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Prospects Weekly: Gross capital flows to developing countries declined sharply in February 2014, Real domestic credit growth is easing across developing regions, Commodity markets reaction to escalating Ukrainian crisis has been muted bar wheat market

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Gross capital flows to developing countries declined sharply in February 2014 to a five-year low, reflecting the recent bout of market volatility and a downward correction from exceptionally high volumes of international bond issuances in January. Cross-border syndicated bank lending flows were also very weak, reaching a decade low in February. Mirroring tigther global financing conditions and weaker domestic demand in some cases, domestic credit growth showed signs of deceleration in most developing regions towards the end of 2013. In other developments, the reaction of global commodity markets to escalating tensions between Ukraine and Russia has been relatively muted so far, considering the strategic importance of these two countries in wheat, oil and gas supplies.
Capital flows to developing countries tumbled in February, with all segments of the market posting sharp losses. Gross capital flows (international bond issuance, cross-border syndicated bank loans, and equity placements) amounted to only $13.9 billion in February, the lowest monthly level since April 2009. After a record $40 billion issuance in January, bond flows dropped sharply to $7.7 billion in February amid increased risk-aversion and on the back of some seasonal effects. Equity issuance remained weak at $2.1 billion as the China’s IPO rally that started in December faded out. Syndicated bank lending stood at $8.8 billion since January 1, its lowest level since 2005 and down 69% from a year earlier. The decline in global syndicated loan activity is relatively broad-based, but more marked in Emerging Europe and Sub-Saharan Africa .Both regions failed to post a single syndicated loan deal this year. Combining January and February data, gross capital flows to developing countries ($63.8 billion in two months) are 30 percent lower than the same period last year, reaching their weakest level since 2010.
Real domestic credit growth is easing across developing regions. Real bank lending flows to residents (deflated by consumer price inflation) decelerated in most developing regions during the final quarter of 2014, reflecting a combination of more moderate domestic demand, external financing pressures and rising interest rates. In the East Asia region, where real credit growth has been growing at double digit rates since mid-2011, the moderation was expected and in some cases a welcome sign of normalization. The slowdown was particularly visible in Thailand, Indonesia, Malaysia and China. In Latin America, Brazil has seen a sharp decline in real credit growth towards the end of last year, driven by policy tightening and weakening demand. Mexico has bucked the trend with a slight pick-up acceleration in domestic lending flows, albeit from a low level. Emerging Europe continue to show an heterogeneous pattern, with still high real credit growth in Turkey -where the effects of recent policy tightening have yet to be seen- and considerable adjustment in Armenia, Georgia and Romania.

Commodity markets reaction to escalating Ukrainian crisis has been muted bar wheat market. Russia -the world's largest oil supplier- accounts for 13 percent of global oil production and contributes 30 percent to Europe's natural gas consumption. Together with Ukraine, they account for 16 percent of global wheat exports, while Ukraine alone contributes 14 percent to global maize exports. Despite their heavy weight in these commodities, price reaction to the Ukraine conflict has been muted so far. Brent, the international marker for oil, closed at $110/bbl on March 4, remarkably similar to last week's average. Wheat and maize prices were up 4.6 percent and 6.3 percent on March 4 compared to a week earlier. Gold prices, often reacting to geopolitical concerns, did not change in any appreciable way. Grain markets are well-supplied--global maize and wheat production are 16.3 percent and 7.1 percent higher compared to 4 years ago when the Russian export ban in August 2010, which came on top of a severe drought caused wheat prices to spike.

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