Download Percent Net private debt flows to developing countries, 1990

Global
Development
Finance 2006
The Development
Potential of Surging
Capital Flows
May/June 2005
Outlook for the global economy
 Growth in developing economies is projected to
remain strong despite higher oil prices
 However, growth will slow as the external
environment is less supportive and developing
countries are more vulnerable
 Sound policies in most developing countries
favor a soft-landing, but downside risks
predominate
Weaker but robust prospects
Real GDP annual percent change
Forecast
9
8
Developing
7
6
5
Developing ex.
India & China
4
3
2
1
High-income
0
1980
1985
Source: World Bank
1990
1995
2000
2005
2008
A cyclical slowing in the
context of a rising growth trend
Real GDP annual percent change
Forecast
9
8
Developing
7
6
5
4
3
2
1
0
1980
1985
Source: World Bank
1990
1995
2000
2005
2008
External factors behind resilience

Higher oil prices reflect strong demand
conditions not a supply shock

Favorable external conditions



Muted inflationary response in high-income
countries
Low interest rates
Increased aid flows
Domestic factors behind resilience

Strong initial conditions in developing
countries




Lower inflation
Lower government deficits and debt
More flexible currency regimes
Entered period with strong current account
positions
Increased vulnerability
Current account buffers have been absorbed
Current account balance of oil-importing developing countries,
% of GDP
10
2005
8
6
4
2002
2
0
-2
-4
-6
East Asia &
Pacific (ex.
China)
Europe &
Cantral Asia
Latin
America &
Caribbean
Middle East
& North
Africa
South Asia
Sub-Saharan
africa
External conditions will be less
favorable

Rising interest rates

Increased investor uncertainty

Persistent risks from:



Global imbalances
An oil supply shock
Possibility of lower non-oil commodity prices
Financial market uncertainty
Exchange rate volatility
Index of euro exchange rates, index Jan. 1, 2006=100
Jan-06
Feb-06
Mar-06
Apr-06
May-06
90
95
100
105
110
115
Depreciation
120
125
130
Brazil
Mozambique
USA
Colombia
Turkey
Indonesia
South Africa
Financial market uncertainty
Lower and more volatile commodity prices?
Commodity price indeces, Jan 2, 2006=100
Crude
195
175
May 16
Copper $/MT
Nickel $/MT
Zinc $/MT
155
Gold $/Troy Oz
Silver Cts/Troy Oz
135
115
95
January-06
February-06
March-06
April-06
May-06
Policy implications

Improved fundamentals should help most
countries manage a deterioration in conditions

Countries need to continue being prudent



Contain additional expenditure obligations that
may not be sustainable in future
Restructure debt
Put in place polices that promote adjustment to
higher oil prices
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
The surge in private capital flows
continued in 2005…
Total net private capital flows to developing countries, 1990-2005
$ 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
…Both global and domestic factors
have contributed





Booming International Commodity Markets
Relatively Low international interest rates
Improved domestic economic policy and
management
Large Reserve Holdings
Better External debt profile
Net private debt flows have
fluctuated substantially…
Net private debt flows to developing countries, 1990-2005
$ 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
…whit more stable FDI accounting for
half of net private flows
Net FDI inflows to developing countries
$ billion
Percent
$237 billion in 2005
(left axis)
250
4
Percent of GDP
(right axis)
200
3
150
2
100
1
50
0
0
1990
1993
1996
1999
2002
2005
Low-income countries receive
significant FDI inflows given their size
FDI inflows / GDP, 1990-2005
Percent
4
Middle-income countries
3
2
Low-income countries (excluding India)
1
0
1990
1993
1996
1999
2002
2005
Developing economies are highly
integrated with each other
Share of flows originating in developing countries
Percent
40
35
30
25
20
15
10
5
0
FDI
Remittances
Trade
Syndicated
Bank Loans
South-South FDI is significant in
infrastructure
Share FDI inflows originating in other developing countries
Percent
30
25
20
15
10
5
0
Telecom
Transport
Energy
Water
…also significant South-South FDI in
the banking sector


Half of foreign-owned banks in low-income
countries are from developing countries
Dominated by regional dimension (like trade
and workers’ remittances)
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
Emerging Asia and oil-exporting countries account
for the bulk of the increase in reserves
$ billions
2500
Others
2000
Emerging Asia
Oil-exporting
1500
1000
500
0
1999
2000
2001
2002
2003
2004
2005
Emerging market bond spreads narrowed
despite higher interest rates
EMBIG spreads
Basis points
1300
1100
Developing countries
900
700
205 basis points
on May 19 2006
500
300
Latin America
100
Jan-01 Aug-01 Mar-02 Oct-02 May-03 Dec-03 Jul-04 Feb-05 Sep-05 Apr-06
Looking ahead, risks and
vulnerabilities remain




Tightening global liquidity and more
discriminating supply of capital
Uncertainties associated with geopolitical risks
and an increase in risk aversion
Dramatic escalation of local stock market
prices raises the risk of asset bubble
Recent pace of sterilized intervention and
reserve accumulation is not sustainable
Policy implications

Continued macroeconomic stability is
vital to sustain investor confidence

Promoting institutions and policies to
operate with more flexible exchange rate
and open capital markets

With ten years to achieve MDGs , donors
should fully implement their aid
commitments