Transcript Prospects for developing countries Key Messages

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
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31
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8
2
2
3
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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.
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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