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Global Development Finance 2005 Mobilizing Finance and Managing Vulnerability Paris and Beijing April 2005 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. Current context: economic activity is slowing Percent change in industrial production, 3 month moving average, annual rate 10 Developing Countries* 6 High-income countries 2 Sep-03 -2 Dec-03 * Data exclude China Source: World Bank Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Current context: Interest rates are rising 10-year U.S. treasury yield, percent 4.75 4.50 4.25 4.00 3.75 3-Jan 17-Jan Source: World Bank 31-Jan 14-Feb 28-Feb 14-Mar Factors contributing to the slowdown Rising interest rates High oil-prices High-tech cycle Administrative efforts to slow growth in China The forecast: A return to more sustainable growth GDP percent change, annual rates Forecast Developing countries 6 High income countries 5 4 3 2 1 0 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 Source: World Bank Almost all regions grow faster than in the past GDP, per cent change from previous year Latin-America Caribbean Sub-saharan Africa 8 7 6 5 4 3 2 1 0 South Asia 8 7 6 5 4 3 2 1 0 8 7 6 5 4 3 2 1 0 19802002 2003 2004* 2005 2006 19802002 2007 Europe & Central Asia 2003 2004* 2005 2006 2007 East-Asia Pacific 8 6 5 4 3 2 1 0 2003 2004* 2005 * estimate Source: World Bank 2006 2007 2003 2004* 2005 2006 2007 Mid-East North Africa 8 7 6 5 4 3 2 1 0 7 19802002 19802002 8 7 6 5 4 3 2 1 0 19802002 2003 2004* 2005 2006 2007 19802002 2003 2004* 2005 2006 2007 Emerging tensions in commodity markets Index, January 2002=100 240 Energy 220 200 180 160 Metals and Minerals ` 140 120 Agricultural products 100 80 1998 1999 Source: World Bank 2000 2001 2002 2003 2004 2005 Signs of accelerating inflation Consumer inflation, percent change, y-o-y 7 6 Developing countries 5 4 3 OECD countries 2 1 1999 2000 Source: World Bank 2001 2002 2003 2004 2005 Global Imbalances are placing pressure on the dollar Current account balances, $millions, estimates for 2004 200 0 -200 -400 -600 -800 United States Euro Area Source: World Bank Japan China Other East Middle Europe Latin Other Asia East & and America North Central and Africa Asia Caribbean Low U.S. interest rates have contributed to dollar weakness Difference between U.S. and Euro 6-month interbank rate, €/$ exchange rate €/$ 1.6 Percent 3.5 Interest rate spread 3 1.4 2.5 Euro / $ 1.2 2 1.5 1.0 1 0.5 0.8 0 0.6 -0.5 0.4 -1 0.2 1995 -2 -1.5 1996 1997 Source: World Bank 1998 1999 2000 2001 2002 2003 2004 2005 A modest depreciation so far Real effective exchange rate, 1970 - 2004 120 110 100 Period average 90 80 70 1970 1975 Source: World Bank 1980 1985 1990 1995 2000 2004 Unless resolved, global imbalances remain a serious source of risk Interest rates could rise by even more if: – Investor’s 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. Financial flows to developing countries continue recovery in 2004 $ billions Total net capital flows 350 300 250 200 Net private flows 150 100 Net official flows 50 0 1990 1992 1994 1996 1998 2000 2002 2004 Developing countries continue to export capital Current account surpluses as percent of GDP 3 All developing countries 2 1 0 -1 -2 -3 -4 Low-income countries -5 -6 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 Large portion of capital flows channeled into reserve accumulation… $ billions 500 Change in reserves 400 300 200 Total capital flows 100 0 -100 Current account balance -200 1980 1984 1988 1992 1996 2000 2004 …Leading to record levels of reserves in developing countries $ billion 1800 Low-income countries 1600 Other middle-income countries 1400 China 1200 1000 800 600 400 200 0 1999 2000 2001 2002 2003 2004 …While reserves in some countries exceed standard levels Venezuela, Rep Bol de India Egypt Indonesia China Brazil Russian Federation Argentina Pakistan 0 6 12 18 Reserves as months of imports 24 A modest recovery in FDI inflows to developing countries in 2004 $ billion FDI as a share of GDP percentage 200 4 150 3 Other middle income Top 5 100 2 Low income 50 1 0 0 1999 2000 2001 2002 2003 Share of GDP 2004 Top 5: China, Brazil, Mexico, Russian Federation, and Chile FDI to poor countries still dominated by flows to resource exporters Percentage of recipients’ GDP in 28 poor countries 10 8 Oil and Mineral exporters 6 Other poor countries 4 2 0 1990 1992 1994 1996 1998 2000 2002 Reported FDI outflows from developing countries highlight growing integration $ billion percentage 45 0.6 40 0.5 35 Percent of GDP 30 0.4 25 0.3 20 15 0.2 10 FDI outflows 0.1 5 0 0 1990 1992 1994 1996 1998 2000 2002 2004 Bond issuance surges while net bank lending remains flat $ billions 70 Net bond flows 60 50 40 30 20 10 0 -10 Net bank lending -20 1990 1992 1994 1996 1998 2000 2002 2004 ODA from DAC donor countries is increasing ODA as a percent of GNI (projections:2004-2006) Percent Projections 0.35 Total ODA/GNI 0.30 0.25 0.20 0.15 Bilateral ODA/GNI 0.10 0.05 Bilateral ODA less special purpose grants/GNI 0.00 1990 1992 1994 1996 1998 2000 2002 2004 2006 … 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 Continuing evidence of shift from loans to grants $ billions Foreign aid grants 50 40 30 20 10 0 -10 Net debt flows from official sector -20 -30 1990 1992 1994 1996 1998 2000 2002 2004 Upturn in long-term U.S. interest rates poses risks… Percent 10-year U.S. yield 5.0 4.0 3.0 2.0 1.0 0.0 Jun-04 Fed Fund target Aug-04 Oct-04 Dec-04 Feb-05 Apr-05 …With borrowing spreads at record low levels Basis points 1000 900 800 700 600 EMBI global bond spreads 500 400 300 Jul-02 Nov-02 Mar-03 Jul-03 Nov-03 Mar-04 Jul-04 Nov-04 Mar-05 …Especially for highly-indebted and more vulnerable emerging markets Average change in spreads (bps) from 200 basis point increase in U.S. benchmark rates 70 60 50 40 30 20 10 0 <40 40-60 61-80 External debt/GNI (%) >90 Growth in domestic debt poses new opportunities and challenges $ billion 900 External Domestic 600 300 0 1997 2002 Asia 1997 2002 Latin America 1997 2002 Europe Risks to poor countries come through financing needs… Percent 4 ODA/GDP in the poorest countries 3 2 1 ODA/GDP in all developing countries 0 1990 1992 1994 1996 1998 2000 2002 …As aid flows fail to keep pace with other financing sources Percentage of recipients’ GDP in 28 poor countries 10 8 ODA Workers’ remittances 6 4 FDI 2 0 -2 Current account balance -4 -6 1990-92 2000-03 Policy can help 1. Policy measures—in the U.S., Europe, and Asia—can facilitate global rebalancing and reduce downside risks. 2. Risks to developing countries call for continued sound macro policies and prudent borrowing. 3. Meeting poor countries’ financing needs requires increased aid and renewed efforts to augment other financing flows. 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