88105 v.2 The External Environment for Developing Countries July 2008 The World Bank Development Economics Prospects Group “Bear market” spurred by financial and inflation uncertainties indexes, Jan1 2008=100 100 Dow Jones TOPIX 95 90 85 CACI 80 MSI 75 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Source: Thomson/Datastream. U.S. inflation pipeline suggests further price hikes for consumer Headline CPI, PPI- and Import price indexes, ch% 3mma y/y 10 20 Import price [right] 8 15 PPI [left] 5 10 CPI [left] 3 5 0 0 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Source: U.S. Department of Commerce. Industrial countries Stimulus checks boost disposable incomes in May – but outlays rise less disposable income and personal consumption, ch% saar 10 personal consumption income 8 6 4 2 0 retail sales -2 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Source: U.S. Department of Commerce. Consumer expectations at record lows... a threat to second-half growth expectations for economy: percentage of survey responses, 3mma 35 expectations “worse” 25 expectations “better” 15 5 -5 -15 “better” minus “worse” -25 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Source: Conference Board. Manufacturing losses had been spared worse outturns by overseas demand goods export volume and IP, ch% saar 8 30 IP manufacturing [L] 6 Export volume [R] 25 20 4 15 2 10 0 5 -2 0 -4 -5 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Source: Department of Commerce, Thomson/Datastream. Japan’s households retrench after strong spending in first quarter retail sales volume and houshold expenditure, ch% 3mma y/y 3 2 HH expenditures 1 0 Retail sales -1 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Source: Cabinet Office-- Thomson/Datastream. Japan’s export growth waning as import demand plummets Export- and import volume growth, ch% saar 30 Exports 20 10 0 -10 Imports -20 -30 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Source: Japan Cabinet Office. Fall of the yen and new orders growth sustain export hopes USD per Yen index [right], and factory orders [left] ch% 3mma y/y 8 120 Factory orders [left] 6 115 4 110 2 105 0 100 -2 Dollar per Yen index [right] -4 95 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Source: Japan Cabinet Office; Thomson/Datastream. Euro Area first-quarter GDP marked down on investment and net-X growth of real GDP, and contributions to growth in percentage points 4 3.2 2.9 2 1.2 0 Change in Stocks Fixed Investment Government Consumption Net exports -2 Q4-2007 Q1-2008-P Q1-2008-F Source: Eurostat and DECPG calculations. German exports drop sharply in May in step with export orders growth export volumes and overseas factory orders, ch% 3mma 17.5 15.0 12.5 10.0 7.5 5.0 Export orders Export volume 2.5 0.0 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Source: Bundesbank-- Thomson/Datastream. HICP breaches 16-year highs illiciting ECB 25-bp rate hike HICP ch% y/y and ECB policy rate (%) 4.5 4.0 3.5 3.0 2.5 HICP 2.0 1.5 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Source: Eurostat through Thomson/Datastream. Industrial production Industrial production growth across developing regions is slowing IP ch% saar: ECA, LAC [left]; Other East Asia [right] 16 40 Europe and 12 30 Central Asia Other East 8 Asia 20 Latin America 4 and the Carribean 10 0 0 -4 -10 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Source: Thomson/Datastream, DECPG. China remains strong; output in the remainder of East Asia is lapsing IP ch% saar 30 China 25 20 15 10 5 0 -5 Other East Asia -10 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Source: Thomson/Datastream, DECPG. Weaker manufacturing orders take a toll on German production IP ch% saar: production [left], orders [right] 10 25 8 20 IP 6 15 4 10 2 5 0 0 -2 -4 -5 Manufacturing orders* -6 -10 -8 -15 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Source: Thomson/Datastream, DECPG. * One month lag International trade G-3 exports slow into second quarter of 2008 export volumes, ch% saar 25 Japan 20 USA 15 10 5 Germany 0 -5 2007M1 2007M3 2007M5 2007M7 2007M9 2007M11 2008M1 2008M3 2008M5 Source: Thomson/Datastream, DECPG calculations. Export market demand falling more quickly than anticipated 100 nominal imports, ch% saar 80 Non-OECD Taiwan, China High-income Brazil 60 40 East Asia 20 0 High-income Russia -20 2007M1 2007M3 2007M5 2007M7 2007M9 2007M11 2008M1 2008M3 2008M5 Source: Thomson/Datastream, DECPG calculations. High-tech exporters see slowdown in outbound shipments 62.5 nominal exports, ch% saar Thailand 50.0 Taiwan, China Malaysia 37.5 25.0 12.5 0.0 Hong Kong SAR China -12.5 -25.0 2007M1 2007M3 2007M5 2007M7 2007M9 2007M11 2008M1 2008M3 Source: Thomson/Datastream, DECPG calculations. Oil prices Oil prices climb on low stocks and sluggish supply growth $/bbl million bbl 140 2800 OECD stocks [R] 120 2700 100 80 2600 60 WB Oil price 2500 40 [L scale] 20 2400 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Source: IEA and DECPG Commodities Group. Tight distillate market bidding up prices for light crudes $/bbl 40 Distillate 30 20 10 Crude (WTI) 0 Price differentials relative to crude Gasoline -10 Jan-06 Jan-07 Dec-07 Source: Datastream and DECPG Commodities Group. Open Interest Crude Oil NYMEX Open interest (‘000 lots) $/bbl 1600 160 1400 140 1200 120 1000 100 800 80 600 60 400 40 200 20 0 0 2 3 4 5 6 7 7 an-0 an-0 an-0 an-0 an-0 an-0 ec-0 J J J J J J D Source: NYMEX and DECPG Commodities Group. Non-oil commodity prices Continued gains in food prices (2000=100) 350 Fats & Oils 325 300 Grains 275 250 Beverages 225 200 175 150 Other Food 125 100 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Source: DECPG Commodities Group. Copper and aluminum remain firmwhile other metals prices drop Cu/Al $/ton Ni $/ton 9000 55000 8000 Copper 50000 45000 7000 40000 6000 Nickel 35000 5000 30000 4000 25000 3000 20000 2000 15000 Aluminum 1000 10000 05 06 07 08 Jan- Jan- Jan- Jan- Source: LME and DECPG Commodities Group. Iron Ore Prices ($/mt) 150 125 100 75 50 25 0 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Source: LME and DECPG Commodities Group. International Finance Bank lending leads flows in June Gross capital flows to emerging markets $ billion 2006 2007 2008 Total H1 H2 Total H1 Apr May Jun Total 494 357 326 683 267 48 45 58 Bonds 137 107 39 146 58 13 12 19 Banks 246 164 180 343 165 22 24 36 Equity 111 86 107 194 44 13 8 3 Lat. America 116 69 88 157 54 14 12 9 Bonds 41 31 14 45 17 5 6 1 E. Europe 179 156 96 252 104 15 16 35 Bonds 64 50 14 64 33 7 5 15 Asia 153 110 113 213 90 16 13 11 Bonds 19 18 6 23 7 0 1 3 Others 45 32 28 60 20 3 4 2 Source: DECPG Finance Team. Equity market downturn appears mirrored in commodity market gains MSCI global equities (USD) [left]; Reuters/Jeffries CRN [right] 1,600 475 MSCI equity [left] 450 1,550 CRN commodities [right] 425 1,500 400 1,450 375 1,400 350 1,350 325 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Source: Bloomberg. Returns on high-yield assets suffer amid flight to quality Developed market- high-yield bond index [left]; EMBIG [right] 275 420 EMBIG [right] 270 415 265 410 260 JPMorgan Developed HY [left] 255 405 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Source: JPMorgan-Chase and Morgan-Stanley. Currencies Dollar continues move-up on yen... step-down on euro at ECB rate hike USD per Euro (inverse) [Left] and Yen per USD [right] Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 1.410 112 1.430 110 1.450 yen/USD 108 1.470 1.490 106 1.510 104 1.530 102 1.550 100 1.570 98 1.590 USD/Euro (inverse) 1.610 96 Source: Thomson/Datastream. Is oil being viewed as a dollar hedge? USD nominal effective rate [left], oil price [right], index 2000=100 110 500 450 105 Oil price [right] 400 100 350 USD NEER [left] 300 95 250 90 200 150 85 100 80 50 Jan-00 Nov-00 Sep-01 Jul-02 May-03 Mar-04 Jan-05 Nov-05 Sep-06 Jul-07 May-08 Source: Thomson/Datastream, DECPG Commodities Group. Emerging market currencies show mixed movements against the dollar LCU per USD indexes, Jan1 2008=100 [*increase = weaker LCU] 115 Korean won Turkish lira 110 105 Philippine peso 100 Indonesian rupiah 95 Brazilian reis 90 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Source: Thomson/Datastream. FOCUS July 2008 Difficulties at Fannie and Freddie Fannie and Freddie share prices halve over the 2nd week of July Share prices ($) 35 Fannie Mae Freddie Mac 30 25 20 15 10 5 0 5/1/2008 6/1/2008 7/1/2008 Source: Thomson/Datastream. Mortgage portfolios and guarantees held by Fannie and Freddie Fannie, 3.0 trillion Freddie, Others, 2.2 trillion 6.9 trillion Source: OFHEO. Market tension eases post actions by Treasury and Federal Reserve CDS spreads of Freddie Mac and Fannie Mae Basis points 90 Fannie Mae 80 70 60 50 40 Freddie Mac 30 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Source: Thomson/Datastream. Further difficulties could carry worldwide repercussions Value of US LT securities held by foreign official institutions (As of June 30, 2007) $ billion 1,500 1,250 1,000 750 500 250 0 Treasury bonds Agency bonds Corp. bonds Corp. stocks Source: U.S. Treasury. The External Environment for Developing Countries July 2008 The World Bank Development Economics Prospects Group