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Financial market turmoil, the global slowdown, and developing countries

April 24, 2008. Financial market turmoil, the global slowdown, and developing countries. Hans Timmer World Bank Development Economics Prospects Group. Key Points.

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Financial market turmoil, the global slowdown, and developing countries

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  1. April 24, 2008 Financial market turmoil, the global slowdown, and developing countries Hans Timmer World Bank Development Economics Prospects Group

  2. Key Points • Slower growth in high-income countries is likely to result in weaker but still solid developing country growth – including under a mild U.S. recession scenario. • Financial turmoil has so far proved manageable, but remains a serious risk for several vulnerable developing countries

  3. Weakening of U.S. domestic demandstarted well before financial turmoil growth of investment and imports, saar 4-quarter moving average U.S. Imports U.S. Investment Source: World Bank.

  4. Growth in high-income countries is slowing Industrial production growth, y/y % OECD leading indicator OECD IP Source: World Bank, DECPG.

  5. Impact on developing countries has been muted so far Industrial Production growth, y/y % Developing countries United States Source: World Bank, DECPG.

  6. Trend developing country growth has become decoupled from trend high-income growth Developing and high-income growth and trend growth Developing countries High-income countries Source: World Bank, DECPG

  7. Trend developing country growth has become decoupled from trend high-income growth Developing and high-income growth and trend growth Developing countries High-income countries Source: World Bank, DECPG.

  8. The cyclical component of developing and high-income country growth remains coupled Deviation from trend GDP growth (percent) Developing country cycle High-income country cycle Source: World Bank, DECPG.

  9. Developing countries have become key drivers of global import growth Contribution to global nominal import growth in US$, y/y %-points Developing countries United States Source: World Bank, DECPG.

  10. Baseline forecast of moderate slowdown Forecast Real GDP, percent change Developing economies High-income Source: World Bank, DECPG.

  11. Most forecaster’s expect slower but still robust growth for developing countries GDP growth, percent Source: Cited agencies. NB: composition of aggregate and waiting schemes differ

  12. High food and energy prices have contributed to an acceleration in developing country inflation Median developing country, percent change year-over-year Source: DECPG, GEM database

  13. Energy and food prices have become major problem Indexes January 2000=100 Energy prices Nominal $ prices Real prices Source: World Bank, DECPG

  14. Energy and food prices have become major problem Indexes January 2000=100 Food prices Nominal $ prices Real prices Source: World Bank, DECPG

  15. Key Points • Slower growth in high-income countries is likely to result in weaker but still solid developing country growth – including under a mild U.S. recession scenario. • Financial turmoil has so far proved manageable, but remains a serious risk for several vulnerable developing countries

  16. Large credit write-downs have weakened banks’ capital positions Selected banks, sub-prime related losses Write-down as % of Tier 1 capital 111.7% 24.6% 14.1% 8.7% 7.7% 32.4% 11.9% 39.5% Total write-downs, $billions Source: IMF, The Banker

  17. Mar 11 Sept 18 Dec 12 UK Eurozone US With massive liquidity injections global funding pressure has eased 3-month Libor spreads over policy interest rates (basis points) Source: Datastream

  18. So far increase in developing-country spreads has been limited Basis points Spreads on US High Yield corporate bonds Emerging-market spreads Source: Bloomberg

  19. However, there are increased signs that external debt flows to developing countries are slowing Gross syndicated loans by quarter Gross bond issuance by quarter $billions # of loans $billions # of bond issues Number of loans (right axis) Number of bonds (right axis) Source: Dealogic DCM Analytics and Loan Analytics.

  20. Private corporations (and investment) are most vulnerable to tighter credit conditions… New bond issues to developing countries, 2002-07 $ billions Source: Dealogic DCM Analytics.

  21. Although countries with weaker fundamentals have seen risk premiums rise by much more CDS spreads, basis points Turkey Kazakhstan South Africa Source: Bloomberg

  22. Emerging market equity markets are down but continue to outperform those in the industrial world Equity price Index (Jan.2-2006 = 100) MSCI Emerging Market MSCI Developed Market Source: Bloomberg

  23. Financial stress has increased volatility in equity markets Equity Volatility index, percent VIX (S&P 500) Source: Bloomberg

  24. April 24, 2008 Financial market turmoil, the global slowdown, and developing countries Hans Timmer World Bank Development Economics Prospects Group

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