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. Correcting misunderstandings • Strong growth is not limited to few big developing countries

3. Correcting misunderstandings • Strong growth is not limited to few big developing countries • Continued strong growth in developing countries is not reflection of de-linking, but result of globalization

4. Correcting misunderstandings • Strong growth is not limited to few big developing countries • Continued strong growth in developing countries is not reflection of de-linking, but result of globalization • Unwinding of imbalances is already going on

5. Correcting misunderstandings • Strong growth is not limited to few big developing countries • Continued strong growth in developing countries is not reflection of de-linking, but result of globalization • Unwinding of imbalances is already going on • Overheating might be bigger risk than global recession

6. Growth in developing countries accelerated Real GDP annual percent change Forecast Developing High-income 2009 Source: World Bank

7. Growth in developing countries accelerated Real GDP annual percent change Forecast Developing High-income Developing ex. China & India 2009 Source: World Bank

8. Acceleration in all regions GDP, per cent change from previous year * estimate Source: World Bank

9. Acceleration has been broadly-based Number of developing countries Good performers Strong performers Mediocre performers Poor performers Note:Poor performers are countries with a per capita GDP decline of 3% or more; Laggards are countries with a per capita GDP growth between -2% and 2%; Good performers are countries with a per capita GDP growth between 3% and 5%; Strong performers are countries with a per capita GDP growth above 5%.

10. African per capita growth rates approach levels of the 1960s Average annual per capita income growth 1960s 1980s 1990s 2001/6 1970s Source: World Bank

11. Correcting misunderstandings • Strong growth is not limited to few big developing countries • Continued strong growth in developing countries is not reflection of de-linking, but result of globalization

12. Developing countries’ policies have improved percent 1980s 2002-2004

13. No De-linking Average annual percentage growth, 2002-2006 Trade GDP

14. Robust growth in global industrial production 3m/3m seasonally adjusted annual rates, percentage Source: World Bank

15. Correcting misunderstandings • Strong growth is not limited to few big developing countries • Continued strong growth in developing countries is not reflection of de-linking, but result of globalization • Unwinding of imbalances is already going on

16. Rotation of sources of growth Growth of domestic demand, annual percent change 2005 2006 2007 Source: World Bank

17. Oil and metal prices have peaked Index, Jan. 2000 = 100 Metals & minerals Energy Agricultural products Source: World Bank, Datastream

18. A Start to Orderly Adjustment? Current account balance, billions US$ 2007 2006 2008 2009 2003 Oil importers Oil exporters Source: World Bank

19. Correcting misunderstandings • Strong growth is not limited to few big developing countries • Continued strong growth in developing countries is not reflection of de-linking, but result of globalization • Unwinding of imbalances is already going on • Overheating might be bigger risk than global recession

20. Inflation is up in several countries Consumer price inflation, year-over-year percent change 2004 Inflation Inflation end 2006 Source: World Bank

21. Inflation under control in the region 3m/3m seasonally adjusted annual rates, percentage Indonesia Philippines Thailand Malaysia Source: World Bank

22. Financial Flows to Developing Countries Key trends: • Capital flows have continued to expand in 2006, but at a more moderate pace • On-going shifts: • external to sovereign borrowing in external debt market • sovereign borrowing in domestic debt markets • Few low-income countries have been able to gain access to international debt market, despite favorable conditions • Foreign aid has stalled, raising doubt about whether donors will meet their commitments

23. Private capital flows have leveled off Net private capital flows to developing countries $ billions Percent $647 billion in 2006 (left axis) Percent of GDP (right axis)

24. More capital going to Europe / Central Asia and East Asian / Pacific regions Regional composition of net private capital flows to developing countries 2006 2000

25. Regional flows only partly reflect relative economic size Regional composition of GDP in 2006 Regional composition of private capital flows in 2006

26. Equity accounts for bulk of private capital flows Net private capital flows to developing countries $ billions Total in 2006 $647 billion Debt $228 billion Equity $419 billion

27. Record IPO transactions, mostly by China… Amount of capital raised through Initial Public Offerings (IPOs)by companies in developing countries $ billions Total in 2006 $71 billion Other Countries $30 billion China $41 billion

28. …fueling surge in portfolio equity flows Net portfolio equity inflows to developing countries $ billions Total in 2006 $94 billion $46 billion $48 billion

29. FDI inflows keeping pace with rapid growth… Net FDI inflows to developing countries $325 billion in 2006 (left axis) $ billions Percent of GDP (right axis) Percent

30. …led by inflows to Europe and Central Asia Net FDI flows to developing countries Total in 2006 $325 billion $ billions $116 billion $88 billion

31. Strong gains in bank lending… Net private debt flows to developing countries $ billions Total in 2006 $228 billion $72 billion $112 billion $49 billion

32. …dominated by Europe and Central Asia Net bank lending to developing countries Total in 2006 $112 billion $ billions $45 billion $67 billion

33. …as net official lending continues sharp decline… Net debt flows to developing countries $ billions $228 billion -$76 billion -$71 billion

34. …with large repayments to Paris Club and IMF Net official lending to developing countries, 1995-2006 $ billions -$48 billion -$25 billion

35. Governments meeting more of their financing needs in domestic market Public debt as a share of GDP in 28 emerging market economies Percent Source: World Bank staff calculations based on JP Morgan

36. Foreign participation in domestic debt markets has increased significantly in some countries Share of domestic debt held by nonresidents in selected countries Percent Source: World Bank staff estimates.

37. Major shift in the composition of external debt… External debt as a share of GDP in developing countries Percent Source: World Bank Debt Reporting System

38. …as more companies based in developing countries active in global capital markets Foreign capital raised by developing-country companies $ billions

39. External borrowing by corporations concentrated in Europe / Central Asia and Latin America External borrowing by corporations in developing countries $ billions

40. Corporate bond issuance exceeding sovereign bond issuance by wide margin External bond issuance by developing countries $ billions $88 billion $43 billion

41. Private capital flows concentrated in the largest economies Share of private capital flows and GDP in the 20 largest developing countries Percent

42. Half of FDI inflows in 2006 went to 5 countries… Net FDI inflows to developing countries Total in 2006 $325 billion $ billions $73 billion $92 billion $161 billion

43. …similar for syndicated bank lending Loan commitments to developing countries $ billions Total in 2006 $218 billion $57 billion $46 billion $115 billion

44. Few developing countries access international debt markets Proportion of developing countries that issue bonds and borrow from foreign banks in each year Percent Bank lending Bond Issuance

45. Scaling up in aid has stalled… Net Official Development Assistance (ODA) disbursements by DAC donors Percent $ billions Debt relief ODA less debt relief / GNI (right scale) ODA less debt relief (left scale) Source: OECD Development Assistance Committee (DAC)

46. …raising doubts that donors will meet commitments ODA allocated to Sub-Saharan Africa in real terms ($2004) $ billions $50 billion in 2010 (commitment) $32 billion in 2005 (incl. debt relief) $24 billion in 2005 (excl. debt relief) Source: World Bank staff calculations based on OECD Development Assistance Committee (DAC).

47. Remittance flows continue to expand… Migrant remittance flows Migrant remittance flows / GDP $ billions $206 billion Percent Low-income countries Middle-income countries Source: World Bank staff estimates.

48. …volume comparable to aid in low-income countries Middle-income countries Low-income countries $ billions $ billions Source: World Bank staff estimates.

49. Managing the financial risks ahead • Possibility of abrupt adjustment • Risk of sudden shift in investor sentiment consequences most severe in vulnerable countries with: • excessive credit growth, • impending inflationary pressures, • sizeable current account imbalances, and • exchange rate appreciation. • Risk may be under-priced in some equity and debt markets

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