The External Environment for Developing Countries

Transcription

1 The External Environment for Developing Countries Overview December 28 OECD GDP is likely to decline sharply in the fourth quarter as the effects of the financial crisis notably lack of access to finance and credit flows compound underlying weakness in domestic demand. Earlier strength in exports supported largely by demand in developing countries, is giving way quickly to decline (14% fall for the United States in October (saar)). Households have retrenched, business spending is lapsing and industrial production is in negative territory across the high-income countries. Economic analysts posit a range of 4-6% decline in U.S. GDP for the final quarter of 28 (saar), steepest since the first quarter of GDP could fall 4% in Japan and 3.5% in the Euro Area A deep synchronous downturn for OECD countries in fourth quarter... growth GDP growth **, percentage change, q/q saar Euro Area United States Japan 28-Q1 28-Q2 28-Q3 28-Q4E...with developing-country production now in decline, led by China industrial production percentage change, saar -1 Jan-7 May-7 Sep-7 Jan-8 May-8 Sep-8 Source: World Bank and National Agencies ** Q4 JPMorgan. Source: World Bank data. Signs of slowdown among developing countries multiply evident most clearly in industrial production, now falling for the aggregate of developing countries. China s output dropped 12% in November (saar) from recent advances of 22% in May 28. Fading export growth across countries is a key factor. Exports from China (dollars) fell almost one-half to growth of 12.5% in November (y/y) from 24% as recently as July; exports from India grew 9.5% in October versus 36% in June. Of some 3 developing countries for which quarterly NIA data is available, 11 witnessed a growth slowdown of more-than 2 points from the second to the third quarters of 28; 6 saw outright GDP decline (saar). Capital flows to emerging markets came to a halt in October and November, with no recorded activity in either bond or equity (IPO) markets. Flows are down 45% over the year through November (y/y). Creditworthiness has deteriorated, with 17 downgrades in the past 3 months, and refinancing risk for 29 has escalated with $21 billion in developing country bonds and loans maturing in the year. Commodity prices continue to plummet, denting terms of trade further for agriculture- metals and oil exporters while offering substantial relief for importers. Since peaking in July, oil prices plunged more-than $1/bbl (75%) to $4/bbl on the back of a sharp falloff in global demand. Agricultural prices are down more-than one-third since June, while copper and nickel are off more than 8% from their highs of 27 as construction, auto output and investment outlays falter on a global basis Developing Developing excl China China This monthly brief was prepared by a team of the Development Economics Prospects Group (DECPG), led by Hans Timmer, and comprising Mick Riordan (G-3 countries, foreign exchange, overall edits), John Baffes (trade), Betty Dow and Shane Streifel (primary commodities), Eung Ju Kim (finance), Cristina Savescu (production) and Gauresh Rajadhyaksha (high-frequency data and Annex). The note reflects the views of the team, but is not formally cleared by the World Bank Group.

2 External Environment for Developing Countries page 2 Global Indicators Global Indicators (Percentage change per annum, unless otherwise specified) e 29f GDP volume: World Memo item: World GDP at PPP weights High-income countries Developing countries Industrial production: World High-income countries Developing countries Export volume (GNFS): World High-income countries Developing countries Trade Prices ($): Manufacturing (MUV) Oil ($/bbl) Non-oil commodities Nominal interest rates: $LIBOR (percent p.a.) LIBOR (percent p.a.) Financial flows FDI ($billion) Gross Capital flows a ($billion) Equity placement ($bn) Bond financing ($bn) Lending ($bn) Source: DECPG, December 28. Estimates and projections based on GEP-29, released Note(s): a. Gross inflows 28 estimated on data to date. Figures in bold represent changes this month.

3 External Environment for Developing Countries page U.S. Q3-GDP drops.5% on massive retrenchment by the consumer growth of real GDP, and contributions to growth in percentage points Q1-28 Q2-28 Q3-28 Source: Department of Commerce and DECPG calculations. Key indicators point to deep U.S. recession in fourth quarter retail sales, mfgr IP % saar [L], change in employment [R] Fed cuts Funds target to.-to.25% with heavy flight to quality underway Fed Funds target- and effective rates; T-note- 2yr, T-note 1 yr T-note 2-yr Industrial production [L] Change in non-farm employment (3mma, ) [R] -2 Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 Apr-8 Jul-8 Oct-8 T-note 1-year Retail sales [L] Source: Departments of Commerce and Labor; Federal Reserve. Fed Funds Target LIBOR 3 months Aug-7 Nov-7 Feb-8 May-8 Aug-8 Nov-8 Source: Thomson/Datastream United States U.S. in recession. Amid heating up of the financial crisis in the United States and abroad, the National Bureau of Economic Research, the official arbiter of U.S. recessions, announced that the United States had entered a period of declining activity as of a year before. And following strong 2.8% GDP growth in the second quarter (supported largely by net exports), private sector demand retrenched in the third quarter. Personal spending dropped a massive 3.7% (saar) and investment fell 5.7% (with declines in housing reaccelerating). Net exports supplied a full point of growth to salvage a modest.5% GDP decline; but fourth quarter outturns will be much less favorable. GDP to fall sharply in final quarter. Weakness in U.S. demand has been magnified by the inability of business and households to access credit, despite Fed and Treasury measures to increase liquidity and incentivize banks to lend. As a result, indicators for October and November have been among the worst seen since the early 198s. Jobs contracted by more than 5, in November, carrying losses for 28 to 1.9 million; retail sales dropped a record 2.9% in October (m/m) down 17.5% in the three months to November (saar). And factory output, responding to these developments as well as faltering U.S. exports (14% decline in October), dropped by a stunning 18% in November (saar). GDP may fall by 4-to 5% (saar), worst since the 6% drop during the first quarter of The Fed s new game plan. The FOMC meeting of December 16 ushered in a new world of Fed policy aimed at getting the flow of credit- and the economy moving using tools outside the box of standard measures. With the Fed Funds target rate cut to a range of. to.25%, the bank can move no further on the interest rate front. Rather, the Fed could purchase potentially several trillions of dollars of U.S. Treasuries, as well as private-sector assets to generate liquidity and target credit-thirsty segments such as mortgages, auto-finance and small business loans.

4 External Environment for Developing Countries page 4 Japan GDP drops 1.8% in Q3 on continuing negative trade outcomes growth of real GDP, and contributions to growth in percentage points Consumption Government Investment Stocks Net Exports Q1-28 Q2-28 Q3-28 Source: Japan Cabinet Office and DECPG calculations. Japan s export strength gives way to large-scale declines export volumes and manufacturing output, ch% saar Industrial production Export volumes Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 Apr-8 Jul-8 Oct-8 Source: Bank of Japan and Japan Cabinet Office. Japan Trade, investment hit Japanese GDP. Following an unusually sharp 3.7% falloff in second quarter growth as both consumer and business spending retrenched GDP for the third quarter fell once again, by a more moderate but still substantial 1.8% (saar). Positive developments included a return to growth in household outlays and a halt to decline in residential investment; these were offset by negative contributions from trade (knocking.4% from growth, contrasted with a 2 point boost in the first quarter) as well as further large-scale reductions in business capital spending. As in the United States and Europe, recent indicators have taken a sharp turn for the worse, and prospects for the fourth quarter are not encouraging. Hard times in fourth quarter. Japan is now suffering a melt-down in export performance as growth conditions in its main trading partners (China, the United States and Europe) have taken a turn for the worse, and as the yen has appreciated to 14- year highs vis-à-vis the dollar as carry trades continue to unwind (earlier investor borrowings in yen channeled into EM assets, now withdrawn and parked again in yen). Export volumes declined for 6 months in succession, down 16.4% as of October (saar). Manufacturing output has followed in step, and business sentiment as well as capital spending intentions have plummeted. GDP appears set for a steep 4% drop in the final quarter of 28. Japan s bank lending starting to grow broad money and total bank lending ch% y/y Broad money Bank lending Jan-6 May-6 Sep-6 Jan-7 May-7 Sep-7 Jan-8 May-8 Sep-8 Source: Bank of Japan. Bank lending picks up. The Bank of Japan reduced its policy rate by 2 basis points from.3% to.1% on December 19, and announced plans to buy Japanese government bonds, as well as (for the first time) commercial paper. To a large degree, the BOJ s actions are echoing those already undertaken by the Federal Reserve at the recent FOMC meeting. At the same time, some encouraging signs of revival in bank lending have emerged, increasing to growth of 3.5% in November (y/y). The GOJ also announced that- to keep this trend in place, it will purchase up to 2 trillion (about $25 billion) in shares of financial institutions to bolster capital positions.

5 External Environment for Developing Countries page 5 Net exports pull Euro Area GDP further into recession in 3 rd quarter growth of real GDP, and contributions to growth in percentage points 2.7 Change in stocks Government Consumption Investment Net Exports Q1-28 Q2-28 Q3-28 Source: Eurostat and DECPG calculations. German exports now in decline following sharp falloff in foreign orders export volume ch% 3mma y/y [L] and export orders, ch% saar [R] Export orders [R] Export volume [L] Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 Apr-8 Jul-8 Oct-8 Source: Bundesbank-- Thomson/Datastream. Inflation an eventual silver lining for Europe? HICP total ch% y/y [L], HICP-energy, ch% y/y [R] HICP -Energy [R] HICP-Total [L] Jan-6 May-6 Sep-6 Jan-7 May-7 Sep-7 Jan-8 May-8 Sep-8 Source: Eurostat through Thomson/Datastream Euro Area GDP to correct sharply. Euro Area headline growth registered a modest.8% decline for the third quarter, a second consecutive period of falling output hence recession. Underlying conditions evident in the GDP report, however, point to a more severe falloff for the fourth-quarter. Stock-building (unwanted) contributed an extraordinary 1.4 points to GDP; contributions from trade (.8 points in the past three quarters) subtracted a massive 2.3 points, while household and business outlays were moribund. Outcomes across countries varied but most featured a step-down for example to decline of 2.1% from contraction of 1.7% in both Germany and Italy (saar). Conditions have since deteriorated to suggest a 3.5% to 4% GDP decline for the final quarter of 28 (saar). [See EC s Quarterly Report released December 19]. Trade faltering. Exports from Germany (and the Euro Zone) are now in decline as earlier strength in emerging-market demand especially from Central and Eastern Europe has dissipated with slowing activity there. Germany s export orders dropped 6.2% in October (m/m), the most on record, carrying orders to annual decline of near 3% (saar). In turn, export volumes slipped into negative territory and factory output has dropped in 3 of the last 4 months to decline 3.5% by October (saar). With trade Europe s pillar of growth in 27, its decline has set off a down-spiral in business confidence (witness IFO and INSEE surveys for December). This has prompted policymakers to examine potential for more fiscal stimulus; as the ECB reduced and reset policy rates on December 18 to revive bank lending. Easing inflation. With the euro s more recent gains against the dollar (see Currencies) coupled with the 75% plunge in crude oil prices since July, the Euro Area has enjoyed a substantial fall in HICP inflation. The energy CPI component declined from 17% in July (y/y) to.7% in November, carrying overall HICP down from 4% to 2.1%. This is welcome news- that in the near-term may provide the ECB with room for additional rate cuts; and at some point in 29 may help to revive household purchasing power and shore up consumer spending.

6 External Environment for Developing Countries page 6 Industrial Production Downturn in IP across OECD to date as pronounced as in 21 recession industrial production, ch% (3m/3m saar) Eurozone Japan USA Jan-1 Jan-2 Jan-3 Jan-4 Jan-5 Jan-6 Jan-7 Jan-8 Source: Thomson/Datastream, DECPG. Weak global demand pressures industrial production in East Asia industrial production, ch% (3m/3m saar) Malaysia East Asia Indonesia China Jan-7 May-7 Sep-7 Jan-8 May-8 Sep-8 Source: Thomson/Datastream, DECPG. IP now in decline across all regions industrial production, ch% (3m/3m saar) All Developing Latin America East Asia Europe and Central Asia Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 Apr-8 Jul-8 Oct-8 Source: Thomson/Datastream, DECPG. Global downturn pushes OECD output to negative ground. Weak performance in the manufacturing sector highlights the depth of recession in the high-income countries. U.S. IP plunged 18.3% percent (saar) in November, on the heels of slumping consumer spending and faltering exports. In Japan the picture is equally disheartening, with output contracting 14.3% on the same basis; more moderate declines of 5.2% are underway in Europe. Momentum in the OECD centers turned sharply negative in the fall, and declines are now close to those registered during the recession of 21 for Europe and Japan; the plunge in U.S. factory output now well exceeds the earlier falloff of 6-7%. And monthly PMI surveys signal that odds for near-term recovery in activity are slim. Exporting economies feel the woes of their trade partners. As OECD imports have contracted for some time, manufactures exporting economies, notably in East Asia, have been hard hit. The overlay of economic downturn with financial crisis and a hard-landing for the high-tech cycle has compounded the situation. Moreover, tighter credit conditions have affected trade volumes adversely, as letters of credit and other sources of trade finance have become scarce. China for example registered the steepest falloff in production growth in almost a decade in November, at a 12% annualized pace of decline (saar). Production through October declined 8.2% in Indonesia, 6.6% in Malaysia and 7.2% for East Asia as a whole. Momentum falters across developing regions. Other developing regions are sharing a similar fate as East Asia, with momentum in all regions falling into negative territory. A more pronounced downturn may be found in Europe and Central Asia. Weak demand from the European Union has taken a heavy toll, with output in Turkey, Hungary and several of the Baltic states hard hit. Among Latin American economies, Mexico s tight trade links with the United States have taken a toll on manufacturing activity.

7 External Environment for Developing Countries page 7 Key OECD imports compress as domestic demand falters import volume: U.S, Japan, Germany and U.K. ch% 3mma y/y Germany U.K. United States Japan Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 Apr-8 Jul-8 Oct-8 Source: National Agencies through Thomson/Datastream. Developing country export growth fades export values (USD): China, India, Mexico and Poland ch% 3mma y/y U.S. current balance improves slightly in third quarter on better balance on non-oil trade India Source: Department of Commerce. Mexico Poland Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 Apr-8 Jul-8 Oct-8 Source: National Agencies through Thomson/Datastream. China Income Services Non-oil BOT Oil balance -2 Transfers -25 Q1-27 Q2-27 Q3-27 Q4-27 Q1-28 Q2-28 Q3-28 Current account International Trade OECD imports compress. As the global financial crisis and nascent recession in high income countries combine forces, what had been a gradual easing of import demand from the United States to the United Kingdom has turned a corner to quicker contraction. Consumption and investment spending across the OECD have shifted to decline during the 2 nd to 3 rd quarters, putting pressure on imports as had the ratcheting of oil and other commodity prices during the first half of the year. As a result U.S. and U.K goods imports (on a smoothed year-on-year basis) are declining at a 4% pace, while imports in Japan and Germany are just now reaching the zero line. These developments are making it difficult for developing countries to maintain export shipments in positive territory, while adding downward pressures on global growth. Developing country exports slow. Countries from China, to India to Mexico are feeling the pinch of import contraction in their export markets. Many more countries from Chile to Malaysia to Cote d Ivoire are seeing these effects compounded by the stunning downturn in terms of trade during the second half of 28. China s dollar-based exports almost halved from growth of 24% in July (3mma y/y) to 12.5% by November; those from Mexico from 2% in April to 4% by October. U.S. current account improves. A welcome narrowing of the U.S. current account deficit occurred in the third quarter, moving to an annual rate of $7 billion from $724 billion in the second quarter; shifting from 5.1% to 4.8% GDP. The improvements stem from three areas. Export growth was strong, but fading across the quarter while crude oil imports eased 6.3% growth. Though the deficit on oil trade continued to increase, better outturns for non-oil trade helped the overall position improve by several billion dollars. Surplus on nonfactor services increased by $2 billion, as did the balance on income as foreigners suffered declines in earnings on U.S. assets. Despite these gains, funding the external shortfall still requires a net foreign inflow of some $1.9 billion per day!

8 $/bbl Jan-4 External Environment for Developing Countries page 8 Crude oil prices plunge back to 24 levels on falling demand Jan-5 Jan-6 World Bank Average Jan-7 Jan-8 Source: Datastream and DECPG Commodities Group. Commodity Prices Oil prices fall on contracting demand. Since peaking in early July, oil prices plunged more than $1/bbl or 72% to just under $4/bbl by early December before rising slightly in recent days. Demand is falling sharply in the OECD, and consumption is slowing in China and other developing countries. Non-OPEC supplies are expected to grow moderately in 29, though falling prices are leading to reductions in investment plans for 29. Stocks are building atypically in the fourth quarter and OPEC agreed to a 2.2mb/d cut in oil production at its meeting December 17 th. This follows a 1.5mb/d cut agreed in October. OPEC has called on non-opec producers and exporters to contribute to efforts to restore prices to reasonable levels. Crude stocks rise on slumping demand and recovery from hurricane disruption M bbl year high-low ranges 27 Jan-4 Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 $/bbl Source: U.S. DOE and DECPG Commodities Group. WTI Futures Prices - NYMEX Monthly contract prices to Dec 213* on select dates in 28 Dec 15 Aug 29 Sep 3 Oct 31 Dec 5 4 Dec-7 Dec-8 Dec-9 Dec-1 Dec-11 Dec-12 Dec-13 Source: NYMEX and DECPG Commodities Group. U.S. oil stocks surge on demand slump. U.S. crude oil stocks jumped into the upper end of their five-year range, underpinned by rebounding production from hurricane disruptions and continuing large declines in demand. Oil product inventories have also moved to the upper end of their range, reflecting weak end-use. U.S. oil product consumption fell by more-than 6% or nearly 1.3mb/d during the first 11 months of the year, with gasoline down more than 3% and distillate off more than 6% (diesel mainly in trucks to haul freight). Estimates of vehicle miles travelled from the U.S. Department of Transportation show relatively large year-on-year declines, with October figures down 3.4%. Oil futures fall into steep contango. Oil futures prices have dropped sharply, particularly at the front end of the curve, in line with the plunge in spot prices. The forward curve has moved from a fairly flat structure at end-august with mild contango (near-by prices below forward prices) to very steep contango at present, widening to nearly $3/bbl. This reflects the large surplus on the market at present and also provides a financial incentive to build stocks. Indeed some companies have leased oil tankers to store oil on the water. Higher forward prices reflect investor expectations for a rise in prices in anticipation of OPEC production cuts to support higher prices and eventually a revival of global demand.

9 External Environment for Developing Countries page Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Cu $/ton 9, 8, 7, 6, 5, 4, 3, 2, Jan-5 12, 1, 8, 6, 4, 2, Agriculture prices plummet on weak demand, falling oil costs and better supply prospects Index 2=1 Fats & Oils Other Food Source: Datastream and DECPG Commodities Group. Metals prices plunge on sharp decline in demand Copper Jan-6 Jan-7 Nickel Jan-8 Source: LME and DECPG Commodities Group. Grains Ocean freight rates sink on lack of demand and credit concerns Baltic dry freight index Jan-5 Jan-6 Jan-7 Jan-8 Source: Datastream and DECPG Commodities Group. Ni $/ton 55, 5, 45, 4, 35, 3, 25, 2, 15, 1, 5, Agriculture prices plummet one-third since June. Agriculture prices dropped 34% since mid-year, including a record fall of 17% in October the largest monthly decline since our records begin in 196. The price declines are due to weakening demand, lower energy costs and improved supply prospects. The largest falloff has been for fats & oils, which are down nearly 5% on weak demand in the edible oils complex. Grains prices dropped 35% on weaker U.S. maize exports amid expectations for an 12% increase in global wheat production and 6% gains in the soybean crop. Rubber prices have fallen by nearly half due to falling oil prices and a poor outlook for the auto sector, as most rubber end-use is for tires. Metals prices continue to drop. Metals declined significantly due to weak global demand, rising inventories and improved supply prospects. Copper prices plunged two-thirds since mid-year due to sharply rising stocks and very weak demand in construction and transport. Other metals prices have been falling for much longer due in part to improved supply, with nickel prices down 8% from 27 peaks on large cuts in global stainless steel production. Zinc prices are also down as much from peaks due to slowing global steel production, which began falling in September (y/y). Most metal prices have fallen into their cost curves and this has prompted announcement of a good number of production cuts and project delays. Bulk freight rates plummet on falling import demand and credit constraints. Freight rates for dry bulk cargoes such as iron ore, coal, and grains plummeted due to much reduced import demand (notably from China) and credit constraints that prevent purchasers from obtaining letters of credit (LC) from banks. China s steel production growing at double digit rates fell 16% in October and mills are slashing output and running down inventories, reducing demand for iron ore and coking coal. The slump in prices is having a large effect on the shipping industry owners, operators and shipyards and even ship scrap yards cannot get LCs to dispose of ageing vessels.

10 External Environment for Developing Countries page 1 Capital flows come to an effective halt over October and November Gross capital flow s to emergin g m arkets $ billio n H1 Q3 Total H1 Q3 Oct N ov YTD Total B ond s B anks E quity La t. A m erica B ond s E. Europe B ond s Asia B ond s Others Source: DECPG Finance Team. International Finance Flows grind to a halt. Capital flows to emerging markets dropped to $8 billion in November, the lowest monthly figure since 1995, with zero activity recorded in either bond or equity markets for a second month running. Bond issuance fell 54% over the first 11 months of the year (y/y) while equity volumes declined 75%. The falloff in bonds is no surprise given market conditions, holding prospective issuers on the sidelines. Bank lending was the only segment that recorded activity in the month, but flows remain 62% below the $22.4 billion monthly average of 28. Most loans credited in November were signed months earlier, underscoring the current difficulties in raising external finance Credit quality of EM sovereigns deteriorated in recent months Credi t ra tin g dow ngra de s sinc e S e ptem ber 2 8 EMB IG spreads (bp) A u g-8 D e c-8 Venezuela One notch from B+ to B by S&P 648 1,88 Ecuador One notch from B- to CCC-, and to selective default rating (SD ) by S &P 724 4,325 From CC C to de fa lu t ra tin g (R D ) b y Fit ch One n otc h f ro m B3 t o Ca a1 by M o od y's Sri Lanka One notch from B+ to B by S&P 774 1,948 Russia One notch from BBB + to BBB by S&P Jam aica One n otc h f rom B+ t o B by Fitch , 12 7 Hungary One n otc h f ro m BBB + t o BBB by S & P an d Fit c One notch from A2 to A3 by Moody's Bulgaria One notch from BBB to BBB- by Fitch One notch from BBB + to BBB by S&P K azak hst an One n otc h f ro m BBB t o B BB - by F itc h , 29 2 Rom ania Two notches from B BB to BB+ by Fitch N / A N/ A One n otc h f ro m BBB - t o BB + by Fitch Lativia One n otc h f rom A2 t o A3 by M ood y's N / A N/ A A rge nt ina One n otc h f ro m B to B- b y S& P , 96 P akistan One n otc h f rom B2 t o B3 by M ood y's 1, 4 2, 19 1 * As of Dec em e br 15 th, 2 8. Source: DECPG Finance Team. Much greater refinancing risk for debt maturing in 29 bonds & loans maturing in 29 by region, billions dollars Loans Bonds Eastern Europe Latin America Asia Others Source: Bondware/Loanware. Creditworthiness deteriorates. Credit quality has faltered in 28, with 17 downgrades and no upgrades over the past three months. The trend of positive net credit rating actions has come to a halt as the financial crisis hit EM sovereigns, especially those in Emerging Europe and to a lesser degree in Latin America. The latest downgrade occurred mid- December, when S&P and Fitch cut their ratings on Ecuador to default status following the country s failure to make an interest payment on bonds maturing in 218. The downtrend in credit quality coincides with a widening in EM spreads the current escalation is now comparable to that at the height of the Russian crisis a decade ago. EM debt prospects for 29 Although the total volume of maturing EM debt in 29 ($27 billion) is less than 28 s ($269 billon) refinancing risks will increase over the next year with access to international debt markets restricted. EM borrowers (mostly corporates) hold $67 billion in bonds and $14 billion in syndicated bank borrowings that will mature at the end of 29, with largest refinancing requirements in Emerging Europe, especially Russia and Turkey. Conditions for market-based financing may worsen in the near-term, implying that we are likely to see restructurings and bankruptcies in EM banks and companies that cannot get rollover financing. Of note, the vast majority of corporations in developing countries are increasingly turning to state-related sources for refinancing.

11 External Environment for Developing Countries page 11 Jan-8 Mar-8 May-8 Jul-8 Sep-8 Nov USD/Euro (inverse) yen/usd Dollar plummets since early December to reverse earlier gains USD per Euro (inverse) [Left] and Yen per USD [right] Source: Thomson/Datastream. Net foreign purchases of U.S. assets halved** over Jan-October 28 net foreign purchases USD billions, 3mma Jan-6 May-6 Sep-6 Jan-7 May-7 Sep-7 Jan-8 May-8 Sep Equity Corporate bonds GSEs Treasuries Source: U.S. Treasury TICS database. ** Jan-Oct8 vs Jan-Oct7 Dollar surges... then retreats against EM currencies LCU per USD indexes, Jan1 28=1 [*increase = weaker LCU] 9 8 Russian rouble Turkish lira Brazilian real Korean won Indonesian rupiah Jan-8 Mar-8 May-8 Jul-8 Sep-8 Nov-8 Source: Thomson/Datastream Currencies Dollar falls precipitously. The dollar mounted a strong rally against the euro over the second half of 28, grounded in diminished expectations (July/August) for Euro Area growth and a narrowing of interest differentials favoring the currency. The greenback picked-up 22% between July 11 th and November 2 th reaching $ by that time. Meanwhile, the yen carried on appreciation on the back of unwinding carry trades, with yen/dollar moving to 99 by early November. But conditions changed dramatically in late-november: the U.S. unit plunged 16% vis-à-vis the euro from November 2 th to December 17 th, losing half of its earlier gains to stand at $1.445; and appreciation of the yen accelerated, reaching on December 17 th up 22% since August. What has affected the tenor of foreign exchange markets so sharply and quickly? U.S. shortfall on foreign flows. The dollar s move up against the euro was more a case of euro weakness than dollar strength as Euro Area economic indicators slumped and earlier European beliefs that the Zone would shake off U.S. financial problems were proved moot. Flight to quality to U.S. Treasuries and GSEs (prior to nationalization) pushed the dollar higher against a range of currencies. But staring in August 28 net foreign purchases of GSEs, U.S. corporate bonds and equities slumped, and by October foreigners were net sellers: $22 billion in Agency bonds; $12 billion in corporate bonds and $3 billion in equity. And as yields on 1-year Treasuries narrowed to 2.2% by mid-december, risk/return calculations have likely turned against the purchase of dollar-based assets. Dollar turns against EM units. As investor funds were withdrawn from EM equity markets, the Korean won, for example dropped 6% of its dollar value through November, with the brunt of decline starting in September. The Turkish lira fell 5%; the Brazilian real and Indonesian rupiah 4% over the year through November. Currencies have begun to recoup in December. Given financial market uncertainties, the next shift in currencies is hard to discern affected by many unknown-unknowns..

12 External Environment for Developing Countries page 12 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/) Weights Average Q4 Q1 Q2 Q3 Aug Sep Oct Nov World High-income countries Industrial countries United States Japan Euro Area United Kindgom 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 Bangladesh Sri Lanka Sub-Saharan Africa South Africa Nigeria Memo: OECD Developing excl. China Developing oil exporters Dev. non-oil exporters Asian high tech 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.

13 External Environment for Developing Countries page 13 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) Weights Average Q4 Q1 Q2 Q3 Aug Sep Oct Nov Real GDP a High-income countries Industrial countries United States Japan Euro Area United Kindgom Other high income Hong Kong (China) Singapore Taiwan (China) Real merchandise imports b High-income countries Industrial countries United States Japan Euro Area United Kindgom Other high income Hong Kong (China) Singapore Taiwan (China) Import Prices c High-income countries Industrial countries United States Japan Euro Area United Kindgom Other high income Hong Kong (China) Singapore Taiwan (China) Real effective exchange rates d Euro Area United States Japan United Kindgom Canada Hong Kong (China) Korea, Rep Singapore Taiwan (China) Switzerland a/ Real GDP aggregated using 1995 weights. b/ On a customs or BoP basis, as available. Weights are 1995 merchandise import: aggregate calculated as sum of components. c/ Aggregate prices are implicit prices of aggregate US dollar value divided by aggregate constant 1995 dollar volume. d/ JP Morgan Trade Weighted Indices (Real, Broad basis). Data are averages of monthly data for the period in question.

14 External Environment for Developing Countries page 14 Table A.3 Global credit conditions (percent unless otherwise indicated a/) Weights Average Latest Q4 Q1 Q2 Q3 Sep Oct Nov 16-Dec Policy Rates United States Japan Euro Area United Kindgom Ten year bond United States Japan Euro Area United Kindgom Spreads (Basis points) b,c 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 d India Pakistan Bangladesh Sri Lanka Sub-Saharan Africa South Africa Nigeria Gross inflows e Developing countries East Asia and Pacific Europe and Central Asia Latin America and Carribean Middle East and North Africa South Asia Sub-Saharan Africa a/monthly figures are simple averages of the daily figures, except the last month, which are the values reported on the mentioned date. Quarterly and Annual figures are simple averages of the monthly figures. b/average values for Spreads are for the period c/aggregates as defined by JP Morgan. d/east Asia and Pacific including South Asian countries. e/in billions of US dollars.

15 External Environment for Developing Countries page 15 Table A.4 Commodity price indices (current US dollar index,index unless otherwise indicated; a/) Weights b Average Q4 Q1 Q2 Q3 Aug Sep Oct Nov Energy Coal, Australia Crude oil, average Natural gas, Europe Non-energy Agriculture Beverages Cocoa Coffee, arabica Coffee, robusta Food Fats and oils Palm oil Soybean meal Soybeans Grains Maize Rice, Thailand, 5% Wheat, US, HRW Other food Bananas, US Sugar, world Raw materials Cotton ("A" Index) Rubber, Singapore Sawnwood, Malaysia Fertilizers Triple superphosphate Metals and minerals Aluminum Copper Gold Nickel Memo: Crude Oil (US$) a/ The World Bank primary commodity price indices are computed from export values in US dollars for low- and middle-income economies, rebased to 199. b/ Energy and gold prices are not included in the index.

16 External Environment for Developing Countries page 16 Table A.5 Developing countries' merchandise export growth (US dollar values unless otherwise indicated; percent change; seasonally adjusted annual rates except monthly figures, which are m/m change /a) Weights Average Q4 Q1 Q2 Q3 Aug Sep Oct Nov Export values Developing countries East Asia and Pacific China Indonesia Thailand Europe and Central Asia Russian Federation Turkey Poland Latin America and Caribbean Brazil Mexico Argentina Middle East and North Africa Saudi Arabia Iran Egypt South Asia India Pakistan Bangladesh Sub-Saharan Africa South Africa Nigeria Export prices b,c Developing countries East Asia and Pacific China Indonesia Thailand Europe and Central Asia Russian Federation Turkey Poland Latin America and Caribbean Brazil Mexico Argentina Middle East and North Africa Saudi Arabia Iran Egypt South Asia India Pakistan Bangladesh Sub-Saharan Africa South Africa Nigeria /a Merchandise export (F.O.B), customs basis. /b Implicit export unit values, U.S. Dollar basis. /c In many cases countries are very late in reporting trade prices. To estimate more timely figures individual trade prices were updated using the median (mean) regional trade price for developing (developed) countries whenever 6% or more of reporters by trade weight reported.

17 External Environment for Developing Countries page 17 Table A.6 Developing countries' merchandise import growth (US dollar values unless otherwise indicated; percent change; seasonally adjusted annual rates except monthly figures, which are m/m change /a) Weights Average Q4 Q1 Q2 Q3 Aug Sep Oct Nov Import values Developing countries East Asia and Pacific China Indonesia Thailand Europe and Central Asia Russian Federation Turkey Poland Latin America and Caribbean Brazil Mexico Argentina Middle East and North Africa Saudi Arabia Iran Egypt South Asia India Pakistan Bangladesh Sub-Saharan Africa South Africa Nigeria Import prices b,c Developing countries East Asia and Pacific China Indonesia Thailand Europe and Central Asia Russian Federation Turkey Poland Latin America and Caribbean Brazil Mexico Argentina Middle East and North Africa Saudi Arabia Iran Egypt South Asia India Pakistan Bangladesh Sub-Saharan Africa South Africa Nigeria /a Merchandise import (C.I.F.), customs basis. /b Implicit import unit values, U.S. Dollar basis. /c In many cases countries are very late in reporting trade prices. To estimate more timely figures individual trade prices were updated using the median (mean) regional trade price for developing (developed) countries whenever 6% or more of reporters by trade weight reported.