Developing world faces $238 billion bombshell as euro zone crisis continues

21 June 2012

Economies across Africa and the developing world risk a decline in exports, investment, remittances and aid as a result of the continued crisis affecting Europe, according to experts at the Overseas Development Institute (ODI).

The developing world is expected to bear a cumulative output loss of $238 billion over 2012-13 because of the continued deepening of the crisis in the euro area.  It is also estimated that a 1% drop in export growth could on average hit growth in poor developing countries by up to 0.5%.

Analysis of country vulnerability to possible financial and real shocks of the euro zone crisis suggests that Mozambique, Kenya, Niger, Cameroon, Cape Verde and Paraguay are amongst those most at risk.

Author Dr Isabella Massa said:

"There are three broad ways in which the euro zone crisis will affect developing countries – through financial contagion, as a knock-on effect of fiscal consolidation in Europe to meet austerity needs, and through a drop in the value of currencies pegged to the euro.

The EU remains the largest single export market for poorer countries, although it is the emerging BRIC economies which are their main source of imports.

Poor countries are vulnerable to the euro crisis not only because of their exposure (due to dependence on trade flows, remittances, private capital flows and aid) but also because of their weaker resilience compared to 2007, before the onset of the global financial crisis.

The ability of developing countries to respond to the shock waves emanating from the euro area crisis is likely to be constrained if international finance dries up and global conditions deteriorate sharply.

The escalation of the euro crisis and the fact that growth rates in emerging BRIC economies, which have been the engine of the global recovery after the 2008–9 financial crisis, are now slowing down make the current situation really worrying for developing countries.”

The ODI Working Paper charts the countries which are most dependent on a variety of economic variables, finding that:

  • Over half of all exports from Morocco, Mozambique and Cameroon are from the EU making them particularly prone to a fall in demand. Cape Verde relies on the EU for over 90% of its exports.
  • Côte d’Ivoire relies on exports to the EU for over 17% of its GDP. In Mozambique and Nigeria the figure is about 14% and 10% respectively.
  • Tajikistan topped the table of dependence on remittances in 2010, with a sizeable 40% of GDP coming from citizens abroad. This figure was over 10% in Gambia and Nigeria for which the EU is the main source of remittances. Liberia and the Democratic Republic of the Congo were highly dependent on  Foreign Direct Investment (FDI) in 2010, with inward FDI as a share of GDP equal to over 25% and 20% respectively. Niger followed with a value of inward FDI as a share of GDP equal to 17%. in Mozambique, Ghana, Cameroon, Rwanda, Zambia and Tanzania European banks represent over half of total bank assets.