The External Environment for Developing Countries

June 2008The World Bank

Development EconomicsProspects Group

High-income CPI in 3% range– fastest since early 1990s

Median (aggregate), HICP (EA) Headline CPI (US) ch% year on year

1

2

3

4

5

1992M1 1995M1 1998M1 2001M1 2004M1 2007M1

Euro Area

United States

Source: Thomson/Datastream DECPG calculations

EM spreads down 75 basis points since recent peaks at mid-March

100

125

150

175

200

225

250

275

300

325

350

375

Jan-07 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Jan-08 Mar-08 May-08

Source: JPMorgan-Chase.

Stripped spreads, basis points

EAP

MSCILAC

ECA

Industrial countries

U.S. households spend rebates in May Retail sales, ch% saar and 3mma y/y

-2

0

2

4

6

8

May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08

Source: U.S. Department of Commerce.

Retail sales, saar

Retail sales, year-on-year

Slackening labor markets could dim consumer outlays in coming months

change in employment 3mma [L], unemployment claims 4wma [R]

-100

-50

0

50

100

150

200

250

300

Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08280

300

320

340

360

380

Source: U.S. Department of Labor.

unemployment claims [right]

employment [left]

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

4-Jun-07

4-Jul-07

3-Aug-07

2-Sep-07

2-Oct-07

1-Nov-07

1-Dec-07

31-Dec-07

30-Jan-08

29-Feb-08

30-Mar-08

29-Apr-08

29-May-08

Fed funds target rate

Source: Thomson/Datastream.

Fed likely to halt rate reductions at 2% as CPI pressures mount

2.93.3

4.0

-1

0

1

2

3

4

5

Q4-2007 Q1-2008 P Q1-2008 R

Source: Cabinet Office and DECPG calculations.

Japan first-quarter GDP revised up on stronger investment

growth of real GDP, and contributions to growth in percentage points

Net X

Invest

PCE

Gvt

dStok

Japan’s orders, exports and production falter in April

orders and export volumes [R], IP mfgr [L] ch% 3mma y/y

0

1

2

3

4

5

6

Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08-5

0

5

10

15

20

Source: Cabinet Office-- Thomson/Datastream.

Exports [R]

Production [L]

Orders [R]

Japan’s inflation increasing on fuel prices and weaker yen

Tokyo CPI, PPI- and Import price indexes, ch% 3mma y/y

-0.5

0.0

0.5

1.0

1.5

2.0

Jan-07 May-07 Sep-07 Jan-08 May-080

3

6

9

12

15

18

Source: Japan Cabinet Office.

import price [right]

CPI [left]

PPI [left]

European surveys broadly lowerIFO ‘expect’, Banc d’France [left], EEC

consumer sentiment [right]

95

98

100

103

105

108

110

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

-15

-12

-9

-6

-3

0

Source: IFO, BdF and EEC through Thomson/Datastream.

EEC consumer [right]

IFO expectations [left]

Banc d’France [left]

German April factory orders plummet-- export orders down 14% (saar)

factory orders, domestic, overseas, ch% saar

-15

-10

-5

0

5

10

15

20

25

30

Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08

Source: Bundesbank-- Thomson/Datastream.

Export orders

Domestic orders

HICP breaches 16-year highs pushed by energy costs

HICP [left]; HICP energy [right], ch% year on year

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08

-2

0

2

4

6

8

10

12

14

HICP [L]HICP Energy [R]

Source: Eurostat through Thomson/Datastream.

Industrial production

Developing countries continue to outperform IP in high-income countries

industrial production, ch% (3m/3m saar)

-2

0

2

4

6

8

10

12

14

16

Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08

Source: Thomson/Datastream, DECPG.

High Income

Developing countries

Production in ECA holding up, Latin America shows signs of weakness industrial production, ch% (q/q saar)

0

3

6

9

12

15

Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08

Source: Thomson/Datastream, DECPG.

Europe and Central Asia

Latin America and the Carribean

IP in China showing moderation, other East Asia in sharp decline

industrial production ch% (q/q saar)

-10

-5

0

5

10

15

20

25

30

Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08

Source: Thomson/Datastream, DECPG.

Other East Asia

China

International trade

Oil imports as a share of GDP up sharply

oil imports as a share of GP (%)

0

1

2

3

4

5

1995 2000 2001 2002 2003 2004 2005 2006 2007 2008

European Union

Source: UN Comtrade, National Sources.

USA

Japan

Forecast,assuming price of oil averages $110/bbl in 2008

U.S. and German capital goods exports regaining momentum

exports of capital goods in nominal LCU, ch% (3mma y/y)

-5

0

5

10

15

20

2006M1 2006M4 2006M7 2006M10 2007M1 2007M4 2007M7 2007M10 2008M1 2008M4

Source: Thomson/Datastream, DECPG calculations.

Japan

USA

Germany

U.S. current account deficit widens on oil during first quarter

non-oil and oil balances ($bn) [L] and current account as %GDP [R]

-240

-200

-160

-120

-80

-40

0

Q1 2005 Q3 2005 Q1 2006 Q3 2006 Q1 2007 Q3 2007 Q1 2008

-7

-6

-5

-4

-3

-2

-1

0

Source: U.S. Department of Commerce.

non-oil balance

oil balance

CAB/GDP [R]

Oil prices

Oil prices higher on supply fears

25

35

45

55

65

75

85

95

105

115

125

135

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

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.

Crude oil inventories in the U.S. fall on higher refinery runs

270

280

290

300

310

320

330

340

350

360

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

M bbl

5-year high-low ranges

Source: U.S. DOE and DECPG Commodities Group.

Non-OPEC supply growth slumps

-3

-2

-1

0

1

2

3

4

1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08

kb/d

Source: IEA and DECPG Commodities Group.

Other

OPEC

FSU

Non-oil commodity prices

Corn and soybean prices rise on threats of flooding

400

600

800

1000

1200

1400

1600

Jan-06Jan-07

Jan-08

100

200

300

400

500

600

700

c/bushel c/bushel

Soybeans

Corn

Source: Datastream and DECPG Commodities Group.

Zinc prices plunge on rebound in mine supply

1000

1500

2000

2500

3000

3500

4000

4500

5000

050100150200250300350400450500550600650

$/ton ‘000 tons

Zinc price

LME stocks

Source: LME and DECPG Commodities Group.

Freight rates ease

0

2000

4000

6000

8000

10000

12000

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

Baltic dry freight index

Source: Datastream and DECPG Commodities Group.

International Finance

Bank lending falls again in May

Source: DECPG Finance Team.

Gross capital flows to emerging markets

$ billion

Q1 Total Q1 Jan-May Total Q1 Apr May YTD

Total 96 494 166 294 683 114 42 30 186

Bonds 42 137 58 88 146 14 13 12 39

Banks 39 246 81 140 343 80 17 10 107

Equity 15 111 26 66 194 20 13 8 41

Lat. America 23 116 38 60 157 18 14 10 41

Bonds 14 41 20 28 45 5 5 6 16

E. Europe 36 179 81 135 252 39 14 11 65

Bonds 17 64 28 43 64 5 7 5 18

Asia 25 153 30 74 213 47 11 5 63

Bonds 8 19 8 13 23 3 0 1 3

Others 12 45 16 25 60 10 3 4 17

2006 2007 2008

EM equities suffer in 2008 returns over 2008 to date (%)

-60

-50

-40

-30

-20

-10

0

10

Source: Bloomberg and DECPG Finance Team.

EM bond spreads have remained stable of late

0

150

300

450

600

750

900

Jan-07 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08

Source: Datastream and DECPG calculations.

high-yield OECD bond spead and EMBIG EM spread, basis points

EM spread

HY-OECD

Currencies

1.410

1.430

1.450

1.470

1.490

1.510

1.530

1.550

1.570

1.590

1.610

Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08

96

98

100

102

104

106

108

110

112

Source: Thomson/Datastream.

yen/USD

USD/Euro (inverse)

Dollar moves up on the yen... in trading range on euro $1.54 to $1.58

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

USD [right]

A look at yen cross rates:are carry trades unwinding?

Yen/LCU: change 2008 ytd. vs full year 2007 percent

-20 -15 -10 -5 0 5 10 15 20

Kor won

India Rpe

Thai bhat

Indo Rph

Aus$

Ch RMB

S$

Source: Thomson/Datastream.

Appreciation of Local Currency

2007 2008

Libor differentials stabilize: U.S. likely on hold, ECB to raise 25 bp

-2.5

-1.5

-0.5

0.5

1.5

2.5

3.5

4.5

5.5

Jan-08 Jan-08 Feb-08 Feb-08 Mar-08 Apr-08 Apr-08 May-08 Jun-08

Source: Datastream and DECPG calculations.

LIBOR-6 months and EURIBOR 6-months, percent

USD LIBOR

EURIBOR

differential: US less euro rates

The External Environment for Developing Countries

June 2008The World Bank

Development EconomicsProspects Group