Global Development Finance 2007

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

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 Developing ex. China & India 2009 Source: World Bank

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

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

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

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

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

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

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

12. More capital is going to East Europe and Central Asia and to East Asia and Pacific regions Total net private capital flows to developing countries 2000 2006

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

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

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

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

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

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

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

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

22. Firm-level borrowing is up substantially… External debt contracted by corporations in developing countries $ billions $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) Latin America EM Europe EM Asia Global Composite

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 Inflation Inflation 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 share of GDP and US current dollar value USD million (right axis) Percent of GDP (left axis)

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