Global Development Finance 2005 Mobilizing Finance and Managing Vulnerability Paris and Beijing April 2005

 Growth among developing countries is slowing to a more sustainable but still robust pace.  Global imbalances remain a serious source of risk.  Slower growth and higher interest rates could jeopardize developing country finances. Outlook for developing countries

Current context: economic activity is slowing Source: World Bank Developing Countries* High-income countries Percent change in industrial production, 3 month moving average, annual rate * Data exclude China

Current context: Interest rates are rising Source: World Bank 10-year U.S. treasury yield, percent

Factors contributing to the slowdown  Rising interest rates  High oil-prices  High-tech cycle  Administrative efforts to slow growth in China

The forecast: A return to more sustainable growth GDP percent change, annual rates Forecast Developing countries High income countries Source: World Bank

The forecast: A return to more sustainable growth Percent growth, annual rates Forecast Developing countries High income countries Source: World Bank

Almost all regions grow faster than in the past Source: World Bank * estimate GDP, per cent change from previous year

Emerging tensions in commodity markets Index, January 2002=100 Source: World Bank

Developing country demand boosted commodity prices Breakdown of demand (2003) Breakdown of additional demand (2004) OECD China Other developing Oil Metals and minerals Oil Metals and minerals Source: World Bank

Signs of accelerating inflation Consumer inflation, percent change, y-o-y Developing countries OECD countries Source: World Bank

Low interest rates have boosted demand Real U.S. interest rates, deflated by consumer inflation Emerging market spreads, basis points Source: World Bank

Global Imbalances are placing pressure on the dollar Current account balances, $millions, estimates for 2004 Source: World Bank

Low U.S. interest rates have contributed to dollar weakness Percent€/$ Euro / $ Interest rate spread Difference between U.S. and Euro 6-month interbank rate, €/$ exchange rate Source: World Bank

A modest depreciation so far 2004 Real effective exchange rate, Source: World Bank

Many countries have appreciated against the dollar... Percent change, real exchange rate, Jan Jan Appreciation Depreciation Source: World Bank

Despite $ appreciation, on the whole developing economies have not lost competitiveness Percent change, real effective exchange rate, Jan Jan Appreciation Depreciation Source: World Bank

Unless resolved, global imbalances remain a serious source of risk  Interest rates could rise by even more if: –Investor’s expect further $ depreciation –If their appetite for risk declines –Central bankers cease accumulating $ at the same rate as in the past  Higher rates would slow growth in developing countries and deteriorate the balance sheets of both low and middle-income countries would deteriorate.

Financial flows to developing countries continue recovery in 2004 $ billions Total net capital flows Net private flows Net official flows

Developing countries continue to export capital Current account surpluses as percent of GDP All developing countries Low-income countries

Large portion of capital flows channeled into reserve accumulation… Total capital flows Change in reserves Current account balance $ billions

…Leading to record levels of reserves in developing countries $ billion

…While reserves in some countries exceed standard levels Reserves as months of imports

$ billion A modest recovery in FDI inflows to developing countries in 2004 FDI as a share of GDP Top 5: China, Brazil, Mexico, Russian Federation, and Chile percentage

FDI to poor countries still dominated by flows to resource exporters Oil and Mineral exporters Other poor countries Percentage of recipients’ GDP in 28 poor countries

Reported FDI outflows from developing countries highlight growing integration $ billion percentage

Bond issuance surges while net bank lending remains flat $ billions Net bond flows Net bank lending

ODA from DAC donor countries is increasing ODA as a percent of GNI (projections: ) Percent Bilateral ODA/GNI Total ODA/GNI Projections Bilateral ODA less special purpose grants/GNI

… But net impact is limited ODA in 2002 Inflation changes Real increase ODA in 2003: $69 billion ODA increase in 2003: $10.7 billion Technical cooperation Debt forgiveness Emergency and disaster relief Administrative costs Other Exchange rate changes

Continuing evidence of shift from loans to grants $ billions Foreign aid grants Net debt flows from official sector

Upturn in long-term U.S. interest rates poses risks… Percent Fed Fund target 10-year U.S. yield

Basis points …With borrowing spreads at record low levels EMBI global bond spreads

External debt/GNI (%) Average change in spreads (bps) from 200 basis point increase in U.S. benchmark rates …Especially for highly-indebted and more vulnerable emerging markets

Growth in domestic debt poses new opportunities and challenges $ billion Asia Latin AmericaEurope

Risks to poor countries come through financing needs… Percent ODA/GDP in all developing countries ODA/GDP in the poorest countries

…As aid flows fail to keep pace with other financing sources Percentage of recipients’ GDP in 28 poor countries Current account balance Workers’ remittances FDI ODA

Policy can help 1.Policy measures—in the U.S., Europe, and Asia—can facilitate global rebalancing and reduce downside risks. 2.Risks to developing countries call for continued sound macro policies and prudent borrowing. 3.Meeting poor countries’ financing needs requires increased aid and renewed efforts to augment other financing flows.

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