Developing countries face a triple challenge of managing a stronger US dollar, China’s economic slowdown and a significantly weaker oil price. China’s economic transition brings uncertainty. And yet its financial liberalisation is likely to result in continued outward foreign direct investment and trade with its trading partners from 2014 levels. Meanwhile, lower oil prices and an appreciating US dollar will be harmful to some sub-Saharan African economies in the form of further inflationary depreciations, higher debt and deteriorating reserve positions.
China faces a difficult balancing act. This entails deleveraging, slower growth and capital account liberalisation. Alongside the country’s deleveraging, it is expected by the Organisation for Economic Co-operation and Development to grow at 6.5% in 2016, less than half of its 14% growth before the 2008 global financial crisis. All the while, it is liberalising its financial system. The impact of this balancing – of deleveraging, slower growth and financial liberalisation – will be mixed.
Key messages from this report are:
- Developing countries will need to manage a stronger US dollar, economic slowdown in China and a significantly weaker oil price.
- The joint impact of this triple dynamic is important now given some developing economies’ inability to counter these shocks.
- Most sub-Saharan African economies will benefit from a lower oil price; yet oil exporters’ declining reserves, is a key vulnerability.