Developing Countries to Remain Resilient - Risks Considerable

Transcription

1 Developing Countries to Remain Resilient - Risks Considerable Financial turmoil a serious threat that has proven manageable so far Developing country dynamism cushions the effect on growth while inflationary pressures mount Second-round oil shock a major problem High food prices are big inflationary force and pose a risk to sound policy stance.

2 4 key issues in developing country outlook Financial Turmoil Growth and the surge in inflation Oil shock repeated Food Prices

3 Prolonged period of low interest rates and ample liquidity contributed to crisis in US subprime mortgage market US interest rates (percent) year fixed mortgage rate Fed funds rate Jan- Jan-2 Jan-4 Jan-6 Jan-8

4 And lax credit standards playing as a contributing factor Net percentage of banks tightening lending standards percent 6 percent 6 4 US 4 Euro zone Q2 21 Q2 22 Q2 23 Q2 24 Q2 25 Q2 26 Q2 27 Q Q2 23 Q2 24 Q2 25 Q2 26 Q2 27 Q2 28

5 Large credit write-downs and plunging share prices have weakened banks capital Credit write-downs ($billions) Citigroup 4.9 Stock prices ($) UBS Merrill Lynch RBS Bank of America Jan-6 May-6 Sep-6 Jan-7 May-7 Sep-7 Jan-8 May-8 Citi Group Merrill Lynch UBS

6 Intervention by central banks has eased global funding pressure 3-month Libor spreads over policy interest rates (basis points) Sept Dec 12 Mar 11 May UK Eurozone 3 US -3-6 Jun-7 Jul-7 Aug-7 Sep-7 Oct-7 Nov-7 Dec-7 Jan-8 Feb-8 Mar-8 Apr-8 May-8

7 Impact on capital flows has so far been limited Bank lending, bond and equity issuance, January 24 April 28 $ billions (12-month moving average) 35 3 August 27 Bank lending Equity issuance 1 5 Bond issuance 24M1 24M7 25M1 25M7 26M1 26M7 27M1 27M7 28M1

8 Emerging sovereign debt spreads widened, but remain low in historical perspective Emerging market sovereign bond spreads, Jan 1994 May 28 Basis points Mexico Russia (EMBI Global composite index) Sub-prime M1 1995M1 1996M1 1997M1 1998M1 1999M1 2M1 21M1 22M1 23M1 24M1 25M1 26M1 27M1 28M1

9 External debt flows to developing countries slowed down in Q4 27 and Q1 28 Gross syndicated loans by quarter $billions Number of loans (right axis) # of loans 4 3 Gross bond issuance by quarter $billions Number of bonds (right axis) # of bond issues Q1 25 Q1 26 Q1 27 Q1 28 Q1 24 Q1 25 Q1 26 Q1 27 Q1 28 Q1

10 Both markets and central banks have actively responded to the turmoil Significant easing of monetary policy in the US Banks ability to recapitalize including raising capital from SWFs (over $1 billion in capital injections including $65 billion from SWFs as of March) Record bank profitability prior to the turmoil (pre-tax profits to Tier 1 capital at 22.7% in 26) International cooperation in financial stability Strong fundamentals in many developing countries

11 Resilience of emerging markets stems from several factors Strong current account positions Ample foreign reserves Low debt burdens / improved debt management Little exposure to US subprime assets Low dependence on structured financial instruments

12 1 Private capital flows expected to moderate in the short run Net private capital flows to developing countries, Projected $1 trillion $ billions Net equity flows $912 billion Percent 8 Net debt flows Net private flows / GDP (right scale)

13 Main messages Growth in developing countries is expected to moderate from 7.8 percent in 27 to 6.5 percent this (and coming two years). However, some countries face a sudden drop in growth

14 Main messages Growth in developing countries is expected to moderate from 7.8 percent in 27 to 6.5 percent this (and coming two years). However, some countries face a sudden drop in growth Lower inflation has been a main ingredient of the success of developing countries, but inflationary pressures are now quickly mounting.

15 Developing countries outperform high-income income countries Real GDP, percentage change 8 6 Developing countries 4 2 High-income countries Source: World Bank

16 Divergence in trend growth percentage change Developing countries 3 2 Hi-income countries Source: World Bank

17 Growth across African countries percentage change s 198s 199s 2-7 Source: World Bank Resource Rich Coastal Landlocked

18 Robust growth in sub-saharan Africa is independent of terms of trade Terms of Trade changes Jan-May 28/23 Zimbabwe Ethiopia Gabon Republic of Congo Angola Lesotho Compounded Growth rate 28/23

19 Decreasing number of poorly performing countries in Sub-Saharan Saharan Africa Number of countries with growth rates within the specified range 1~3% <=% Source: World Bank

20 Large current account imbalance in ECA countries Macedonia Croatia Albania Romania Bulgaria Latvia Lithuania Slovak Republic Hungary Poland Turkey Georgia Kyrgyz Republic Moldova Belarus Armenia Ukraine Kazakhstan Russia Azerbaijan Uzbekistan ECA -3 Share of GDP, percent Eastern Europe Source: World Bank Baltics Central Europe CIS Oil Importers CIS Oil Exporters

21 Growth divergence in ECA % chg, quarter over quarter, annualized 15 6Q1 6Q2 6Q3 6Q4 7Q1 7Q2 7Q3 7Q4 8Q1 1 5 Hungary Latvia Czech -5 Source: World Bank

22 Main messages Growth in developing countries is expected to moderate from 7.8 percent in 27 to 6.5 percent this (and coming two years). However, some countries face a sudden drop in growth Lower inflation has been a main ingredient of the success of developing countries, but inflationary pressures are now quickly mounting.

23 Inflation in high-income income countries declined percentage change, 5-yr 5 moving average, GDP weighted Source: World Bank

24 Inflation in developing countries declined percentage change, 5-yr 5 moving average, median Source: World Bank

25 8 Percentage of developing countries with double-digit digit inflation declined percentage in all developing countries Source: World Bank

26 Inverse long-term correlation between investment and growth percentage change, 5-yr 5 moving average, median LMIC median inflation LMIC real GDP growth (right) Source: World Bank

27 Global IP and metals prices strongly correlated percentage change, year over year 1 75 Global IP Metal Price (right) M1 1993M1 1995M1 1997M1 1999M1 21M1 23M1 25M1 27M1-75 Source: World Bank

28 Commodity price inflation and domestic inflation Percentage change, median of all developing countries 8 6 Commodity price inflation (left axis) Source: World Bank

29 Commodity price inflation and domestic inflation Percentage change, median of all developing countries Commodity price inflation (left axis) Domestic inflation (GDP deflator, right axis) Source: World Bank

30 Rising inflation CPI, Median developing countries, percent change year-over over-year Jan 2 Jan 21 Jan 22 Jan 23 Jan 24 Jan 25 Jan 26 Jan 27 Jan 28 Source: World Bank, GEM database

31 Inflationary pressures Energy and food prices have surged U.S. monetary policy was loosened in reaction to financial turmoil Countries with currencies pegged to the dollar experience higher inflation (China) Influx of oil revenues pushes up inflation in oil exporting countries (Russia, Saudi Arabia) Stimulative policies create (repressed) inflation (Argentina, Bolivia, Venezuela) Several developing countries are hitting capacity constraints (Vietnam)

32 Oil market developments Reduced spare capacity following years of low prices and underinvestment High prices have cut into demand but supply response has been weak Expectations of strong demand in DC and concerns about supply growth DC are much more vulnerable to higher oil prices today than they were in 23

33 Recent rise in oil price as large as earlier World crude oil price ($/bbl) Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan- Jan-3 Jan-6

34 Recent rise in oil price as large as earlier World crude oil price ($/bbl) Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan- Jan-3 Jan-6

35 Recent rise in oil price as large as earlier World crude oil price ($/bbl) Jun 5- Jan. 7 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan- Jan-3 Jan-6

36 Recent rise in oil price as large as earlier World crude oil price ($/bbl) Jun 5- Jan. 7 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan- Jan-3 Jan-6

37 A record real price (in dollars) Crude oil price, $ / per barrel Real price (deflated by US GDP Deflator) Projection Nominal

38 (mb/d) 9 Developing countries responsible for most of the increase in demand since FSU OECD Other Other Asia China

39 World Oil Consumption Growth (mb( mb/d) OECD Oth Asia China Other Q 1Q1 1Q2 1Q3 1Q4 1Q5 1Q6 1Q7 1Q8

40 World Oil Supply (mb( mb/d) 9 8 OPEC Spare Capacity OPEC FSU Other 1 OECD

41 OPEC production has been stagnate since 1998 OPEC (incl. Iraq oil production) mb/d Including Iraq 3 28 Level of production in March Jan-9 Jan-95 Jan- Jan-5

42 mb/d 4 3 World Oil Supply Growth OPEC Other FSU Q 1Q1 1Q2 1Q3 1Q4 1Q5 1Q6 1Q7 1Q8

43 India Growth Non-OPEC Oil Supply excluding Russia (mb ( mb/d) Brazil Kazakh Canada Azeri China Sudan Chad Thailand Ecuador Cote d'iv E Timor Angola

44 UK Decline in Non-OPEC Oil Supply (mb ( mb/d) Denmark Argentina Congo Gabon Yemen Syria Colombia Egypt Oman Australia USA Norway Uzbek

45 Impacts First price hike (23-26) 26) had minimal impact because: Inflation was and remained low Interest rates were low Growth (and export growth) was strong Countries had very healthy current account positions Second hike (27-todate) is even larger Inflation is rising Interest rates are higher and will likely rise Global growth (and exports) are slowing Countries current account positions have deteriorated

46 OPEC Oil Revenues ($ billion) Other OPEC Other ME Saudi Arabia

47 Factors that allowed DC to absorb higher oil prices have deteriorated Inflation CA % of GDP Export growth Note: Current account data concern oil importers (excluding China) Source: DECPG

48 Recent hike in oil prices adds significantly to burden of oil importers Terms-of-trade impact of commodity price changes since January 27, oil-importing developing countries Energy All commodities HIPC SSA (ex South Africa) Sub-Sahran Africa South Asia Centra Lamerica Latin America East Asia & Pacific Low income All developing % of 26 GDP

49 Historical perspective on Food Prices Decades of low prices led to underinvestment Low food stocks due to policy changes Structural changes in demand for energy and metals High energy prices raise production costs and increase incentives for biofuels Other factors: weak dollar, export bans, speculation

50 US dollar prices overplay real increase International food price indices, 2= Nominal US dollars 15 1 Real, i.e. relative to developing countries CPI 5 2M1 21M1 22M1 23M1 24M1 25M1 26M1 27M1 28 Source: DECPG

51 Grain Prices (nominal $/ton) Wheat Rice Maize

52 Oilseed Prices (nominal $/ton) Soybeans Soyoil Palmoil

53 East Asia grain demand (w/china) 2 (rolling 5 yr growth rate) Feed Total consumption

54 Feed efficiency in East Asia (Meat produced per unit of grain fed)

55 Prices to remain high Demand for biofuels will probably increase (new US Energy bill in 27) Energy and fertilizer prices expected to remain high Surplus production capacity limited (CRP) Several countries have pasture land that can be cropped