Global Development Finance 2006 cites improved policies, trade growth and South-South flows, but warns of risks posed by widening payments imbalances and high oil prices

TOKYO, May 30, 2006- Net private capital flows to developing countries reached a record high of $491 billion in 2005, driven by privatizations, mergers and acquisitions, external debt refinancing, as well as strong investor interest in local-currency bond markets in Asia and Latin America, says the World Bank's annual 2006 Global Development Finance report. The surging flows, including record bank lending and bond issuance, among others, coincided with 6.4-percent economic growth in the developing world last year, more than double the 2.8-percent growth in developed countries.

"These increased capital flows reflected greater confidence in the economic prospects of several developing countries," said François Bourguignon, World Bank Chief Economist and Senior Vice President for Development Economics. "Countries are benefiting from improved global market conditions and investment climates, while closer global financial integration is posing difficult challenges to policymakers in both developed and developing countries to sustain economic growth and financial stability."

"....This relatively benign soft-landing scenario for developing countries faces both internal and external risks. First, the high growth of the past several years is generating tensions within individual countries. In several East European countries this has taken the form of rising inflation, currency appreciation, and high current-account deficits, while in others it has expressed itself in rising asset prices, inflationary pressure, and growing domestic tensions between fast and slower growing regions and sectors. Second, many of the buffers that permitted countries to absorb higher oil prices with a minimum of disruption have been exhausted, and countries have yet to fully adjust to higher oil prices. As a result, developing countries are much more vulnerable to potential external shocks, such as a disruptive resolution of global imbalances, a decline in nonoil commodity prices, or a hike in oil prices following a supply shock." (GDF 2006, p. 13)