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