By Lesley Wroughton
WASHINGTON, April 19 (Reuters) - Developing countries should post their strongest growth in two decades in 2004 as the global recovery firms, but a sudden rise in interest rates could harm the outlook, a World Bank report said on Monday.
In its 2004 Global Development Finance report, the bank warned that governments should prepare themselves for a possible rise in international borrowing rates and avoid overexposure to short-term foreign debt.
It said a rate rise could come quickly if current account imbalances, in particular the U.S. trade and budget gaps, were unwound in a way that disrupted financial markets.
World Bank economist Hans Timmer told a news conference that preparing for a rise was more important than the size of an increase.
"It is much more important that developing countries are being prepared now to handle some higher interest rates instead of suddenly being surprised," he told a news conference.
The report forecast gross domestic product growth in developing economies at 5.4 percent in 2004, up from 4.8 percent last year. This, it said, could slow to about 5 percent over 2005 and 2006 as the booming economies of East Asia cooled.
Timmer said there were several signs of economic overheating in China, including a 30 percent increase in investment, import growth of over 30 percent and money supply growth of more than 20 percent -- twice as much as nominal GDP growth.
"We are not that concerned because the Chinese authorities are very well aware of this fact and have shown they are able in guiding the growth rate and clearly understand there are limits," he said.
CAPITAL FLOWS REBOUND
A rebound in global capital flows to all regions except the Middle East and North Africa is helping to propel growth, driven mainly by more liquidity in industrialized countries and stronger economic policies from emerging market governments.
Net private flows, including official flows, increased in 2003, reaching $228 billion -- their highest level since 1998 and up from $191 billion in 2002.
World Bank chief economist Francois Bourguignon said flows were mainly going to the few large developing countries like China, Russia, Mexico, India and Brazil.
"There is nothing wrong with this, but you also have to think about other countries and to cover their huge needs in financing of infrastructure investment," he said.
The report said policymakers must ensure the rebound in capital flows to developing nations is sustained.
"It will be important to maintain investor confidence, while avoiding the excesses -- and increased vulnerability -- that have accompanied surges in lending to developing countries in the past," it said.
At the same time, aid has to increase, the bank warned.
It said global aid increased the last two years, with the U.S. emergency plan to battle HIV/AIDS, but was still historically low and short of what is needed to meet the Millennium Development Goals, to which governments agreed in an effort to cut poverty in half by 2015.
It said the collapse of trade talks in Mexico in September over reducing agricultural subsidies increased pressure to find more sources of aid for the world's poorest countries.
Also, the war in Iraq has sapped the increase in development assistance that otherwise would have gone to other countries, the bank said.
Headquartered in Washington, the World Bank provides billions of dollars in loans every year to the world's developing countries to promote growth and reduce poverty.
© Reuters 2004
