Global Development Finance 2007

Global Development Finance 2007

The Globalization of Corporate Finance in Developing Countries

May, 2007

T H E W O R L D B A N K

Key Messages

Slowdown in global growth and rising interest rates may induce a shift in benign financial conditions facing developing countries.

Private capital flows have continued to expand in 2006, but at a slower pace.

The financial globalization of the corporate sector in developing countries progressed.

Soft landing expected; downside global risks considerable.

Turkey’s performance impressive but challenges remain.

-1

1

2

3

4

5

6

7

8

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007

A moderation of global growth

Real GDP annual percent changeForecast

Developing

2009

Source: World Bank

-1

1

2

3

4

5

6

7

8

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007

A moderation of global growth

Real GDP annual percent changeForecast

Developing

2009

Developing ex. China &

India

Source: World Bank

-1

1

2

3

4

5

6

7

8

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007

A moderation of global growth

Real GDP annual percent changeForecast

Developing

High-income

2009

Developing ex. China &

India

Source: World Bank

U.S. trade balance improving

-7

-6

-5

-4

-3

-2

Q4 2001 Q4 2002 Q4 2003 Q4 2004 Q4 2005 Q4 2006

Oil balanceNon-oil balance

Source: U.S. Department of Commerce.

Balance on goods, oil and non-oil (%GDP)

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1

OtherOPEC

FSUWorld

Non-OPEC supply is coming on stream

Change in oil deliveries (y/y millions of barrels per day)

Source: International Energy Agency

OPEC as swing producer

Core inflation in high-income countries: still some worries

-2-1.5

-1-0.5

00.5

11.5

22.5

33.5

Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07

United Kingdom

United States

Japan

Euro zone

Resilience depends partly on continued low long-term yields

and spreads

- 4

- 2

0

2

4

6

8

10

12

1980 1983 1986 1989 1993 1996 1999 2002 2006

United-States

United Kingdom

Source: World Bank

Japan

Euro zone

Real long-term government bond yields

Regional growth: slower but still rapid in all regions

2

3

4

5

6

7

8

9

10

East-Asia &Pacific

Europe &Central Asia

Latin America& Caribbean

Middle-East &North Africa

South Asia Sub-SaharanAfrica

20052006200720082009

Percent change in GDP

Source: World Bank

$ billions

0

100

200

300

400

500

600

700

1990 1993 1996 1999 2002 2005

0

1

2

3

4

5

6

Net private capital flows to developing countries

Percent of GDP (right axis)5.8% in 2005-6

Percent

$647 billion in 2006

Private capital flows have leveled off

More capital is going to East Europe and Central Asia and to East Asia and Pacific

regions

Europe & Central Asia

26%

Latin America & Caribbean

47%

East Asia & Pacific

15%

Sub-Saharan Africa

5%South Asia5%Middle East &

North Africa2%

2000 2006

Total net private capital flows to developing countries

Latin America & Caribbean

14%

Middle East & North Africa

4%

South Asia6%

Sub-Saharan Africa

6%

East Asia & Pacific

28%

Europe & Central Asia

42%

-20

-10

0

10

20

30

40

50

1990 1992 1994 1996 1998 2000 2002 2004 2006

-8

-5

-2

1

4

7

10

13

$ billionsNet private capital flows to Turkey

Percent of GDP (right axis)12% in 2005-06

Percent

Turkey has been attracting disproportionate amounts of

private capital

Developing countries added record amount to reserves in

2006

Reserves grew by $633 bn vs. by $345 bn in 2005 to reach close to $ 2 trillion

This reflected a current account surplus of $ 348 bn (up by $ 92 bn on 2005) and net total capital flows of $ 571 bn (up by $ 90 bn)

The balancing item (errors and omissions and acquisition of foreign assets by DCs) was $ -286 bn vs $ -345 bn in 2005.

-100

0

100

200

300

400

500

600

700

1990 1992 1994 1996 1998 2000 2002 2004 2006

Debt

Portfolio equity

FDI

$ billions

$234

$94

$325

Net private flows $647 billion in 2006

Equity flows account for the lion share

DebtDebt36 %36 %

EquityEquity64 %64 %

$ billionsNet private debt flows to developing countries

Bank lending dominates the expansion in private debt flows

-100

-50

0

50

100

150

200

250

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Short-term debt flowsBank lendingBond flowsNet private debt flows

0

2

4

6

8

10

Brazil Mexico Venezuela Peru Others*

$ billions

20

25

30

35

40

1998 1999 2000 2001 2002 2003 2004 2005 2006

Percent

Total value of public external debt buyback operations in 2006

Public external debt as a share of GDP in developing countries

* Including Philippines, Nigeria, Colombia, Panama, and Uruguay

Governments have continued to reduce their external debt…

39% in 1999

23% in 2006

…while increasing their domestic debt

Source: World Bank staff calculations based on JP Morgan

0

10

20

30

40

1998 1999 2000 2001 2002 2003 2004 2005 2006

External DomesticPercent

Public debt as a share of GDP in 28 emerging market economies

Increased M&A by emerging market firms ..

0

100

200

300

400

500

600

700

800

1990 1993 1996 1999 2002 2005

ServicesManufacturingPrimary

0

10

20

30

40

50

60

70

80

90

100

1990 1993 1996 1999 2002 2005

ServicesManufacturingPrimary

Number of deals

Cross-border M&A transaction by developing countries

Total value of deals

400

250

50

$ billion$ billion

$56

$32

$13

0

15

30

45

60

75

2002 2003 2004 2005 2006

$ billions

OtherCountrie

s

China

…and record IPO transactions (led by China)…

$71 billion

Capital raised through Initial Public Offerings (IPOs) by companies in developing countries

0

20

40

60

80

100

120

140

1998 1999 2000 2001 2002 2003 2004 2005 2006

Corporate

Sovereign

$ billions

Bond issuance by developing countries

$88 billion

$43 billion

Corporate bond issuance now exceeds sovereign borrowing

0

50

100

150

200

250

300

2002 2003 2004 2005 2006

Other regions

East Asia and Pacific

Latin America and the Caribbean

Europe and Central Asia

Firm-level borrowing is up substantially…

$ billions

External debt contracted by corporations in developing countries

$293 billion

Sharp increase in some emerging market equity prices could be a signal

of asset overvaluation MSCI equity price index (Jan. 2000 = 100)

0

40

80

120

160

200

240

280

320

2000M1 2001M1 2002M1 2003M1 2004M1 2005M1 2006M1 2007M1

EM Europe

Latin America

Global Composite

EM Asia

0 200 400 600 800 1000 1200 1400 1600

Malaysia

China

Korea, Rep.

Thailand

Poland

Colombia

Croatia

Turkey

Panama

Argentina

Peru

Mexico

Brazil

Apr-07

Sep-98

Jun-97

Emerging market bond spreads may have moved into complacent

territoryJP Morgan EMBI Global Bond Spreads

Basis points

ECA: External positions could come under pressure

0

5

10

15

20

25

Hungar

y

Alban

ia

Croat

ia

Turke

y

Mol

dova

Georg

ia

Roman

ia

Lithua

nia

Tajiki

stan

Bosnia

& Her

z

Eston

ia

Bulga

ria

Latvia

Kyrgy

z Rep

ublic

Current account deficit (% of GDP)

Percent

-1 1 3 5 7 9 11 13 15 17

Burkina FasoChile

MalaysiaMoroccoLithuania

EstoniaBarbados

South AfricaIndia

KazakhstanBotswana

PakistanTurkey

UgandaArgentina

UkraineMauritius

Egypt, ArabParaguay

Kenya

Inflation is a concern in several developing countries

Consumer price inflation, year-over-year percent change2004

Inflation Inflation end

2006

Source: World Bank

Key challenge ahead: managing the risk of an abrupt turn in the

credit cycle

Consequences would be severe in some countries

Risk under-priced in markets with large imbalances and/or incipient inflation?

Inadequate information relating to new instruments, borrowers and creditors

Structured financial products & hedge funds/private equity

External debt increasingly in corporate sector

GDP growth in Turkey is moderating

0

1

2

3

4

5

6

7

8

9

10

Q1-05 Q2-05 Q3-05 Q4-05 Q1-06 Q2-06 Q3-06 Q4-06 2005 2006 2007f

year-on-year percent change

But Current Account Deficit Remains High

-10

-8

-6

-4

-2

0

2

4

2000 2001 2002 2003 2004 2005 2006 2007f

-40,000

-32,000

-24,000

-16,000

-8,000

0

8,000

16,000

Percent of GDP (left axis)

USD million (right axis)

Percent share of GDP and US current dollar value

Public debt profile has improved but remains a source of

vulnerability

0

10

20

30

40

50

60

70

80

2000 2001 2002 2003 2004 2005 2006

Domestic debt

Externaldebt

Central government debt as percent share of GDP