The External Environment for Developing Countries

January 2009The World Bank

Development EconomicsProspects Group

Global industrial production plummets into 4th quarter of 2008...

manufacturing production, ch% (saar)

-20

-15

-10

-5

0

5

10

15

Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08

Source: DEC Prospects Group.

OECD

Developing

World

50

60

70

80

90

100

110

Sep-08 Oct-08 Nov-08 Dec-08 Jan-09

Source: Thomson/Datastream, Morgan Stanley (*USD index).

...while worries about recession and banks push markets lower in January

equity market indices (LCU)* Sep-15-

2008 = 100.

MSCI (Emerging Markets)TOPIX (Japan)

DJIA (USA)

DAX (Germany)

Industrial countries

U.S. employment losses in 2008 sum to 2.6 million...worst since 1945 change in non-farm employment,

‘000

-600

-500

-400

-300

-200

-100

0

100

200

Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08

Source: U.S. Department of Labor.

monthly change

3mma change

Falling exports, orders and production pressure U.S. GDP

export volumes, durable goods orders and IPmfg, ch% saar

-20

-15

-10

-5

0

5

10

Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08

-40

-30

-20

-10

0

10

20

30

40

Source: Department of Commerce, Federal Reserve.

Export volumes [R]

Durable goods orders [R]

Production [L]

0

1

2

3

4

5

6

Aug-07 Nov-07 Feb-08 May-08 Aug-08 Nov-08

Source: Thomson/Datastream.

Interbank market rates- and yield on ten-year note easing

Fed Funds target- and effective rates; Libor and T-note 10 yr

Fed Funds Target

LIBOR 6 months

T-note 10-year

Fed Funds Effective

Japan’s exports and production point to severe 4th quarter downturn

export volumes and manufacturing output, ch% saar

-25

-20

-15

-10

-5

0

5

10

Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08

-30

-20

-10

0

10

20

30

Source: Bank of Japan and Japan Cabinet Office.

Industrial production [L]

Export volumes [R]

Household spending turns to the doldrums in the last months of 2008

household expend, retail sales [L]; Tokyo consumer confidence [R]

-2

-1

0

1

2

3

Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08

25

30

35

40

45

50

Source: Japan Cabinet Office.

HH spending [L]

Consumer confidence [R]

Retail sales [L]

0.5

0.8

1.0

1.3

1.5

1.8

2.0

Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09

85

90

95

100

105

110

115

Source: Thomson/Datastream.

Yen strength on unwinding “carry trades” supports BOJ ease Yen/USD rate (inverse) [right]; TIBOR

and JGB 10-year [left]

Yen/dollar (inverse) [R]

TIBOR 6 months [L]

JGB- ten year [L]

European confidence plummets while ECB asesses economic damage

Euro Area consumer confidence [L]; IFO overall [R]

-30

-25

-20

-15

-10

-5

0

Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-0885

90

95

100

105

110

115

Source: Eurostat-- Thomson/Datastream.

IFO overall [R]

EC Consumer confidence [L]

Production now in sharp decline across the Euro Area

manufacturing production, ch% (saar)

-20

-15

-10

-5

0

5

10

Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08

Source: Eurostat.

Germany

France

Italy

Euro Area

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

Aug-07 Nov-07 Feb-08 May-08 Aug-08 Nov-081.22

1.30

1.38

1.46

1.54

1.62

Source: Thomson/Datastream.

Euro interbank rates fall quickly adding pressure on the currency Euribor and Bund- 10 yr [L]; USD per

Euro [R]

USD per Euro [R]

EURIBOR 6 months [L]

Bund, ten-year [L]

Industrial production

Developing countries’ IP plunges, mirroring high-income countries

real IP (3m/3m saar)

-16

-12

-8

-4

0

4

8

12

16

Jan-04 Jan-05 Jan-06 Jan-07 Jan-08

Source: Thomson/Datastream, DECPG.

High-income

Developing countries

East Asia and Central and Eastern Europe hit hardest

real IP (3m/3m saar)

-30

-20

-10

0

10

20

30

Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09

ECA

East Asia, excl China

Source: Thomson/Datastream, DECPG.

Dramatic IP contraction in export intensive economies

real IP (6m/6m saar)

-50

-40

-30

-20

-10

0

10

20

30

Jan-99 May-00 Sep-01 Jan-03 May-04 Sep-05 Jan-07 May-08

HungaryTurkey

Czech Republic

Korea

Taiwan

Source: Thomson/Datastream, DECPG.

International trade

Major OECD imports contract in step with domestic demand

import volumes: U.S, Japan, Germany and U.K. ch% 3mma y/y

-7.5

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

15.0

Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08

Source: National Agencies through Thomson/Datastream.

United States

Japan

Germany

U.K.

Developing exports in decline export volumes: China, India, Mexico and

Jordan ch% 3mma y/y

-15

-5

5

15

25

35

Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08

Source: National Agencies through Thomson/Datastream.

China

India

Jordan

Mexico

-80

-60

-40

-20

0

Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08

Source: Department of Commerce.

U.S. trade balance improves sharply in November on plummeting oil price

Goods balance

Oil balance

Non-oil balance

goods balance, and oil- and non-oil balances ($bn)

Oil prices

Oil prices appear to stabilize amid OPEC production cuts

25

35

45

55

65

75

85

95

105

115

125

135

Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09

25

26

27

28

29

30

31

$/bbl mb/d

Oil price [L scale]

OPEC-11 Production (x Angola) [R]

Source: IEA and DECPG Commodities Group.

Growth in U.S. Oil Demand (yr/yr)

-2000

-1500

-1000

-500

0

500

1000

Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09

Other

Resid

Distillate

Gasoline

kb/d

Source: IEA and DECPG Commodities Group.

WTI Futures Prices - NYMEX

30

40

50

60

70

80

90

100

110

120

Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13

Jan 15 09

$/bbl

Monthly contract prices to Dec 2013 on select dates in 2008-09

Oct 31

Sep 30

Aug 29

Dec 24

Source: NYMEX and DECPG Commodities Group.

Non-oil commodity prices

100

150

200

250

300

350

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09

Grains

Fats & Oils

Other Food

Agriculture price declines begin to moderate

2000=100

Source: Datastream and DECPG Commodities Group.

Metal prices rebound slightly on index rebalancing

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

Jan-05Jan-06

Jan-07Jan-08

Jan-09

0

50

100

150

200

250

300

350

400

450

$/ton ‘000 tons

Copper price

LME stocks

Source: LME and DECPG Commodities Group.

Global steel production plunging

0

5

10

15

20

25

30

35

40

45

50

Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09

China

Other AsiaEurope

FSUOther

N America

mn tons

Source: Datastream and DECPG Commodities Group.

International Finance

A difficult year for emerging market capital flows

Source: DECPG Finance Team.

Gross capital flows to emerging markets

$ billion

H1 Q3 Q4 Total H1 Q3 Q4 Dec Total

Total 349 163 139 652 253 73 44 16 371

Bonds 107 20 19 146 58 9 2 2 69

Banks 156 101 55 312 150 62 42 14 254

Equity 86 42 66 194 45 2 0 0 47

Lat. America 69 54 32 156 56 13 10 5 79

Bonds 31 6 8 45 17 1 2 2 20

E. Europe 156 45 46 247 101 35 21 4 158

Bonds 50 5 9 64 32 8 0.1 0.1 40

Asia 93 47 47 188 69 15 8 4 91

Bonds 18 5 1 23 7 0.4 0 0 7

Others 31 16 14 61 27 10 5 3 43

2007 2008

Equities post modest gains in December

percentage change (in local currency)

-55

-45

-35

-25

-15

-5

5

15

MSCIEmergingMarkets

MSCIMature

Markets

MSCI BRIC S&P 500 FTSE-100 Nikkei

Source: Bloomberg and DECPG Finance Team.

2008

Oct

Nov Dec

-20

-10

0

10

20

30

Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09

0

100

200

300

400

500

600

700

800

900

1000

Source: JPMorgan-Chase and DECPG Finance Team.

Sharp widening in EM bond spreads at year-end 2008

Yen/USD rate (inverse) [right]; TIBOR and JGB 10-year [left]

EMBIG annual retruns [Left]

EMBIG spread [Right]

Currencies

1.230

1.270

1.310

1.350

1.390

1.430

1.470

1.510

1.550

1.590

1.630

Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09

86

90

94

98

102

106

110

Source: Thomson/Datastream.

yen/USD

USD/Euro (inverse)

Dollar falls on Fed rate cutuntil ECB reduction seen as sure

USD per Euro (inverse) [Left] and Yen per USD [right]

1

2

3

4

5

6

Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09

Interest differentials well in favorof stronger euro since November USD Libor and EURIBOR (6 months),

percent EURIBOR 6 months

USD LIBOR 6 months

Source: Thomson/Datastream.

95

100

105

110

115

120

125

130

135

Sep-08 Oct-08 Nov-08 Dec-08 Jan-09

Source: Thomson/Datastream.

Dollar mixed against EM currencies LCU per USD indexes, Sept-15 2008=100

[*increase = weaker LCU] Turkish lira

Brazilian real

Korean won

Russian rouble

The External Environment for Developing Countries

January 2009The World Bank

Development EconomicsProspects Group