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Global Development Finance 2006
The Development Potential of Surging
Capital FlowsBy Mr. Hans Timmer
June 2006
Outlook for the global economy
Growth in developing economies is projected to remain strong despite higher oil prices
Outlook for the global economy
Growth in developing economies is projected to remain strong despite higher oil prices
However, the external environment is becoming less supportive and developing countries are more vulnerable
Sound policies in most developing countries favor a soft-landing, but downside risks predominate
-2
0
2
4
6
8
1980 1985 1990 1995 2000 2005
Strong performance
Real GDP annual percent change Forecast
Developing countries
High-income2008
Source: World Bank
-2
0
2
4
6
8
1980 1985 1990 1995 2000 2005
Strong performance
Real GDP annual percent change Forecast
Developing
High-income2008
Developing ex. India & China
Source: World Bank
-2
0
2
4
6
8
1980 1985 1990 1995 2000 2005
Strong performance
Real GDP annual percent change Forecast
2008
Source: World Bank
Sub-Saharan Africa
-3
0
3
6
9
12
1980 1985 1990 1995 2000 2005
Strong performance
Real GDP annual percent change Forecast
High-income
2008
Developing East Asia
Source: World Bank
-2
0
2
4
6
8
1980 1985 1990 1995 2000 2005
Strong performance
Real GDP annual percent change Forecast
High-income countries
2008
Source: World Bank
Factors behind strong growth
Improved fundamentals Integration in global markets Lower inflation Lower government deficits and debt More flexible currency regimes Microeconomic reforms
Strong initial conditions in developing countries Entered period with strong current account positions
Favorable external environment Low interest rates Increased aid flows
Outlook for the global economy
Growth in developing economies is projected to remain strong despite higher oil prices
However, the external environment is becoming less supportive and developing countries are more vulnerable
Sound policies in most developing countries favor a soft-landing, but downside risks predominate
More volatile commodity prices?
95
115
135
155
175
195
January-06 February-06 March-06 April-06 May-06
Crude
Gold $/Troy Oz
Commodity price indices, Jan 2, 2006=100
May 16
More volatile commodity prices?
95
115
135
155
175
195
January-06 February-06 March-06 April-06 May-06
Crude
Zinc $/MT
Gold $/Troy Oz
Commodity price indices, Jan 2, 2006=100
May 16
More volatile commodity prices?
95
115
135
155
175
195
January-06 February-06 March-06 April-06 May-06
Crude
Copper $/MT
Nickel $/MT
Zinc $/MT
Gold $/Troy Oz
Silver Cts/Troy Oz
Commodity price indices, Jan 2, 2006=100
May 16
Exchange rate uncertainty
90
100
110
120
130
Jan-06 Feb-06 Mar-06 Apr-06 May-06
Brazil Colombia IndonesiaMozambique Turkey South AfricaUSA
Index of euro exchange rates, index Jan. 1, 2006=100
Depreciation
Increased vulnerabilityCurrent account buffers have been
absorbed
Current account balance of oil-importing developing countries, % of GDP
-6
-4
-2
0
2
4
6
8
10
East Asia &Pacific (ex.
China)
Europe &Cantral Asia
LatinAmerica &Caribbean
Middle East& NorthAfrica
South Asia Sub-Saharanafrica
2005
2002
Policy implications
Improved fundamentals should help most countries manage a deterioration in conditions
Countries need to continue being prudent Put in place polices that promote
adjustment to higher oil prices Contain additional expenditure obligations
that may not be sustainable in future Restructure debt