Good morning, everyone. I’m glad you could join and very sorry to disturb you on a holiday weekend.
There’s a lot to go through. I want to cover the global challenges, the Global Sovereign Debt Roundtable, Ukraine, and the World Bank Group’s evolution process. Then I’ll take questions.
Global growth is expected to be weak this year, slowing to 2% from 3.1% in 2022. For the U.S., we’re expecting a slowdown to 1.2% from 2.1% in 2022.
Several factors are weighing on the second half outlook: Oil prices have jumped back above $80/barrel. The recent banking sector stress dampens activity. And inflation pressures persist. The U.S. month-over-month core inflation has been rising over the last five months. There will be new data on Wednesday.
If we look at developing countries excluding China, we expect a slowdown to about 3.1% in 2023 from 4.1% in 2022. The concern in our recent reports is that slow growth will persist for years for many developing countries, increasing the fiscal stress and debt problems. It’s a combination of weak investment, higher interest rates, and relatively weak growth in the advanced economies.
The danger is acute due to inflation, currency depreciation, rising debt service costs, and the collapse of international reserves. The diversion of natural gas to Europe presents grave obstacles to developing country production of electricity, fertilizer, and food. These problems are severely constraining future growth and deepening inequality and fragility for developing countries. I travelled to West Africa in March, where we are working to provide support in the face of these problems.
Looking to the big picture, I’ll mention two problems: first, the normalization of interest rates after an artificial decade near zero. This creates problems in terms of the duration mismatch as we’ve seen in the bank failures, liquidity shortages, and how to allocate the losses. The duration mismatch will take time to digest. With inflation persistent and the dollar weakening, the risk is that the losses will be allocated to those with lower incomes, including through inflation.
A second major problem is that the available global capital is being absorbed by a narrow group of advanced economies that have extremely high government debt levels. I’ll call them “sinkholes.” To make matters worse, their populations are aging rapidly and the peace dividend of the 1990s was used up.
I’ve advocated a range of new policies that would spur production to combat inflation and currency weakness, but the likelihood is a long period of slow growth, asset repricing, and capital moving in the wrong direction – toward a narrow group of governments and big corporations rather than to the small businesses and working capital that could add to global growth.
I’ll note two exceptions to the slowdown: China and India. China’s GDP growth is rebounding to over 5% in 2023, with strong private investment. I note the stability of China’s currency and the countercyclical nature of its monetary policy. I was in China in December as they ended the lockdown. The government is encouraging growth in services, especially health care and tourism.
India continues to be one of the fastest-growing major economies in the world. We’re looking for growth of 6.3% in their FY23/24. They will feel some effect from the global slowdown. I was there in February and think it will take capital market liberalization for India to achieve their 8% growth goal.
Let me run through key parts of this week’s schedule:
On Wednesday morning, I will co-chair the Global Sovereign Debt Roundtable with Kristalina and India’s Finance Minister Sitharaman. The deputies met on April 3 and went through technical notes, so I hope there will be some progress. I posted details in a blog yesterday. The goal is to share information earlier in the debt restructuring process and work toward comparable burden sharing. There should be discussion of a formal standstill on debt service at the request of the debtor country and of the treatment of arrears and penalties.
Also on Wednesday, I will chair the third Ukraine Ministerial Roundtable. Ukraine has immense recovery and reconstruction needs, and we estimate that there is an additional $11 billion funding gap in 2023 for critical expenditures.
Lastly on a very busy Wednesday, we’ll be discussing the evolution roadmap at the Development Committee meeting. There’s been substantial discussion with the Board and shareholders on the mission, operations, and financing. We are moving to revise the IBRD’s minimum Equity-to-Loan Ratio to 19% from 20%, provide a pilot capital-market investors to invest in hybrid capital, and increase the size of our bilateral guarantee program. These initiatives can add up to $50 billion of financing capacity over the next ten years.
With that, I’ll take your questions.