World Bank warns of economic fallout if bird flu mutates

Deutsche Presse Agentur
Published: Tuesday September 12, 2006

Singapore- The World Bank (WB) warned on Tuesday of a "sharp decline" in economic activity if the current strain of bird flu mutates into a strain transmittable between humans. "The extent of the decline and the prospects for a rapid recovery would depend on the characteristics of the new virus, as well as on the degree of preparedness in both the public and private sectors," the institution said in its Global Financial Stability Report.

The report was released ahead of the week-long International Monetary Fund and World Bank's annual meeting in Singapore.

A pandemic would pose important risks for the global financial system, it said in elaborating on downside risks to be considered while the global financial markets remain strong.

"Some reduction in risk appetite is highly likely" in a pandemic, "leading to a greater demand for liquidity and for low-risk assets."

While the "flight to quality" ought to be temporary, asset price declines could put the balance sheets of some financial institutions under stress," the report said.

It addressed the possibility of a "period in which net capital flows to emerging markets decline, perhaps substantially for countries with relatively week fundamentals."

Operational risks could arise from high absenteeism disrupting critical functions and services of the financial system, including payments, clearing and settlement, and trading.

"Preparation in the form of business continuity plans can go a long way to minimize the potential for such costly disruptions," the World Bank said.

Indonesia and Vietnam have been the hardest hit by the disease since 2003.

The IMF is encouraging countries to prepare for a possible pandemic and has been organizing regional seminars that bring together central banks and supervisory authorities, health experts, and business continuity planners.

Other risks to the current strong performance of the global economy and international financial markets include an intensification of inflation pressures, increases in oil prices; and a more rapid cooling-off in the US housing market, leading to a pronounced slowdown of the US economy, the report said.

© 2006 DPA - Deutsche Presse-Agenteur