The External Environment for Developing Countries

March 2009The World Bank

Development EconomicsProspects Group

2.0

2.3

2.5

2.8

3.0

3.3

Jan-09 Jan-09 Jan-09 Feb-09 Mar-09 Mar-094.5

5.0

5.5

6.0

6.5

Source: Thomson/Datastream.

Federal Reserve’s “quantitative easing” spurs quick fall in long rates

U.S. ten-year T-note, 30-year fixed- and ARM mortgage rates, percent

Ten-year note [left]

30-year fixed mortgage [right]

Variable ARM rate [right]

556065707580859095

100105

Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09

Source: Thomson/Datastream.

... sustaining longest equity rally since end-2008

Indexes: 100 on September 15, 2008 [Lehman Brothers]

MSCI-Emerging Markets

CAC- France

DJIA USA

Topix Japan

Industrial countries

2.8

-0.5

-3.8

-6.2

-8

-6

-4

-2

0

2

4

6

Q2-2008 Q3-2008 Q4-2008 F Q4-2008 R

Source: Department of Commerce and DECPG calculations.

U.S. GDP revised to substantial 6.2% decline in fourth quarter 2008

growth of real GDP, and contributions to growth in percentage points

StocksGovernmentConsumption

InvestmentNet Exports

Continued employment losses affecting incomes and retail spending

retail sales growth (saar) [L]; change in employment (3mma) [R]

-30

-25

-20

-15

-10

-5

0

5

10

15

Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09-800

-600

-400

-200

0

200

400

Source: U.S. Departments of Commerce and Labor.

Retail sales [L]

Change in employment [R]

Virtual collapse in manufacturing and exports pressures growth further

durable goods orders, export volumes and mfgr output, ch% saar

-25

-20

-15

-10

-5

0

5

10

Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09-50-40-30-20-10010203040

Source: Federal Reserve, Department of Commerce.

Orders [right]

Production [left]

Exports [right]

Japan’s trade and production falling from a veritable “cliff” through February

export volumes and manufacturing output, ch% saar

-60

-50

-40

-30

-20

-10

0

10

Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09-80

-60

-40

-20

0

20

40

60

Source: Bank of Japan and Japan Cabinet Office.

IP [Left]

Export volume [R]

-15-12-9-6-30369

1215

Q1-2008 Q2-2008 Q3-2008 Q4-2008Source: National Sources through Thomson/Datastream.

United States and Asia account for the bulk of the decline in Japan’s exports contributions to growth in percentage

points

USAMENA

EUOther

AsiaTotal

Japan’s liquidity inches higher

-2-101234567

01/31/2007 07/31/2007 01/31/2008 07/31/2008 01/30/2009

Source: Bank of Japan.

growth of M-0, M1 and ‘L’, ch%, y/y‘L’ (Broad money)

M-1

M-0

2.8

-1.0 -1.0

-5.7

-8

-6

-4

-2

0

2

4

Q1-2008 Q2-2008 Q3-2008 Q4-2008

Source: EUROSTAT and DECPG calculations.

GDP in Euro Area falls sharply on investment and exports

growth of real GDP, and contributions to growth in percentage points

StocksConsumptionGovernmentInvestmentNet Exports

Trade is sapping the German economy of any forward momentum

export orders and factory output, ch% saar

-70-60-50-40-30-20-10

0102030

Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09

Source: EUROSTAT through Thomson/Datastream.

Export orders

IP Manufacturing

European labor markets begin to weaken, sentiment falls quickly

growth in the number of EA unemployed [left] EC consumer sentiment [right]

-15

-10

-5

0

5

10

15

Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09-35

-30

-25

-20

-15

-10

-5

0

Source: EUROSTAT and European Commission.

Euro Area consumer sentiment [right]

growth in the number of unemployed (y/y), % [left]

Industrial production

-25

-20

-15

-10

-5

0

5

10

15

Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09

Manufacturing output collapses across high-income OECD countries

manufactures output, ch% (3m/3m saar)

USA

Eurozone

-56.5%Japan

Source: Thomson/Datastream, DECPG.

-40

-30

-20

-10

0

10

Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09

Industrial output decline intensifies in Europe

industrial production ch% (3m/3m saar)

Germany

Italy

Spain

France

Source: Thomson/Datastream, DECPG.

-50.0

-37.5

-25.0

-12.5

0.0

12.5

25.0

Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09

Industrial output collapses in ECA as trade partners fall deeper into recession

industrial production, ch% (3m/3m saar)

Czech Republic

Europe and Central Asia

Hungary

Turkey

Source: Thomson/Datastream, DECPG.

International trade

Growth of world trade in dollarsQ4-2008 / Q-4 2007 (%)

-16

-14

-12

-10

-8

-6

-4

-2

0

World USA Japan Euro Area Developingcountries

Source: National Agencies through Thomson/Datastream.

export values: ch% yr/yr

-250

-200

-150

-100

-50

0

50

100

Q4-2007 Q1-2008 Q2-2008 Q3-2008 Q4-2008

Source: Department of Commerce.

U.S. current balance improves in fourth quarter on falloff in goods

imports (notably oil)

IncomeServices

Non-oilBOT

Oil balance

Transfers

Current account

World trade has averaged 10% growth per annum over the last 2 decades

export values (USD), ch%

-5

0

5

10

15

20

25

1991 1993 1995 1997 1999 2001 2003 2005 2007

Source: National Agencies through Haver Analytics.

Oil prices

OECD oil stocks remain high

0

20

40

60

80

100

120

140

Jan-00 Jan-02 Jan-04 Jan-06 Jan-082,300

2,400

2,500

2,600

2,700

2,800$/bbl million bbl

Oil price [L]

OECD stocks [R]

Source: IEA and DECPG Commodities Group.

OPEC oil production drops sharply

22

24

26

28

30

32

Jan-00 Jan-02 Jan-04 Jan-06 Jan-08

mb/d

OPEC-11

Including Iraq

Source: IEA and DECPG Commodities Group.

WTI Futures Prices - NYMEX

30

40

50

60

70

80

Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

Mar 16

$/bbl Monthly contract prices to Dec 2014* on select dates in 2009

Feb 18

Jan 15

Source: NYMEX.

Non-oil commodity prices

100

150

200

250

300

350

Jan-06 Jan-07 Jan-08 Jan-09

Grains

Fats & OilsBeverages

Other Food

Food prices slip in February on weak demand (2000=100)

Source: DECPG Commodities Group.

Copper prices rise on Chinese restocking

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

Jan-06 Jan-07 Jan-08 Jan-0950

100

150

200

250

300

350

400

450

500

550$/ton ‘000 tons

Copper price

LME stocks

Source: LME and DECPG Commodities Group.

Freight rates revive on stronger trans-PAC bulk shipments

0

2,000

4,000

6,000

8,000

10,000

12,000

Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09

$/ton

Baltic dry freight index

Source: Datastream and DECPG Commodities Group.

International Finance

Lending falters in early 2009 as banks deleverage and build capital

Source: DECPG Finance Team.

Gross capital flows to emerging markets

$ billionQ1 Total Jan Feb Q1 Total Jan Feb

Total 164 652 30 33 103 370 18 15 Bonds 58 146 7 2 12 65 9 6 Banks 79 312 17 28 71 257 10 9 Equity 26 194 6 3 20 48 0 0

Lat. America 38 156 9 4 19 80 9 10 Bonds 20 45 4 0 5 20 5 3E. Europe 82 247 5 16 36 155 6 1 Bonds 28 64 1 2 4 35 2 0Asia 27 188 14 9 38 92 3 3 Bonds 8 23 3 0 3 7 2 3Others 16 61 2 3 11 43 0 0

2007 2008 2009

EM equities outperform mature markets over 2009 to date

-18-15-12-9-6-30369

12

January February March * Year to date *

Source: Morgan-Stanley through Thomson/Datastream

return by period

Emerging markets

Mature markets

* through March 13

Sovereign credit risk has increased sharply across emerging markets

Sovereign CDS spreads in basis points

0 250 500 750 1,000 1,250 1,500

UkraineArgentina

KazakstanIndonesia

TurkeyPhilippines

RussiaBulgaria

South AfricaColombia

BrazilThailandMalaysia

Mexico

Source: Bloomberg and DECPG Finance Team.

// 4,600

// 3,680

Currencies

1.230

1.270

1.310

1.350

1.390

1.430

1.470

1.510

1.550

1.590

1.630

Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09

86

90

94

98

102

106

110

Source: Thomson/Datastream.

yen/USD

USD/Euro (inverse)

Dollar continues gains against euroand yen until FOMC of March 18

USD per Euro (inverse) [Left] and Yen per USD [right]

Net foreign purchases of U.S. assets turn to outflow as of the fourth quarter

net foreign purchases USD billions

-120-80-40

04080

120160200240280

Q1-2008 Q2-2008 Q3-2008 Q4-2008 Jan-09 (qr)

Treasuries Corp Bonds GSEs Equity Total

Source: U.S. Treasury ‘TICS’ database.

Emerging market currencies down vs the dollar over 2009 to date

percentage change (USD per LCU) (%)

-30 -25 -20 -15 -10 -5 0 5

Rus Rbl

Pol zty

Hun frt

Mex pso

Cze crn

Tur lra

Brz rei

Ind rpe

Mys rgt

Indo rph

US NEER

Source: Thomson/Datastream.

The External Environment for Developing Countries

March 2009The World Bank

Development EconomicsProspects Group