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April 24, 2008. Financial market turmoil, the global slowdown, and developing countries. Hans Timmer World Bank Development Economics Prospects Group. Key Points.

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april 24 2008
April 24, 2008

Financial market turmoil, the global slowdown, and developing countries

Hans Timmer

World Bank

Development Economics Prospects Group

key points
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
Weakening of U.S. domestic demandstarted well before financial turmoil

growth of investment and imports, saar 4-quarter moving average

U.S. Imports

U.S. Investment

Source: World Bank.

growth in high income countries is slowing
Growth in high-income countries is slowing

Industrial production growth, y/y %

OECD leading indicator

OECD IP

Source: World Bank, DECPG.

impact on developing countries has been muted so far
Impact on developing countries has been muted so far

Industrial Production growth, y/y %

Developing countries

United States

Source: World Bank, DECPG.

trend developing country growth has become decoupled from trend high income growth
Trend developing country growth has become decoupled from trend high-income growth

Developing and high-income growth and trend growth

Developing countries

High-income countries

Source: World Bank, DECPG

trend developing country growth has become decoupled from trend high income growth7
Trend developing country growth has become decoupled from trend high-income growth

Developing and high-income growth and trend growth

Developing countries

High-income countries

Source: World Bank, DECPG.

the cyclical component of developing and high income country growth remains coupled
The cyclical component of developing and high-income country growth remains coupled

Deviation from trend GDP growth (percent)

Developing country cycle

High-income country cycle

Source: World Bank, DECPG.

developing countries have become key drivers of global import growth
Developing countries have become key drivers of global import growth

Contribution to global nominal import growth in US$, y/y %-points

Developing countries

United States

Source: World Bank, DECPG.

baseline forecast of moderate slowdown
Baseline forecast of moderate slowdown

Forecast

Real GDP, percent change

Developing economies

High-income

Source: World Bank, DECPG.

most forecaster s expect slower but still robust growth for developing countries
Most forecaster’s expect slower but still robust growth for developing countries

GDP growth, percent

Source: Cited agencies.

NB: composition of aggregate and waiting schemes differ

high food and energy prices have contributed to an acceleration in developing country inflation
High food and energy prices have contributed to an acceleration in developing country inflation

Median developing country, percent change year-over-year

Source: DECPG, GEM database

energy and food prices have become major problem
Energy and food prices have become major problem

Indexes January 2000=100

Energy prices

Nominal $ prices

Real prices

Source: World Bank, DECPG

energy and food prices have become major problem14
Energy and food prices have become major problem

Indexes January 2000=100

Food prices

Nominal $ prices

Real prices

Source: World Bank, DECPG

key points15
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
Large credit write-downs have weakened banks’ capital positions

Selected banks, sub-prime related losses

Write-down as % of Tier 1 capital

111.7%

24.6%

14.1%

8.7%

7.7%

32.4%

11.9%

39.5%

Total write-downs, $billions

Source: IMF, The Banker

with massive liquidity injections global funding pressure has eased

Mar 11

Sept 18

Dec 12

UK

Eurozone

US

With massive liquidity injections global funding pressure has eased

3-month Libor spreads over policy interest rates (basis points)

Source: Datastream

so far increase in developing country spreads has been limited
So far increase in developing-country spreads has been limited

Basis points

Spreads on US High Yield

corporate bonds

Emerging-market

spreads

Source: Bloomberg

however there are increased signs that external debt flows to developing countries are slowing
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

# of loans

$billions

# of bond issues

Number of loans (right axis)

Number of bonds (right axis)

Source: Dealogic DCM Analytics and Loan Analytics.

slide20

Private corporations (and investment) are most vulnerable to tighter credit conditions…

New bond issues to developing countries, 2002-07

$ billions

Source: Dealogic DCM Analytics.

although countries with weaker fundamentals have seen risk premiums rise by much more
Although countries with weaker fundamentals have seen risk premiums rise by much more

CDS spreads, basis points

Turkey

Kazakhstan

South Africa

Source: Bloomberg

emerging market equity markets are down but continue to outperform those in the industrial world
Emerging market equity markets are down but continue to outperform those in the industrial world

Equity price Index (Jan.2-2006 = 100)

MSCI Emerging Market

MSCI Developed Market

Source: Bloomberg

financial stress has increased volatility in equity markets
Financial stress has increased volatility in equity markets

Equity Volatility index, percent

VIX (S&P 500)

Source: Bloomberg

april 24 200824
April 24, 2008

Financial market turmoil, the global slowdown, and developing countries

Hans Timmer

World Bank

Development Economics Prospects Group

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