Developing Trends: May 2013

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1 Developing Trends: May 213 Overview Quarterly GDP trends diverge among major economies. Supported by a pick-up in consumption expenditures (3.2 percent, q/q saar) and gross private domestic investment (12.3%), US GDP expanded at 2.5% in Q1 213 (up from.4% in Q4 212), notwithstanding the drag from the ongoing fiscal consolidation (government spending contracted by 4.1%). Q1 213 GDP for Japan also accelerated at an annualized pace of 3.5 percent (q/q saar) from.2 percent in Q4 212, however unlike the US, public demand (government consumption and public investment) contributed 2.4 percentage points to GDP growth in Q Further, private demand, in particular private consumption spurred GDP growth in Japan. For both the United States and Japan, the contribution of net exports to GDP growth was negative. In contrast Euro Area GDP contracted for the sixth consecutive quarter in Q1 213 (-.6% q/q saar) reflecting subdued conditions there. Nonetheless, Euro Area activity is expected to pick-up later in the year as the drag from ongoing fiscal consolidation reduces and credit begins to flow to the real sector. On a quarteron-quarter basis, China s GDP growth remained relatively robust even though it decelerated to 6.6% (7.8% on a year-on-year basis), buoyed on by growth in financial intermediation, wholesale and retail Quarterly GDP Performance in Selected Economies (%ch, q/q seassonally adjusted annualized rates) Q4 212 Q1 213 Japan USA Euro Area China Source: World Bank and Datastream Private capital flows to developing countries were robust in the first four months of 213 Gross capital flows to developing countries, $ billions Equities (new issues) Syndicated bank lending Bond issuance Total flows Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Note: Bars represent 3 month moving averages of reported flows; Line shows total unsmoothed flows. Source: Dealogic and World Bank Prospects Group. trade, and construction sectors. With the exception of a few other countries, Q1 213 GDP data for other developing countries are yet to be released. Nonetheless, with industrial production in the rest of the developing countries growing at an annualized pace of 3.1% (q/q saar) in Q1 213, slightly up from the 2.8 percent registered in Q4 212, this suggests real-side activity has in general kept apace, albeit with differences across countries. Going forward, however, global business sentiment indicators point to a decelerating pace of expansion. Indeed, JP Morgan-Markit s Global Composite Purchasing Manager Index declined from 53. in March to 51.9 in April, with declines in sentiment cutting across both high-income (USA, Germany ) and developing countries (China, India, Turkey, Brazil). Developing Trends was prepared by the Development Economics Prospects Group (DECPG) of the World Bank. The team is coordinated by Allen Dennis (Overview and Trade), and is comprised of Tehmina Khan (High-Income, Industrial Production and Business sentiment), Eung Ju Kim (Highincome and Finance), John Baffes and Damir Cosic (Commodities), and Sanket Mohapatra (Exchange rate) Ekaterine Vashakmadze (Inflation), and Adil Islam (Statistical Annex). The report was prepared under the guidance of Andrew Burns. This note reflects the views of the team, but is not formally cleared by the World Bank Group.

2 Developing Trends: May 213 (%) Cost of bond financing increased in February and March Implicit Yield= Yield on US 1 year treasury+embig Bond Spread 2 15 Remittance flows to developing regions, (percentage change) 212e 213f 214f 215f The record low borrowing cost on Jan 3rd = 4.2% Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Source: JP Morgan and World Bank -5 All developing East Asia and Europe and Latin America Middle-East and countries Pacific Central Asia and Caribbean North Africa Source: World Bank e estimate f forecast South Asia Sub-Saharan Africa Although real-side activity could decelerate in Q2, financial flows to developing countries continue to remain solid through the start of Q2. After two solid quarters - 212Q4 and 213Q1- gross capital flows to developing countries got off to another strong start in the second quarter. At $65.8 billion in April, gross flows were up 42 percent from a year earlier and 13.4 percent from March levels. The increase in capital flows was largely driven by bond issuances, which doubled in April, reaching a monthly record $44.4 billion. Bond market access for non-investment grade borrowers continued to improve, with Rwanda issuing its first bond. Vietnam, Papua New Guinea, Ghana, Nigeria, and Bangladesh are expected to follow suit to take advantage of investors appetite for higher yielding developing-country sovereign bonds. Equity flows were also up slightly. However, bank lending plummeted 68 percent in April on the back of a sharp drop in loans to Europe and Central Asia (mostly Russia). Overall, for the first 4 months of the year capital flows are up 5% from year-earlier levels. Notwithstanding strong capital flows, developing country bond yields have risen since January despite the general risk-off phase in global financial markets. Indeed, the cost of international bond financing has gone up this year after reaching a record low level in early January. Unlike previous episodes, the recent rise in the yields did not occur during a period of heightened global risk-aversion. Moreover, the widening in secondarymarket bond spreads was not associated with a decline in benchmark US yields. These developments could be consistent with the beginning of a new trend where the price of risk returns to levels that are more normal. The trend decline in spreads for developing countries over the last five years is partly explained by their improved credit quality. However it also reflects the very low policy rates and quantitative easing in highincome countries, with easy monetary conditions having suppressed the price of risk in both developed and developing countries. Recent increases possibly reflect market expectations that the pace of quantitative easing in the United States may ease soon even though Fed policymakers have reassured the markets that they will remain accommodative. These developments could also be due to increasing concern on the part of investors about inflation of asset prices in some developing countries and recent easing of commodity prices. Remittance flows to developing countries continue to increase, albeit it with differences across regions. Remittances, an important financial flow to developing countries, rose to $41 billion in 212, up 5.3 percent. However, this aggregate story masks important differences across countries. For instance, the large number of migrants in the Arabian Gulf generated large increases in remittance flows from the Gulf Cooperation Council countries to South Asia and the Middle East and North Africa. By contrast, developing regions that are more closely tied to high-income Europe (Eastern Europe, Latin America and Sub Saharan Africa), where the protracted debt crisis took a severe toll on economic activity, experienced much weaker increases. Remittance flows to developing countries are projected to increase 6.1percent in 213 and to gradually firm to a 1.2 percent rate of increase in 215 reflecting gradually strengthening growth in high-income countries. April 24, 213

3 High income (1) US data are mixed, suggesting a slow recovery supported by still resilient consumer spending and improvements in housing and labor markets. Activity in Japan has been boosted by aggressive monetary easing. Euro Area GDP contracted for the sixth quarter in a row but at a slower pace, although forward looking PMI indicators show deteriorating business conditions in Germany, its largest economy. US manufacturing surveys from May point to weakness ahead, but consumer sentiment is showing signs of improvement. The US recovery is being supported by consumer spending, but facing fiscal tightening challenges ahead US GDP grew by 2.5% (q/q saar) in Q1, up from a very weak.4% outturn in Q4, supported by an acceleration in consumer spending and residential and inventory investment. Equities reached record highs in May on growing optimism. Consumer spending has remained resilient (although weakening slightly), amid signs of continued recovery in labor and housing markets, and confidence improved in May. However IP growth eased to 3.6% (3m/3m saar) in April from 4.4% in March and May manufacturing surveys suggest weakness ahead. Fiscal tightening, which weighed negatively on growth in Q1, will likely remain a drag going forward. Economic activity in the Euro Area remains depressed but shows signs of stabilizing Euro Area GDP fell at a slower pace of.9% (q/q saar) in Q1, a sixth consecutive quarterly decline but slower than Q4 s 2.3% fall. France succumbed to recession in Q1 while Germany grew by a modest.3% after a 2.7% drop in Q4 last year supported by private spending. The rate of GDP declines in the periphery economies eased in Q1, notably Portugal. And forward looking manufacturing April PMIs also show slower declines in France, Italy, Spain and Greece. That said unemployment continues to increase while credit remains tight. German PMIs point to contracting output, but factory orders, a gauge of future investment spending gained momentum in March. The German GfK consumer confidence index for May also rose to a 6-year high suggesting continued support for private consumption spending. Activity remained strong in Japan supported by a weaker yen and aggressive monetary easing. GDP rose by 3.5% (q/q saar) in Q1, up from 1.% in Q4, led by higher private spending and exports. Industrial activity and consumer spending remained strong, although easing slightly. IP rose by 8.% (3m/3m saar) in March from 1.1% in February. Retail sales rose by 3.4% (3m/3m saar) down from 4.1% in February. Manufacturing PMIs point to faster expansion in output while consumer confidence is hovering at close to its highest levels since mid-27. April 24, 213 Diffusion Index Manufacturing purchasing managers index (PMI) Euro Area USA Japan Germany Italy 5-line 4 Jan-1Apr-1Jul-1Oct-1Jan-11Apr-11Jul-11Oct-11Jan-12Apr-12Jul-12Oct-12Jan-13Apr-13 Source: World Bank Prospects Group and Markit Last updated: May. 16, 213

4 High income (2) G3 equities have remained robust in May, with Japan s Topix reaching a 4 1/2 year high and U.S. and German benchmarks marking multiple record highs. The cost of insuring Italian and Spanish debt have dropped by more than a half since last summer. Portugal posted the largest narrowing in CDS spreads among Eurozone economies. Furthermore, borrowing costs for Italy, Spain, and Portugal have tightened considerably thus far this year. G3 stock markets continued to rally in May, with Japanese stocks outperforming its counterparts. Japan s Topix reached a 4 1/2 year high in mid- May, continuing to benefit from a weaker yen that has supported Japanese export. Japan s Topix has advanced 46% thus far this year, outperforming all major stock indexes in the world amid unprecedented monetary stimulus plans. U.S. stocks remained resilient in May with both the S&P 5 and Dow marking multiple record highs. The S&P has gained 17% this year and 146% from a 12-year low reached in March 29. German s DAX has also continued to hit new highs in May, rallying 6.1%, amid positive economic data in Euro-zone. 1.3% thus far this year. Credit default swap spreads for troubled Euro- Area economies have tightened by a half since last summer. CDS spreads for Italy and Spain have continued to improve in May, tightening by 23 and 15 basis points (bps), as Italy formed a new government in late-april, ending two months of political gridlock. And their current spreads are less than half of record levels reached in last summer. Spreads for Portugal are currently at 323 bps, down significantly from last year s high of 1,561 bps reached in early-january. The narrowing of spreads has been influenced by the European Union s ban on short-selling government bond using credit default swap. Borrowing costs for Italy and Spain have risen slightly in May, while those for Portugal have tumbled. The benchmark 1-year yields on Spanish and Italian government bonds have widened by 17 bps and 13 bps thus far May after they reached 2- year lows in late-april. Nevertheless, the 1-year borrowings costs for Italy and Spain have declined by 16 bps and 6 bps this year. Meanwhile, comparable Portuguese bond yields have tumbled 41 bps this month as the country sold its first 1-year bond since its bailout. Notably, Greek bond rallied following rating upgrade by Fitch Ratings, sending the 1-year yield to the lowest level since June 21. Index, January 1 21= S&P-5 (USA) 8 DAX (Germany) Topix (Japan) 7 Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Daily CDS Sovereign rates since Jan Basis points 2, 1,6 1,2 8 4 Portugal Ireland Spain Italy Belgium G-3 equity markets Jan-1Apr-1Jul-1Oct-1Jan-11Apr-11Jul-11Oct-11Jan-12Apr-12Jul-12Oct-12Jan-13Apr-13 Daily yields on 1-year government bonds Yield (percent) Spain Italy Portugal 3 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Source: Bloomberg and Development Prospects Group page 1

5 Industrial Activity Global industrial production expanded at a faster pace in the first quarter of 213, supported by a surprisingly strong outturn in the US, and recovery in industrial output in Latin America and the Europe and Central Asia, and notwithstanding a disappointing performance in the East Asia region. Capital-goods orders point to increased global capital spending in early 213, but momentum may be weakening. Meanwhile inventories levels in the United States and Euro Area diverge, with weak inventory levels in the Euro Area representing a source of upside risk for output growth in coming months. Global IP growth has strengthened, supported by momentum acceleration in high income economies Developing country IP growth remained relatively flat at 4.1 percent in the first quarter, as weaker growth in China (9.7% seasonally adjusted annualized rate (saar)) was offset by recovery in growth in Latin America and Europe and Central Asia. Output growth in high-income countries continued to strengthen, driven by above trend expansion in the United States and other high income countries outside the Euro Area. US IP growth stood at 5% (saar) in the first quarter. Growth in Japan rebounded to close to 8% saar helped in part by the large depreciation of the Yen. Global industrial production growth firms in the first quarter percent, 3m/3m saar Jan ' Jan '2 Jan '4 Jan '6 Jan '8 Jan '1 Jan '12 China Developing countries excl. China World High income Capital-goods orders point to increased global capital spending in early 213. After a sharp decline in mid-212, G3 capital goods orders recovered briskly in H2 212, with shipments following a similar path. Capitalgoods orders rose at a more moderate pace in the first part of Q1 213, with US capital goods orders rising at a 16.7% annualized pace, down from a 2% expansion in Q In Japan, after a robust recovery in Q4 (12%) capital goods orders growth slowed to 3.3% in the three months leading to February, while in Germany capital goods orders rose 4.4% over the same period, almost half the pace recorded in Q4. Inventory levels diverge between the United States and the Euro Area. Inventory levels in the United States are currently above pre-crisis levels, reflecting the relative strength and maturity of the recovery in that economy (both the housing and labor markets continue to show sustained improvements). In the Euro Area, however, inventory levels remain well below their pre-crisis averages partly due to weak growth, but also because firms lack confidence that demand will firm anytime soon. While weak inventory levels are a factor contributing to weak demand in Europe, the low inventory levels may also be a source of upside risk. If activity does start to strengthen, firms will need to increase production even more quickly in order to replenish inventories.

6 Business Sentiment Business sentiment indexes suggest a slower pace of global activity for the second quarter of 213. Business sentiment in major developing countries remains positive but has eased in recent months, suggesting growth may slow in the second quarter following the very strong rebound in the fourth quarter of 212 and first quarter of 213. Global Manufacturing Purchasing Manager s survey indices (PMI) deteriorated slightly in April Growth in global manufacturing worsened in April, with the JP Morgan Global Manufacturing output PMI inching down to 5.5, the lowest reading since December, from 51.1 in March. Business sentiment in the US deteriorated to a six-month low of 52.1, down 2.6 points from March. The Euro Area sentiment inched down to 46.7 as sentiment weakened considerably in Germany with the PMI falling to 48.1, the lowest level this year. Despite slight improvements in sentiment in France, Italy and Spain PMIs remained at depressed (sub-5) levels in these and several other Euro Area countries. Sentiment improved markedly in Japan rising.8 points to Business sentiment deteriorates in April Diffusion index, 5=no growth Developing Countries High Income Countries Sentiment in developing countries also deteriorated, mostly on account of the deterioration in East Asia. PMI in major developing countries such as Brazil, China, India, Mexico, and Turkey all declined, but indicate ongoing expansion albeit at a slower pace. China saw the largest decline in the PMI in East Asia, losing 1.3 points, while Vietnam and Indonesia saw an improvement in sentiment of.3 and.4 points, respectively. In Latin America. Brazil s sentiment declined 1 point, but remained ion growth territory (5.8). Business sentiment deteriorated in the largest economies in South Asia and Latin America Business confidence remained relatively stable in Russia, with the PMI inching down.1 points, but remaining in growth territory. Business sentiment in India continued to deteriorated dropping an additional.9 points in April. Business sentiment worsens in developing countries Diffusion index, 5 = no growth Jan '6 Jan '8 Jan '1 Jan '12 East Asia & Pacific Europe & Central Asia Latin America & Caribbean

7 International Trade (1) Following the cyclical rebound in global trade in Q4 212, the global trade expansion continued through Q1 213, albeit at a weaker pace mostly on account of a decelerating import demand among high-income countries. Going forward, with business sentiment indicators suggesting a softer patch in Q2 213, it is likely that import demand in both developing country and high-income countries will weaken. Indeed, where data is available for April, this is already being observed. Global trade expansion decelerated in Q Global trade increased at an annualized pace of 4.1% in Q1 213, less than half the pace of expansion in Q4 212 (9.3%). However, while developing countries sustained their acceleration in import demand between the Q4 212 and Q1213, the pace of expansion in high-income imports decelerated, mostly driven by weaker import demand from the United States as well as still contracting import demand from China. With business sentiment indicators for both high-income and developing countries suggesting a softer patch in economic activity for Q2, global import demand is likely to weaken further in Q2. Global Import volumes Percent change, 3m/3m saar World High income Developing Developing excl. China -2 Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 The pick up in import demand among developing countries is broad-based. Through Q1 213 available data suggests that the expansion in developing countries was broadbased across all developing regions. However early indicators are that import growth will likely decelerate in Q In East Asia and the Pacific, where data for April is available import growth decelerated to an annualized pace of 9.8% in the three months to April. Indeed, already in South Asia import demand has decelerated for the third consecutive month through April. Further Purchasing Manager Indices in April for a number of large emerging economies (China, Brazil, Turkey, India) also point to the weakening in activity. Regional Import v olumes Percent change, 3m/3m saar East Asia & Pacific Europe & Central Asia East Asia & Pacific (ex. China) Latin America & Caribbean -2 Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 Data lags behind in Sub Saharan Africa and the Middle East and North Africa. However latest data shows Sub Saharan Africa to have registered a rebound in import demand in Q1 213, while the contraction in the Middle East and North Africa deepened. Data for both sub Saharan Africa and the Middle East and North Africa lag behind. Latest available data shows that, as was the case for other developing countries, import demand for Sub Saharan Africa strengthened in January 213 at a robust 12.8% annualized pace. However in the Middle East and North Africa, the contraction in import demand actually deepened (-13.3% in January, 3m/3m saar), reflecting the effects of political challenges on demand conditions in the region. Regional import v olumes Percent change, 3m/3m saar South Asia -2 Sub Saharan Africa South Africa Middle East and North Africa -4 Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13

8 International Trade (2) Consistent with the weakening of import demand, export growth slowed in Q1 213 across both high-income and developing regions. Among developing regions where data is available for Q1 213, export growth was strongest in East Asia and the Pacific as well as in South Asia. However, though export growth was weaker in the Europe and Central Asia region, it continued expanding, unlike in Latin America and the Caribbean where export growth contracted in Q There has been a broad-based deceleration in export growth in Q Consistent with the decelerating pace of import demand, export growth among both high-income and developing countries decelerated in the Q1 213 compared with Q However, unlike high-income countries where export growth contracted (-1.%, q/q saar) export growth continued expanding at a double digit pace for developing countries as an aggregate. However excluding China, developing countries exports growth expanded at a much weaker 3.5% in Q1 213 compared with an expansion of 11.6% in Q Global export volumes Percent change, 3m/3m saar World High income Developing Developing excl. China -2 Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 The strength of expansion in exports among developing regions differed in Q Among developing regions for which data is available for through March 213, the pace of export expansion was strongest for East Asia (excl. China it was less strong and actually decelerated), and South Asia (where the pace picked up). Weighed down by contracting export growth in the two largest economies in the region, Turkey and Russia, export growth in Europe and Central Asia region decelerated, but stayed positive on aggregate. Latin America was the only region whose exports contracted in Q1 213 (-8.4% q/q saar), reflecting decelerating import demand from its major trading partners (China and the united States). Exports in both Sub Saharan Africa and Middle East both recovered by Q Data for both Sub Saharan Africa and the Middle East lags behind other developing regions. However available data through January shows a strong rebound in export growth for Sub Saharan Africa and strong growth in the Middle East and North Africa region (unlike the decline the lagged recovery in its imports). Regional export v olumes Percent change, 3m/3m saar East Asia & Pacific Europe & Central Asia East Asia & Pacific (ex. China) Latin America & Caribbean -3 Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 Regional export v olumes Percent change, 3m/3m saar South Asia Sub Saharan Africa South Africa Middle East and North Africa Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13

9 Commodities (1) Prices of most industrial commodities (crude oil and metals) as well as precious metals have rebounded little in May after the precipitous declines in April. However, prices are still far from mid-february peaks as the markets remain well supplied and demand remains sluggish amid signs of a soft patch in the global recovery. Oil prices recover, Brent down 14.2%; WTI down 3.2% since the mid-february peaks. After topping at $119/bbl in mid-february, Brent (the international marker) has reversed course and by mid-may has hovered around $1/bbl. Oil demand picture is weak at a time when oil supplies are plentiful from both OPEC and non- OPEC sources, and US crude oil inventories have risen to an all-time record high of above 395 million barrels, in data going back to WTI price (US mid-continent price), has fallen less than Brent as producers are by-passing Cushing, Oklahoma and transporting oil directly to refineries in the Gulf by train, in turn strengthening WTI prices relative to Brent. The gap between Brent and WTI narrowed to US$ 7/bbl by mid- May 213, the lowest level in 7 months. Metal prices have rebounded little in May. Metal prices have sharply reversed course since mid-february and most are down on a year-todate basis. Prices of nickel, tin, aluminum and copper have declined by 19%, 16%, 13% and 11%, respectively, from their mid-february peaks to the 3rd week of May. Most base metals are well supplied in 213 which is likely to exert downside pressure on prices. Copper and aluminum are well supplied as evidenced by large stocks at the major metals exchanges (1% and 4% of annual consumption for aluminum and copper respectively). Combined stocks of copper at metals exchanges have increased by 53% in the first four months of the year. USD per barrel Oil prices 8 Brent West-Texas Intermediate 7 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr Index, January 212=1 14 Metals Prices 9 Tin Copper 8 Nickel Aluminium 7 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Precious metals prices are flat in May after experiencing their sharpest decline in 3 years in April. Precious metals have been on the decline since early 212Q4 and price of silver, gold and platinum are down 17%, 25% and 3%, respectively. In addition to diminishing concerns regarding inflationary pressures, the announcement of potential sales of gold by Cyprus central bank precipitated liquidation of gold holdings by institutional investors (ETFs). Indeed, precious metals experienced one of the sharpest declines on record on April 15. Holdings of gold by ETFs are down (17% year-todate), while silver and platinum are up 2% and 3%, respectively, as the latter have some industrial use. US$/troy ounce 1,9 1,8 1,7 1,6 1,5 Precious Metal Prices 1,4 Gold Platinum Silver (right axis) 1,3 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 US cents/troy ounce 3,6 Source: World Bank Prospects Group and Handy&Harman Last updated: May. 22, 213 3,4 3,2 3, 2,8 2,6 2,4

10 Commodities (2) The US Department of Agriculture (USDA) confirmed its upbeat outlook for the crop in its May 1 update following a higher than expected actual stock report in March. Bothe maize and wheat markets are expected to regain most of the weather-induced losses incurred last summer. Raw material prices continued their slide; edible oil prices weakened as well. Maize and wheat supply outlook improves; rice market remains well-supplied. In its May 1, 213 update, the USDA confirmed the improved outlook for the 212/13 global grain crop. Global maize output is expected to reach 666 million tons in 213/14, almost 13% higher than current season s crop; the stock-touse ratio (S/U) is expected to reach 16.6% in 213/14, up from current season s 14.4%. Wheat supplies are expected to improve as well with output up 7% and S/U ratio almost 27%, marginally up from the current season s 28.6%. The rice market continues to be well supplied with production estimated at almost 48 million tons, 6 million tons above consumption, and the S/U ratio 22.7%, remarkably similar to historical norms. Grain prices have been remarkably stable following USDA s May 1 update. Following sharp declines following USDA s quarterly stocks, maize has been traded remarkably stable around 65 US cents per bushel since the beginning of May. Wheat prices have been declining, from 73 earlier in May to 68 US per bushel later in the month. Yet, price risks for the 213/14 crop are on the upside at the moment as delayed plantings in the US could upset markets. Rice prices have been remarkably stable during the past few months fluctuating very little, around US$55 per ton. Rice price risks, however, are on the downside, and depend crucially how the Thai government handles the vast amounts of stocks it has accumulated under its rice purchasing program. Supply concerns boost cotton prices while rubber prices find support on news of strong demand; separately, edible oil prices weaken further. Cotton prices have reversed their declining trend as new data show that global cotton production is expected to decline 6% in 213/14, which comes on the top of this season s 5% decline. Natural rubber prices reversed the trend as well following news of tire demand pick up in the US and China and relatively strong Brent prices natural rubber competes with synthetic rubber, which uses crude oil as a key input. Separately, the edible oil index declined almost 3.5% in April, to reach a 32-month low. Global edible oil production is expected to reach yet another record in 213/ % 35% 3% 25% 2% 15% 1% US$ per metric tonne Wheat Maize Grain prices 2 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Source: World Bank Prospects Group and CME Last updated: May. 22, 213 US$ per kilogram Marked improvements in both maize and wheat markets (stock to use ratio, percent) Wheat Source: US Department of Agriculture (May 1, 213) Cotton [Left] Rubber [Right] Raw material prices Maize US$ per kilogram Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Source: World Bank Prospects Group, ICE and SGX Last updated: May. 22,

11 International Finance (1) CDS spreads for developing countries have narrowed from April highs, driven mostly by a sharp drop in Argentinian spreads. Developed-country equities have bounced back in May, but they have continued to underperform those of developing economies in May. Stock markets in Emerging Europe and Emerging Asia regions have advanced in May, while Latin America have posted a small drop. Developing-country CDS rates have narrowed from April highs, due mostly to a sharp decline in Argentina spreads. CDS spreads for developing countries have tightened by 56bps on average from April highs, driven mostly by a sharp drop in Argentina spreads, which decreased 1,166bps. Excluding Argentina, however, developingcountry sovereigns also saw their spreads declined 18 bps since early April. Despite the recent narrowing in CDS spreads, Argentina remains as the riskiest developingcountry sovereign credit. Daily CDS Sovereign rates since Jan Basis points East Asia & Pacific Europe & Central Asia Latin America & Caribbean Middle-East & North Africa Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Developing-country equities bounced back from April s lows, but they continued to underperform those of developing countries. Developing-country stocks have advanced 2.2% thus far May amid the positive global backdrop, after posting a sharp sell-off in April, compared with a 4.2% gain for developed countries. Developing-country shares have gained only.7% this year compared to a 16.7% gain for mature-market equities. Developing-country stocks have been hampered by worries over slowing economic growth (especially in China) and falling commodity prices due mostly to strong dollar. Index (Jan 1, 211 = 1) Emerging Markets Developed Markets MSCI Equity Indices 7 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Stock markets across developing regions have rebounded in May, except Latin America. General strength was shown among developing country stock markets in May, with Emerging European shares faring better than other regions. Both Emerging Europe and Emerging Asia regional indices have increased by 3.2% and 2.2% thus far in May, respectively. In contrast, Latin American stock markets have lost.3%. Among the BRIC countries, Brazil (-1.3%) and Russia (-.1%) were the worst performers this month. In contrast, both Chin (6%) and India 94%) posted considerable gains. MSCI Regional Equity Indices Index (Jan 1, 211 = 1) MSCI Asia MSCI EE MSCI LAC 7 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13

12 International Finance (2) Borrowing cost for developing-country sovereign debt have widened this year, after reaching a record low in early January. Developing-country bond funds continued to receive inflows in April, indicating investors are currently not rotating out of EM bonds, but equity funds remained weak with further outflows. Gross capital flows in the first four month of 213 are up 5% from the like period last year. Borrowing costs for developing-country sovereign bonds have widened thus far this year. Developing-country sovereign spreads have risen 31 basis points (bps) since early January, when they reached this year s low of 245 bps. Unlike previous episodes, the recent widening in the spreads took place during a period of heightened global risk aversion. Furthermore, developing-country bond spreads have widened this year amid rising benchmark U.S. long-term Treasury yields and despite the continued improvement of developing-country credit quality. Developing-country bond spreads sicne June 211 (JP Morgan EMBIG spreads, basis points ) EM sovereign bond spreads 2 27 Average 2 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Source: Bloomberg and Development Prospects Group Inflows to developing-county bond and equity funds are down slightly in April Emerging-market bond funds posted inflows of about $4 billion in April, eased from an average monthly inflows of $9.2 billion in the first quarter. Notably, EM bond funds received positive flows for 49 consecutive week since last June, suggesting investors are not rotating out of EM bonds yet despite global stock market rally this year. Meanwhile, EM equity funds posted a second consecutive outflows of about $2.7 billion in April, up from $1.7 billion in previous month. After reaching a record high of $24.9 billion in January, and equity flows tumbled in March. Capital flows increased in April as a strong bond issuance more than offset a sharp drop in bank lending. Gross capital flows to developing countries rose by 13.4% to $65.8 billion in April, as strong bond flows offset faltering bank flows. And flows for the first four months of the year amounted to $24.5 billion, up 5% from the like period of 212, with all segments of the market strengthening considerably. In 213, Capital flows climbed in every developing-country regions, except Middle East and North Africa. A surge in bank lending and bond issuance in Russia helped to boost flows to the Europe and Central Asia. Foreign portfolio inflows to developing-country assets $ billions Gross Capital Flows to Dev eloping Regions $ billion, 3-mon. m.a EM Fixed Income Funds EM Equity Funds JanMarMayJul SepNovJanMarMayJul SepNovJanMar Bond Issuance Equity Issuance Syndicated Bank Loans Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13

13 International Finance (3) Equity flows have remained resilient in 213, with year-to-date flows rising 52% from a year before. Bond flows posted a fresh record high in April, boosted by the Brazil s biggest corporate issuance on record. Corporate borrowers continued to dominate bond issuance, led by Brazilian and Russian firms. Bank lending is down sharply in April, but year-to-date volume is more than doubled from a year before. Equity flows remained steady in April. Equity placements (a combination of IPOs and follow-on issuance) reached $11 billion in April, up 1.4% from March. Year-to-date flows are up 52% to $42.6 billion from a year before. The increase in equity flows in the first four month of 213 was due to the strong follow-on issuance from Latin America and Emerging Europe. Brazil, China, and India continued to dominate overall equity volume this year, accounting for 58% of total equity issuance; but there were also an increase in equity flows to other countries, including Indonesia, Philippines, Thailand, Chile, and Mexico. Bond flows rose to new record highs in April, boosted by the Brazil s largest developingcountry corporate bond issue ever. Bond issuance nearly doubled to $44.8 billion in April, posting the new monthly highs on record. And year-to-date flows stand 28% above the levels reached in the like period of 212. Corporate borrowers continued to dominate bond flows in April, with Russian firms issuing record international bonds ($12.8 billion) and Petrobras (Brazil s state-owned oil company) selling the largest developing-country corporate bonds ever ($11 billion). On sovereign side, Rwanda tapped the international bond market for the first time ever in April, raising $4 million in 1-year global bonds $ billion (3-mon. m.a.) International Equity Issuance East Asia & Pacific Europe & Central Asia Latin America & Caribbean Middle East & North Africa South Asia Sub-Saharan Africa Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 $ billion (3-mon. m.a.) 14 International Bond Issuance East Asia & Pacific Europe & Central Asia Latin America & Caribbean Middle East & North Africa South Asia Sub-Saharan Africa Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Bank lending is down sharply in April, but year-to -date volume is more than doubled from a year earlier. Syndicated bank loans to developing countries fell to an estimated $1 billion in April, down sharply from about $26 billion in March. However, bank flows more than doubled year-on -year to about $77 billion in the first four months of 213 despite the a sharp drop in the number of syndicated loan deals. Most of the increase was led by large loans to Russia, where lending rose five fold from a year before. $ billion (3-mon. m.a.) Bank Lending East Asia & Pacific Europe & Central Asia Latin America & Caribbean Middle East & North Africa South Asia Sub-Saharan Africa Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Source: Deallogic, DEC Prospects Group Last updated: May. 22, 213

14 Exchange Rates Sharply relaxed monetary policy in Japan caused the yen to depreciate by 21% in trade-weighted real effective exchange rate (REER) terms since September 212. The euro appreciated 3.7% in REER terms and the US dollar by 2% in this period. The appreciation of developing-country currencies also picked up pace (4.7% since September 212), reflecting both the yen depreciation and a surge in capital inflows, notwithstanding a recent easing of crude oil and industrial commodity prices for commodity-exporting countries. Sharply relaxed monetary policy in Japan caused the yen to depreciate 21% in REER terms since September 212. The euro appreciated 3.7% and the US dollar by 2% in the same period. A sharply relaxed monetary policy in Japan to counter a decade-long deflation and support economic growth caused the Japanese yen to depreciate 21% in real effective (REER) terms between September 212 and April 213. In the same period, the US dollar appreciated 2% in REER terms and the euro by 3.7%. The Euro has appreciated a stronger 7.1% in REER terms compared to July 212 level (following ECB head Mario Draghi s pledge to stand behind the currency union); but weakened 1.3% since February, impacted by weakness in the Euro Area economy. High income real effective exchange rates Index, Jan 211 = Japan USA Euro Area 75 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Developing-country REER appreciation picked pace in recent months due to capital inflows, yen depreciation, or a combination of both. Emerging market currencies appreciated in REER terms in recent months as financial market stabilization and US quantitative easing (QE) pushed capital flows towards high-yielding emerging market assets, and yen depreciation put upward pressure on Japan s trade-partner currencies. The GDP-weighted average REER for developing countries appreciated by 4.7% since September 212, a considerably faster pace compared with the 1.5% appreciation in the previous 24 months. East Asian trade-partners of Japan have faced sharp REER appreciation since September 212, particularly Thailand (12.5%), China (5.8%), Indonesia (5.4%), and Malaysia (4.4%). The South African rand and Indian rupee were exceptions to the trend of real appreciation of developing-country currencies since Sept The Brazilian real and Russian ruble appreciated 7.4% and 3.8% from robust capital inflows, despite a recent easing of commodity prices. The Mexican peso also benefited (8.3% REER appreciation) from inflows into government bonds. The Turkish lira continued to strengthen from capital inflows (7.1% in REER terms), with a stable nominal effective exchange rate (NEER) and large inflation differential with trade-partner countries. The Indian rupee rose on improved capital inflows (3.1% in REER terms), despite growth concerns and a wider current account deficit. However, the South African rand continued to weaken (-6.1% in REER terms) with slower growth, partly related to earlier mining sector tensions. Developing real effective exchange rate Index, Jan 211 = Brazil China India Indonesia 11 Mexico Russia Turkey South Africa Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Developing nominal effective exchange rate Index, Jan 211 = Brazil China India Indonesia 8 Mexico Russia Turkey South Africa 76 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13

15 Inflation Inflationary pressures continue to ease in developing countries and show signs of stabilization in high income economies. This reflects continued commodity price decline and decelerating activity in some regions. Price pressures continue to be present in MENA and SAS due local conditions, including supply related constraints. Inflation eased in SST following a temporary grain price related hike. Price pressures are also present in a number of selected economies where easy policies are combined with capacity constraints. Global inflation continue to ease in both developing and high income countries Inflation eased further in developing countries as an aggregate to a 6 percent annualized rate in the three months to April reflecting a decline in commodity prices and moderation in economic activity after a strong rebound. High-income country inflation showed signs of stabilization in April following a steep decline in the earlier months. Low-income country quarterly inflation which accelerated in the last quarter of 212 due to grain price related hike also showed some easing. Inflation continues to accelerate in EAP (excluding China) led by Indonesia, eased in ECA and ticked down in LAC Inflation continues to be broadly in-check across the EAP region but continues to be above the targeted rate in Indonesia. China s inflation eased in April, partly due to curbs on spending. Inflation remains subdued in Malaysia and Thailand reflecting currency appreciation and slowing growth. Inflation remains moderate in ECA reflecting easing food prices and weak economic activity. In Turkey however inflationary pressures remain fueled by easing of policy. Inflation eased in LAC following an earlier grain price related hike, but remains high in Argentina and Venezuela reflecting sharp devaluations. In Brazil, tightening of the policy supported the easing of inflationary pressures. Dev eloping and high income inflation Percent change, 3m/3m saar Developing CPI inflation High-income CPI inflation Jan-1Apr-1Jul-1Oct-1Jan-11Apr-11Jul-11Oct-11Jan-12Apr-12Jul-12Oct-12Jan-13Apr-13 Source: World Bank Prospects Group Last updated: May. 22, 213 EAP, ECA & LAC inflation Percent change, 3m/3m saar China EAP excl. China Europe & Central Asia Latin America & Caribbean Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 MENA is seeing price pressure escalating reflecting currency depreciation in Egypt and also supply constraints due to political tensions. Inflation is easing in South Africa following earlier build-up related to fiscal relaxation, currency depreciation and private sector wage hikes. A complete pass-through of earlier monetary policy tightening and commodity price moderation has translated in easing price pressures in Sub- Saharan Africa. Price pressures remain present in South Asia due to supply side bottlenecks. Inflation momentum accelerated in MENA reflecting supply disruptions due to political tensions in Syria, currency devaluation in Egypt and economic sanctions in Iran. MENA, SAS & SSA inflation Percent change, 3m/3msaar 2 Middle East & North Africa excl. Iran and Syria South Asia South Africa 16 SSA excl. South Africa Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13

16 Table A.1 Global industrial production growth (constant prices; percent; seasonally adjusted annual rates except monthly figures which are in percent change over previous month a/) Average Q2 Q3 Q4 Q1 Dec Jan Feb Mar World High-income countries Industrial countries United States Japan Euro Area United Kingdom Other high income Hong Kong (China) Singapore Taiwan (China) Developing countries East Asia and Pacific China Indonesia Thailand Malaysia Europe and Central Asia Russian Federation Turkey Poland Czech Republic Latin America and Caribbean Brazil Mexico Argentina Colombia Middle East and North Africa Saudi Arabia Iran Egypt Algeria South Asia India Pakistan Sri Lanka Sub-Saharan Africa South Africa Nigeria Memo: OECD Developing excl. China Developing oil exporters Dev. non-oil exporters a In general, series refer to industrial production excluding construction (e.g. manufacturing, mining and utilitites). Where this is not available the closest proxy is used, often manufacturing output or oil output, if the country is a major oil producer.

17 Table A.2 Demand conditions in high-income countries (US dollar values unless otherwise indicated; percent change; seasonally adjusted annual rates except monthly figures, which are m/m change) Weight Avg Q2 Q3 Q4 Q1 Dec Jan Feb Mar Real GDP High-income countries Industrial countries United States Japan Euro Area United Kingdom Real merchandise imports High-income countries Industrial countries United States Japan Euro Area United Kingdom Other high income Hong Kong (China) Singapore Taiwan (China) Import Prices High-income countries Industrial countries United States Japan Euro Area United Kingdom Other high income Hong Kong (China) Singapore Taiwan (China) Real effective exchange rates a Euro Area United States Japan United Kingdom Canada Hong Kong (China) Korea, Rep Singapore Taiwan (China) Switzerland a/ JP Morgan Trade Weighted Indices (Real, Broad basis). Data are averages of monthly data for the period in question.