Global Development Finance 2006 The Development Potential of Surging Capital Flows By Mr. Hans Timmer June 2006

Outlook for the global economy Growth in developing economies is projected to remain strong despite higher oil prices

Outlook for the global economy Growth in developing economies is projected to remain strong despite higher oil prices However, the external environment is becoming less supportive and developing countries are more vulnerable Sound policies in most developing countries favor a soft-landing, but downside risks predominate

Strong performance Real GDP annual percent change Forecast Developing countries High-income 2008 Source: World Bank

Strong performance Real GDP annual percent change Forecast Developing High-income 2008 Developing ex. India & China Source: World Bank

Strong performance Real GDP annual percent change Forecast 2008 Source: World Bank Sub-Saharan Africa

Strong performance Real GDP annual percent change Forecast High-income 2008 Developing East Asia Source: World Bank

Strong performance Real GDP annual percent change Forecast High-income countries 2008 Source: World Bank

Factors behind strong growth Improved fundamentals Integration in global markets Lower inflation Lower government deficits and debt More flexible currency regimes Microeconomic reforms Strong initial conditions in developing countries Entered period with strong current account positions Favorable external environment Low interest rates Increased aid flows

Outlook for the global economy Growth in developing economies is projected to remain strong despite higher oil prices However, the external environment is becoming less supportive and developing countries are more vulnerable Sound policies in most developing countries favor a soft-landing, but downside risks predominate

More volatile commodity prices? Commodity price indices, Jan 2, 2006=100 May 16

More volatile commodity prices? Commodity price indices, Jan 2, 2006=100 May 16

More volatile commodity prices? Commodity price indices, Jan 2, 2006=100 May 16

Exchange rate uncertainty Index of euro exchange rates, index Jan. 1, 2006=100 Depreciation

Increased vulnerability Current account buffers have been absorbed Current account balance of oil-importing developing countries, % of GDP

Policy implications Improved fundamentals should help most countries manage a deterioration in conditions Countries need to continue being prudent Put in place polices that promote adjustment to higher oil prices Contain additional expenditure obligations that may not be sustainable in future Restructure debt