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Prospects for Developing Countries Global Economic Prospects 2008 The World Bank Prospects for developing countries Key Messages The U.S. sub-prime crisis has carried limited financial effects to developing countries to date. Prospects for developing countries Key Messages The U.S. sub-prime crisis has carried limited financial effects to developing countries to date. Resilience among developing economies is helping to mitigate the U.S. slowdown and promotes adjustment of global imbalances. Prospects for developing countries Key Messages The U.S. sub-prime crisis has carried limited financial effects to developing countries to date. Resilience among developing economies is helping to mitigate the U.S. slowdown and promotes adjustment of global imbalances. Growth in developing economies is expected to slow only modestly over the coming 2 years. Prospects for developing countries Key Messages The U.S. sub-prime crisis has carried limited financial effects to developing countries to date. Resilience among developing economies is helping to mitigate the U.S. slowdown and promotes adjustment of global imbalances. Growth in developing economies is expected to slow only modestly over the coming 2 years. Serious risks remain for developing countries– to the downside as well as to the upside. Prospects for developing countries Key Messages The U.S. sub-prime crisis has carried limited financial effects to developing countries to date. Resilience among developing economies is helping to mitigate the U.S. slowdown and promotes adjustment of global imbalances. Growth in developing economies is expected to slow only modestly over the coming 2 years. Serious risks remain for developing countries– to the downside as well as to the upside. Still- longer term growth appears favorable. Prospects for developing countries Key Messages The U.S. sub-prime crisis has carried limited financial effects to developing countries to date. Perceived riskiness of high-yield corporate bonds increased more than EM bonds spreads, basis points 600 High-yield spread 500 400 300 200 EM-BIG spread 100 2-J -07 n a 1-F -07 b e 7 07 07 07 07 -07 -07 -07 - 07 -07 l l t r -0 r y p n g v c u a u p a e u u -J -O No -S -A 1-J 9 3-M 2-A 1-J 9 2-M 31 0 8 2 2 3 2 Source: Bloomberg, JPMorgan-Chase. Following onset of crisis– emerging-market spreads increased and have become more volatile... spreads over U.S. Treasuries, basis points 340 Latin America 300 EMBIG-Total 260 220 180 140 East Asia Europe and Central Asia 100 1-Jan-07 14-Feb-07 30-Mar-07 13-May-07 26-Jun-07 9-Aug-07 22-Sep-07 5-Nov-07 19-Dec-07 Source: JPMorgan . ...but in historical perspective the present widening of spreads is modest Bond spreads (basis points) 2,500 2,250 2,000 1,750 1,500 1,250 1,000 750 500 250 Emerging market bond spread (EMBIG) 0 1994M1 1995M9 Source: JPMorgan. 1997M5 1999M1 2000M9 2002M5 2004M1 2005M9 2007M5 Bond yields have flattenedwith falling U.S. Treasury rates the prime factor raising spreads Bond spreads and yields (basis points) 2,500 2,250 2,000 1,750 Emerging market bond yields 1,500 1,250 1,000 750 500 250 Emerging market bond spread (EMBIG) 0 1994M1 1995M9 Source: JPMorgan. 1997M5 1999M1 2000M9 2002M5 2004M1 2005M9 2007M5 Emerging equity markets fell sharply but more-than recouped earlier losses... 150 equity market indices (USD): Jan-07 =100 140 130 MSCI-Emerging Markets 120 DJIA (USA) 110 100 TOPIX (Japan) 90 1-Jan-07 15-Feb-07 1-Apr-07 16-May-07 30-Jun-07 14-Aug-07 28-Sep-07 12-Nov-07 27-Dec-07 Source: Morgan-Stanley, Thomson/Datastream. ...keeping bullish longer-term trends intact equity market indices (USD): Sep-05 =100 250 Latin America 225 All Emerging Markets 200 175 Europe and Central Asia 150 Asia 125 100 1-Sep05 1-Dec05 1-Mar06 1-Jun06 Source: Morgan-Stanley, Thomson/Datastream. 1-Sep06 1-Dec06 1-Mar07 1-Jun07 1-Sep07 1-Dec07 Prospects for developing countries Key Messages The U.S. sub-prime crisis has carried limited financial effects to developing countries. Resilience among developing economies is helping to mitigate the U.S. slowdown and promotes adjustment of global imbalances. Weakening of U.S. domestic demand started well before financial turmoil growth of investment and imports, 4-quarter moving average 15 U.S. Imports 10 5 0 U.S. Investment -5 -10 -15 1999-I 2000-I Source: World Bank. 2001-I 2002-I 2003-I 2004-I 2005-I 2006-I 2007-I Developing country growth retained robust momentum through the first-half of 2007... 10 real GDP, percent change 8 2005 2006 2007-H1 6 4 2 0 East Asia South Asia Source: World Bank and National Agencies. Latin America United States ...with import demand from the developing world a support U.S. exports nominal growth in US$, 12m/12m ch% 35 Developing country imports 25 15 5 -5 U.S. exports -15 1994M7 1996M7 Source: World Bank. 1998M7 2000M7 2002M7 2004M7 2006M7 The dollar’s decline to near all-time lows is a key factor for trade & capital flows real effective exchange rate 120 110 100 90 80 Source: IMF. n06 Ja n03 Ja n00 Ja n97 Ja n94 Ja n91 Ja n88 Ja n85 Ja n82 Ja n79 Ja n76 Ja n73 Ja Ja n70 70 Gradual reductions in U.S. current account deficit likely to continue U.S. current account balance, % of GDP -3.0 -4.0 -5.0 % of GDP -6.0 -7.0 Q1 2000 Q1 2001 Q1 2002 Q1 2003 Source: U.S. Department of Commerce. Q1 2004 Q1 2005 Q1 2006 Q1 2007 Prospects for developing countries Key Messages The U.S. sub-prime crisis has carried limited financial effects to developing countries to date. Resilience among developing economies is helping to mitigate the U.S. slowdown and promotes adjustment of global imbalances. Growth in developing economies is expected to slow only modestly over the coming 2 years. Modest slowing of growth expected for developing economies Real GDP, percent change Forecast 8 Developing economies 6 4 2 East Asia financial crisis 0 81 82 83 84 85 86 87 88 89 990 91 92 93 94 95 96 97 98 99 000 9 1 1 2 -2 2001 global downturn Early 1980s debt crisis Source: World Bank. 1990s recession Transition countries 1 2 3 4 05 0 2 6 7 8 9 Growth has far-exceeded that of highincome countries for an extended period Real GDP, percent change Forecast 8 Developing economies 6 High-income 4 2 0 81 82 83 84 85 86 87 88 89 990 91 92 93 94 95 96 97 98 99 000 9 1 1 2 -2 Source: World Bank. 1 2 3 4 05 0 2 6 7 8 9 Extreme headwinds of higher food and energy prices for net importers Commodity price indices, 1990=100 400 Crude oil 350 300 250 Fats and oils 200 150 Grains 100 Other foods 50 1-Jan-00 Source: 1-Jan-01 1-Jan-02 1-Jan-03 DECPG Commodities Team. 1-Jan-04 1-Jan-05 1-Jan-06 1-Jan-07 Positive developments in Sub-Saharan Africa are of particular note Real GDP, percent change Forecast 8 6 Developing economies Sub-Saharan Africa High-income 4 2 0 81 82 83 84 85 86 87 88 89 990 91 92 93 94 95 96 97 98 99 000 9 1 1 2 -2 Source: World Bank. 1 2 3 4 05 0 2 6 7 8 9 Prospects for developing countries Risks Serious risks remain for developing countries– to the downside as well as to the upside. Prospects for developing countries Risks Serious risks remain for developing countries– to the downside as well as to the upside. A low case scenario triggered by sharp decline in U.S. home prices, worsening of the credit crunch and U.S. recession in 2008 would affect developing countries quite adversely. Export and investment falloff hits middle income countries hard GDP 2008 percent change 8 Base 6 Low Case Difference 4 2 0 -2 World Source: World Bank. High-income OECD USA Low and Middle Income Middle Income Low Income Prospects for developing countries Risks Serious risks remain for developing countries– to the downside as well as to the upside. A low case scenario triggered by sharp decline in U.S. home prices, worsening of the credit crunch and U.S. recession in 2008 would affect developing countries quite adversely. Retrenchment in business investment an important element as emerging-market corporations now dominate capital flows. Corporate debt now accounts for twothirds of emerging market bond issuance Bond issuance by developing countries, 1998-2007 140 $ billions Corporate - private 120 Corporate - public Sovereign 100 80 60 40 20 0 1998 1999 Source: World Bank. 2000 2001 2002 2003 2004 2005 2006 2007P Prospects for developing countries Risks Serious risks remain for developing countries– to the downside as well as to the upside. A low case scenario triggered by sharp decline in U.S. home prices, worsening of the credit crunch and U.S. recession in 2008, would affect developing countries quite adversely. Retrenchment in business investment an important element as emerging-market corporations now dominate capital flows. An upside risk... against the background of lower global interest rates and burgeoning liquidity in emerging markets... is potential formation of new asset-market “bubbles”, overheating and escalation in inflation pressures. Fed funds lowered 100 basis points with massive reserve injections to calm inter-bank markets 6.0 Fed funds target rate 5.5 LIBOR 6-months 5.0 4.5 Fed funds effective rate 4.0 4-Jun-07 2-Jul-07 30-Jul-07 27-Aug-07 24-Sep-07 22-Oct-07 19-Nov-07 17-Dec-07 Source: Federal Reserve and Datastream . Prospects for developing countries Key Messages Still- longer-term growth appears favorable. MDG poverty targets are likely to be achieved by developing countries as a group, with SubSaharan Africa improving, but still short of goals. Per-capita GDP growth shows marked gains in the current decade 10 annual per-capita GDP growth, percent 1980/90 1990/00 2000/10 2010/20 8 6 4 2 0 -2 East Asia South Asia Europe and Central Asia Middle East and North Africa Source: World Bank data and simulations with the Linkage model. SubSaharan Africa Latin America Poverty goals are likely to be reached in most regions, but Africa lags… Percent of pop. living below $1/day 50 1990 40 30 Millennium Development Goals 20 10 0 Developing countries Source: World Bank. Sub-Saharan Africa Poverty goals are likely to be reached in most regions, but Africa lags… Percent of pop. living below $1/day 50 1990 2004 40 30 Millennium Development Goals 20 10 0 Developing countries Source: World Bank. Sub-Saharan Africa Poverty goals are likely to be reached in most regions, but Africa lags… Percent of pop. living below $1/day 50 1990 2004 40 Forecast 2015 30 Millennium Development Goals 20 10 0 Developing countries Source: World Bank. Sub-Saharan Africa Prospects for Developing Countries Global Economic Prospects 2008 The World Bank