Untitled

1
Global Development Finance 2005Mobilizing
Finance and Managing VulnerabilityParis and
BeijingApril 2005
2
Outlook for developing countries

• Growth among developing countries is slowing to a
  more sustainable but still robust pace.
• Global imbalances remain a serious source of
  risk.
• Slower growth and higher interest rates could
  jeopardize developing country finances.

3
Current context economic activity is slowing
Percent change in industrial production, 3 month
moving average, annual rate

Developing Countries
High-income countries
Data exclude China
Source World Bank
4
Current context Interest rates are rising
10-year U.S. treasury yield, percent

Source World Bank
5
Factors contributing to the slowdown

• Rising interest rates
• High oil-prices
• High-tech cycle
• Administrative efforts to slow growth in China

6
The forecast A return to more sustainable growth
GDP percent change, annual rates
Forecast
Developing countries
High income countries
Source World Bank
7
The forecast A return to more sustainable growth
Forecast
Percent growth, annual rates
Developing countries
High income countries
Source World Bank
8
Almost all regions grow faster than in the past
GDP, per cent change from previous year

estimate
Source World Bank
9
Emerging tensions in commodity markets
Index, January 2002100
Source World Bank
10
Developing country demand boosted commodity prices
Breakdown of demand (2003)
Breakdown of additional demand (2004)
Other developing
China
OECD
Metals and minerals
Metals and minerals
Oil
Oil
Source World Bank
11
Signs of accelerating inflation
Consumer inflation, percent change, y-o-y
Developing countries
OECD countries
Source World Bank
12
Low interest rates have boosted demand
Real U.S. interest rates, deflated by consumer
inflation
Emerging market spreads, basis points
Source World Bank
13
Global Imbalances are placing pressure on the
dollar
Current account balances, millions, estimates
for 2004
Source World Bank
14
Low U.S. interest rates have contributed to
dollar weakness
Difference between U.S. and Euro 6-month
interbank rate, / exchange rate
Percent
/
Interest rate spread
Euro /
Source World Bank
15
A modest depreciation so far
Real effective exchange rate, 1970 - 2004
2004
Source World Bank
16
Many countries have appreciatedagainst the
dollar...
Percent change, real exchange rate, Jan. 2002-
Jan. 2005
Appreciation
Depreciation
Source World Bank
17
Despite appreciation, on the whole developing
economies have not lost competitiveness
Percent change, real effective exchange rate,
Jan. 2002- Jan. 2005
Appreciation
Depreciation
Source World Bank
18
Unless resolved, global imbalances remain a
serious source of risk

• Interest rates could rise by even more if
• Investors expect further depreciation
• If their appetite for risk declines
• Central bankers cease accumulating at the same
  rate as in the past
• Higher rates would slow growth in developing
  countries and deteriorate the balance sheets of
  both low and middle-income countries would
  deteriorate.

19
Financial flows to developing countries continue
recovery in 2004
billions
Total net capital flows
Net private flows
Net official flows
20
Developing countries continue to export capital
Current account surpluses as percent of GDP
All developing countries
Low-income countries
21
Large portion of capital flows channeled into
reserve accumulation
billions
Change in reserves
Total capital flows
Current account balance
22
Leading to record levels of reserves in
developing countries
billion
23
While reserves in some countries exceed standard
levels
Reserves as months of imports
24
A modest recovery in FDI inflows to developing
countries in 2004
billion
percentage
FDI as a share of GDP
Top 5 China, Brazil, Mexico, Russian Federation,
and Chile
25
FDI to poor countries still dominated by flows to
resource exporters
Percentage of recipients GDP in 28 poor countries
Oil and Mineral exporters
Other poor countries
26
Reported FDI outflows from developing countries
highlight growing integration
billion
percentage
27
Bond issuance surges while net bank lending
remains flat
billions
Net bond flows
Net bank lending
28
ODA from DAC donor countries is increasing
ODA as a percent of GNI (projections2004-2006)
Percent
Projections
Total ODA/GNI
Bilateral ODA/GNI
Bilateral ODA less special purpose grants/GNI
29
But net impact is limited
ODA in 2003 69 billion
ODA increase in 2003 10.7 billion
Real increase
Other
Inflation changes
Exchange rate changes
Administrative costs
Emergency and disaster relief
ODA in 2002
Debt forgiveness
Technical cooperation
30
Continuing evidence of shift from loans to grants
billions
Foreign aid grants
Net debt flows from official sector
31
Upturn in long-term U.S. interest rates poses
risks
Percent
10-year U.S. yield
Fed Fund target
32
With borrowing spreads at record low levels
Basis points
EMBI global bond spreads
33
Especially for highly-indebted and more
vulnerable emerging markets
Average change in spreads (bps) from 200 basis
point increase in U.S. benchmark rates
External debt/GNI ()
34
Growth in domestic debt poses new opportunities
and challenges
billion
Asia
Latin America
Europe
35
Risks to poor countries come through financing
needs
Percent
ODA/GDP in the poorest countries
ODA/GDP in all developing countries
36
As aid flows fail to keep pace with other
financing sources
Percentage of recipients GDP in 28 poor countries
ODA
Workers remittances
FDI
Current account balance
37
Policy can help

• Policy measuresin the U.S., Europe, and Asiacan
  facilitate global rebalancing and reduce downside
  risks.
• Risks to developing countries call for continued
  sound macro policies and prudent borrowing.
• Meeting poor countries financing needs requires
  increased aid and renewed efforts to augment
  other financing flows.

38

• www.worldbank.org/
• globaloutlook
• Multilingual, modular presentation
• Printable version
• Forecast database out to 2007
• Downloadable charts
• Insightful calculators and simulation tools
• Valuable one-page data briefs