia and Pacific. 

An unexpected deceleration of major economies in the region or weaker-than-expected global trade would dampen growth in the region, and a faster-than-expected slowdown in China would have sizable regional spillovers.

Similarly, an adverse reaction to the US Federal Reserve’s anticipated rise in interest rates or an increase in global risk aversion could also slow growth. The large, financially integrated economies of the region with sizable external, foreign-currency denominated, and/or short-term debt - such as Indonesia, Malaysia and, to a lesser degree, Thailand - would be most exposed.

Among advanced economies, growth in the United States is expected to pick up to 2.2 per cent, as manufacturing and investment growth gain traction after a weak 2016. The report looks at how proposed fiscal stimulus and other policy initiatives in the United States could spill over to the global economy.

“Because of the outsize role the United States plays in the world economy, changes in policy direction may have global ripple effects. More expansionary US fiscal policies could lead to stronger growth in the United States and abroad over the near-term, but changes to trade or other policies could offset those gains,” said World Bank Development Economics Prospects Director Ayhan Kose. “Elevated policy uncertainty in major economies could also have adverse impacts on global growth.”

The US is prepared to welcome the new president later this month. 

The International Monetary Fund will release its World Economic Outlook Update on January 16.