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Prospects Weekly: the cost of international bond financing for developing countries has increased since January 2013, Deceleration in the pace of global trade expansion in Q1 2013, North American producers are expected to lead a surge in global crude oil

Global Macroeconomics Team's picture
Notwithstanding the generalized decline in risk perceptions across global financial markets, the cost of international bond financing for developing countries has increased since January 2013. There was a broadly based deceleration in the pace of global trade expansion in Q1 2013. Recent business sentiment and export order indices suggest that this deceleration will continue into Q2 2013. Over the medium-term, North American producers are expected to lead a surge in global crude oil production, which will exceed the expected increase in demand – most of which is expected to come from developing countriese.
Developing country bond yields have risen since January despite the general “risk-off” phase in global financial markets. The cost of international bond financing has been on the rise since early January. Unusually, the increase was not prompted by an uptick in global tensions, and occurred even though developing-country ratings upgrades have outpaced downgrades during the same period. The higher yields reflect both higher spreads (up 48 basis points since January 3) and higher base rates (up 10 basis points). These developments may partly reflect a reduction in the perceived risk of high-income country debt (which would cause high-income country yields to fall relative to developing-country yields). There may also have been a generalized increase in the price of risk, which would have contributed to an increase in both base rates and spreads. Investor concerns about asset price inflation in some developing countries and the recent easing of commodity prices may also be at play.
Following a solid cyclical rebound in Q4 2012, the expansion in global trade decelerated in 2013Q1. Global trade grew at an annualized pace of 4.1 percent in the first quarter of 2013, compared with 9.3 percent during the previous quarter. In China, import growth strengthened further in Q1 2013. Elsewhere, the deceleration in import growth cut across both high-income and developing regions. That said, developing country (excluding China) import demand was still expanding at a robust 10.2 percent pace. In contrast, import demand in high-income countries actually fell at a 0.9 percent annualized pace. With business sentiment and export order indices for both high-income and developing countries (including China, Brazil, and Russia) declining in April, the deceleration in global trade growth is likely to continue. Indeed, Chinese data for April suggest that the wider global deceleration has hit that country as well.
The International Energy Agency (IEA) projects that North America will lead the increase in crude oil supply, while developing countries lead the increase in demand. In its recent medium-term outlook for the oil market, the IEA projects that global crude oil supply will increase by 8.4 million barrels per day (mbd) by 2018 up 5% from the 91mbd in 2012. The increase mainly reflects surging North American crude output (2.3 mbpd from US “light tight oil”, which includes production from shale, and 1.3 mpbd from Canada’s oil sands). On the demand side, the IEA forecasts that non-OECD demand will overtake OECD demand this year, reaching 54% of global demand by 2018. Spare capacity in the global oil market is expected to rise to more than 7mbd in 2014 (a level normally associated with weak prices), up from 1.5-3.0mbd between 2004 and 2008. It should then begin to decline by 2016 as US production growth slows while demand growth remains firm.

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