Developing countries may not be able to weather a repeat of a global financial crisis as well as they did in 2008 because their fiscal positions are worse now than they were in 2007, the World Bank has warned.
Government deficits of developing countries are on average 2 percentage points worse than in 2007 before the onset of the financial crisis, Hans Timmer, Director of the World Bank’s Economic Prospects Group, told CNBC Asia’s “Squawk Box” on Wednesday. But at that time, 40 percent of developing nations were running budget surpluses, compared to less than 20 percent today.
In addition, almost half of developing nations tracked by the World Bank are now running a budget deficit larger than 3 percent of GDP, Timmer added.
“They can still absorb a lot of shocks but it would be difficult to rebound as quickly from a new crisis as they did so successfully in 2009, 2010,” Timmer said.
Countries in Europe and Central Asia would be among the most vulnerable to an “acute crisis” in Europe because of their close trade and financial ties to Europe, according to a report put out by Timmer’s team titled “Global Economic Prospects” on Wednesday.
“However, should the situation in Europe deteriorate sharply, no developing region would be spared,” the report said. “The world's poorest countries will also feel the fall out – especially countries that are heavily reliant on remittances, tourism or commodity exports or that have high-levels of short-term debt.”
To ensure that they can weather another crisis – now posed by increased uncertainty over Europe, governments in all developing nations will need to cut short-term debt and their budget deficits, the World Bank said.
In addition, central banks in these nations will need to move monetary policy towards a ‘neutral’ stance in case they need to reduce interest rates, the report added. Governments will also need to ensure that they continue to implement structural reforms.
Barring a major crisis in Europe, the World Bank forecast that growth in developing countries is likely to slow to 5.3 percent in 2012 from 6.1 percent last year. This will strengthen to 5.9 percent in 2013 and to 6 percent in 2014, it added.
Overall global GDP is projected to grow 2.5 percent, 3 percent and 3.3 percent for the same period.
By CNBC's Jean Chua.