Global Economic Downturn and Potential Impact on Developing Economies like Zambia

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

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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

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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

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-400

-200

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400

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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

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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

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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

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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

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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$)

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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