theexternalenvironmentfordevelopingcountries.docVIP

The External Environment for Developing Countries March 2008 Overview Spreading financial havoc was illustrated this month by the “fire sale” of investment bank Bear Stearns. The resulting slump in equity markets was global in proportion, with many bourses declining 10% since early March. Exchanges in India and China dropped more-than 17%. Dramatic moves were undertaken by the Fed- cutting the Fed funds rate by 75 basis points to 2.25% and using unorthodox methods to provide liquidity to the financial system. This carried the side effect that the dollar dropped 4% against the euro since the start of March and 7% vis-à-vis the yen. Most developing countries also saw their currencies appreciate, though to a lesser extent. Exceptions were Turkey and South Africa with depreciations of some 5% since early March. Tightening of credit conditions led to a further slowing in capital flows to $22 billion in February, less than 40% of the average monthly flow of 2007. Few sovereigns came to the bond market, with Hungary, Latvia and Turkey accounting for 90% of issuance. Equity placement fell to $3 billion, less than 20% of the 2007 monthly average. Prices of many commodities surged more-than 20% since the start of February, in large measure reflecting activities of investors searching for yield, or aiming to hedge against a falling dollar and increasing inflation pressures. Recent international food price increases have generally not been mirrored in domestic food price inflation to date (see Focus). U.S. imports will likely decline in 2008 as the dollar weakens and the U.S. economy slows sharply. Developing countries’ growth will increasingly depend on domestic demand and exports to Europe and Japan, boosted by the strong euro and yen. This rotation of growth away from the United States is already well underway. Global Indicators Global Indicators (Percentage change per annum, unless otherwise specified) 2005 2006 2007e 2008f GDP volume: Worl