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
600 500 400 300 200 100
2-J 07 na 1-F 07 be 7 7 7 7 7 7 07 07 07 - 07 l-0 l- 0 t -0 r -0 r-0 y- 0 pngc u a u p a e u ov u -J -O -S -N 1-J 3-M 2-A 1-J 2-M 31 0-A 29 29 3 28
High-yield spread
EM-BIG spread
Source: Bloomberg, JPMorgan-Chase.
Following onset of crisis– emerging-market spreads increased and have become more volatile...
340 300 260 220 180 140
East Asia Europe and Central Asia EMBIG-Total spreads over U.S. Treasuries, basis points Latin America
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 0 1994M1 1995M9 1997M5 1999M1 2000M9 2002M5 2004M1 2005M9 2007M5
Emerging market bond spread (EMBIG)
Source: JPMorgan.
Bond yields have flattenedwith falling U.S. Treasury rates the prime factor raising spreads
2,500 2,250 2,000 1,750 1,500 1,250 1,000 750 500 250 0 1994M1 1995M9 1997M5 1999M1 2000M9 2002M5 2004M1 2005M9 2007M5
Bond spreads and yields (basis points)
Emerging market bond yields
Emerging market bond spread (EMBIG)
Source: JPMorgan.
Emerging equity markets fell sharply but more-than recouped earlier losses...
150 140 130
MSCI-Emerging Markets equity market indices (USD): Jan-07 =100
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
250 225 200 175 150 125 100
1-Sep05 1-Dec05 1-Mar06 1-Jun06 1-Sep06 1-Dec06 1-Mar07
Latin America All Emerging Markets
Europe and Central Asia
Asia
1-Jun07
1-Sep07
1-Dec07
Source: Morgan-Stanley, Thomson/Datastream.
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 -5 -10 -15
1999-I 2000-I 2001-I 2002-I 2003-I 2004-I 2005-I 2006-I 2007-I
U.S. Investment
Source: World Bank.
Developing country growth retained robust momentum through the first-half of 2007...
10 8 6 4 2 0
East Asia South Asia Latin America United States
Source: World Bank and National Agencies.
real GDP, percent change
2005
2006
2007-H1
...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 1998M7 2000M7 2002M7 2004M7 2006M7
Source: World Bank.
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 70
n70 n73 n76 n79 n82 n85 n88 n91 n94 n97 n00 n03 Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja n06
Source: IMF.
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 0
19 81 82 89 19 90 91 83 84 85 86 87 88 92 93 94 95
East Asia financial crisis
98 99 20 00 96 97 1
2001 global downturn
4 20 05
2
3
6
7
8
-2
Early 1980s debt crisis
Source: World Bank.
1990s recession Transition countries
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
19 81 82 89 19 90 91 98 99 20 00 4 20 05 83 84 85 86 87 88 92 93 94 95 96 97 1 2 3 6 7 8
-2
Source: World Bank.
9
Extreme headwinds of higher food and energy prices for net importers
Commodity price indices, 1990=100
400 350 300 250 200 150
Grains
Crude oil
Fats and oils
100
Other foods
50
1-Jan-00
Source:
1-Jan-01
1-Jan-02
1-Jan-03
1-Jan-04
1-Jan-05
1-Jan-06
1-Jan-07
DECPG Commodities Team.
Positive developments in Sub-Saharan Africa are of particular note
Real GDP, percent change
Forecast
8 6 4 2 0
19 81 82 89 19 90 91 98 99 20 00 4 20 05 83 84 85 86 87 88 92 93 94 95 96 97 1 2 3 6 7 8
Sub-Saharan Africa High-income
Developing economies
-2
Source: World Bank.
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
8
Base
GDP 2008 percent change
6 4 2 0 -2
World
Low Case Difference
High-income OECD
USA
Low and Middle Income
Middle Income
Low Income
Source: World Bank.
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
140 120 100 80 60 40 20 0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007P
Source: World Bank.
$ billions
Corporate - private Corporate - public Sovereign
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 8 6 4 2 0 -2
East Asia South Asia Europe and Central Asia Middle East and North Africa SubSaharan Africa Latin America
annual per-capita GDP growth, percent
1980/90 1990/00 2000/10 2010/20
Source: World Bank data and simulations with the Linkage model.
Poverty goals are likely to be reached in most regions, but Africa lags…
Percent of pop. living below $1/day
50
1990
40 30
20 10 0 Developing countries
Source: World Bank.
Millennium Development Goals
Sub-Saharan Africa
Poverty goals are likely to be reached in most regions, but Africa lags…
Percent of pop. living below $1/day
50 40 30
1990 2004
20 10 0 Developing countries
Source: World Bank.
Millennium Development Goals
Sub-Saharan Africa
Poverty goals are likely to be reached in most regions, but Africa lags…
Percent of pop. living below $1/day
50 40 30
1990 2004
Forecast 2015
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