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Global Development Finance 2005Mobilizing
Finance and Managing VulnerabilityBankers
Association for Finance and TradeMiami,
FloridaApril 18, 2005
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Outlook for developing countries

• Growth among developing countries is slowing to a
  more sustainable but still robust pace.
• Global imbalances pose serious global risks.
• Financial flows to developing countries continue
  to recover and diversify.
• Slower growth and higher interest rates could
  jeopardize developing country finances.

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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
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Factors contributing to the slowdown

• Rising interest rates
• High oil-prices
• High-tech cycle
• Waning impact of fiscal stimulus

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The forecast A return to more sustainable growth
GDP percent change, annual rates
Forecast
Developing countries
High income countries
Source World Bank
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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
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Emerging tensions in commodity markets
Index, January 2002100
Source World Bank
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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
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Financing the U.S. current account
billions
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Modest dollar depreciation to date
Real effective exchange rate, 1970 - 2004
Plaza Agreement
Breakdown of Bretton Woods
Recent decline
Productivity boom
2004
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A modest depreciation so far
Real effective exchange rate, 1970 - 2004
2004
Source World Bank
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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
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Many countries have appreciatedagainst the
dollar...
Percent change, real exchange rate, Jan. 2002-
Jan. 2005
Appreciation
Depreciation
Source World Bank
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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
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Unless resolved, global imbalances remain a
serious source of risk

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

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Financial flows to developing countries continue
recovery in 2004
billions
Total net capital flows
Net private flows
Net official flows
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Private equity flows are almost twice as large as
private debt flows
billions
192 billion
Net private equity flows
109 billion
Net private debt flows
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Bond issuance surges while net bank lending
remains flat
billions
Net bond flows
Net bank lending
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Over longer-term, rotation from debt to equity
billions
Net debt flows
Net equity flows
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Changing composition of emerging market private
debt
Stock of debt billion
Bond debt
Short-term bank debt
Long-term bank debt
2003
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Many developing countries have moved to flexible
exchange rate regimes

• Trend toward greater flexibility in exchange
  rates, one third now in free float
• Including diverse countries, Sri Lanka, Yemen,
  Brazil, Colombia, Poland, South Africa, Turkey,
  Tanzania, Philippines,..
• Increasing through orderly transitionEgypt move
  to a managed float in January 2003
• Still majority are in managed float category

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Developing countries continue to export capital
Current account surpluses as percent of GDP
All developing countries
Low-income countries
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Large portion of capital flows channeled into
reserve accumulation
billions
Change in reserves
Total capital flows
Current account balance
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Leading to record levels of reserves in
developing countries
billion
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While reserves in some countries exceed standard
levels
Reserves as months of imports
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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
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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
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Reported FDI outflows from developing countries
highlight growing integration
billion
percentage
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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
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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
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Continuing evidence of shift from loans to grants
billions
Foreign aid grants
Net debt flows from official sector
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Upturn in long-term U.S. interest rates poses
risks
Percent
10-year U.S. yield
Fed Fund target
38
With emerging market benchmark spreads also
beginning to widen
May 1999 June 2000
Period of last U.S. interest rate increase
Current spread
Change from low of Mar-05
Low
High
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With borrowing spreads at record low levels
Basis points
EMBI global bond spreads
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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 ()
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Growth in domestic debt poses new opportunities
and challenges
billion
Asia
Latin America
Europe
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Share of domestic debt in total public debt
Select Asian countries
Select Latin American countries
Percent
Malaysia
Brazil
Mexico
Philippines
Argentina
Thailand
Indonesia
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Risks to poor countries come through financing
needs
Percent
ODA/GDP in the poorest countries
ODA/GDP in all developing countries
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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
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Policy can help

• Policy measuresin the U.S., Europe, and Asiacan
  facilitate global rebalancing and reduce downside
  risks.
• High-reserve developing countries need to address
  costs and sustainability of current stance
• Risks to developing countries call for continued
  sound macro policies and prudent borrowing.

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