Developing Trends: February 2014

Transcription

1 Developing Trends: February 2014 Overview The recent episode of market volatility had differentiated impacts on developing countries. Following a string of weaker than expected economic news in January (weak business sentiment data for China, and another disappointing jobs report for the United States) and a sharp devaluation of the Argentinian peso, financial market volatility spiked to levels not seen since summer Reflecting this uncertainty and the flight to safer assets, US treasuries declined by some 20 basis points (bps) in the last two weeks of January, while markets in developing countries came under pressure. Between January 22nd to February 5th developing country stock markets sustained losses of 6 percent and their CDS spreads widened by some 100 bps. Further, currencies of some large middle-income countries with higher current account balances and external financing needs came under pressure: the Turkish lira and South African rand sustained declines of 6.4 and 4.7 percent in nominal effective exchange rate terms in January. Notably, currencies of other larger middle-income economies that were hard hit in the summer 2013 (Brazil, India, and Indonesia) remained stable in January, reflecting improving fundamentals compared to the earlier period. For most middle-income economies, recent volatility has had limited effect on exchange rates Nominal effective exchange rate, April 1, 2013= Brazil India Malaysia Russian Federation South Africa Turkey Jan '13 Feb '13 Mar '13 Apr '13 May '13 Jun '13 Jul '13 Aug '13 Sep '13 Oct '13 Nov '13 Dec '13 Jan '14 Feb '14 Source: World Bank, JP Morgan, DataStream. 8...however middle-income countries with weaker improvements to their current account balances were harder hit during the recent bout of market volatility 2 Current account balances (% of GDP) BRA IDN ARG IND MEX IDN -2 TUR June 2013 TUR SAF Jan-14 (latest quarter for CAB) SAF Source: Haver and World Bank IND BRA MEX ARG Change in nominal effective exchange rate, %ch Overall, some 70 percent of developing country currencies remained stable (i.e. sustained less than a 0.5 percent depreciation) and or appreciated during January showing that the effects of the recent volatilities were limited to a narrow set of countries. Since the second week in February this recent episode of market volatility appears to be waning down, as reflected in the uptick in US treasuries in the two weeks to February 18 th, as well as the recouping of earlier losses in developing country stock markets and currencies (supported by interest rate hikes, the Turkey lira and South Africa rand are now close to their January highs). Nonetheless, in economies where domestic difficulties dominate (e.g. Argentina, Venezuela and Ukraine) currencies are yet to recover, although for Argentina, CDS rates have come down somewhat. Going forward, markets are likely to remain sensitive to bad economic news with increased scrutiny on individual developing countries with weaker fundamentals. Developing Trends was prepared by the Development Economics Prospects Group (DECPG) of the World Bank. The team is coordinated by Allen Dennis (Overview), and is comprised of Tehmina Khan (High-Income), Gerard Kambou (Industrial Production), Derek Chen (Business sentiment), Eung Ju Kim (High-income and Finance), John Baffes and Damir Cosic (Commodities), and Sanket Mohapatra (Exchange rate) Ekaterine Vashakmadze (Inflation and Trade), 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. 1

2 Developing Trends: February Capital flows to developing countries remained robust in January Gross capital flows to developing countries, $ billions 80 Equity issuance Bank lending Bond issuance 0 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Source: Dealogic and World Bank Prospects Group Recent business sentiment indicators point strengthening activity in developing countries (Purchasing Manager Index, 50 = Neutral) Developing (ex. China) China 44 India Turkey M M M M M M M01 Source: Haver and World Bank Gross capital flows to developing countries were up 13% in January, but are likely to come in weaker in February. Supported by seasonal factors, as January tends to be one of the busiest months of the year for bond issuances, gross capital flows to developing countries increased to $51 billion in January, up from $45 billion in December. Some 75 percent of these flows were from bond issuances mostly investment grade borrowers (sovereign and corporate) as they were able to lock in favorable rates before the renewed bout of market uncertainty in late January. In contrast to bond issuances, equity and bank lending flows fell sharply in January, higher levels of risk aversion and a continued rise in loan funding costs that started late last year. Preliminary data for February suggests that capital flows could come in weaker on account of the recent bout of volatility (which continued into early February) and dampened flows to East Asian economies due to the week long Lunar New Year holiday. Notwithstanding recent perturbations in developing country financial markets, business sentiment indicators suggest continued strengthening in real side activity for developing countries. Supported by the ongoing cyclical rebound in global trade as well as robust domestic demand in some economies, January purchasing manager indicators signal a pick-up in the pace of expansion in Brazil, Hungry, India, Indonesia, Mexico and Vietnam. Among economies whose financial markets were harder hit and have raised interest rates, business sentiment was still robust in Turkey (52.7), albeit at a weaker pace; whereas in South Africa sentiment signaled a moderate contraction. On aggregate, sentiment in developing countries (ex. China) points to the second fastest expansion in activity in eleven months (51.3). However, in China, despite strong trade flows in January (10.6 percent rise in exports, y/y) a weakening of new orders contributed to the decline in sentiment to its lowest level in six months. While, on aggregate, developing country growth is expected to pick-up in 2014, in economies that have had to significantly increase interest rates in response to the recent market turmoil and where inflation is rising on account of weaker currencies, growth prospects remain dimmer. Influenced by a heterogeneity of factors, commodity price movements have continued to decouple in recent weeks. Given their store of value function, the recent perturbation in financial markets mostly impacted precious metals. Gold prices, which declined by almost 30 percent in 2013, have since recovered some 10 percent thus far in 2014 with a reversal in February of the outflows in gold-backed exchange traded funds. Unlike, precious metals, industrial metal prices fell in January on account of weak demand in China. As regards oil markets, Brent prices (international marker) remained remarkably stable as upward pressures from supply disruptions (North Sea, Libya and Iraq) were counterbalanced by worries on oil demand from developing countries. However, on account of an extended cold spell in the United States WTI oil prices (the mid-continent US indicator) have increased in recent weeks, thus narrowing the wedge in Brent and WTI prices. On improved supply outlook, most agricultural prices (led by grains) continued their downward slide with a one percent decline in Q Agricultural prices are projected to decline by 2.5 percent in February 20,

3 High income (1) The recovery in high income economies continues to firm. Following a robust expansion in GDP in Q data suggest some moderation in activity in the US, likely reflecting temporary drags from unusually severe weather. The Euro Area has managed to grow for three consecutive quarters with momentum improving in Q4, but this is yet to have much impact on the high unemployment rate and declining inflation. Despite disappointing Q4 GDP data, private domestic demand in Japan picked up momentum. Activity in the US softened at the start of the year likely reflecting severe weather impacts The US economy expanded by a robust 3.2% (saar) in Q4 (vs 4.1% in Q3) supported by strong consumer spending and rising exports that offset a significant drag from government spending. Indications are that extremely cold weather has weighed somewhat on household spending, business activity and job creation, with both industrial output and retail sales contracting for the first time in several months in January. January Markit PMI surveys indicate a faster rate of expansion in the service sector and continued expansion in manufacturing suggesting these setbacks are likely to be temporary. With the outlook positive, the US Fed further pared its asset purchase program in February (by an additional $10bn to $55bn per month). Euro Area growth is building momentum, but deflation and unemployment concerns remain Euro Area GDP growth accelerated to 1.2% (saar) in Q4, double the pace in Q3. This marked the 3rd quarter of growth since the end of an 18-month recession (the longest on record). The recovery was broad-based with France, which struggled to grow in Q3, expanding by 1.3% and Italy becoming the fourth periphery economy to exit recession. January PMI data show resurgent activity in Germany combined with solid expansion in Spain and signs of recovery in Italy and Greece, taking the composite (manufacturing and services) Eurozone PMI to 31-month high. However growth is well below the rate needed to make a dent in near-record unemployment rates (of 12% and over 25% in Greece and Spain) and there are growing concerns about deflation. Domestic activity in Japan is strengthening Large doses of monetary and fiscal stimulus have boosted the Tankan business confidence index to a 6-year high and pushed up core inflation to 1.3% in December after 15 years of deflation. However GDP growth remained broadly flat at 1% annualized in Q4, mainly due to large drags from net trade. On the plus side growth in private consumption and investment remained strong suggesting that the domestic economic recovery remains intact. Policy however remains focused on macroeconomic stimulus with further monetary easing announced recently, while progress on structural reforms that could boost medium term growth lagging behind. 3 Industrial Production Source: Datastream, World Bank Manufacturing PMIs Source: Markit Economics, World Bank Inflation Source: Datastream, World Bank

4 High income (2) After struggling last month amid global risk aversion, G3 equities have bounced back in February. The cost of insuring troubled Euro-zone countries debt has fallen further this month, reflecting the market s assessment of reduced risk. Italian and Spanish bonds have rallied this year amid growing optimism that the euro-zone economy is recovering from the sovereign debt crisis. After sliding in late January on account of risk aversion, G3 equities have rebounded in February. After early year sell-off, G3 equities have bounced back this month with U.S. equities rebounding close to record levels. Despite the recent rally, Japan s benchmark Topix index has still lost about 7.7% this year, the most among major developed markets. Japanese shares have significantly underperformed thus far this years as U.S. (S&P 500) and German (DAX) benchmark stock gauges have advanced 5.7% and 5.2%, respectively. G 3 stock markets Credit default swap spreads for troubled Euro- Area economies have continued their downward trend. CDS spreads for high-spread Euro-zone economies have continued to tighten through February, down more than 30 basis points thus far this year. This reflects the market s assessment of sharply reduced credit risk for those countries amid signs of improving real-side activity, albeit moderate. Notably, the cost of insuring Portuguese sovereign bonds against default have declined this year by 87 basis points (bps) and 26 bps following strong demand for their new bond issuances.. Source: World Bank and Datastream 5-year sovereign CDS rates since January 2011 Borrowing costs for Italy and Spain have declined to multi-year lows. Italian and Spanish government bonds rallied this year with those of the region s high-risk countries amid growing optimism the euro-zone economy is recovering from the sovereign debt crisis. Italy s 10-year bond yield fell to an eight-year low of 3.56% in February, and Spain s 10-year yield fell to the lowest level since March 2006 at 3.51%. Italian and Spanish government securities have gained 3.2% and 3.9% this year, respectively. Meanwhile, German bonds have earned 1.8%. Source: World Bank and Datastream Yields on 10-year government bonds Yield (percent) Portugal Spain Italy 3 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Source: World Bank and Bloomberg 4 page 1

5 Industrial Activity Global industrial production growth strengthened notably in the fourth quarter of 2013, driven by a robust pick-up in high income countries and continued expansion in developing countries. December figures show that, driving growth in high income countries in Q4, U.S. s IP growth accelerated sharply buoyed by manufacturing production. Though remaining high, IP growth softened in the developing regions reflecting a slowdown in China and India amid weakening domestic demand. Global IP growth strengthened in the fourth quarter of Global IP grew at a seasonally adjusted annualized pace of 5.1 percent (3m/3m, saar) in Q4, after having risen 4.4 percent saar in Q3. This robust growth was due in part to a pick-up in high-income countries IP growth, which strengthened to 3.6 percent saar in Q4, up from 2.5 percent saar in Q3. Driving this pick-up in high income IP growth, the U.S. s IP growth accelerated to 6.8 percent saar in Q4, sharply faster than the 2.4 percent saar recorded in Q3. Developing countries IP growth remained stable in Q4, rising 6.7 percent saar in the three months ended in December, compared with 6.8 percent saar growth recorded in Q3. Developing countries IP growth in Q was marked by a notable slowdown in China. China s IP growth decelerated to 10.9 percent saar in Q4 after rising to 12.7 percent saar in Q3, as factory output and investment growth slowed. Excluding China, IP growth in the rest of East Asia and Pacific region slowed in December IP growth rose to 5.2 percent saar in developing Europe and Central Asia in Q4, up from 4.2 percent saar in Q3, helped by robust manufacturing growth in Turkey, Romania and Hungary. In contrast, IP growth contracted further in Latin America and the Caribbean in Q4, as manufacturing output declined in Mexico and Argentina. IP growth contracted in India in Q4, while it rebounded in South Africa. After rising to a record high 8.8 percent saar in Q3, India s IP growth contracted 6.2 percent saar in Q4 driven by falling manufacturing output. Excluding India, IP growth accelerated in the rest of the South Asia region, mainly reflecting gains in Pakistan. After contracting 8.1 percent saar in Q3, South Africa s IP growth rebounded strongly in Q4, as factory output improved, leading a rebound in the Sub-Saharan Africa region. In Middle East and North Africa, available data shows that after contracting sharply in the three months ended September, IP growth weakened further in October, decreasing 33.6 percent saar, as political instability and civil unrest continued to weigh on economic activity in the region. Global IP growth strengthened in Q Source: World Bank China s IP growth decelerated in Q Source: World Bank IP growth contracted in India in Q Source: World Bank

6 Business Sentiment Business sentiment within the global manufacturing sector continues to be optimistic with the latest global PMI reading just a notch below the 30-month high. Overall, advanced countries continue to show improvement in sentiment, led by the Euro Area. In contrast, sentiment among developing regions declined into contraction territory led by East Asia & Pacific with its PMI dipping to a 6-month low. Similarly, the PMI for Europe & Central Asia declined, but still indicated continued expansion. On the other hand, both Latin America and South Asia saw improvement in business optimism and accelerating expansions. Global manufacturing sector sentiment edges down from the 30 month high, with weakening in the U.S. but strengthening in the Euro Area. At 52.9 in January, the JPMorgan Global Manufacturing PMI edged down from December s 30- month high of 53.0, reflecting continued growth of production, new orders and employment. Largely attributed to the adverse weather conditions, the U.S. (ISM) PMI slumped from 56.5 in December to 51.3 in January, with slowing in the growth of new orders and production. Underpinned by solid growth in production, new orders and new export orders, the Euro Area PMI jumped from 52.7 in December to 54.0 in January, the strongest since May Driven by strong output and new order growth but weakening new export orders, Japan s PMI jumped up from 55.2 to 56.6, the highest since February Strengthening external demand have led to improved sentiment in several emerging economies such as Brazil, Mexico and India. Led by strong new order growth, Brazil s PMI increased from 50.5 in December to 50.8 in January. However, employment did fall in January mainly due to an uncertain economic outlook. With strengthening domestic and foreign demand, India s PMI increased from 50.7 to 51.4, the highest reading since March Due to strong external demand, the Mexican PMI increased from 52.6 to 54.0 in January, indicating the strongest improvement in business conditions for a year. However, other emerging economies experienced weakened demand and less optimistic sentiment. For the second consecutive month, the Chinese PMI declined, edging down from 51.0 to 50.5 in January, and growth easing in production, new orders and employment. Russia s PMI s slide continued in January, decreasing from 48.8 to 48.0, the lowest reading since June Declines were observed for output, new orders, exports, and employment. With weakening foreign demand and consequent easing of growth of new export orders, South Africa s PMI dropped from 50.5 to 50.3 in January. With easing external demand and spikes in input costs, Turkey s PMI fell from 53.5 in December to 52.7 in January, signaling the slowest expansion since August, but still above the series average. 6 Manufacturing Purchasing Managers Index (PMI) Source: World Bank and Markit PMI Indexes Emerging Economies 1 Source: World Bank and Markit PMI Indexes Emerging Economies 2 Source: World Bank and Markit

7 International Trade (1) Global trade continued to expand in December, albeit at a slower pace than in November. Robust import demand in high-income economies, in China and in Europe and Central Asia region contributed to expansion in global trade. Demand for imports remained subdued in the East Asia and the Pacific region and continued to contract at accelerated rates in Latin America and Caribbean and South Asia reflecting effects of currency devaluation and policy tightening. Developing country import demand expanded at a moderate 2.7 percent pace in December. Global trade volumes expanded at 2.7 percent annualized rate in the three months to December, which was weaker than a 4.8 percent expansion in November and reflected moderation of demand for imports in both high income and developing countries. The pace of expansion of high income country quarterly import demand slowed to 3.7 percent annualized rate in the three months to December from 6.4 percent in November reflection moderation in the United States. Expansion of developing country trade volumes also eased to 0.5 percent annualized rate in the three months to December compared to a slightly stronger 1.1 percent in November. Performance across developing countries and regions show considerable heterogeneity. Import demand remained strong in China (7.1 percent in December) reflecting mini-stimulus. Imports in the rest of the region recorded insignificant contraction which partly reflects a continued adjustment in Indonesia. Import demand remained strong in ECA region in December reflecting strong outcomes in Turkey (35.7 percent in December). In LAC on the contrary, import demand continued to slide reflecting policy tightening in Brazil. Contraction of import demand has likely bottomed out but continues at an accelerated pace in South Asia (8.3 percent in December) reflecting adjustment to weaker currency. Data lags behind in Sub Saharan Africa and the Middle East Considerable lags in data lags for the Middle east and Sub Saharan Africa impede the assessment of most recent trends. In South Africa, where high frequency data is available, import demand has been volatile showing a 16.5 percent expansion in June followed by a three month period of contraction, a 10.6 percent recovery in October and a very sharp 10.4 percent contraction in November. In the Middle East and North Africa, the contraction in import demand persisted through February (seven consecutive months of contracting imports), reflecting the effects of political challenges on demand conditions in the region. Global Import Volumes Source: Datastream and World Bank Regional Import Volumes: EAP, ECA, LAC Source: Datastream and World Bank Regional Import Volumes: MENA, SAS, Sub-Sah. Africa 7 Source: Datastream and World Bank

8 International Trade (2) Steady demand for imports from high income economies and China combined with depreciated local currencies contributed to a continued expansion of developing country exports in December. All developing regions, where high frequency data is available, continued to show a rebound in exports in December, with particularly strong performance in East Asia and the Pacific region. Supported by strengthening high-income imports, developing country exports continued to accelerate. China s exports continue to expand at a double digit rate for the third consecutive month including at 26.8 percent annualized rate in the three months to December. Excluding China, developing country exports expanded at 19.3 percent rate in December marking a third consecutive month of expansion at a double digit rate. Improved external demand will support growth prospects in developing countries, particularly in those economies where domestic demand has weakened, on account of tighter credit conditions. Export performance in developing regions shows continued improvement. Overall, the recovery in the Euro Zone is supporting export growth in Europe and Central Asia region since July following an earlier period of contraction. Exports from LAC continue to expand, although the pace of expansion weakened in December to 2.5 percent compared with 8.8 percent in November. In South Asia, where exports have shown a fourmonth period of a sustained recovery led by India and supported by weaker local currency, export growth rate eased to just 2.4 percent annualized rate in December. Global exports continue to expand in Q1 led by strong demand in high income countries and China. If the strengthening of high-income country activity is to persist, as is expected, this should provide some further support to a pick-up in developing country exports, especially in those countries where export growth continued to lag behind. Global Export Volumes Source: Datastream and World Bank Regional Export Volumes: EAP, ECA, LAC Source: Datastream and World Bank Regional Export Volumes: MENA, SAS, Sub-Sah. Africa China s export growth continues to be strong in January of 2014, rising by 10.6 percent (yoy), buoyed by exports to the European Union. Considerable lags in data lags for the Middle east and Sub Saharan Africa impede the assessment of most recent trends. 8 Source: Datastream and World Bank

9 Commodities (1) Crude oil prices eased in January, in part, due to expectation of weaker seasonal demand as the spring refinery maintenance season started. Prices of industrial metals declined slightly on demand concerns from slowdown in emerging markets. Precious metals reversed their declines in January after three straight months of declines as turmoil in emerging market equities and currencies has increased gold s appeal as a haven. Crude oil prices eased in January in part due to expectations of weaker seasonal demand. Oil markets rallied from mid-january on bitterly cold US winter and strong demand for distillate. However, they averaged $102/bbl, down 3 percent (m/m) for the entire month as the spring refinery maintenance season dampened demand. Global oil supplies fell 290 kb/d to 92.1 mb/d in January on falling non-opec supply. OPEC crude supply was slightly up by 85 kb/d as downturn in Iraq s production offset the partial recovery of Libya s output. The gap between Brent and WTI narrowed to US$ 8/bbl by mid-feb 2014, a four-month low, as crude oil stocks declined in Cushing, OK (delivery point for WTI) as new pipelines were draining excess inventories toward refineries in the Gulf. Metal prices declined in January on demand concerns from emerging markets. Metals prices were down 0.7% (m/m) in January on worries of the slowdown in demand from emerging markets. Indonesia s introduced a ban on export of unprocessed ore from Jan 12, which is intended to increase the value of the country s exports and expand its processing capacity. The largest impact on global markets is expected for nickel and bauxite as Indonesia exports significant volumes to China. Global stocks of metals at major exchanges have declined (down 1% m/m in January), they are still elevated by historical standards. Copper stocks have been declining since the mid 2013 (-25% y/ y), but Nickel stocks are up 78% (y/y) in January. Precious metals prices reversed their declines in January after three straight months. Precious metals have been on the decline since early 2012 but prices have increased by 1.8 percent in January (m/m) as turmoil in emerging market equities and currencies has increased gold s appeal as a haven. Reduced demand for safe-heaven investments and expectations of changes in US monetary policy have triggered a rush out of the exchangetraded funds, which have been the main drivers on price declines in While January holdings of gold by exchange traded funds (ETFs) are down on y/y basis (34%), monthly declines slowed, and data for early weeks of February show a pick-up in holdings. 9 Source: Datastream. Source: Datastream. Crude Oil Prices Metals Prices Source: Datastream and World Bank. Precious Metals Prices

10 Commodities (2) The global grain outlook continues to remain solid, according to the February 10, 2014 update by the U.S. Department of Agriculture. The World Bank s agricultural price index declined more than 1% in January (yet, it is 8.3% lower than a year ago). Beverages is the only index that recorded gains in January. Grains and oils & meals were down almost 2% each and raw materials declined almost 1%. The outlook for three grains (maize, wheat, and rice) remains solid. The maize outlook remains solid with the stocksto-use (S/U) ratio an indicator of supply and demand conditions expected to reach 16.7% during 2013/14, down from January s estimate of 17.1% but much higher than 15.4% in 2012/13. The rice market continues to be well-supplied. Current season s global rice production will reach million tons, marginally higher than last season s million tons, implying an S/U ratio of 22.2%, well within historical norms. The S/U ratio for wheat expected to reach 26.1% in 2013/14, slightly down from January s estimate of 26.4% but higher than last season s 25.9%. Global production will reach almost 712 million tons, up from last season s 656 million tons. Maize and rice prices are still at pre-2008 boom levels. Wheat prices weakening but still high. Maize prices averaged $198/mt in January, the lowest since November In addition to improved global supply outlook, the weakness reflects a moderation of maize diversion to the production of biofuels. Rice prices averaged $450/mt in January very similar to December average. Yet, a healthy global crop combined with likely stock releases by Thai government are weighing heavily on the market with price risks on the downside. Wheat prices averaged $276/mt in January, 5% lower than December and almost 18% lower than a year ago. Despite a price uptick in early February, wheat s global outlook looks much healthier now than it did in the Summer of Soybean prices and edible oils reversed the downward trend, but still low by historical standards. Soybean and edible oil prices, which had been under downward pressure earlier in the year, reversed course, making significant gains in early February, mostly reflecting strong import demand by China and some stock build-up by Argentina. Overall, however, the edible oil and oilseed markets are well-supplied. Separately, the limited strength of the beverage price index was due to a 5% percent increase in Arabica prices, in turn, a reflection of lower than expected Brazilian output (more than 5% down from 2013). Brazil is the world s dominant coffee (and Arabica) supplier. 10 Source: World Bank Source: World Bank Stock-to-use ratios 40% 35% 30% Wheat 25% Rice 20% 15% Maize 10% Source: US Department of Agriculture (February 10, 2013) Maize and wheat prices Soybean and soybean oil prices

11 International Finance (1) Credit risks for developing countries have eased in February as Argentina spreads have declined more than 500 basis points. Global stocks have bounced back recently, restoring $3 trillion of market valuations that was lost due to last month s sell-off. Central banks for Brazil, India, Turkey, and South Africa have hiked key policy rates this year amid renewed market pressure. Developing-country CDS rates have tightened recently as market sentiment has improved CDS spreads for developing countries widened more than 100 basis points last month, led by a surge in Argentina, spreads have declined by more than 30 bps thus far February as credit risk concerns have eased. Overall credit risks for developing countries have declined from last month as a perceived risk of sovereign default for some high-risk countries has eased. For example, CDS spreads for Argentina have fallen more than 500 bps thus far February. 5-year sovereign CDS spreads for developing countries Global stock markets have bounced back recently World stock markets have rallied recently, restoring $3trillion of market valuations that was lost due to last month s market volatility. After posting the worst start to a year since 2009, developing-country stocks rallied, trimming yearto-date loss to 4.5%. But they continue to underperform mature-market stocks. Nevertheless, concerns over emerging-market equities remain heightened as outflows from global equity funds have continued throughout February. Source: World Bank and Bloomberg MSCI stock market indices Source: World Bank and Bloomberg Central banks for several developing countries have recently hiked policy rates Monetary policy changes since May 2013 Brazil, India, Turkey and South Africa have raised their key policy rates under renewed market pressure this year. Brazil kicked off the round by raising policy rates by 25 basis points (bps), followed by 25 bps hike by India, and Turkey hiked its 1-week repo rate by more than 500 bps. This was immediately followed by South Africa s decision to raise its lending rate for the first time in nearly six years. In contrast, Hungary and Romania have further cut their key interest rates this year. Policy rate changes since May 2013 (basis points) Turkey Brazil Indonesia India South Africa Thailand Peru Mexico Colombia Romania Hungary Source: World bank and Bloomberg 11

12 International Finance (2) After widening sharply between mid-january and early February, developing-country bond spreads have tightened recently as global risk aversion has relatively eased. Outflows from developing-country bond and equity funds have continued this year through February. Capital flows to developing countries started the year on a strong note, helped by a record high bond issuance. Borrowing costs for developing-country sovereign bonds have eased in February After reaching this year s high levels of 397 basis points on February 3rd, developing-country bond spreads have tightened by 30 bps as global risk aversion eased. EM borrowing costs widened by 64 bps between mid-january and early February amid emergingmarket sell-off. Widening in spreads were led by high-risk countries; including Argentina, Venezuela, and Ukraine. Developing-country sovereign bond spreads since 2011 (JP Morgan EMBIG spreads, basis points ) EM sovereign bond spreads Average 200 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13 Dec-13 Pace of outflows from developing-country bond and equity funds accelerated at the start of In January, global investors pulled $12.2 billion out of emerging-market equity funds, close to $15.2 billion outflows recorded for the whole of last year. Emerging-market bond funds also suffered outflows of $4.6 billion. Outflows from emerging-market funds have continued thus far February with year-to-date equity outflows reaching $18.6 billion Meanwhile, EM bond funds fared relatively better, suffered $6.6 billion in outflows this year after losing $14 billion in Source: World Bank and JPMorgan Foreign portfolio inflows to developing countries $ billions EM Fixed Income Funds -40 EM Equity Funds -50 Jan May Sep Jan May Sep Jan May Sep Jan Capital flows to developing countries started the year on a strong note. Gross capital flows to developing countries remained robust at $51 billion, up from $45 billion in December, as record bond issuance offset faltering in bank lending and equity issuance. Bond flows accounted for more than 75% of total capital flows to developing countries during the first month of Latin America region was the biggest recipient of total flows in the month as nearly all other regions posted declines in flows (except a small gain in Europe and Central Asia). Source: World Bank and EPFR Gross capital flows to developing countries Source: World Bank and Dealogic 12

13 International Finance (3) Equity flows faltered in January, due mostly to a sharp drop in flows to China. Bond issuance amounted to alltime highs in January as many developing-country borrowers tried to lock in relatively favorable financing conditions. Bank lending fell sharply in the month as a result of a continued rise in loan funding costs since late last year. Equity flows faltered in January. Equity flows (a combination of IPOs and followon issuance) was weak at $5billion in January due to a sharp drop in flows to China. Following a surge in December, which was somewhat inflated by a mega deal in China, global stock-market volatility that started mid-january dented equity issuance activity. Preliminary data suggest that February volumes are likely to remain subdued. Equity placements (IPOs and follow-on issuance) Bond issuance reached all-time highs in January. Developing-country bond issuer managed to raise a historic high of $39.7 billion in January, surpassing previous high of $38.3 billion reached in May 2013, as many borrowers seek lock in cheaper long-term financing before an expected spike in global interest rates. Seasonal factor may have also played a part, as January historically is one of the busiest months of the year for bond issuance. As in recent months, bond issuance activity was concentrated among investment-grade borrowers, while riskier issuers continued to have a limited access. Source: World Bank and Dealogic International bond issuance Bank lending was weak in January Syndicated bank loans to developing countries fell sharply by 73% to $5.9 billion in January from a month ago, posting the lowest monthly volume since May The sharp drop in syndicated can partly be explained by a continued rise in loan funding costs since late last year. East Asian and Latin American borrowers accounted for 72% of the decline during the first month of Source: World Bank and Dealogic Cross-border syndicated bank loan Source: World Bank and Dealogic 13

14 Exchange Rates The euro gained in recent months together with firming economic recovery. Currencies of large middleincome developing countries came under pressure in late January, as a sell-off due to domestic political and macroeconomic problems exacerbated US tapering concerns. But the effect was mostly limited to those exposed to capital markets, with the majority (57%) of developing currencies either stable or appreciating since January 22nd. Developing currencies however remain vulnerable to tightening of global financial conditions. The euro gained strength with an economic upturn, while rise in financial market uncertainty drove US yields lower and the dollar higher, despite the start of QE tapering The euro has appreciated in trade weighted effective terms in recent months, along with a firming economic recovery in the Eurozone. Despite the US Federal Reserve starting to taper its quantitative easing (QE) program in January, a rise in financial market uncertainty and flight to safe assets drove US treasury yields lower, and the dollar higher, in January. As financial uncertainty abated in Feb., long-term yields rose. The Japanese yen has broadly stabilized and started to appreciate, following an earlier steep depreciation resulting from monetary stimulus. Currencies of large middle-income countries came under pressure in late January as domestic problems exacerbated QE tapering concerns Several emerging currencies came under depreciation pressures in late January, following U.S. QE tapering and slowing activity in China. Countries with weak macroeconomic fundamentals and domestic problems were most affected. Domestic political turmoil and macroeconomic weakness in Argentina and Ukraine sparked a 11% and 4.4% depreciation in NEER terms since January 22 (although with a modest recovery in February). Ghana s weak fiscal performance and external imbalances resulted in a 3.7% depreciation, despite imposition of exchange controls. A larger 16% devaluation of Kazakhstan s pegged currency was linked partly to a weaker rouble. Receding financial market uncertainty, improved fundamentals, and monetary tightening helped stabilize developing currencies in February Turkey with current account deficit and growth concerns experienced 6% depreciation during January. But sharp monetary tightening helped the currency rise back to the early Jan. level. Reflecting improved fundamentals, losses were limited in other major currencies that had suffered sharp depreciation during the May-August 2013 turmoil. Monetary tightening in South Africa and India helped their currencies to recoup losses in February. Brazil s and Indonesia s currencies appreciated 3% in NEER terms since Jan 22. While 17% of developing country currencies lost more than 1 percent in NEER terms since Jan 22, a majority of developing countries (57%) were stable or even appreciated. 14 Euro and US dollar appreciate, Yen stabilizes Source: Datastream, IFS Depreciation of developing currencies against US$ Source: Datastream, IFS Depreciation of developing currencies in NEER terms Source: Datastream, IFS

15 Inflation Global inflation eased in December reflecting slide in high income country inflation and moderating price pressures in the developing countries. Policy tightening has helped to contain inflationary pressures in a selected group of large Middle Income countries including Brazil, China, Indonesia and Turkey. Still incomplete, January inflation reading points toward resurging price pressures in a number of developing economies reflecting currency depreciation. Global inflation eased to 3.3 percent in December reflecting continued slide in high-income country inflation and moderation of price pressures in developing countries. High-income country inflation dropped to 1.2 percent annualized rate in the three months to December reflecting weak domestic demand and large spare capacity especially in the Euro Area. Inflation in developing countries also continued to ease falling below 7 percent mark in the three months to December for the first time since September of 2013 partly reflecting policy tightening and pass through of mid-2013 devaluation wave. Inflation eased significantly in ECA, remains at moderate levels in LAC (excluding Venezuela), and continues to slide down in the EAP region. Weak domestic demand combined with tight policies contributed to a record low inflation in ECA region which fell to the all time low 2.4 percent in the three months to December. In Latin America and Caribbean (excl. Venezuela), inflation remains below 6 percent since November of 2012 partly reflecting policy tightening in Brazil. In contrast, inflation remains at its record high levels in Venezuela and accelerated in Argentina reflecting a sharp devaluation of the peso. In the EAP region quarterly inflation eased to a 2.2 percent annualized rate in the three months to January reflecting easing price pressures in China and Indonesia, but moderate price pressures are building up in the rest of the region. Inflation outcomes reflect local conditions in MENA, South Asia and Sub-Saharan Africa. Quarterly inflation in MENA remains high reflecting price pressures in Iran and Syria related to political turmoil. Elsewhere in the region inflation accelerated insignificantly reflecting resurging price pressures in Egypt. Inflation in South Asia region eased to 9.5 percent annualized rate in January reflecting policy tightening in India. Inflation in Sub-Saharan Africa (excl. South Africa) accelerated to 9.2 percent annualized rate in the three months to December reflecting local conditions. Recent policy tightening helped to further contain price pressures in South Africa. Developing and high income inflation Source: World Bank Prospects Group; IMF IFS. Inflation in EAP, ECA and LAC Source: World Bank Prospects Group; IMF IFS. Inflation in MENA, SAS and SSA 15 Source: Source: World Bank Prospects Group; IMF IFS.

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 Q4 Q1 Q2 Q3 Aug Sep Oct Nov World High -in come cou n tries Industrial countries United States Japan Euro Area United Kingdom Other high income Hong Kong (China) Singapore Taiwan (China) Dev elopin g cou n tries 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. 16

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) Avg Q1 Q2 Q3 Q4 Sep Oct Nov Dec Real GDP High - income countries Industrial countries United States Japan Euro Area United Kingdom Real merch an dis e imports High - income countries Industrial countries United States Japan Euro Area United Kingdom Other high income Hong Kong (China) Singapore Taiwan (China) I mport Prices High - income countries Industrial countries United States Japan Euro Area United Kingdom Other high income Hong Kong (China) Singapore Taiwan (China) Real effectiv e ex ch an ge 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. 17

18 Table A.3 Global credit conditions (percent unless otherwise indicated a/) Average Q2 Q3 Q4 Sep Oct Nov Dec Policy Rates United States Japan Euro Area United Kingdom Ten year bon d United States Japan Euro Area United Kingdom Spreads (Bas is poin ts ) b,c Dev elopin g cou n tries East Asia and Pacific China Indonesia Phillippines Malaysia Europe and Central Asia Russian Federation Turkey Poland Latin America and Caribbean Brazil Mexico Argentina Colombia Middle East and North Africa Egypt South Asia d Pakistan Sri Lanka Sub-Saharan Africa South Africa Gros s in flow s e Dev elopin g cou n tries 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 daily figures. Quarterly and Annual figures are simple averages of 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. 18