The External Environment for Developing Countries

d Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized The External Environment for Developing Countries July 2009 The World Bank Development Economics Prospects Group

10 China at the forefront of the global economic recovery industrial production, percent (month-on-month) 5 World China 0-5 USA Germany -10 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Source: Thomson/Datastream, Haver, DECPG.

50 Cross border bank flows to developing countries continue meagre billions USD, 3-month moving average 40 Syndicated lending 30 20 10 0 Bonds Jan-05 Aug-05 Mar-06 Oct-06 May-07 Dec-07 Jul-08 Feb-09 Source: Loanware and Bondware.

Industrial countries

Employment losses ease with potential positive effects on spending retail volume growth (y/y) [L]; change in employment (3mma) [R] 2 250 0-2 -4-6 -8 Retail sales [L] Change in employment [R] 50-150 -350-550 -10 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Source: U.S. Departments of Commerce and Labor. -750

55.0 52.5 U.S. economic activity is stabilzing but bank loan charge-offs surging ISM composite economic activity index [left]; Bank charge-offs (% total C&I loans) [right] ISM composite index [left] 2.0 1.8 50.0 47.5 45.0 42.5 40.0 37.5 C&I charge-offs [right] Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Source: Institute for Supply Management; Federal Reserve Board. 1.5 1.3 1.0 0.8 0.5 0.3

25.0 U.S. trade developments may offer boost for 2 nd quarter GDP export and import volumes, ch% saar Export volumes 12.5 0.0-12.5-25.0 Import volumes -37.5-50.0 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Source: U.S. Department of Commerce.

60 40 Japan s trade and production take a sharp leg up over May/June export volumes and manufacturing output, ch% saar Export volume 20 0 Production -20-40 -60-80 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Source: Bank of Japan and Japan Cabinet Office.

5.5 5.0 4.5 4.0 Labor markets deteriorate quickly while spending continues to falter unemployment rate (%) [left]; retail sales, ch% yr-on-yr [right] Unemployment rate % [left] Retail sales [right] 2 1 0-1 -2-3 -4 3.5-5 Oct-06 Feb-07 Jun-07 Oct-07 Feb-08 Jun-08 Oct-08 Feb-09 Jun-09 Source: Japan Cabinet Office.

2 1 Japan s inflation drops well into negative territory Toyko CPI and corporate goods prices, ch%, y/y Headline CPI 0-1 -2-3 -4-5 Corporate goods prices (PPI) -6 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Source: Bank of Japan.

9.5 9.0 European labor markets continue to weaken, but sentiment up on lower CPI unemployment rate (%) [left]; EC consumer sentiment [right] Unemployment rate % [left] 0-5 -10 8.5 8.0 7.5 Euro Area consumer sentiment [right] -15-20 -25-30 7.0 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Source: EUROSTAT and European Commission. -35

6 5 4 3 2 Euro Area CPI in negative ground HICP headline and core, ch% y/y and EURIBOR (%) EURIBOR Headline HICP HICP-core 1 0-1 Source: Eurostat.

Industrial production

Deep peak-to-trough declines in industrial production are now being reversed Mexico United Kingdom United States Argentina Malaysia Colombia Brazil Pakistan Bulgaria South Africa Thailand Singapore Korea, Rep. Germany Turkey Italy Slovenia Spain Slovak Republic Japan Hungary Taiwan (China) Peak-totrough decline percent change Percent of contraction reversed -60-40 -20 0 20 40 60 80 100 Source: Thomson/Datastream, DECPG.

10 China at the forefront of the global economic recovery industrial production, percent (month-on-month) 5 World China 0-5 USA Germany -10 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Source: Thomson/Datastream, Haver, DECPG.

Global manufacturing looking up JPMorgan global PMI summary - Manufacturing Manufacturing Feb Mar Apr May Jun Output 33.4 35.3 41.3 46.9 50.4 New orders 31.4 35.9 43.8 48.5 49 Employment 35 35.9 38.2 39.5 42.2 Source: JPMorgan. Source: JPMorgan-Chase

International trade

World export growth appears to be bottoming exports, ch% seasonally adjusted annual rates (saar) 35 15-5 -25-45 -65 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Source: World Bank data.

Global imbalances ease moderately as U.S. deficit and China surplus narrow goods trade balance, U.S. $-bn, seasonally adjusted, annualized 600 400 200 0-200 -400 China -600 United States -800-1,000-1,200 Jan-02 Dec-02 Nov-03 Oct-04 Sep-05 Aug-06 Jul-07 Jun-08 May-09 Source: National Agencies through Thomson/Datastream.

Eurozone exports begin to support more moderate declines in production 25 IP and exports, ch% seasonally adjusted annual rates (saar) 5-15 Industrial Production -35 Exports -55 Jul-07 Nov-07 Mar-08 Jul-08 Nov-08 Mar-09 Source: Eurostat.

Oil prices

140 $/bbl Oil prices and OECD oil stocks million bbl 2800 120 100 80 2700 2600 60 40 20 2500 2400 0 Jan-96 Jan-98 Jan-00 Jan-09 Jan-09 Jan-09 Jan-09 Source: IEA and DECPG Commodities Group. 2300

World Oil Production (mb/d) 55 Non-OPEC 50 45 40 Non-OPEC x FSU 35 OPEC 30 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Source: IEA and DECPG Commodities Group.

WTI Futures Prices - NYMEX $/bbl Monthly contract prices to Dec 2014* for select dates in 2009 90 80 70 Jun 11 Jul 13 60 50 Feb 18 40 30 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Source: NYMEX.

Non-oil commodity prices

(2000=100) 350 Food prices edged higher in June 300 250 200 150 Grains Fats & Oils Beverages Other Food 100 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Source: DECPG Commodities Group.

Metals prices ease following large gains in first-half 2009 9000 55000 8000 50000 7000 Copper 45000 40000 6000 35000 5000 30000 4000 25000 3000 Nickel 20000 15000 2000 Aluminium 10000 1000 5000 Source: LME and DECPG Commodities Group.

Freight rates fall on slowdown in bulk trade 12000 10000 8000 6000 4000 2000 0 Source: Datastream and DECPG Commodities Group.

International Finance

Flows slowed in June; first-half volumes halved from a year earlier Gross capital flows to emerging markets $ billion 2007 2008 2009 Tot al H1 H2 Total H1 Apr May Jun Total 652 258 132 389 106 14 24 21 Bonds 146 53 12 65 36 6 8 3 Banks 312 151 106 257 37 2 9 6 Equity 194 54 14 68 33 5 7 12 Lat. America 156 61 29 90 34 2 5 7 Bonds 45 17 3 20 15 2 1 2 E. Europe 247 99 57 157 22 4 7 5 Bonds 64 27 8 35 13 3 5 1 Asia 188 69 29 98 42 7 10 9 Bonds 23 7 0 7 6 1 1 0 Ot hers 61 28 17 44 7 0 3 1 Source: DECPG Finance Team.

Cross border bank flows remain well below the levels seen in previous years billions USD, 3-month moving average 50 40 Syndicated lending 30 20 10 0 Bonds Jan-05 Aug-05 Mar-06 Oct-06 May-07 Dec-07 Jul-08 Feb-09 Source: Loanware and Bondware.

EM assets rebound from recent corrections MSCI equity index, USD [left]; EM bonds spreads, bps [right] 850 800 EMBIG spreads [right] 750 700 750 700 650 600 550 500 MSCI equity index [left] 650 600 550 500 450 450 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Source: Morgan-Stanley and JPMorgan-Chase. 400

Currencies

Dollar weakens vs yen trading range around $1.40 against euro USD per Euro (inverse) [Left] and Yen per USD [right] Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 1.230 1.270 110 1.310 106 1.350 1.390 102 1.430 1.470 98 1.510 94 1.550 1.590 USD/Euro (inverse) yen/usd 90 1.630 Source: Thomson/Datastream. 86

Dollar slips vs EM currencies in seconed quarter percentage change (USD per LCU) (%) US NEER Stronger Local Currency Indo rph Ind rpe Brz rei First quarter 2009 Second quarter 2009 Tur lra Cze crn Mex pso Hun frt Rus Rbl -30-25 -20-15 -10-5 0 5 10 15 Source: Thomson/Datastream.

FOCUS Developments in real effective exchange rates

Real effective exchange rates depreciate in most of the world s largest economies 130 January 2008 = 100 Japan 120 110 China 100 90 USA Euro Area Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Source: Thomson/Datastream, Haver, DECPG.

Real effective appreciation for commodity exporters as commodity prices stage a comeback January 2008 = 100 120 110 100 90 Canada Brazil Australia 80 70 60 South Africa Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Source: Thomson/Datastream, Haver, DECPG.

REERs bounce off lows of early 2009 in countries exporting capital goods and autos BIS effective exchange rate, broad Indices,January 2008 = 100 120 110 Hungary 100 Czech Republic 90 80 70 60 South Korea Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Source: Bank for International Settlements.

The External Environment for Developing Countries July 2009 The World Bank Development Economics Prospects Group