World Bank President Jim Yong Kim predicted another wave of higher global interest rates that could hurt emerging markets when the U.S. Federal Reserve starts tapering its $85 billion-a-month asset-purchase program.
Bond prices slumped internationally and emerging-market stocks plunged after May 22, when Fed Chairman Ben S. Bernanke said for the first time the central bank could withdraw stimulus, also called quantitative easing. While those market movements were partly reversed after the Fed maintained its policy, the International Monetary Fund and the World Bank have urged nations from Turkey to Indonesia to strengthen their economies in preparation for the reduction.
“We think we’ve seen about a third of the overall increase in interest rates responding to that first announcement,” Kim told reporters in Washington today. “What that means is when QE tapering actually happens, interest rates will continue to go up,” which “could cause problems for the emerging-market economies.”
Among other consequences, higher borrowing costs will complicate developing economies’ access to funding for large-scale investments such as power plants and highways, according to Kim, who is trying to create a Global Infrastructure Facility to help direct private-sector money into such projects.
Investors “need us to be able to go in and, based on our 60-plus years of experience doing projects in these countries, knowing the governments and also knowing the private sector, to come in and be able to say ‘here is a project, here are the risks, here’s how we’re going to mitigate those risks,’” Kim said, adding that the bank would also contribute its own money.
Brazil, Russia, India, China and South Africa see an infrastructure deficit of about $4.5 trillion over the next five years that public aid alone is unable to fill, he said. Managers at sovereign wealth funds and at pension funds have expressed interest in the facility, where the rules of governance remain to be decided and are “tricky,” he said.
Among encouraging signs to the global economy is the U.S., which the bank sees growing about 2.8 percent next year. Expansion in China seems to have rebounded in the third quarter, said Kim, who welcomed news of an elevated role of markets in the nation’s economic strategy at a gathering of Communist Party leaders this week in Beijing.
“The language coming out of the party congress is extremely positive,” Kim said.
Kim also said he’s offered the Washington-based lender’s assistance to the Philippines, where rescuers are battling to deliver emergency aid to areas ravaged by Super Typhoon Haiyan, which may have killed more than 10,000 people.
The bank can assist in any way the government deems appropriate, from speeding up cash-transfer programs to helping remove debris, he said.
The typhoon is another example of serious storms that have become more frequent and call for measures countries can take to slow or mitigate the effects of climate change, such as the removal of fossil-fuel subsidies or investment in renewable energies, Kim said.
“What I hope the tragedy in the Philippines helps us to do is to move away from having what I think are silly arguments” over the reality of climate change, he said. “There are so many things we can do right now, let’s stop the argument, let’s move forward.”