Global Economic Downturn and Potential Impact on Developing Economies like Zambia

1. Global Economic Downturnand Potential Impact on Developing Economies like Zambia October 23, 2008

2. Global Financial Crisis: How Might it affect Developing Countries • Could have an impact through different channels: • Through direct exposure to global financial markets • Through commodity prices • Through global slowdown and increased risk aversion • Through this summer, the overall impact of the financial market turmoil and slowing growth in high income countries was manageable and most developing countries continued to perform reasonably well. • Challenges have now increased and financial difficulties in the U.S. in recent weeks has intensified these challenges

3. What is happening in Global Financial Markets? Stock market price indices (June 2007 = 100) • Recent developments have tightened credit conditions throughout the world • Massive market capitalization losses in investment banking • About $500 billion decline in market capitalization since October 2007 • Consolidation of broker-dealers and commercial banks; end of stand-alone investment banks in the U.S. • U.S. government plan to remove bad debt from banks’ balance sheets. “Nationalization” of Fannie Mae, Freddie Mac; AIG S&P 500 Financials Source: Bloomberg.

4. Emerging market equity prices have declined in line with mature markets... MSCI equity price indexes % change in equity prices since Oct, 2007 Index (Jan. 2007 = 100) Emerging markets Mature markets Source: MSCI & IFC.

5. For much of Africa • Direct exposure to the subprime-related distressed credit products of the U.S. and Europe appears to be limited • Direct exposure of troubled U.S. or European banks could lead to downsizing of subsidiary operations in developing countries by weakened parent banks and/or difficulties for domestic banks with direct exposures

6. Foreign banks play a dominant role in some developing countries… Number of foreign banks (left axis) Number of countries with exposure Percent Market share of assets (right axis) Hungary 94%; Mexico 82%; Indonesia 28%; Brazil 25%; India 5%; Thailand 5% A single bank having a dominant share in some countries, e.g. Citibank - 21% in Mexico or Barclays - 26% in Botswana Source: World Bank staff estimates based on data from Bankscope.

7. …particularly in higher-risk countries Emerging market (EMBI Global) sovereign bond spreads Source: JPMorgan.

8. Private debt and portfolio flows to developing countries moderating but FDI remains strong Bank lending, bond and equity issuance Jan. 2004 – Aug. 2008 FDI inflows to 25 developing countries 2002H1 – 2008H1 $ billions $ billions (12-month moving average) August 2007 Bank lending Bond issuance Equity issuance Source: DEC Prospects Group.

9. Private capital flows expected to decline Net private debt and equity flows 1990-2007, projected 2008-09 Percent of GDP $990 bn in 2008 $ billions $895 bn in 2009 Base case Percent of GDP (right axis) Low case Source: DEC Prospects Group.

10. What is happening with Commodity Prices? • Most commodity prices have fallen substantially as economic growth and demand slow • Oil prices have declined sharply in response to slower demand growth in the U.S. and OECD and increased OPEC supplies • Food prices are expected to fall on good supply prospects and weaker oil prices. However, prices will remain historically high and continue to be a major concern • Metals and mineral prices have weakened as supplies have increased and are expected to decrease further while demand weakens. China’s demand will be critical to prices

11. US Oil Demand and World Oil Prices kb/d 3-mo moving average (y/y) $/bbl Brent Dubai Source: U.S. EIA, Datastream and DEC Prospects Group.

12. Commodity Prices Grain Prices Oilseed Prices $/ton $/ton Source: DEC Prospects Group.

13. Metals prices fall on increasing concerns about demand $/ton $/ton Copper Nickel Zinc Source: LME and DEC Prospects Group.

14. Commodity Price Forecast Oil Metals & minerals $/barrel Index (2000 = 100) Source: DEC Prospects Group.

15. Industrial production & Imports declining Percentage change(3m/3m) Percentage change(3m/3m) Developing countries United States High-income OECD Developing Ex. China High-income OECD Annual growth of import volumes Annual growth of industrial production Source: DEC Prospects Group.

16. Inflation has surged Median inflation ratesJan 2000 to July 2008 Median inflation and real GDP growth1965 to 2007, projected 2008-10 Percentage change(12m/12m) Percentage change(12m/12m) Inflation (left axis) Developing countries High-income OECD GDP growth (right axis) Inverse long-term correlation between inflation and growth Source: DEC Prospects Group.

17. Should investment retrenchgrowth could be much diminished Real GDP growth2000 to 2007, projected 2008-10 Percent Developing countries High-income OECD “Zero investment growth” Source: DEC Prospects Group.

18. Sharply lower developed country and world growth

19. Protecting the most vulnerable

20. Zambia: Fortunes linked to Copper

21. Per capita GDP is half 1970 levels but there has been adramatic increase in investment levels due to copper prices

22. Rural Poverty Remains a Challenge • The copper boom has fuelled growth that is urban centric – as a result, good recent progress in reducing urban poverty • No progress in reducing rural poverty • Gap between urban and rural areas widening

23. Zambia: Poor Track Record of Managing Booms

24. Entering a period of Uncertainty

25. Implications Going Forward • Dutch Disease: Managing fiscal, monetary and exchange rate policy wisely • Managing Volatility: design, management and governance of the copper fund • Maximizing fiscal impact: Need to use scarce fiscal resources for maximum development impact • Transparency and Accountability: Extractive Industries Transparency Initiative