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Global Development Finance 2005Mobilizing Finance and Managing VulnerabilityParis and BeijingApril 2005
Outlook for developing countries • Growth among developing countries is slowing to a more sustainable but still robust pace. • Global imbalances remain a serious source of risk. • Slower growth and higher interest rates could jeopardize developing country finances.
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
Current context: Interest rates are rising 10-year U.S. treasury yield, percent Source: World Bank
Factors contributing to the slowdown • Rising interest rates • High oil-prices • High-tech cycle • Administrative efforts to slow growth in China
The forecast:A return to more sustainable growth GDP percent change, annual rates Forecast Developing countries High income countries Source: World Bank
Almost all regions grow faster than in the past GDP, per cent change from previous year * estimate Source: World Bank
Emerging tensions in commodity markets Index, January 2002=100 Source: World Bank
Signs of accelerating inflation Consumer inflation, percent change, y-o-y Developing countries OECD countries Source: World Bank
Global Imbalances are placing pressure on the dollar Current account balances, $millions, estimates for 2004 Source: World Bank
Low U.S. interest rates have contributed to dollar weakness Difference between U.S. and Euro 6-month interbank rate, €/$ exchange rate €/$ Percent Interest rate spread Euro / $ Source: World Bank
A modest depreciation so far Real effective exchange rate, 1970 - 2004 2004 Source: World Bank
Unless resolved, global imbalances remain a serious source of risk • Interest rates could rise by even more if: • Investor’s expect further $ depreciation • If their appetite for risk declines • Central bankers cease accumulating $ at the same rate as in the past • Higher rates would slow growth in developing countries and deteriorate the balance sheets of both low and middle-income countries would deteriorate.
Financial flows to developing countries continue recovery in 2004 $ billions Total net capital flows Net private flows Net official flows
Developing countries continue to export capital Current account surpluses as percent of GDP All developing countries Low-income countries
Large portion of capital flows channeled into reserve accumulation… $ billions Change in reserves Total capital flows Current account balance
…Leading to record levels of reserves in developing countries $ billion
…While reserves in some countries exceed standard levels Reserves as months of imports
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
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
Reported FDI outflows from developing countries highlight growing integration $ billion percentage
Bond issuance surges while net bank lending remains flat $ billions Net bond flows Net bank lending
ODA from DAC donor countries is increasing ODA as a percent of GNI (projections:2004-2006) Percent Projections Total ODA/GNI Bilateral ODA/GNI Bilateral ODA less special purpose grants/GNI
… 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
Continuing evidence of shift from loans to grants $ billions Foreign aid grants Net debt flows from official sector
Upturn in long-term U.S. interest rates poses risks… Percent 10-year U.S. yield Fed Fund target
…With borrowing spreads at record low levels Basis points EMBI global bond spreads
…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 (%)
Growth in domestic debt poses new opportunities and challenges $ billion Asia Latin America Europe
Risks to poor countries come through financing needs… Percent ODA/GDP in the poorest countries ODA/GDP in all developing countries
…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
Policy can help • Policy measures—in the U.S., Europe, and Asia—can facilitate global rebalancing and reduce downside risks. • Risks to developing countries call for continued sound macro policies and prudent borrowing. • Meeting poor countries’ financing needs requires increased aid and renewed efforts to augment other financing flows.
www.worldbank.org/ • globaloutlook • Multilingual, modular presentation • Printable version • Forecast database out to 2007 • Downloadable charts • Insightful calculators and simulation tools • Valuable one-page data briefs