World Bank warns Asia to be alert against risks from US rate rises
While conditions support short-term growth, agency warns against complacency with risk of reversed capital flows after US rates rise
East Asian economies have recovered from the global financial crisis and are growing close to potential but governments cannot be complacent as capital flows could reverse quickly once United States interest rates rise, World Bank economists said in a global outlook report.
Since March, long-term interest rates and market volatility declined to "unusually low levels", narrowing bond spreads and putting downward pressure on borrowing costs, the report said.
Central banks have been very easy and accommodating [in their policies]
This triggered "a renewed search for yields", which supported the demand for developing country assets and currencies, it said.
Current market conditions were "supportive in the short term" to developing country prospects but could encourage investors to underprice risk and borrowers to increase leverage, the lender said.
This might set the ground for sudden spikes in volatility and sharp adjustments to adverse news, it warned.
The World Bank downgraded its global gross domestic product outlook for this year to 2.8 per cent from 3.2 per cent.
If long-term US bond yields rose 100 basis points, developing economies could experience a 50 per cent drop in capital inflows, the report said, and this "could lead to lower investment and growth" for some countries.