The External Environment for Developing Countries June 2008

The World Bank Development Economics Prospects Group

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

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

United States 4 Euro Area 3 2 1 1992M1 1995M1 1998M1 2001M1 2004M1

Source: Thomson/Datastream DECPG calculations

2007M1

375 350 EM spreads down 75 basis points since recent peaks at mid-March

Stripped spreads, basis points LAC MSCI

325 300 275 250 225 200 175 150

EAP ECA

125 100 Jan-07 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Jan-08 Mar-08 May-08

Source: JPMorgan Chase.

Industrial countries

4 2 6 8 U.S. households spend rebates in May

Retail sales, ch% saar and 3mma y/y

Retail sales, saar Retail sales, year-on-year 0 -2 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08

Source: U.S. Department of Commerce.

May-08

Slackening labor markets could dim consumer outlays in coming months

change in employment 3mma [L], unemployment

300

claims 4wma [R]

380 250 unemployment claims [right] 360 200 150 100 50 0 -50 -100 Jan-06 employment [left] May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08

Source: U.S. Department of Labor.

340 320 300 May-08 280

Fed likely to halt rate reductions at 2% as CPI pressures mount 5.5

5.0

4.5

4.0

Fed funds target rate 3.5

3.0

2.5

2.0

1.5

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 Source: Thomson/Datastream.

0 -1 1 2 3 4 5 Japan first-quarter GDP revised up on stronger investment

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

4.0

Net X 3.3

2.9

Invest PCE Gvt dStok Q4-2007 Q1-2008 P Q1-2008 R

Source: Cabinet Office and DECPG calculations.

6 Japan’s orders, exports and production falter in April

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

20 Orders [R] 5 15 Exports [R] 4 10 3 5 2 0 1 Production [L] 0 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08

Source: Cabinet Office- Thomson/Datastream.

-5

2.0

Japan’s inflation increasing on fuel prices and weaker yen

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

18 import price [right] 15 1.5

PPI [left] 12 1.0

9 0.5

6 0.0

3 CPI [left] -0.5

Jan-07 May-08 0 May-07 Sep-07 Jan-08

Source: Japan Cabinet Office.

European surveys broadly lower

IFO ‘expect’, Banc d’France [left], EEC consumer sentiment [right]

110 0 Banc d’France [left] 108 -3 105 -6 103 -9 100 IFO expectations [left] 98 EEC consumer [right] 95 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08

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

-12 -15

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

factory orders, domestic, overseas, ch% saar

30 Export orders 25 20 15 10 5 0 -5 -10 Domestic orders -15 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08

Source: Bundesbank- Thomson/Datastream.

HICP breaches 16-year highs pushed by energy costs

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

4.0

14 3.5

12 10 3.0

8 2.5

2.0

1.5

HICP [L] HICP Energy [R] 2 0 6 4 1.0

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

Source: Eurostat through Thomson/Datastream.

-2

Industrial production

10 8 6 4 2 0 Developing countries continue to outperform IP in high-income countries

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

16 Developing countries 14 12 High Income -2 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08

Source: Thomson/Datastream,

Production in ECA holding up, Latin America shows signs of weakness

industrial production, ch% (q/q saar)

15 12 Europe and Central Asia 9 6 3 Latin America and the Carribean 0 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08

Source: Thomson/Datastream,

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

industrial production ch% (q/q saar)

30 25 20 15 10 5 0 -5 China Other East Asia -10 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08

Source: Thomson/Datastream,

International trade

Oil imports as a share of GDP up sharply

oil imports as a share of GP (%)

5

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

USA 4 Japan European Union 3 2 1 0 1995 2000 2001 2002 2003 2004 2005

Source: UN Comtrade, National Sources.

2006 2007 2008

U.S. and German capital goods exports 20 regaining momentum

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

USA 15 Japan 10 5 Germany 0 -5 2006M1 2006M4 2006M7 2006M10 2007M1 2007M4 2007M7 2007M10 2008M1

Source: Thomson/Datastream, DECPG calculations.

2008M4

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

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

0 -1 -40 non-oil balance -2 -80 -3 -120 -4 -160 oil balance -5 -200 -6 CAB/GDP [R] -240 Q1 2005 Q3 2005 Q1 2006 Q3 2006 Q1 2007 Q3 2007

Source: U.S. Department of Commerce.

Q1 2008 -7

Oil prices

Oil prices higher on supply fears $/ bbl 135 125 115 105 95 85 75 65 55 45 35 25

Jan-03 OPEC-11 Production (x Angola) [R] Oil price [L scale] Jan-04 Jan-05 Jan-06 Jan-07 Source: IEA and DECPG Commodities Group.

Jan-08

mb/d 31 30 29 28 27 26 25

M bbl

360

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

5-year high-low ranges 350 340 330 320 310 300 290 280 270 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Source: U.S. DOE and DECPG Commodities Group.

Jan-09

0 -1 -2 kb/d 4 Non-OPEC supply growth slumps 3 2 OPEC Other FSU 1 -3 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05

Source: IEA and DECPG Commodities Group.

1Q06 1Q07 1Q08

Non-oil commodity prices

Corn and soybean prices rise on threats of flooding c/bushel 1600 Soybeans c/bushel 700 1400 600 1200 1000 800 Corn 600 400 Ja n 06 Ja n 07 Ja n 08

Source: Datastream and DECPG Commodities Group.

500 400 300 200 100

$/ton 5000 4500 4000 3500 3000 2500 2000 1500 1000 Zinc prices plunge on rebound in mine supply

LME stocks Zinc price

‘000 tons 650 600 550 500 450 400 350 300 250 200 150 100 50 0 Ja n 05 Ju l-0 5 Ja n 06 Ju l-0 7 Ja n 07 Ju l-0 7

Source: LME and DECPG Commodities Group.

Ja n 08

Freight rates ease 12000 10000 8000 6000 4000

Baltic dry freight index

2000 0 Jan-05 Jan-06 Jan-07

Source: Datastream and DECPG Commodities Group.

Jan-08

International Finance

Bank lending falls again in May Gross capital flows to emerging markets

$ billion

2006 Q1 Total 2007 Q1 Jan-May Total Q1 2008 Apr May YTD Total Bonds Banks Equity Lat. America Bonds E. Europe Bonds Asia Bonds Others 96 42 39 15 494 137 246 111 166 58 81 26 294 88 140 66 683 146 343 194 114 14 80 20 42 13 17 13 23 14 36 17 25 116 41 179 64 153 38 20 81 28 30 60 28 135 43 74 157 45 252 64 213 18 5 39 5 47 14 5 14 7 11 8 12 19 45 8 16 13 25 23 60 3 10 0 3 Source: DECPG Finance Team.

1 4 10 6 11 5 5 30 12 10 8 186 39 107 41 41 16 65 18 63 3 17

EM equities suffer in 2008

returns over 2008 to date (%)

10 0 -10 -20 -30 -40 -50 -60 D ev el op ed E M B ra zi l M ex ic o R us si a A rg en tin a In do ne si a H un ga ry P ol an d In di a Tu rk ey C hi na V ie tn am

Source: Bloomberg and DECPG Finance Team.

EM bond spreads have remained stable of late

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

900

HY-OECD

750 600 450 300

EM spread

150 0 Jan-07 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08

Source: Datastream and DECPG calculations.

Jun-08

Currencies

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]

Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 1.410

112 1.430

110 1.450

108 1.470

1.490

1.510

yen/US D 106 104 USD/Euro (inverse) 1.530

1.550

102 100 1.570

98 1.590

1.610

96

Source: Thomson/Datastream.

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

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

Kor won India Rpe Thai bhat Indo Rph Aus$ Ch RMB Appreciation of Local Currency



S$ -20 20 -15 -10 -5 0 5 10 2007 2008

Source: Thomson/Datastream

15

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

LIBOR-6 months and EURIBOR 6-months, percent

5.5

4.5

3.5

2.5

EURIBOR USD LIBOR

1.5

0.5

-0.5

differential: US less euro rates

-1.5

-2.5

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

Source: Datastream and DECPG calculations.

Jun-08

The External Environment for Developing Countries June 2008

The World Bank Development Economics Prospects Group