Santiago, Chile March 25, 2004

1
The Outlook for the Global Economy and Capital
Flows to Emerging Markets
Santiago, ChileMarch 25, 2004
Charles Dallara, IIF
2
Outline
IIF

• U.S. Economic Outlook
• Non-U.S. Economic Outlook
• Emerging Market Capital Flows

3
United States Robust growth
IIF

• Fiscal and monetary policies have helped to spur
  strong growth, which is likely to continue in
  2004
• The good news
• Little inflation
• Investment remains strong
• Capacity utilization is rising
• Risks remain, and not all indicators point to
  sustained robust growth

4
United StatesPotential stumbling blocks
IIF

• Concerns over fiscal deficit
• Low national savings rate and large current
  account deficit
• Tepid employment growth
• Jittery equity market
• Our baseline forecast calls for 4.4 growth in
  2004, slightly below consensus forecast

5
United States Fiscal Balance, 2004-14(In
percent of GDP)
Global Outlook
IIF
6
United States Fiscal Stimulus, 2000-05(In
percent of Potential GDP)
Global Outlook
IIF
7
US Current Account Balance(In percent of GDP)
Global Outlook
IIF
8
United States Nonfarm Payroll Accumulation
Since End of Recession(t last month of
recession)
Global Outlook
IIF
9
Non-U.S. OutlookModerate Recovery
IIF

• European growth is likely to show some recovery
  this year
• Japans economy will record positive growth for
  the second year in a row
• Emerging market growth is likely to pick up,
  coinciding with the global recovery

10
Real Growthpercent change from previous year
IIF
11
EurozoneHow sustainable is recovery?
IIF

• Overall, growth is likely to be 1.7 this year,
  following growth of 0.4 in 2003
• Business and consumer confidence has shown
  improvement
• Purchasing managers index (PMI) has risen 7 out
  of the last 8 months
• ECB hesitant to reduce interest rates, despite
  falling inflation
• Greater structural reform efforts are key for
  long-term growth

12
JapanEnding deflation?
IIF

• GDP is likely to grow 2.8 this year, following
  an estimated increase of 2.7 in 2003
• Exports and business investment have been driving
  force behind higher than expected growth
• Labor market conditions are beginning to improve
• Further need to address banking and other
  structural weaknesses

13
Emerging Markets Pick up in growth expected
IIF

• Overall, growth is likely to be 5.8 this year,
  following 4.9 last year
• Expected growth exceeds the average long-term
  rate by more than one percentage point
• Boost in real GDP accounted for by an
  acceleration in growth in Latin America

14
Emerging Market Real GDP Growthpercent change
from previous year
IIF
15
Emerging Market Capital FlowsReturn to long-run
average
IIF

• Net private capital flows reached a six-year high
  of 190 billion in 2003, a 50 increase from 2002
• Surge in flows reflected a significant increase
  in nonbank lending (mostly bonds) and a
  reemergence of portfolio equity investment
• Direct investment hit a seven-year low,
  reflecting lingering effects of weak growth,
  bursting of technology/telecommunications bubble,
  and problems in Argentina
• Commercial banks were net lenders for the first
  time in six years

16
Emerging Market Economies External
Financing(billions of dollars)
IIF
e estimate f IIF forecast (1) Including
net lending, monetary gold, and omissions.
17
Equity Investment (billions of dollars)
IIF
18
Emerging Market Bond IssuanceFavorable
environment
IIF

• Bond issuance of 81 billion in 2003
  significantly outpaced that for 2002
• Issuers benefited from ample global liquidity and
  greater risk tolerance by investors
• EMBI spread narrowed 347 basis points during
  2003 to 418 basis points
• Latin America showed the largest decline in
  spreads
• EMBI reached historic low in mid-January 2004
  before widening again

19
Emerging Market Bond Issuance(continued)
IIF

• Latin America had largest bond issuance in 2003
• Notably strong in Brazil and Mexico
• Bond issuance rose sharply in Emerging Europe
• 12 emerging market countries issued bonds, which
  included collective action clauses for the first
  time under New York law

20
IIF
EMBI Spreads
21
Narrowing EMBI Spreads(basis points)Change
from September 30, 2002 to March 15, 2004
IIF
22
Bond Issuance by Region(billions of dollars)
IIF
23
Capital Flows Outlook 2004How long will the good
times last?
IIF

• Net private capital flows are expected to
  increase to 217 billion this year, supported by
  stronger global growth and still low policy
  interest rates
• Continued increase in flows is based on rebound
  in direct investment and a further rise in bond
  and equity flows
• Bond issuance so far this year has proceeded at
  rapid pace, including Latin America

24
Capital Flows Outlook 2004 Risks
IIF

• Weaker growth in the industrial world than
  currently envisaged
• Retrenchment in major equity markets
• Deterioration in credit quality among more
  heavily indebted emerging market countries
• Market valuations have run ahead of fundamentals

25
Regional Capital FlowsMirror relative economic
performance
IIF

• Asia/Pacific region is likely to account for 50
  percent of total net flows to emerging markets in
  2004
• Net private flows to Europe are expected to
  increase sharply
• Net flows to Latin America are projected to
  increase to 43 billion in 2004, from 24 billion
  in 2003
• Middle East will remain minor recipient of capital

26
Financial Flows to Emerging Market Economies by
Region, Net(billions of dollars)
IIF
27
The Outlook for the Global Economy and Capital
Flows to Emerging Markets
Santiago, ChileMarch 25, 2004
Charles Dallara, IIF