World Bank Concerned About U.S. Debt Ceiling and Emerging Markets

By: Bloomberg

World Bank President, Jim Yong Kim, joined Bloomberg Television’s Sara Eisen live from the IMF this morning and said he expects staff reductions as the institution seeks to cut its budget by $400 million annually for three years.

Dr. Kim on what the rest of the world thinks about the U.S. government shutdown and potential breach of the debt ceiling:

"We look carefully at what happened the last time we had a near miss. I know you've got an eye on emerging markets and places of the world we don't talk about as much. We look at what happens in developing economies in August 2011. Even those that was a near miss, we did not get to default, the impact of developing economies was huge. There was a 75 basis points increase in bond spreads. The cost of borrowing went up in emerging countries and there was a 15% hit in the stock market. Those effects persisted over month. It's very real for people in developing worlds and I want to make it clear to policymakers in Washington that whatever you do, please think about the impact this will have in developing countries. We look at what are people in the South trying to grow business. More than 50% of our imports are to developing countries."

On what is going on with the emerging markets given added tension coming from Washington:

"First of all, we will see increasing interest rates and this will be a problem. There is such an issue now around developing countries having access to long-term capital for these critical infrastructure projects. With the flight to save haven, we will see further currency depreciation's and that has already has an impact. The other thing is the general decrease in confidence. These countries need investments especially in critical infrastructure to grow their economies. The impacts are multiple and they will be serve."

On whether there are deeper and longer structural lasting problems in emerging markets:

"One thing we saw with the announcement of tapering that happened in the spring, we saw a spike in interest rates. It really revealed all the witnesses in emerging market economies. Not every emerging market economy was impacted the same way. The message we have been sending to emerging markets is now is the time to undertake the reforms you have been promising with fiscal policy and business environment and they need to know how to do these things. When interest rates were low, some of these economies said we are in good shape and we have access to capital and don't need to make reforms and now, their currencies are dropping and they say there is too much pressure so they cannot do it now. Our message is clear. The reforms we need to make, we all know what they are, go do it now."

On how long is that window with the U.S. on the verge of tapering:

"When Chairman Bernanke announced he will not decrease bond purchasing this month and probably the next month, it gave the developing economies a few months of breaking space. This is the time at the breathing space but we are all holding our breath not to see what will happened"

On what his message to Janet Yellen would be:

"I think Chairman Bernanke handled this just as we had hoped. We have all been saying the most important things to communicate about eventual tapering early which he did and do it gradually. From everything I can tell, that's a commitment that both Chairman Bernanke and Janet Yellen share. It's hard to ask them to think about these other economies...What we are doing is saying don't depend on emerging economies or depend on other countries doing these things for you. You have reforms to make, move right now and get those done."

On which economy he is most concerned about:

"There are many especially in emerging markets that we are concerned about. Let me take you through a couple of them. The Chinese growth rate has dropped and that is a concern for everyone. It was almost seven percent. I just came back from China and they are doing the right thing. They are going forward with the Shanghai free-trade zone. They are moving their economy from one focus on investment to more on consumption. They are going forward on services despite the fact that the few emerging market economies growth rates are lower. You know we've got to make these reforms to go ahead. They are a good example for all the other emerging market economies."

On whether the World Bank is looking to get leaner by cutting jobs:

"There will be staff reductions but we are not doing this on a basis of any number. We will see where we are working efficiently and where we are not. We have no really done that for some time. We have not looked at the structure for 17 years so it is time. I said we will cut a number of $400million per year out of the budget over the next three years. As we do that, we will look at every position and ask if the people doing this job contributing? If not, we will have staff reductions."

bloomberg.com

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