Prospects for Prospects for Developing CountriesDeveloping Countries

Global Economic Prospects 2008Global Economic Prospects 2008The World BankThe World Bank

Prospects for developing countriesProspects for developing countriesKey MessagesKey Messages

The U.S. sub-prime crisis has carried limited financial effects to developing countries to date.

Prospects for developing countriesProspects for developing countriesKey MessagesKey Messages

The U.S. sub-prime crisis has carried limited financial effects to developing countries to date.

Resilience among developing economies is helping to mitigate the U.S. slowdown and promotes adjustment of global imbalances.

Prospects for developing countriesProspects for developing countriesKey MessagesKey Messages

The U.S. sub-prime crisis has carried limited financial effects to developing countries to date.

Resilience among developing economies is helping to mitigate the U.S. slowdown and promotes adjustment of global imbalances.

Growth in developing economies is expected to slow only modestly over the coming 2 years.

Prospects for developing countriesProspects for developing countriesKey MessagesKey Messages

The U.S. sub-prime crisis has carried limited financial effects to developing countries to date.

Resilience among developing economies is helping to mitigate the U.S. slowdown and promotes adjustment of global imbalances.

Growth in developing economies is expected to slow only modestly over the coming 2 years.

Serious risks remain for developing countries– to the downside as well as to the upside.

Prospects for developing countriesProspects for developing countriesKey MessagesKey Messages

The U.S. sub-prime crisis has carried limited financial effects to developing countries to date.

Resilience among developing economies is helping to mitigate the U.S. slowdown and promotes adjustment of global imbalances.

Growth in developing economies is expected to slow only modestly over the coming 2 years.

Serious risks remain for developing countries– to the downside as well as to the upside.

Still- longer term growth appears favorable.

Prospects for developing countriesProspects for developing countriesKey MessagesKey Messages

The U.S. sub-prime crisis has carried limited financial effects to developing countries to date.

Perceived riskiness of high-yield corporate Perceived riskiness of high-yield corporate bonds increased more than EM bondsbonds increased more than EM bonds

100

200

300

400

500

600

Source: Bloomberg, JPMorgan-Chase.

High-yield spread

EM-BIG spread

spreads, basis points

Following onset of crisis– Following onset of crisis– emerging-market spreads increasedemerging-market spreads increased and have become more volatile... and have become more volatile...

100

140

180

220

260

300

340

1-Jan-07 14-Feb-07 30-Mar-07 13-May-07 26-Jun-07 9-Aug-07 22-Sep-07 5-Nov-07 19-Dec-07

Source: JPMorgan.

EMBIG-Total

Europe and Central Asia

Latin America

East Asia

spreads over U.S. Treasuries, basis points

...but in historical perspective ...but in historical perspective the present widening of spreads is the present widening of spreads is

modestmodest

0

250

500

750

1,000

1,250

1,500

1,750

2,000

2,250

2,500

1994M1 1995M9 1997M5 1999M1 2000M9 2002M5 2004M1 2005M9 2007M5

Bond spreads (basis points)

Emerging market bond spread (EMBIG)

Source: JPMorgan.

Bond yields have flattened-Bond yields have flattened- with falling U.S. Treasury rates with falling U.S. Treasury rates the prime factor raising spreadsthe prime factor raising spreads

0

250

500

750

1,000

1,250

1,500

1,750

2,000

2,250

2,500

1994M1 1995M9 1997M5 1999M1 2000M9 2002M5 2004M1 2005M9 2007M5

Bond spreads and yields (basis points)

Source: JPMorgan.

Emerging market bond spread (EMBIG)

Emerging market bond yields

Emerging equity markets fell sharplyEmerging equity markets fell sharply but more-than recouped earlier losses... but more-than recouped earlier losses...

90

100

110

120

130

140

150

1-Jan-07 15-Feb-07 1-Apr-07 16-May-07 30-Jun-07 14-Aug-07 28-Sep-07 12-Nov-07 27-Dec-07

Source: Morgan-Stanley, Thomson/Datastream.

MSCI-Emerging Markets

DJIA (USA)

TOPIX (Japan)

equity market indices (USD): Jan-07 =100

...keeping bullish longer-term trends intact...keeping bullish longer-term trends intact

100

125

150

175

200

225

250

1-Sep-05

1-Dec-05

1-Mar-06

1-Jun-06

1-Sep-06

1-Dec-06

1-Mar-07

1-Jun-07

1-Sep-07

1-Dec-07

Source: Morgan-Stanley, Thomson/Datastream.

All Emerging Markets

Latin America

Asia

Europe and Central Asia

equity market indices (USD): Sep-05 =100

Prospects for developing countriesProspects for developing countriesKey MessagesKey Messages

The U.S. sub-prime crisis has carried limited financial effects to developing countries.

Resilience among developing economies is helping to mitigate the U.S. slowdown and promotes adjustment of global imbalances.

Weakening of U.S. domestic demandWeakening of U.S. domestic demandstarted well before financial turmoilstarted well before financial turmoil

growth of investment and imports, 4-quarter moving average

-15

-10

-5

0

5

10

15

1999-I 2000-I 2001-I 2002-I 2003-I 2004-I 2005-I 2006-I 2007-I

Source: World Bank.

U.S. Investment

U.S. Imports

Developing country growth retained Developing country growth retained robust momentum through the robust momentum through the

first-half of 2007...first-half of 2007...

0

2

4

6

8

10

East Asia South Asia Latin America United States

2005 2006 2007-H1

Source: World Bank and National Agencies.

real GDP, percent changereal GDP, percent change

...with import demand from the ...with import demand from the developing world a support U.S. exportsdeveloping world a support U.S. exports

nominal growth in US$, 12m/12m ch%

-15

-5

5

15

25

35

1994M7 1996M7 1998M7 2000M7 2002M7 2004M7 2006M7

U.S. exports

Developing country imports

Source: World Bank.

The dollar’s decline to near all-time lows is The dollar’s decline to near all-time lows is a key factor for trade & capital flowsa key factor for trade & capital flows

real effective exchange rate

70

80

90

100

110

120

Source: IMF.

Gradual reductions in U.S.Gradual reductions in U.S. current account deficit likely to continue current account deficit likely to continue

U.S. current account balance, % of GDP

-7.0

-6.0

-5.0

-4.0

-3.0

Q1 2000 Q1 2001 Q1 2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007

Source: U.S. Department of Commerce.

% of GDP

Prospects for developing countriesProspects for developing countriesKey MessagesKey Messages

The U.S. sub-prime crisis has carried limited financial effects to developing countries to date.

Resilience among developing economies is helping to mitigate the U.S. slowdown and promotes adjustment of global imbalances.

Growth in developing economies is expected to slow only modestly over the coming 2 years.

-2

0

2

4

6

8

1981 82 83 84 85 86 87 88 89

1990 91 92 93 94 95 96 97 98 99

2000 1 2 3 4

2005 6 7 8 9

Modest slowing of growth expected for Modest slowing of growth expected for developing economiesdeveloping economies

Real GDP, percent changeReal GDP, percent change

Early 1980s debt crisis

1990s recession Transition countries

East Asia financial crisis

2001 global downturn

ForecastForecast

Source: World Bank.

Developing economies

-2

0

2

4

6

8

1981 82 83 84 85 86 87 88 89

1990 91 92 93 94 95 96 97 98 99

2000 1 2 3 4

2005 6 7 8 9

Growth has far-exceeded that of high-Growth has far-exceeded that of high-income countries for an extended periodincome countries for an extended period

Real GDP, percent changeReal GDP, percent change

High-income

Source: World Bank.

Developing economies

ForecastForecast

50

100

150

200

250

300

350

400

1-Jan-00 1-Jan-01 1-Jan-02 1-Jan-03 1-Jan-04 1-Jan-05 1-Jan-06 1-Jan-07

Source: DECPG Commodities Team.

Grains

Other foods

Fats and oils

Extreme headwinds of higher food and Extreme headwinds of higher food and energy prices for net importersenergy prices for net importers

Commodity price indices, 1990=100

Crude oil

-2

0

2

4

6

8

1981 82 83 84 85 86 87 88 89

1990 91 92 93 94 95 96 97 98 99

2000 1 2 3 4

2005 6 7 8 9

Positive developments in Sub-Saharan Positive developments in Sub-Saharan Africa are of particular noteAfrica are of particular note

Real GDP, percent changeReal GDP, percent change

Sub-Saharan Africa

Source: World Bank.

Developing economies

ForecastForecast

High-income

Prospects for developing countriesProspects for developing countriesRisksRisks

Serious risks remain for developing countries– to the downside as well as to the upside.

Prospects for developing countriesProspects for developing countriesRisksRisks

Serious risks remain for developing countries– to the downside as well as to the upside. A low case scenario triggered by sharp decline in

U.S. home prices, worsening of the credit crunch and U.S. recession in 2008 would affect developing countries quite adversely.

Export and investment falloff hits Export and investment falloff hits middle income countries hardmiddle income countries hard

-2

0

2

4

6

8

World High-incomeOECD

USA Low andMiddleIncome

MiddleIncome

Low Income

Base

Low Case

Difference

Source: World Bank.

GDP 2008 percent change

Prospects for developing countriesProspects for developing countriesRisksRisks

Serious risks remain for developing countries– to the downside as well as to the upside. A low case scenario triggered by sharp decline in U.S.

home prices, worsening of the credit crunch and U.S. recession in 2008 would affect developing countries quite adversely.

Retrenchment in business investment an important element as emerging-market corporations now dominate capital flows.

0

20

40

60

80

100

120

140

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007P

Corporate - private

Corporate - public

Sovereign

$ billions

Bond issuance by developing countries, 1998-2007

Corporate debt now accounts for two-Corporate debt now accounts for two-thirds of emerging market bond issuancethirds of emerging market bond issuance

Source: World Bank.

Prospects for developing countriesProspects for developing countriesRisksRisks

Serious risks remain for developing countries– to the downside as well as to the upside. A low case scenario triggered by sharp decline in U.S.

home prices, worsening of the credit crunch and U.S. recession in 2008, would affect developing countries quite adversely.

Retrenchment in business investment an important element as emerging-market corporations now dominate capital flows.

An upside risk... against the background of lower global interest rates and burgeoning liquidity in emerging markets... is potential formation of new asset-market “bubbles”, overheating and escalation in inflation pressures.

Fed funds lowered 100 basis pointsFed funds lowered 100 basis pointswith massive reserve injections to calm with massive reserve injections to calm

inter-bank marketsinter-bank markets

4.0

4.5

5.0

5.5

6.0

4-Jun-07 2-Jul-07 30-Jul-07 27-Aug-07 24-Sep-07 22-Oct-07 19-Nov-07 17-Dec-07

Fed funds effective rate

Source: Federal Reserve and Datastream.

Fed funds target rate

LIBOR 6-months

Prospects for developing countriesProspects for developing countriesKey MessagesKey Messages

Still- longer-term growth appears favorable. MDG poverty targets are likely to be achieved by

developing countries as a group, with Sub-Saharan Africa improving, but still short of goals.

-2

0

2

4

6

8

10

East Asia SouthAsia

Europeand

CentralAsia

MiddleEast and

NorthAfrica

Sub-Saharan

Africa

LatinAmerica

1980/90 1990/00 2000/10 2010/20

Per-capita GDP growth shows marked Per-capita GDP growth shows marked gains in the current decadegains in the current decade

annual per-capita GDP growth, percent

Source: World Bank data and simulations with the Linkage model.

Poverty goals are likely to be reached in Poverty goals are likely to be reached in most regions, but Africa lags…most regions, but Africa lags…

0

10

20

30

40

50

Developing countries Sub-Saharan Africa

Percent of pop. living below $1/day

Millennium Development Goals

Source: World Bank.

1990

Poverty goals are likely to be reached in Poverty goals are likely to be reached in most regions, but Africa lags…most regions, but Africa lags…

0

10

20

30

40

50

Developing countries Sub-Saharan Africa

Percent of pop. living below $1/day

1990

Source: World Bank.

2004

Millennium Development Goals

Poverty goals are likely to be reached in Poverty goals are likely to be reached in most regions, but Africa lags…most regions, but Africa lags…

0

10

20

30

40

50

Developing countries Sub-Saharan Africa

Percent of pop. living below $1/day

Source: World Bank.

Forecast 2015

1990

2004

Millennium Development Goals

Prospects for Prospects for Developing CountriesDeveloping Countries

Global Economic Prospects 2008Global Economic Prospects 2008The World BankThe World Bank