Download Percent of GDP (right axis)

Global
Development
Finance 2006
The Development
Potential of Surging
Capital Flows
By Mansoor Dailami
TDLC, Tokyo, Japan
May 31, 2006
2005 – A Landmark Year in
Development Finance




Private capital flows have reached record
levels
South-South flows are important aspect of
development finance
For the poorest countries, donors have
enhanced their aid effort
Risks and vulnerabilities remain
Private capital flows to developing
countries grew at record pace in 2005
Total net private capital flows to developing countries
$ billions
Percent
Percent of GDP (right axis)
500
6
$491 billion
in 2005
450
5
400
350
4
300
250
3
200
2
150
100
1
50
0
0
1990
1993
1996
1999
2002
2005
… with all types of private flows
recording gains in 2005
$ billions
600
500
Bank
Bond
$137 billion
Portfolio equity flows
400
FDI
$62 billion
300
$61 billion
200
$238 billion
100
0
2002
2003
2004
2005
Both global and domestic factors
have contributed

On the global side



Booming international trade
Relatively low international interest rates
On the domestic side





Improved domestic monetary and exchange rate policy
Large official reserve holdings
Better external debt management
Development of local debt markets
Progress toward meeting international standards for
transparency and corporate governance
Developing-country credit quality
improved markedly in 2005
Number of credit upgrades/downgrades by Fitch, Moody’s and S&P
50
Upgrades
46
Downgrades
40
36
32
31
30
20
10
22
20
20
20
18
10
9
9
2004
2005
0
2000
2001
2002
2003
Net private debt flows have
fluctuated substantially…
Net private debt flows to developing countries
$ billion
Percent
250
Percent of GDP
(right axis)
200
3
$192 billion in 2005
(left axis)
2
150
100
1
50
0
0
1990
-50
1993
1996
1999
2002
2005
-1
…portfolio equity flows have also
been volatile
Net portfolio equity inflows to developing countries,1990-2005
$ billion
$61 billion in 2005
(left axis)
65
60
Percent
20
Percent of GDP
(right axis)
55
50
15
45
40
35
10
30
25
20
5
15
10
5
0
0
1990
1993
1996
1999
2002
2005
…while more stable FDI accounted
for half of net private flows
Net FDI inflows to developing countries
$ billion
$237 billion in 2005
(left axis)
250
Percent
4
Percent of GDP
(right axis)
200
3
150
2
100
1
50
0
0
1990
1993
1996
1999
2002
2005
FDI flows dominate private capital
inflows to East Asia
$ billion
80
FDI flows
60
40
20
0
-20
Portfolio equity flows
Debt flows
-40
-60
1991
1993
1995
1997
1999
2001
2003
2005
China continues to dominate
FDI inflows to East Asia
FDI flows into East Asia and the Pacific
$ billion
60
China
50
40
30
Other countries
20
10
0
1991
1993
1995
1997
1999
2001
2003
2005
Non-FDI flows to China increased
markedly in recent years
Non-FDI flows into East Asia and the Pacific
$ billion
80
China
60
40
20
0
-20
Other countries
-40
-60
1990
1992
1994
1996
1998
2000
2002
2004
Developing economies are highly
integrated with each other
Share of flows to developing countries and originating from
developing countries
Percent
Developing countries’ GDP
as a share of global GDP
40
35
30
25
20
15
10
5
0
FDI
Remittances
Trade
Syndicated
Bank Loans
GDP
South-South FDI is significant in banking
sector, particularly in low income countries
Share of South-South in
total number of foreign banks
Share of South-South in
total foreign bank assets
Percent
Percent
50
50
45
45
40
40
35
35
30
30
25
25
20
20
15
15
10
10
5
5
0
0
Low
Income
Middle
Income
All
Developing
Low
Income
Middle
Income
All
Developing
Donors continue to scale-up aid…
Net ODA disbursements from DAC donors
$106.5 billion
in 2005
$79.6 billion
in 2004
23
Debt relief
4.2
30.2
45.2
38.3
45.2
Other special
purpose grants
Other components
of ODA
…and enhance commitments for future aid
Net ODA as a percent of GNI in DAC donor countries, 1990-2005
Projection: 2006-10
Percent
0.36% in 2010
0.35
0.33% in 2005
0.30
Total ODA excluding debt
relief to Iraq and Nigeria
0.27% in 2005
0.25
0.20
1990
1995
2000
2005
2010
This time around, what has changed?






More flexible exchange rate regimes: 62 percent of
countries versus 33 percent during the previous
episode
Oil exporters and emerging Asia now have sizable
current account surpluses and reserves
External debt positions have improved
More countries have developed local debt markets
Less reliance on short-term bank debt
Equity flows dominate: FDI accounts for 57 percent of
private capital flows versus 47 percent last time
Considerable improvements in external
liability positions of East Asia
Percent
45
Percent
Reserves/short-term debt (right)
500
450
40
400
35
350
300
30
250
25
200
20
Total debt/GDP (left)
150
100
15
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
East Asia’s current account surplus
continued to rise led by China
$ billion
160
140
East Asia
China
120
100
80
60
40
20
0
-20
-40
-60
1991
1993
1995
1997
1999
2001
2003
2005
But, risks and vulnerabilities remain





Heightened market anxiety associated with global
payments imbalances
Possibility of higher global interest rates and economic
slow-down
Uncertainties associated with geopolitical risks
Higher inflation expectations and possibility of more
aggressive monetary policy responses
Recent pace of sterilized intervention and reserve
accumulation in emerging market economies is not
sustainable
With U.S. monetary tightening, emerging
market bond spreads have widened recently
Percent
Basis points
230
5
US Federal Funds
rate (right)
220
4.75
210
200
4.5
190
4.25
180
170
Jan-06
EMBIG spreads (left)
4
Feb-06
Mar-06
Apr-06
May-06
Boom in local equity market prices has
raised the risk of sharp market correction
Jan. 2004 = 100
175
Emerging Market equity
price index (MSCI )
150
FTSE 100
125
S&P
100
75
Jan04
Apr04
Jul04
Oct04
Jan05
Apr05
Jul05
Oct05
Jan06
Apr06
Policy implications

For developing countries…

Consistent management of monetary and
exchange rate policy

Sound fiscal policy to promote price stability

Integrated approach to internal and external
debt management

Own responsibility to improve business
environment and governance

Prudence approach to commercial borrowing,
while maintaining debt sustainability
continued …. Policy Implications

For the international policy community…

Multilateral cooperation to prevent disorderly market
reaction to global imbalances

Shared responsibility between deficit and surplus countries

Recognizing structural asymmetry between international
reserve currency countries and others

Donor commitments:
• Follow through on pledges to enhance aid , and ensure aid
allocations in line with development priorities