1. Global Development Finance 2007 The Globalization of Corporate Finance in Developing Countries May, 2007 T H E W O R L D B A N K

2. Key Messages   Slowdown in global growth and rising interest rates may induce a shift in benign financial conditions facing developing countries.   Private capital flows have continued to expand in 2006, but at a slower pace.   The financial globalization of the corporate sector in developing countries progressed.   Soft landing expected; downside global risks considerable.   Turkey’s performance impressive but challenges remain.

3. A moderation of global growth Real GDP annual percent change Forecast Developing 2009 Source: World Bank

4. A moderation of global growth Real GDP annual percent change Forecast Developing 2009 Developing ex. China & India Source: World Bank

5. A moderation of global growth Real GDP annual percent change Forecast Developing High-income 2009 Developing ex. China & India Source: World Bank

6. U.S. trade balance improving Source: U.S. Department of Commerce. Balance on goods, oil and non-oil (%GDP)

7. Non-OPEC supply is coming on stream Change in oil deliveries (y/y millions of barrels per day) Source: International Energy Agency OPEC as swing producer

8. Core inflation in high-income countries: still some worries United Kingdom United States Japan Euro zone

9. Resilience depends partly on continued low long-term yields and spreads United-States United Kingdom Source: World Bank Japan Euro zone Real long-term government bond yields

10. Regional growth: slower but still rapid in all regions Percent change in GDP Source: World Bank

11. $ billions Net private capital flows to developing countries Percent of GDP (right axis) 5.8% in 2005-6 Percent $647 billion in 2006 Private capital flows have leveled off

12. More capital is going to East Europe and Central Asia and to East Asia and Pacific regions 20002006 Total net private capital flows to developing countries

13. $ billions Net private capital flows to Turkey Percent of GDP (right axis) 12% in 2005-06 Percent Turkey has been attracting disproportionate amounts of private capital

14. Developing countries added record amount to reserves in 2006 Reserves grew by $633 bn vs. by $345 bn in 2005 to reach close to $ 2 trillion This reflected a current account surplus of $ 348 bn (up by $ 92 bn on 2005) and net total capital flows of $ 571 bn (up by $ 90 bn) The balancing item (errors and omissions and acquisition of foreign assets by DCs) was $ -286 bn vs $ -345 bn in 2005.

15. $ billions $234 $94 $325 Net private flows $647 billion in 2006 Equity flows account for the lion share Debt 36 % Equity 64 %

16. $ billions Net private debt flows to developing countries Bank lending dominates the expansion in private debt flows

17. $ billions Percent Total value of public external debt buyback operations in 2006 Public external debt as a share of GDP in developing countries * Including Philippines, Nigeria, Colombia, Panama, and Uruguay Governments have continued to reduce their external debt… 39% in 1999 23% in 2006

18. …while increasing their domestic debt Source: World Bank staff calculations based on JP Morgan Percent Public debt as a share of GDP in 28 emerging market economies

19. Increased M&A by emerging market firms.. Number of deals Cross-border M&A transaction by developing countries Total value of deals 400 250 50 $ billion $56 $32 $13

20. $ billions Other Countries China …and record IPO transactions (led by China)… $71 billion Capital raised through Initial Public Offerings (IPOs) by companies in developing countries

21. $ billions Bond issuance by developing countries $88 billion $43 billion Corporate bond issuance now exceeds sovereign borrowing

22. Firm-level borrowing is up substantially… $ billions External debt contracted by corporations in developing countries $293 billion

23. Sharp increase in some emerging market equity prices could be a signal of asset overvaluation MSCI equity price index (Jan. 2000 = 100) EM Europe Latin America Global Composite EM Asia

24. Emerging market bond spreads may have moved into complacent territory JP Morgan EMBI Global Bond Spreads Basis points

25. ECA: External positions could come under pressure Current account deficit (% of GDP) Percent

26. Inflation is a concern in several developing countries Consumer price inflation, year-over-year percent change 2004 InflationInflation end 2006 Source: World Bank

27. Key challenge ahead: managing the risk of an abrupt turn in the credit cycle   Consequences would be severe in some countries   Risk under-priced in markets with large imbalances and/or incipient inflation?   Inadequate information relating to new instruments, borrowers and creditors   Structured financial products & hedge funds/private equity   External debt increasingly in corporate sector

28. GDP growth in Turkey is moderating year-on-year percent change

29. But Current Account Deficit Remains High Percent of GDP (left axis) USD million (right axis) Percent share of GDP and US current dollar value

30. Public debt profile has improved but remains a source of vulnerability Domestic debt External debt Central government debt as percent share of GDP