1. Global Development Finance 2006 The Development Potential of Surging Capital Flows May/June 2005

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

3. Weaker but robust prospects
Real GDP annual percent change
Forecast
Developing
Developing ex. India & China
Turning to the outlook.
This graph illustrates GDP growth since 1980 for developing countries in red and high-income countries in blue.
Two things are of note:
First growth among developing countries has been much stronger than in high-income countries for most of this decade and through the forecast period.
Secondly, while growth among developing economies has slowed substantially it remain at historically high levels.
GDP among developing economies is estimated to have increased 5.9 percent this year and is projected to rise by more than 5.5 percent in each of 2006 and 2007.
While very rapid growth in China and India contribute to this strong score, even excluding these countries GDP in developing economies is estimated to have expanded by almost 5 percent this year.
This strong performance is particularly heartening both because of its implications for poverty reduction and because it has occurred in the context of very high oil prices and mediocre performance by high-income countries.
That strong performance owes much to the substantial reforms that developing countries have put in place over the past several decades, including trade reform, improved macro econommic policy and more structural policies aimed at improving growth potential and the investment climate.
High-income
2008
Source: World Bank

4. A cyclical slowing in the context of a rising growth trend
Real GDP annual percent change
Forecast
Developing
Turning to the outlook.
This graph illustrates GDP growth since 1980 for developing countries in red and high-income countries in blue.
Two things are of note:
First growth among developing countries has been much stronger than in high-income countries for most of this decade and through the forecast period.
Secondly, while growth among developing economies has slowed substantially it remain at historically high levels.
GDP among developing economies is estimated to have increased 5.9 percent this year and is projected to rise by more than 5.5 percent in each of 2006 and 2007.
While very rapid growth in China and India contribute to this strong score, even excluding these countries GDP in developing economies is estimated to have expanded by almost 5 percent this year.
This strong performance is particularly heartening both because of its implications for poverty reduction and because it has occurred in the context of very high oil prices and mediocre performance by high-income countries.
That strong performance owes much to the substantial reforms that developing countries have put in place over the past several decades, including trade reform, improved macro econommic policy and more structural policies aimed at improving growth potential and the investment climate.
2008
Source: World Bank

5. External factors behind resilience
Higher oil prices reflect strong demand conditions not a supply shock
Favorable external conditions
Muted inflationary response in high-income countries
Low interest rates
Increased aid flows

6. Domestic factors behind resilience
Strong initial conditions in developing countries
Lower inflation
Lower government deficits and debt
More flexible currency regimes
Entered period with strong current account positions

7. Increased vulnerability Current account buffers have been absorbed
Current account balance of oil-importing developing countries,
% of GDP
2005
2002

8. External conditions will be less favorable
Rising interest rates
Increased investor uncertainty
Persistent risks from:
Global imbalances
An oil supply shock
Possibility of lower non-oil commodity prices

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

10. Financial market uncertainty Lower and more volatile commodity prices?
Commodity price indeces, Jan 2, 2006=100
May 16

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

12. 2005 – A Landmark Year in Development Finance
Private capital flows have reached record levels
South-South flows are important aspect of development finance
For the poorest countries, donors have enhanced their aid effort

13. The surge in private capital flows continued in 2005…
Total net private capital flows to developing countries,
$ billions
Percent
Percent of GDP (right axis)
$491 billion
in 2005
The statistics on net flows are compiled only once a year, which is based on the cycle when the member countries of the Bank report their external liability positions through the Debtor Reporting System.
Thus, we rely on GROSS capital market financing figures to formulate a sense of the trends and issues in development finance.
This chart shows the trend in GROSS flows. As can be seen, the robust volume in gross flows supports the rise in NET flows in 2003 and 2004, as was shown in the chart earlier.
2005

14. …Both global and domestic factors have contributed
Booming International Commodity Markets
Relatively Low international interest rates
Improved domestic economic policy and management
Large Reserve Holdings
Better External debt profile

15. Net private debt flows have fluctuated substantially…
Net private debt flows to developing countries,
$ billion
Percent
Percent of GDP
(right axis)
$192 billion in 2005
(left axis)
Although the top 10 countries (China, Russian Federation, Brazil, Mexico, Czech Republic, Poland, Chile, South Africa, India, and Malaysia) still accounted for almost 65 percent of FDI to developing counties in 2005, the concentration is considerably less than the 75 percent level of the late 1990s.

16. …whit more stable FDI accounting for half of net private flows
Net FDI inflows to developing countries
$ billion
Percent
$237 billion in 2005
(left axis)
Percent of GDP
(right axis)
Although the top 10 countries (China, Russian Federation, Brazil, Mexico, Czech Republic, Poland, Chile, South Africa, India, and Malaysia) still accounted for almost 65 percent of FDI to developing counties in 2005, the concentration is considerably less than the 75 percent level of the late 1990s.

17. Low-income countries receive significant FDI inflows given their size
FDI inflows / GDP,
Percent
Middle-income countries
Low-income countries (excluding India)

18. Developing economies are highly integrated with each other
Share of flows originating in developing countries
Percent

19. South-South FDI is significant in infrastructure
Share FDI inflows originating in other developing countries
Percent

20. …also significant South-South FDI in the banking sector
Half of foreign-owned banks in low-income countries are from developing countries
Dominated by regional dimension (like trade and workers’ remittances)

21. Donors continue to scale-up aid…
Net ODA disbursements from DAC donors
$106.5 billion in 2005
$79.6 billion in 2004
Debt relief
Other special purpose grants
ODA increased from 58.3 billion in 2002 to $69.0 billion in 2003, a 18 percent increase in nominal terms, but only 5 percent in real terms ($58 billion in 2002 to $61 billion in 2003).
Other components of ODA

22. …and enhance commitments for future aid
Net ODA as a percent of GNI in DAC donor countries,
Projection:
Percent
0.36% in 2010
0.33% in 2005
---partly due to large debt relief grants to Iraq and Nigeria ODA rose from $79.5 in 2004 to $106.5 in 2005
a $27 billion increase, by far the largest on record
debt relief totaled $20 billion in 2005, with $14 billion provided to Iraq and $5 billion to Nigeria
Underlying aid effort remains on upward trend
ODA excluding debt relief increased by 8.7% in 2005 in real terms, up from 5.6 percent average annual increase over the previous three years
OECD DAC Secretariat is projecting ODA to increase to 0.36% of GNI in 2010, just above levels attained in the early 1990s, but well below most estimates of levels of aid required to accelerate progress on the MDGs
The share of ODA allocated to Africa has increased over the past few years, and is expected to continue increasing over the balance of the decade based on commitments made at the G-8 Leaders Summit in July
Donors plan on allocating at least half of the increase in total ODA to Africa by 2010, which would raise Africa’s share of ODA to 50%, up from a low of 25% in 1999
Total ODA excluding debt relief to Iraq and Nigeria 0.27% in 2005

23. Emerging Asia and oil-exporting countries account for the bulk of the increase in reserves
$ billions
The statistics on net flows are compiled only once a year, which is based on the cycle when the member countries of the Bank report their external liability positions through the Debtor Reporting System.
Thus, we rely on GROSS capital market financing figures to formulate a sense of the trends and issues in development finance.
This chart shows the trend in GROSS flows. As can be seen, the robust volume in gross flows supports the rise in NET flows in 2003 and 2004, as was shown in the chart earlier.

24. Emerging market bond spreads narrowed despite higher interest rates
EMBIG spreads
Basis points
Developing countries
205 basis points
on May
Latin America

25. Looking ahead, risks and vulnerabilities remain
Tightening global liquidity and more discriminating supply of capital
Uncertainties associated with geopolitical risks and an increase in risk aversion
Dramatic escalation of local stock market prices raises the risk of asset bubble
Recent pace of sterilized intervention and reserve accumulation is not sustainable

26. Policy implications
Continued macroeconomic stability is vital to sustain investor confidence
Promoting institutions and policies to operate with more flexible exchange rate and open capital markets
With ten years to achieve MDGs , donors should fully implement their aid commitments