Global Economic Downturn and Potential Impact on Developing Economies like Zambia
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Global Economic Downturnand Potential Impact on
Developing Economies like Zambia
October 23, 2008
Global Financial Crisis: How Might it affect Developing Countries
Could have an impact through different channels:
– Through direct exposure to global financial markets– Through commodity prices – Through global slowdown and increased risk aversion
Through this summer, the overall impact of the financial market turmoil and slowing growth in high income countries was manageable and most developing countries continued to perform reasonably well.
Challenges have now increased and financial difficulties in the U.S. in recent weeks has intensified these challenges
What is happening in Global Financial Markets?
Recent developments have tightened credit conditions throughout the world
Massive market capitalization losses in investment banking – About $500 billion decline in
market capitalization since October 2007
Consolidation of broker-dealers and commercial banks; end of stand-alone investment banks in the U.S.
U.S. government plan to remove bad debt from banks’ balance sheets. “Nationalization” of Fannie Mae, Freddie Mac; AIG
40
50
60
70
80
90
100
110
Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08
Stock market price indices Stock market price indices (June 2007 = 100)(June 2007 = 100)
S&P 500S&P 500
FinancialsFinancials
Source: Bloomberg.Source: Bloomberg.
Emerging market equity prices have declined in line with mature markets...
70
80
90
100
110
120
130
140
150
Jan-07
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Index (Jan. 2007 = 100)
Emerging markets
Mature markets
MSCI equity price indexes
Source: MSCI & IFC.Source: MSCI & IFC.
-70 -50 -30 -10 10
Composite index
JordanMoroccoColombia
IsrealCzech Republic
EgyptChile
ArgentinaMexico
MalaysiaHungary
BrazilThailand
PolandSouth Africa
IndonesiaTaiwan
PeruPhilippines
KoreaIndia
TurkeyPakistanRussian
China
Equity price change Exchange rate change
% change in equity prices since Oct, 2007
For much of Africa
Direct exposure to the subprime-related distressed credit products of the U.S. and Europe appears to be limited
Direct exposure of troubled U.S. or European banks could lead to downsizing of subsidiary operations in developing countries by weakened parent banks and/or difficulties for domestic banks with direct exposures
Foreign banks play a dominant role in some developing countries…
500
600
700
800
900
0
5
10
15
20
25
30
35
40
45Market share of assets Market share of assets (right axis)(right axis)
Number of foreign banks Number of foreign banks
(left axis)(left axis)
Hungary 94%; Mexico 82%;
Indonesia 28%; Brazil 25%;
India 5%; Thailand 5%
Percent
0 20 40 60 80
HSBCCredit Agricole Indosuez
BOT-MitsubishiDeutsche Bank
CalyonDresdnerRaiffeisenBarclays
Standard CharteredABN AMRO
CommerzbankNatixis
WestLBBNP Paribas
ING BankSociété Générale
Citibank
Number of countries with exposure
A single bank having a dominant share in some A single bank having a dominant share in some countries, e.g. countries, e.g. Citibank - 21% in Mexico or Citibank - 21% in Mexico or Barclays - 26% in BotswanaBarclays - 26% in Botswana
Source: World Bank staff estimates based on data from Bankscope.Source: World Bank staff estimates based on data from Bankscope.
0 200 400 600 800 1000 1200
PakistanVenezuela
EcuadorArgentinaSri Lanka
GeorgiaBelize
UkraineKazakhstan
IraqGhanaSerbia
Dominican RepGabon
LebanonJamaicaVietnam
IndonesiaUruguay
RussiaTurkey
El SalvadorBrazil
01-Jun-07 12-Sep-08 17-Sep-08
…particularly in higher-risk countries
Emerging market (EMBI Global) sovereign bond spreads
Source: JPMorgan.Source: JPMorgan.
0
5
10
15
20
25
30
35
2004M1 2005M1 2006M1 2007M1 2008M1
August 2007
Bank lending, bond and equity issuanceJan. 2004 – Aug. 2008
Bank Bank lendinglending
Equity issuance
Bond issuanceBond issuance
Private debt and portfolio flows to developing countries moderating but FDI remains strong
Source: DEC Prospects Group.Source: DEC Prospects Group.
$ billions (12-month moving average)
0
50
100
150
200
250
300
China, Russia and Brazil
22 other developing countries
FDI inflows to 25 developing countries 2002H1 – 2008H1
$ billions
$ billions$ billions
0
200
400
600
800
1000
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
P
0
2
4
6
8
Net private debt and equity flows1990-2007, projected 2008-09
PercenPercentt
of GDPof GDP
Percent of GDP(right axis)
Private capital flows expected to decline
$990 bn in $990 bn in 20082008$895 bn in $895 bn in
20092009
Base case
Low case
Source: DEC Prospects Group.Source: DEC Prospects Group.
What is happening with Commodity Prices?
Most commodity prices have fallen substantially as economic growth and demand slow
Oil prices have declined sharply in response to slower demand growth in the U.S. and OECD and increased OPEC supplies
Food prices are expected to fall on good supply prospects and weaker oil prices. However, prices will remain historically high and continue to be a major concern
Metals and mineral prices have weakened as supplies have increased and are expected to decrease further while demand weakens. China’s demand will be critical to prices
US Oil Demand and World Oil Prices
-1200
-1000
-800
-600
-400
-200
0
200
400
600
800
1000
Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09
Other
Resid
Distillate
Gasoline
kb/d 3-mo moving average (y/y)
Source: U.S. EIA, Datastream and DEC Prospects Group.
25
50
75
100
125
150
Brent
Dubai
$/bbl
Commodity Prices
0
200
400
600
800
1000
2002 2003 2004 2005 2006 2007 2008
Wheat Maize Rice
$/ton Grain Prices
Source: DEC Prospects Group.
0
300
600
900
1200
1500
1800
2006 2007 2008
Soybeans Soyoil Palmoil
Oilseed Prices$/ton
Metals prices fall on increasing concerns about demand
1000
2000
3000
4000
5000
6000
7000
8000
9000
Jan-05Jan-06
Jan-07Jan-08
10000
15000
20000
25000
30000
35000
40000
45000
50000
55000
$/ton $/ton
Zinc
Copper
Source: LME and DEC Prospects Group.
Nickel
Commodity Price Forecast
60
80
100
120
2006 2007 2008 2009 2010
Base
Low Case
$/barrel Oil
Source: DEC Prospects Group.
200
250
300
350
400
2006 2007 2008 2009 2010
Base
Low Case
Index (2000 = 100)Metals & minerals
Industrial production & Imports declining
-5
0
5
10
15
1999.1m 2000.07m 2002.1m 2003.07m 2005.01m 2006.07m 2008.1m
United States
High-income OECD
Annual growth of import volumes
Percentage change(3m/3m)
Source: DEC Prospects Group.
-5
0
5
10
15
2006M1 2006M6 2006M11 2007M4 2007M9 2008M2 2008M7
Annual growth of industrial production
Developing countries
High-income OECD
Percentage change(3m/3m)
Developing Ex. China
Inflation has surged
0
3
6
9
12
Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08
Developing countries
High-income OECD
Median inflation ratesJan 2000 to July 2008
Percentage change(12m/12m)
Source: DEC Prospects Group.
0
4
8
12
16
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
0
2
4
6
8
Inflation (left axis)
GDP growth (right axis)
Median inflation and real GDP growth1965 to 2007, projected 2008-10
Percentage change(12m/12m)
Inverse long-term correlation between inflation and growth
Should investment retrenchgrowth could be much diminished
0
2
4
6
8
2000 2002 2004 2006 2008 2010
High-income OECD
Developing countries
Real GDP growth2000 to 2007, projected 2008-10Percent
“Zero investment growth”
Source: DEC Prospects Group.
Sharply lower developed country and world growth
Real GDP Growth in Developed and Developing Countries (Percent)
0
2
4
6
8
IMF - Advanced
IMF - Developing
WB - Developing
WB - Developed
Developing Regions Growth 2007 2009 Change
EAP 10.5 6.4 -4.1 ECA 7.1 3.5 -3.6 LAC 5.7 2.2 -3.5 MNA 5.7 3.5 -2.2 SAS 8.4 5.2 -3.2 SSA 6.3 4.8 -2.1 Source: DECPG
Protecting the most vulnerable
-25 -20 -15 -10 -5 0 5
SeychellesSolomon IsJordanJamaicaEritrea*FijiTogo*Haiti*CambodiaMaldivesGuinea*Tajikistan*LebanonEthiopiaComoros*Djibouti*Sw azilandMadagascarVanuatuNepal*SriLankaBurundi*MauritaniaRw anda*Malaw iCent.Afr. Rep*Coted'Ivoire*Congo,D.R.*
ToT Impact of Oil Shock (% GDP)
ToT Impact of Food Shock (% GDP)
Zambia: Fortunes linked to Copper
2
2.5
3
3.5
4
4.5
5
5.5
6
6.5
2002 2003 2004 2005 2006 2007 2008
Zambia: Annual GDP Growth
0
500
1000
1500
2000
2500
3000
3500
4000
2003 2004 2005 2006 2007 2008
Copper Exports in Million US$Account for 70 % of total exports
Per capita GDP is half 1970 levels but there has been adramatic increase in investment levels due to copper prices
Rural Poverty Remains a Challenge
20
30
40
50
60
70
80
90
100
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Po
vert
y H
ead
Co
un
t (%
) Rural
Urban
National
The copper boom has fuelled growth that is urban centric – as a result, good recent progress in reducing urban poverty
No progress in reducing rural poverty
Gap between urban and rural areas widening
Zambia: Poor Track Record of Managing Booms
Entering a period of Uncertainty
Zambia Fuel Imports(Million US$)
0
100
200
300
400
500
600
700
800
2003 2004 2005 2006 2007 2008e
Copper Price(US$cent / lb)
100
200
300
400
Jan-04 Jan-05 Jan-06 Jan-07 Jan-08
Decline of 40 %
Implications Going Forward
Dutch Disease: Managing fiscal, monetary and exchange rate policy wisely
Managing Volatility: design, management and governance of the copper fund
Maximizing fiscal impact: Need to use scarce fiscal resources for maximum development impact
Transparency and Accountability: Extractive Industries Transparency Initiative
Zambia Tax Revenue(% of GDP)
0
5
10
15
20
2003 2004 2005 2006 2007 2008e
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