WASHINGTON, June 12 The World Bank said eventual
monetary tightening in advanced economies could crimp growth in
emerging markets as interest rates rise, lowering the nations'
potential output by as much as 12 percent.
That long-term risk is likely greater than the short-term
impact from volatility in emerging market currency and bond
markets, as traders try to position themselves for when the U.S.
Federal Reserve begins its exit from ultra-loose monetary
policies, said Kaushik Basu, the World Bank's chief economist.
Basu was speaking ahead of the launch of the bank's
twice-yearly Global Economic Prospects report on Wednesday.
The report argued that the euro area and fiscal uncertainty
in the United States are receding as major risks to the global
economy. Instead, developing nations have to be on guard against
side effects from aggressive monetary expansion in advanced
Japan launched a massive bond-buying program in April to
prod the economy out of decades of stagnation, raising fears
Japanese investors would flood into emerging markets in search
of higher yields and cause overheating.
At the same time, global markets were battered this week as
traders tried to read the tea leaves of when the U.S. central
bank will decide to start winding down its own stimulus
For emerging markets, this market volatility should not be
too disruptive over the medium term, although it could cause
some capital flow fluctuations in the next three to six months,
"(The volatility) is an adjustment trauma, in anticipation
of what is going to come, and as soon as the policy change is
properly in place I do expect this trauma to go away," Basu
The Fed's exit from so-called "quantitative easing" should
also cancel out some of the overheating impact from Japan's
loose policies, according to the World Bank report.
What is more worrying is what happens later, as long-term
interest rates begin to rise when the Fed and other central
banks tighten monetary policies.
Higher interest rates would raise the cost of capital in
emerging markets, leading to lower capital investment, which
causes lower growth in the long run, the bank said.
"Longer term, potential output could be lower by between 7
and 12 percent unless measures are undertaken to reduce domestic
factors that contribute to the high cost of capital," according
to the report.
The risk is especially high for countries such as Egypt,
Jamaica and Pakistan, that have run up high debt in a time of
low interest rates. If interest rates surge suddenly, these
countries would face sharply higher debt servicing costs that
they may not be able to manage, the World Bank said.