Transcript Financial market turmoil, the global slowdown, and developing

Financial market turmoil, the global
slowdown, and developing countries
Hans Timmer
April 24, 2008
World Bank
Development Economics Prospects Group
Key Points
 Slower growth in high-income countries is likely to result in
weaker but still solid developing country growth – including
under a mild U.S. recession scenario.
 Financial turmoil has so far proved manageable, but
remains a serious risk for several vulnerable developing
countries
Weakening of U.S. domestic demand
started well before financial turmoil
growth of investment and imports, saar 4-quarter moving average
15
U.S. Imports
10
5
0
U.S. Investment
-5
-10
1999-I
2000-I
Source: World Bank.
2001-I
2002-I
2003-I
2004-I
2005-I
2006-I
2007-I
Growth in high-income countries is slowing
Industrial production growth, y/y %
9
OECD leading
indicator
6
OECD IP
3
0
-3
-6
2000M1
Source: World Bank, DECPG.
2002M1
2004M1
2006M1
2008M1
Impact on developing countries has been muted so far
Industrial Production growth, y/y %
15
Developing countries
10
5
0
United States
-5
1994M1
1996M1
Source: World Bank, DECPG.
1998M1
2000M1
2002M1
2004M1
2006M1
2008M1
Trend developing country growth has become
decoupled from trend high-income growth
Developing and high-income growth and trend growth
9
8
7
Developing countries
6
5
4
3
2
1
High-income countries
0
-11962
1967
1972
Source: World Bank, DECPG
1977
1982
1987
1992
1997
2002
2007
Trend developing country growth has become
decoupled from trend high-income growth
Developing and high-income growth and trend growth
9
8
7
Developing countries
6
5
4
3
2
1
High-income countries
0
-11962
1967
1972
Source: World Bank, DECPG.
1977
1982
1987
1992
1997
2002
2007
The cyclical component of developing and
high-income country growth remains coupled
Deviation from trend GDP growth (percent)
3
Developing
country cycle
2
1
0
-1
-2
High-income
country cycle
-3
-4
1962
1967
1972
Source: World Bank, DECPG.
1977
1982
1987
1992
1997
2002
2007
Developing countries have become key drivers of
global import growth
Contribution to global nominal import growth in US$, y/y %-points
10
Developing countries
5
0
United States
-5
1991M1
1993M1
1995M1
Source: World Bank, DECPG.
1997M1
1999M1
2001M1
2003M1
2005M1
2007M1
Baseline forecast of moderate slowdown
Forecast
Real GDP, percent change
10
8
Developing economies
6
High-income
4
2
0
1981
84
-2
Source: World Bank, DECPG.
87
1990
93
96
99
2002
05
08
Most forecaster’s expect slower but still robust
growth for developing countries
GDP growth, percent
9
2007
2008
2009
8
7
6
5
4
3
World Bank
IMF
JP Morgan
Consensus
Source: Cited agencies.
NB: composition of aggregate and waiting schemes differ
Oxford
Economics
EIU
IIF
High food and energy prices have contributed to an
acceleration in developing country inflation
Median developing country, percent change year-over-year
9
8
7
6
5
4
3
Jan 2000 Jan 2001 Jan 2002 Jan 2003 Jan 2004 Jan 2005 Jan 2006 Jan 2007 Jan 2008
Source: DECPG, GEM database
Energy and food prices have become major problem
Indexes January 2000=100
Energy prices
400
350
Nominal $ prices
300
250
200
150
Real prices
100
50
2000M1
2001M1
Source: World Bank, DECPG
2002M1
2003M1
2004M1
2005M1
2006M1
2007M1
Energy and food prices have become major problem
Indexes January 2000=100
Food prices
210
Nominal $ prices
195
180
165
150
135
120
105
Real prices
90
75
2000M1
2001M1
Source: World Bank, DECPG
2002M1
2003M1
2004M1
2005M1
2006M1
2007M1
Key Points
 Slower growth in high-income countries is likely to result in
weaker but still solid developing country growth – including
under a mild U.S. recession scenario.
 Financial turmoil has so far proved manageable, but
remains a serious risk for several vulnerable developing
countries
Large credit write-downs have weakened banks’ capital
positions
Selected banks, sub-prime related losses
Write-down as % of Tier 1 capital
111.7%
UBS
Citigroup
24.6%
14.1%
HSBC
8.7%
Bank of America
Credit Agricole
7.7%
Washington Mutual
32.4%
11.9%
Wachovia
39.5%
CIBC
0
Source: IMF, The Banker
10
20
30
40
Total write-downs, $billions
With massive liquidity injections global funding
pressure has eased
3-month Libor spreads over policy
interest rates (basis points)
Sept 18
120
Mar 11
Dec 12
UK
90
Eurozone
60
30
US
0
-30
-60
Ju
07
n
7
J
-0
ul
A
Source: Datastream
07
ug
07
p
Se
7
-0
t
c
O
N
o
07
v
D
07
ec
08
n
Ja
08
b
Fe
8
-0
r
a
M
A
8
-0
r
p
So far increase in developing-country spreads has
been limited
Basis points
1000
800
Spreads on US High Yield
corporate bonds
600
400
200
Emerging-market
spreads
0
Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08
Source: Bloomberg
However, there are increased signs that external debt
flows to developing countries are slowing
Gross syndicated loans by quarter
Gross bond issuance by quarter
$billions
$billions
70
Number of bonds
(right axis)
60
140
# of loans
Number of loans
(right axis)
120
400
# of bond issues
150
120
100
300
80
50
90
40
200
60
40
30
60
20
100
20
0
2005 Q1
30
10
2006 Q1
2007 Q1
0
2008 Q1
Source: Dealogic DCM Analytics and Loan Analytics.
0
2005 Q1
2006 Q1
2007 Q1
0
2008 Q1
Private corporations (and investment) are most
vulnerable to tighter credit conditions…
New bond issues to developing countries, 2002-07
$ billions
150
Sovereign
Corporate
120
90
60
30
0
2002
2003
Source: Dealogic DCM Analytics.
2004
2005
2006
2007
Although countries with weaker fundamentals have
seen risk premiums rise by much more
CDS spreads, basis points
360
320
280
Turkey
240
200
160
120
Kazakhstan
80
40
South Africa
0
Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08
Source: Bloomberg
Emerging market equity markets are down but
continue to outperform those in the industrial world
Equity price Index (Jan.2-2006 = 100)
180
160
MSCI Emerging Market
140
120
100
MSCI Developed Market
80
60
Jan06
Apr06
Source: Bloomberg
Jul06
Oct06
Jan07
Apr07
Jul07
Oct07
Jan08
Apr08
Financial stress has increased volatility in equity
markets
Equity Volatility index, percent
35
30
25
20
15
VIX (S&P 500)
10
5
Jan-07
Source: Bloomberg
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
Financial market turmoil, the global
slowdown, and developing countries
Hans Timmer
April 24, 2008
World Bank
Development Economics Prospects Group