Country watch list

country(ies) on positive watch list

Austria (A2)

Risk assessment

Heavily exposed to market conditions in Germany and Central and Eastern Europe

The Austrian economy has been hit by the crisis mainly in relation to its manufactured exports, comprised notably of automotives, machine-tools, electronic components, and construction materials. Markets for such products, mainly in Germany and in Central and Eastern Europe fell away. The significant commitments of the banking industry in Central and Eastern Europe were a further source of anxiety.
Recovery, which started in the third quarter of 2009, will continue in 2010. Growth will remain sluggish, as it relies essentially on export demand revival and on continued government support for consumption, at the price of further worsening of public finances that were almost in balance.
Household consumption will hold up well. Austrians benefited in 2009 from substantial salary increases through the annual institutionalised collective bargaining negotiations. Real estate prices, having resisted excess upward pressure in the past, will not now decline. Finally, unemployment increases are contained by the massive use of partial lay-offs, substantially paid for by the State.
Exports, which collapsed at the end of 2008 and the beginning of 2009, will continue to recover, insofar as the European automotive industry does not unduly suffer from the ending of the government scrappage allowances and assuming the recovery of neighbouring European economies continues.
At best, investment will not decline thanks to public infrastructure expenditures. Despite tax advantages, the recovery of exports and industrial production will not encourage much investment expenditure due to existing excess capacity and the reluctance of banks to lend. Also, residential housing investment will remain uninspired even if refurbishment work, especially heat insulation, benefits from government assistance.

Business solvency showed a limited deterioration and is expected to recover

With the crisis, during 2009, companies showed a slight deterioration in payment behavior. Worsening in payment terms was, however, marked in the automotive sector (equipment and assembly), machines for industry, road transport, and the paper and printing/publishing industries. Defaults were also recorded in the woodworking industry but due to causes pre-dating the crisis. With the recovery business practices should stabilise.

Top

Belgium (A2)

Risk assessment

The relatively solid financial health of Belgian companies contributed to limiting the impact of the recession in 2009

With its open economy Belgium suffered from the collapse of world trade. The banking crisis moreover shook household and corporate confidence. With the severity of the economic contraction mitigated, however, by the generally good financial health of Belgian companies before the crisis, investment declined less than it did elsewhere. And the credit crunch has been less severe than expected. GDP growth will only recover moderately in 2010, with risks still impeding a sharper upturn.

Economic growth in 2010 will depend on the strength of the recovery in the euro zone

By undermining the value of financial assets held by households (270% of GDP in 2007), the crisis profoundly shook their confidence in 2009. And they consequently increased their savings (15% of disposable income) by nearly 2% and reduced spending. But significant wage growth (automatically indexed to past inflation) and the emergence of negative inflation nonetheless limited the resulting decline in consumption. Households will continue to exercise prudence and hold back on spending in 2010 with wages only expected to rise moderately and the growth of unemployment, partly checked last year by widespread recourse to shorter working hours, will accelerate. Residential investment will continue to contract until the 2010 fourth quarter despite temporary government support for the sector (reduction in VAT on new housing construction). Corporate investment, meanwhile, will only begin to accelerate again mid-2010. Suffering from low production capacity utilisation and a slowdown of profits, companies will remain very dependent on European orders (77% of sales abroad), particularly from Germany, France, and the Netherlands. The sector specialisation of Belgian companies on low value-added products with low technology content will not be conducive to a strong export recovery. The foreign-trade contribution to GDP growth will be barely positive: imports, highly correlated with the export trend (international integration of production chains), will only increase slightly (up 0.8%). The run-up to local elections in 2012 will spur public sector investment, expected to grow over 6% this year. In addition to measures of support for the banking sector, the federal government has implemented measures intended to benefit households (increases in social transfers) and companies (tax breaks intended to offset wage growth, financing, and payment facilities). The fiscal deficit, which grew nearly threefold in 2009, will remain essentially stable in 2010 despite gradual discontinuation of those measures with the poor economic conditions continuing to weigh on tax revenues. Public sector debt, meanwhile, will reach disquieting levels (101.4% of GDP).

The public works sector underpinned by large investment projects

Companies held up well overall in 2009 as evidenced by the increase of just 13% in the bankruptcy rate in the 12-month period ending in August. After deterioration in the first half of 2009, Coface payment incident experience improved in the second part of the year. Export order books will be unlikely to recover to a very significant extent, which is expected to affect earnings in 2010. Unit labour costs, albeit improving thanks to the deceleration of wages, will nonetheless remain generally higher than companies elsewhere in the euro zone and thus remain a handicap in all markets. Domestic credit is expected to grow in 2010 provided banks are adequately recapitalised.

Top

France (A2)

Risk assessment

The cash-for-clunkers incentive has underpinned growth in the 4th quarter of 2009

Growth accelerated noticeably in the 4th quarter 2009 (by 0.6%), fueled essentially by household consumption, in particular in the manufactured goods sector, and by the variation of stocks. Anticipating the reduction of the amount of the car scrappage allowance from January 2010, French people increased their car purchases, and accordingly appreciably reduced their savings capacity. In spite of a new decline in December, industrial activity stabilised over this period. Production nevertheless fell by about 5% compared with the 4th quarter of 2008, already very weak. Finally, growth will have contracted by 2.2 % in 2009 and will progress only marginally in 2010 (+1.3 %).

Households cut back on their spending in 2010

In January, acquisition of durable goods again slid back, and in February household confidence deteriorated. These data probably spell a decline in spending by French people in 2010, as the effects of the recovery plan begin to wear off. After increasing by 2.2% in 2009, their purchasing power will gain only 0.6% in phase with the slower growth of public transfers and wages. The savings rate will stabilise at a high level (17% of disposable income) as a result of concerns over the rise of unemployment, which affects 10% of the working population. Residential investment will remain relatively anaemic until the end of 2010 with housing loans then rekindling a slight upturn after a two-year slowdown. The low production capacity utilisation rate (73% in January 2010) and the deceleration of profits will force companies to postpone investments. The softness of the recovery expected in Europe (two-thirds of exports) will not be propitious to a strong recovery of exports, an area where companies have been gradually losing market share. The stimulus programme implemented by the government (1.2% of GDP) has affected public sector finances last year. With fiscal policy remaining expansionary overall, it will help to compensate for the prudence of households and companies. After growing in 2009, the public sector deficit will decline slightly (8.2% of GDP) as a result of the gradual discontinuation of some support measures. The debt is expected to grow to 85.6% of GDP.

Large investment projects will underpin the public works sector

Since last summer, the pace of payment incidents has eased, reflecting the slowdown in bankruptcies (up 12% in the 4th quarter of 2009. The 23% rebound of bankruptcies in January compared to December 2009 should not affect the general downward trend of bankruptcies but it constitutes a warning signal coming after the figures indicating the slow-down of industrial activity in December.

Top

Germany (A2)

Risk assessment

A modest and exclusively export-driven recovery

After four quarters in recession, economic growth resumed in the second quarter last year thanks to the revival of exports.

Although capital goods exports have been buoyed by the investment recovery in emerging countries, they hardly benefit at all from demand in developed countries, especially European ones, where capacity utilisation rates remains low. Net trade contribution to growth is limited by the fact that imports have been recovering faster than exports.

Despite a capacity utilisation of 75%, company investment will nonetheless resume as the advantageous amortisation system is due to expire at the end of the year. Only public sector spending will show a good level of growth with full effect of the stimulus policy on the construction of buildings and transport infrastructures.

Household consumption could crumble without the automotive scrapping incentive and with the downward pressure on wages. Despite the extension of the partial unemployment compensation mechanisms from which they benefit, companies will likely eliminate jobs to increase productivity. The fiscal consolidation plan will only begin to take effect from 2011, however, and then only moderate.

Deterioration of payment behaviour: brief and moderate

Appearing relatively later and with less severity than in other European countries, the deterioration of corporate payment behaviour in Germany reflected by both the COFACE payment-incident index and the official default index maintained by the federal bureau of statistics was nonetheless very real. But very profitable and relatively debt-free before the crisis, however, German companies in general showed some resiliency.

Deterioration concentrated in the industrial and exporting regions in the west and south

But there were nonetheless many failures in sectors very affected by the drop in capital equipment sales: among automotive parts makers and in mechanicals, metallurgy, and plasturgy. The deterioration was thus greatest in industry concentrated in the west and the south. Construction suffered no deterioration, however, with the sector benefiting from economic stimulus measures via rail and road infrastructure. In the absence of a speculative property bubble, housing investment has remained on an even keel. Similarly, in the eastern regions, less industrialised and focusing more on the domestic market, payment defaults increased very little.

A return to normal by mid-2010

Many smaller industrial companies were shaken by the decline in both domestic and foreign demand and have been contending with late payments from customers. They have experienced greater difficulty obtaining financing with German banks having troubles of their own. A return to satisfactory profitability - initiated thanks particularly to the adjustment of capacity to demand - will take several months.

Top

Hong Kong (A2)

Risk assessment

Recession in 2009 but a significant rebound expected in 2010

Hong Kong was particularly affected by the global economic and financial crisis as a result of its economic openness with exports and imports representing 350% of GDP. Machinery, electronics sales abroad and tourism contracted for the full year. Domestic demand, however, showed signs of recovery by the 2009 second quarter. Private consumption is again trending up buoyed by the improvement in the job market attributable in particular to the recovery in the tourism sector, the increase in nominal wages, and the positive wealth effect resulting from the rise of the Hong Kong stock market's Hang Seng index and the property market. Corporate investment gradually recovered after the easing of credit conditions. On the supply side, the financial services and retail sectors achieved rapid growth while trade-related services continued to suffer from the slowdown of foreign demand.

In Q1 2010, GDP growth reached 8.2% y/y and the recovery will likely stay on track in 2010 thanks to the economic rebound in Continental China, low interest rates, and expansionary fiscal policy. The fiscal stimulus measures implemented (equivalent to 5% of GDP) are expected to result in a gain of two points of GDP by supporting household consumption and smaller companies via property and income tax exemptions and reductions, transfer payments to low-income households, and a system of public guarantees for smaller companies. In this context, Coface monitoring records are expected to reflect improvement in payment behaviour.

A still healthy financial position

In the financial sphere, the more rapid contraction of exports of goods and services compared to imports contributed in 2009 to the decline in the current account surplus as a result of the fall of demand from OECD countries for electronics, telecommunications equipment, machinery and manufactured goods. Although the Lehman Brothers bankruptcy gave rise to massive withdrawals of portfolio investments, they were offset by the repatriation of funds by companies based in Hong Kong and by the unwinding of carry trade transactions. Foreign exchange reserves thus increased again in 2009. The current account surplus is expected to grow slightly in 2010 as a result of the recovery of exports of services (tourism, financial services, merchandisin, and logistics). The reserves will thus remain at a satisfactory level.

The peg of the Hong Kong dollar to the US dollar is expected to be maintained in 2010 even if the chief executive officer, Donald Tsang, has raised the long-term possibility of establishing a link between the Hong Kong dollar and the renminbi.

The banking system held up well in the crisis thanks to effective oversight and regulation and prudent risk management. The exposure of Hong Kong banks to toxic assets has been limited with the proportion of non-performing loans in their portfolios remaining low and their solvency and liquidity ratios high.

A stable political situation

Donald Tsang, elected for a third term in March 2007, remains popular. Pressure from democratic parties for institution of direct universal suffrage has nonetheless weighed on relations with Beijing, which only envisages such electoral reform from 2017 for the office of chief executive officer and 2020 for Parliament.

Top

Netherlands (A2)

Risk assessment

Sharp contraction in 2009 

The economy suffered a violent downturn in 2009 triggered by the sudden collapse of global demand with both exports and corporate investment falling in consequence. Households cut spending and their savings rose by five percentage points (18% of disposable income). Only public spending contributed to limiting the impact of the crisis. In 2010, continued support measures by the government and an upturn in foreign demand will underpin economic growth that will nonetheless remain soft.

Household consumption and investment still sluggish in 2010, modest export recovery

Household consumption will continue to contract in 2010 reflecting the decline in disposable income (expected slowdown of wages and rise of social security contributions in the framework of the mandatory pension-fund consolidation plan) and the negative wealth effect. The savings rate will be stable. Confidence will be shaken by the sharp growth of unemployment, up from 3.4% in 2009 to 6% this year, with companies thus far having preferred partial layoffs to keep skilled staff on the payroll as long as possible. Residential investment will suffer from the prudence exercised by households despite tax breaks enabling them to fully deduct mortgage interest charges. The modest recovery of the economies of the main trading partners (especially Germany and France) will enable exports to begin growing again, albeit weakly. Productive investment will, however, continue to contract with debt-ridden companies preferring to use overcapacity to fill new orders and replenish stocks. Despite the weakness of domestic demand, imports will grow as fast as exports, driven by the re-export business characteristic of the Netherlands foreign trade. The current account will thus show a surplus of 5.5% of GDP.

The fiscal budget, slightly in surplus in 2008, showed a deficit in 2009, consequence of the three economic support programmes instituted by the government (especially the banking system bail-out with the nationalisations of Fortis Nederland and ABN Amro), the impact of the economic stabilisers, and the fall of revenues derived from North Sea natural gas. Continued public spending at the same level and the growth of service charges on the public debt (reaching 66% of GDP) will exacerbate the deficit.

Companies tight on cash

Credit to companies declined considerably with the collapse of the Netherlands' financial sector, which suffered more on average than banks elsewhere in Europe. The spectacular increase in bankruptcies (up 70% in 12 months through September 2009) reflects the intense pressures on the cash positions of companies. These pressures are expected to ease considerably with costs lower (reductions in wages) and as foreign demand gradually grows stronger. This trend is reflected by Coface payment incident experience which posts a slight improvement in the last quarter of 2009. Despite the recovery of international trade, maritime freight will bear watching, with overcapacity resulting from the contraction of demand and the heavy investments made before the crisis driving prices down. 

Top

Norway (A2)

Risk assessment

A mild, short-lived recession thanks to positive fallout on the continent from the offshore oil and gas activity that contributes one quarter of GDP

The recovery began in the 2009 second quarter after just two quarters of negative growth. The recovery has continued since then albeit at a slower pace in the first half this year.

Although less intensive than in 2009, government support programmes will continue to be a factor in 2010, facilitated by the fiscal room for manoeuvre generated by the oil earnings. The long term objective of maintaining the structural deficit, exclusive of hydrocarbon-related revenues, below 4% of the special pension fund's up-to-date valuation was thus not missed by much. Cities are still encouraged to engage in building and infrastructure construction.

Dynamic public spending has offset private domestic demand that has been flat since early this year. Despite low unemployment (amid a reversal of migratory flows) and continued rapid income growth, consumption by households has been lacklustre and their housing investment in decline after rebounding last year, a negative trend attributable to high debt, tighter bank policy on lending, and a halt in the rise of housing prices. Although household demand could gain some momentum in the second half, that will not be the case for corporate investment in the non-oil sector.

After suffering just a limited downturn in the crisis, non-oil exports have initiated a very gradual recovery Their traditional lack of competitiveness will keep them from taking full advantage of the world trade recovery especially with the Norwegian krone likely to appreciate further if the central bank continues to raise its key rates, a policy it was among the first to adopt in autumn 2009.

Corporate solvency will improve

Corporate bankruptcies, which increased sharply in 2009, have been levelling off this year. They remain nonetheless numerous in several sectors: construction, property services, merchandise transport (especially maritime), automotive commerce and repair, and consumer durables distribution. Companies associated directly or indirectly with the hydrocarbon sector are benefiting from the dynamism of investment in this sector, buoyed by the rise of prices.

Top

Taiwan (A2)

RISK ASSESSMENT

Recession in 2009 but gradual recovery in 2010

Taiwan was significantly affected by the crisis. The recession is mainly attributable to the weakening of foreign demand, particularly from the United States, the island's main trading partner considering that it is the ultimate re-export destination for about 70°per°cent of Taiwan's exports to Mainland China. The contribution of net exports and investment to GDP growth was negative in 2009. Conversely, consumption, spurred by the stimulus plan proved relatively resilient to the crisis. On the supply side, the drop in foreign demand affected the machinery and electronics sectors, which represent over 50% of exports. Particularly laptops and LCD monitors - products where Taiwan is the leader - were the first branches to suffer. The services sector (particularly tourism, wholesale commerce, and financial services) also contracted.

In Q1 2010, thanks to the expansionary fiscal and monetary policies adopted and the gradual revival of growth in China and the United States, the Taiwanese economy recovered gradually (13.3% y/y). For the entire year, GDP growth should reach 6.5%. Indeed, exports have rebounded and contributed positively to growth while household consumption has increased in a context of growing confidence and improvement in the labour market. But investment has remained sluggish with public investments planned in the stimulus package not sufficing to offset the lack of dynamism in the private sector. In this context, corporate payment behaviour has improved. However, the contraction of margins associated with the overcapacity in some sectors will bear watching.

Solid financial position

The fiscal deficit widened considerably in 2009 as a result of the fiscal stimulus implemented by the authorities to revive growth: tax reductions, infrastructure investments, income subsidies for the neediest households, and loans to first-time home buyers. Although the deficit should remain large in 2010, the public debt is expected to remain sustainable.

The current account surplus increased in 2009 due to the more rapid contraction of imports in relation to exports, and it will remain large this year as a result of the expected recovery of machinery and electronics exports and tourism.

Meanwhile, 2009 was marked by massive inflows of capital, three-quarters of which, according to the Central Bank, are speculative in nature representing bets on the appreciation of the new Taiwanese dollar. In this context, the Financial Oversight Commission decided to bar non-residents from making sight deposits from November 2009. This control on capital flows is expected to remain in effect in 2010.

And foreign exchange reserves will likely remain very high in 2010, providing the island with protection against a foreign currency liquidity crisis.

Strengthened economic and financial cooperation with Continental China

In the political arena, the January 2008 legislative elections and March 2008 presidential election were marked by the coming into power of the Kuomintang. Under the Ma Ying-Jeou presidency, the tensions with Beijing have tended to ease and economic and financial relations to develop. Several agreements have thus been concluded restoring air transport, maritime, and postal links between the two countries. Progress was also made on financial cooperation as attested by the opening of the Taiwan Stock Exchange to investors from Mainland China, the possibility for banks from either territory to set up subsidiaries on the territory of the other, and the possibility for Continental China to open renminbi accounts in Taiwan. This trend is expected to continue in 2010-2011 with the conclusion of the Economic Cooperation Framework Agreement in June 2010.

Top

United States (A2)

Risk assessment

Return to growth:  1.3% following an excellent 4th quarter 2009

The economy grew by an excellent 1.4% in the 4th quarter of 2009, quarter on quarter. The slowing-down of the reduction of stocks contributed extensively to this improvement, together with company investment, led by spending on computer equipment and software. Household consumption rose by 1.7% and the tax incentives aimed at first-time home buyers, which were extended beyond the initial limit (November 2009), allowed residential investment to continue to progress (by 5%), even though this measure, which had triggered a 19% jump in home purchases in the 3rd quarter, began to run out of steam. The contribution of net exports was positive, exports and imports registering robust increases (up 22% and 15% respectively). However, compared with the 4th quarter 2008, when activity had fallen abruptly, growth improved by only a timid 0.1%. For 2009, negative growth will be limited to 2.4%.

Exports will continue to stimulate activity in 2010

Macroeconomic data for January and February caused some anxiety regarding the ability of domestic demand to take over from public interventionism, the effects of which should ease off in the second half-year of 2010. The poor climatic conditions in certain States of the Union do not alone explain the fall-off in consumer confidence (the confidence index lost 10 points in February). The shock of the severe depreciation of financial and property assets, the spectacular rise of unemployment, the low level of wages, the increase in payment defaults, and the continuing credit crunch still prompt households to exercise prudence and continue to focus on paying down debt, which has dropped from 128% of disposable income in 2008 to 124% in 2009. This context and the deterioration of public sector finances lead them to anticipate possible tax hikes and thus to increase their savings rate — up from 4.1% end 2009 to between 5% and 8% this year -. Building starts continue to fall, due to of the high level of stocks (7.2 months in December 2009) and difficulties encountered by developers in the financing of their projects. This does not augur well for a strong rebound of residential investment in 2010. The situation of the housing market will become even more problematic from April. Indeed, mortgages rates could go up again because the ending of purchases of Fanny Mae and Freddie Mac securities, and the expiry of the tax credit for new owners, which should no longer be in force. Furthermore, the spiral of the seizures of property which feeds stocks continues to depress prices in the housing sector. Commercial property will continue to suffer from the prudence of businesses that have still to cope with a low capacity utilisation level (73%). The restocking process in progress late last year could come to an end as soon as the second quarter and remain below potential for the rest of the year. In this context industrial companies will make sure that demand is really coming back before making new spending commitments. Today, the contraction of credit (down 22% from the peak of October 2008) does not facilitate the financing by companies of heavy investments.

On the other hand, exports should make a positive contribution to growth. The recovery of activity in Mexico (11% of exports) and the dynamic Asian economies (20%) should help to sustain a satisfactory level of development. Nonetheless, this evolution will remain below the pre-crisis trend as sales abroad are recorded in industrialised countries where growth will be weak. But outside dollar areas, the price-competitiveness of American products will be enhanced by the currently favourable dollar exchange rates. The $700 billion Troubled Asset Relief Program (TARP) has had a considerable effect on public finances: the fiscal deficit will exceed 10% of GDP and the debt will swell (98% of GDP).

Credit to SMEs still scarce

Large companies have limited the deceleration of the rate of profit — 9.5% of GDP compared to 11% in 2007 — and have significantly improved their cash flow-to-capital expenditures ratio (from 79.5% to 116.6%). Smaller companies are more vulnerable, as evidenced by the measures the Obama Administration has taken in order to prompt regional banks to bolster the activity of this type of businesses. Bankruptcies have increased in 2009, up 55%. The pace has nonetheless eased in the last three months (up 10%).

Top

United Kingdom (A3)

Risk assessment

Despite a late recovery, a positive watch was placed on the A3 rating in June

Developing in the 2009 last quarter after six quarters of recession the recovery was thus slow to develop. Domestic demand particularly suffered from the difficulties in the financial and property sectors in a context of high household and corporate debt. The accommodating character of economic policy and the government's massive bail-out of the financial sector, which went as far as nationalisations, only sufficed to slow the fall.

Nonetheless, a positive watch has been placed on the United Kingdom A3 rating in June, in line with, on one hand, the corporate payment behaviour improvement and the decline in bankruptcies and, on the other hand, the fact that the public debt posts long maturities and a low foreign ownership.

A timid export-based recovery

The recovery is very slim indeed resting at this juncture essentially on a destocking slowdown and exports, while domestic demand is sluggish with households and companies still far from having sufficiently reduced their debt and cleaned up their balance sheets.

Despite the sharp fall of the pound sterling - down 30% and 20% respectively against the dollar and the euro since the latest peak - exports have managed just a moderate take-off with exporters apparently preferring to shore up profitability rather than attempting to increase market share. Sales of services (40% of exports including 30% for financial services alone) have been struggling. while those of manufactured goods composed more than 50% of transport equipment, electrical goods, machines and metallurgical products, continue to suffer from the economic downturn of the European continent and the erosion of the industrial base. In contrast, the pharmaceutical, bio-technological and food processing sectors continue to perform well.

Household consumption - already squeezed by the VAT increase implemented early in the year, the raising of income taxes, the upsurge of inflation, and a still sluggish job market - will come under even greater pressure: The new coalition government formed by the conservative and liberal-democratic parties intensified cost-savings measures in the framework of the emergency budget scheduled released last June. Disposable income and employment could be in for some more suffering. In this context a new decline in residential property prices, still historically high, could be accompanied by a new increase in savings. Debt is still very high because low interest rates, although reducing the cost of debt servicing, have meant slower debt reduction.

With economic activity still low corporate investment has stagnated and will be unlikely to initiate a catch-up process until late in the year. Non-residential construction will nonetheless benefit from the continuation of projects in preparation for the Olympic Games and spending on housing will likely grow slightly albeit from a low level.

The net effect of the budgetary treatment the new coalition in power will accord to the public sector deficit - immediate increase in capital gains taxes for higher rate tax payers, new rise in VAT in 2011, reductions in social benefits, two-year freeze on civil service payrolls but also income tax exemptions for one million low-income households - could choke off the recovery especially with interest rates unable to come down any further. Although the recovery in manufacturing is expected to continue thanks to exports and stock replenishment, services and construction have already begun to run out of steam. The sentiment of households and companies - their expectations on income and business - will be crucial.

Payment behaviour beginning to improve

The corporate payment incident index has started to improve since last summer. To improve their performance, export companies refrained in all likelihood from passing on the entire pound sterling depreciation in their sales prices. In Scotland, where the original deterioration was relatively limited, the improvement process seems accordingly to be faster paced. Companies continue meanwhile to adjust their production capacity to the reduced level of activity. It will take time, however, for payment behaviour to return to pre-crisis levels.

Top

Brazil (A4)

Risk assessment

Brisk growth rebound and inflationary pressures

After a slight contraction in 2009, the Brazilian economy is resuming relatively strong growth this year amid the run-up to the presidential election in October and the recovery expected in the global economy. GDP growth is driven by increased public spending, strong household consumption fuelled by the rise of wages, as well as by a strong expansion of corporate investment.

Due to the strong recovery in activity, coupled with inflationary pressures and overheating fears, the Central Bank is gradually tightening its monetary policy during the course of 2010, after cutting its key rate (Selic interest rate) to a historical low in 2009.

Putting the deterioration of public accounts into perspective

As a result of the international crisis, which required implementation of counter-cyclical measures, the public finances situation was weakened with public spending remaining too rigid, the structure of domestic debt deteriorating, and already high public debt growing further and consequently impeding investment in infrastructure. Sovereign risk will nonetheless remain manageable in view of the relatively moderate cost of the economic stimulus programme and the net creditor external position maintained by the public sector since 2008.

Deterioration of external accounts due to domestic demand expansion

 Foreign trade has been following the trend in world trade and will thus be likely to benefit from the upturn expected this year. In 2009, however, for the first time since 1978, exports of staple commodities exceeded those of manufactured products, a trend likely to continue with Brazil's export performance driven by sales to China, consisting mainly of commodities. Furthermore, domestic demand expansion is sustaining an upsurge in imports, which will significantly drive down the trade surplus. Therefore, with the services deficit likely to grow, the current account deficit will widen, but foreign direct investment is expected to cover almost half of large external financing needs.

Foreign debt amount will grow substantially in 2010, with an increase in the proportion of private debt, and the burden of serving that debt remaining high in relation to exports. But Brazil's external vulnerability will likely remain manageable. As a result of the relatively bright outlook overall, the real is expected to remain at fair levels with foreign exchange reserves increasing to record levels. Although the banking sector is solid, the sharp rise in loans granted by state-run banks in the framework of the stimulus programme constitutes a potential risk.

Race for the presidential election next October,  but a lagging pace on reforms

In the presidential race, the fight should be tight between the centrist opposition candidate José Serra (PSDB) and Dilma Rousseff, designated by President Lula (who is barred by the constitution from seeking a third term) to represent the government party PT. Whatever the outcome of the election, however, economic policy is expected to remain essentially unchanged. But the political system makes government-by-coalition inevitable, which tends to complicate adoption of structural reforms in a country still marked by severe inequality.

Improvement in payment behaviour

In this generally favourable context, all sectors have performed well: the industry continues to lead the expansion, agriculture rebounds after poor results in 2009 (due to drought) and services show significant improvement. Moreover, large firms have been renewing their credit lines on favourable terms and credit is readily available for small and medium sized enterprises. For companies penalized by the the exchange rate trend, they focus on the vast domestic market at the expense of exports. The improvement of corporate payment behaviour should therefore continue.

Top

Peru (B)

Risk assessment

Very strong return to growth

Growth will rebound quite strongly in 2010, in line with the expansion in Asia and Brazil and with the recovery in the U.S., after a deceleration in 2009 due to the international crisis. Economic activity will also be driven by the rebound in household consumption, linked to the reduction of unemployment, by business investment, mainly in mining, as well as by public spending in social programmes, public works and water sanitation.

Robust public finances

Measures to boost the economy via a counter-cyclical fiscal policy, led to a deficit in 2009, which should, however, decline in 2010, despite new fiscal stimulus measures ahead of the regional elections in October 2010 and the presidential and legislative elections in April 2011. The government remains committed to a programme of reforms in relation with the IMF and the public debt ratio represents only a quarter of GDP, although the part denominated in foreign currencies remains substantial. In general, public finances are healthy; Peru has accumulated a fiscal stabilisation fund of $3 billion.

Small current account deficit but external position satisfactory

After the dip in 2009, exports should benefit in 2010 from stronger demand from Asia, especially sales of ores and also fish to China, now the country's second trading partner behind the US. After the signing of a free trade agreement with the US in 2007, a new commercial agreement with China has come into force at the beginning of 2010. Other agreements were concluded with the EU, Canada and Singapore, and negotiations are under way with Mexico, Japan and South Korea. The recovery will nevertheless cause imports to rise even faster, especially of heavy equipment. A slow increase in remittances from expatriates and in tourist revenues, combined with a rise  in transport costs and in profits repatriation by foreign-owned companies, should spell a slight decline of the current account deficit, entirely covered, however, by foreign direct investment flows.

Moreover, repayments ahead of schedule of debt due to the "Paris Club" public creditors have contributed to reducing external debt and related service costs, so that debt ratios equal the best of the region.  Also, a high level of foreign exchange reserves reduces the risk of a liquidity crunch and should contribute to the stability of the nuevo sol in 2010. Besides, the banking system remains sound, despite a significant dollarisation.

Socio-political tensions persist

President Alan Garcia can not constitutionally stand in April 2011 and could seek to promote a moderate candidate. In the meantime, the President still faces serious socio-political problems, as popular discontent continues to be fuelled by problems related to implementing public programmes, by corruption and by opposition from the indigenous groups to government investment projects in regions with mining and energy resources.

Satisfactory payments experience

The mining and gas sector is the most successful one along with fishing, whereas the textile and garment industry is suffering from competition from Asia. Accordingly, Coface's experience of payments from the private sector should remain satisfactory, despite the poor quality of the country's institutions and the business environment.

Top

Turkey (B)

Risk assessment

A sustained recovery after a severe recession

There was a pronounced recession in the first half of 2009, activity rebounding, however, in the final quarter, limiting the decline in GDP over the year as a whole. The unprecedented fall in domestic interest rates, the replenishment of stocks, and the strengthening of capital flows and foreign demand are reflected by a strong recovery in 2010. Growth has been accompanied by rising inflation and a widening current account deficit but is likely to gradually slow during the year reflecting the end of base effects, a limited rise in household income, excess capacity and the fallout of the European crisis. Economic activity currently rests on sound foundations (entrepreneurial dynamism, improvement in the business climate, specialisation quality, banking sector solidity) which augur well, in the medium and long term, for a relatively sustained growth.

Payment incidents returned to satisfactory levels

Corporate payment behaviour deteriorated sharply in autumn 2008. The deterioration was caused mainly by the economic downturn, the fall in exports, and the depreciation of the exchange rate, which affected automotives, construction and related activities (plastics, cement, electrical equipment), retail, paper, chemicals, and textiles-clothing. The financial health of Turkish companies has nonetheless gradually strengthened during the past year with the payment index improving in consequence and returning to more satisfactory levels from summer 2009.

Good capacity to cope with the international financial crisis

The lack of an agreement with the IMF notwithstanding, the financial tensions that had intensified in autumn 2008 began to ease in the second quarter last year. Concerns over the extent of foreign financing needs eased considerably as a result of the sharp contraction in the current account deficit, the repatriation of assets held abroad by residents, and the resumption of foreign capital inflows. Financial stabilisation, the signs of recovery and the desire to conduct an independent budgetary policy explain the decision of the authorities not to negotiate a new stand-by agreement with the IMF. Strong pressures on the exchange rate, that would primarily affect companies with heavy foreign currency debt, could, however, return in the event of budgetary difficulties (the government, however, has commited itself to strengthening fiscal discipline via the implementation of a fiscal rule) or political unrest. Meanwhile, a banking sector that benefited from a profound clean-up since the national financial crisis in 2001 has held up well in the global crisis. It is in a position to finance both the credit recovery and the purchase of treasury bills thus easing the pressure on public finances, which deteriorated as a result of the economic downturn and the loosening of fiscal policy.

A tense political climate

The victory in the municipal elections won by the ruling party (AKP) in March 2009, even if the results were mixed, tends to ensure political continuity. However, tensions have increased between the government and Kemalist forces, which control the courts and the army, and there are uncertainties as to the continuation of the present economic policy after the legislative elections planned, in principle, for July 2011. The constitution debate launched end of May 2010 by the AKP opened a lengthy electoral campaign.

Top

Uruguay (B)

Risk assessment

A growth rebound with inflation still high

GDP growth is expected to gain strength in 2010, after remaining quite robust in 2009, owing notably to the construction of a new wood pulp factory, amid the global economic crisis. The economy will be underpinned by household consumption, thanks to wage increases, and private investment, notably foreign. The economy will also benefit from improved productivity and a more buoyant international environment.

Despite a less relaxed monetary policy, inflation will persist (around 7%) due to the pressure exerted by domestic demand, the rise of world raw material prices and the likely slight depreciation of the exchange rate.

Return to prudent fiscal policy

After the fiscal stimulus measures adopted in 2009, justified by the need to cushion the effects of the crisis, the government led by the new president, Jose Mujica, will have to return to prudent fiscal policy intended to reduce the public debt burden (60% of GDP, mainly in US dollar). A mandatory balanced-budget rule could thus be adopted in the future. Meanwhile, the economic recovery is expected to make it easier to keep electoral promises as regards social spending (education, health) and support for small and medium sized enterprises, via tax incentives and micro credit.

Slight deterioration of external accounts

After the decline in foreign demand that marked 2009, exacerbated by the drought that affected agriculture and livestock breeding, exports will benefit from the rise in world prices for farm products and the growing needs of the main trading partners - Brazil, United States, and Argentina - and from the growth of cellulose and wood pulp sales. But imports will surge even more, due mainly to the rise of oil prices with the country remaining dependent on hydrocarbon purchases (a quarter of total imports). The services balance will likely benefit from increased tourism, but the income balance will be affected by dividend repatriation by foreign companies. These trends will only partially offset the deterioration of the trade balance and, overall, a current account deficit is expected.

Foreign direct investment inflows should, however, cover a large proportion of that deficit, notably with a new project of pulp and paper mill by a consortium of Swedish and Chilean firms, and allow foreign exchange reserves to remain at a very comfortable level. Moreover, the banking system is relatively strong, with adequate capitalization and liquidity, but its continued de dollarization is necessary.

Political continuity characterised by moderation

The new president, José Mujica, in office since March 2010, belongs to the same centre-left party, the Frente Amplio, as the outgoing president, Tabare Vazquez. Backed by a small parliamentary majority resulting from the elections held late 2009 and faced with the task of reconciling the pragmatic and radical wings of the government coalition, Jose Mujica is expected to follow essentially the same moderate economic and social policy as his predecessor.

Top

Russian Federation (C)

Risk assessment

A moderate recovery

After recording, in 2009, the severest recession it has known since the 1998 crisis, activity in Russia revived with GDP growth of 0.5% year-on-year in February 2010, thanks to the upturn in the oil prices, to base effects and capital inflows after several months of lost confidence. In 2010, the Russian economy should record positive but moderate growth. The solid gains made recently by net exports, however, hide the persistent weakness of household consumption in spite of an expected upturn in the course of the second half of 2010. The Moscow stock market continues to recover after the sharp fall recorded in 2008 and at the beginning of 2009; securities have recovered some of their value, bond spreads have gone back to the pre-crisis levels and the rouble is gradually strengthening thanks to the recovery of oil prices and the return of direct foreign investment. Some recent signs of improvement on the job market augur well for a positive change in household expenditure in the coming quarters, but the unemployment rate remains unchanged and consumer credit rare. Corporates, which have suffered from the consequences of the credit crunch, are nevertheless posting improved access to credit and a better refinancing rate. The persistence of certain structural factors — lack of an efficient banking system, lag in technology, insufficient investment in the oil sector, and problems associated with the business climate — also affects the recovery.

Considerable room for manoeuvre but persistent difficulties nonetheless

Faced with a worse than expected economic situation late 2008, the government adopted counter-cyclical fiscal policy entailing costly emergency measures intended to avert the collapse of the financial system and the private sector. Hardly indebted, the government undeniably has a large security cushion to fall back on via its Reserve Fund. It has also resumed the programme of partial privatisation of state-run companies in 2010-2011. The stabilisation of the rouble in 2010 and the decline of risk aversion make it possible to build up foreign exchange reserves. But the fall in oil revenues, the rescue plan in response to the problem of excessive private external debt and the recession had less success in 2009 in reducing the budgetary deficit than was expected. It is likely to remain high in 2010. The government will continue its stimulus policy directed to the automobile, agricultural and military industrial sectors, while reducing public investment spending. It is thus likely that some Russian companies and small banks not protected by the government will suffer new financial difficulties in 2010. Corporate payment behaviour, which deteriorated sharply in the crisis, will remain poor.

Meanwhile, the banking sector remains very risky. Despite the recapitalisation of many banks, the sharp deterioration in the quality of loan portfolios has affected all banks. Large state-run banks, strengthened by government backing, seem to be holding up better thanks to consequential provisions for non-performing loans and play a preponderate role in financing the economy. Many small private banks meanwhile have been suffering from the deterioration of their solvency and struggling to refinance their operations. The Russian banking sector is now the object of a greater concentration of banking assets around the four big public banks. Credit activity is expected to take off more strongly once the banks have cleaned up their loan portfolios.

Preponderance of the government

External events (war in Georgia, financial crisis) have served to consolidate the predominant domestic roles of the government and its Prime Minister, Vladimir Putin, particularly in the economy. But considerable social tensions have developed. And Russia still suffers from a business environment that is not very reassuring.

Top

Bolivia (D)

Risk assessment

Accelerating GDP growth

Economic growth is expected to accelerate in 2010, after holding up well in the global economic slump in 2009, thanks largely to public spending and a robust informal economy. GDP growth is driven by household consumption, underpinned by welfare programmes, and an increase, albeit modest, of workers remittances. The economy is benefitting also from continuation of expansionary fiscal policy, financed by hydrocarbon revenues. Except from a buoyant construction sector, private investment will recover only gradually, as it remains affected by state interventionism and an unsatisfactory business environment.

Inflation, meanwhile, is not expected to exceed 2%, owing to low food products prices and a strong exchange rate.

Continuing state interventionism

The development model providing for increased state intervention in the economy is stipulated in the new constitution. After the nationalisation of the gas sector end 2006 and the main telecommunications operator in May 2008, a mining company, a subsidiary of a Swiss firm Glencore, as well as four electricity companies, including Corani controlled by France's GDF Suez, have been nationalised in May 2010. The Morales administration also wishes to create state-run companies in the cement, paper, dairy, and pharmaceuticals sectors. It also wants to see development in the iron and lithium areas, to be in a position to export additional enhanced products. Applying that policy is nonetheless remaining complicated by the lack of local skilled labour and, without help from abroad, the government is likely to meet with difficulties in managing the state-owned enterprises.

A still significant current account surplus

The recovery of the global economy will spur an upturn in exports, particularly natural gas to Brazil (the main market for this product) and ores to Asia. This upturn is limited, however, by the loss of preferential access to the United States market under the Andean Trade Promotion and Drug Eradication Act. Suspended end 2008 for "non-cooperation in combating narcotics trafficking", the preferential access was then cancelled in June 2009 by the Obama administration. Imports will rebound due mainly to the rise of world energy prices. The recovery of emigrant remittances (mainly from Spain) will be gradual, however, with services and invisibles remaining slightly in deficit. Finally, there will be a still significant current account surplus.

Although a part of external debt has been cancelled and foreign exchange reserves are expected to remain at very high levels, the poorest South American country's relations with international creditors and international financial institutions will continue to be strained, due to the radicalism of Bolivian authorities.

President Morales' position consolidated

The new Constitution ratified in February 2009 - providing in particular for a second presidential term and autonomy for both indigenous Bolivians and the rich Eastern regions still under opposition leadership - paved the way for President Evo Morales' easy re-election in December 2009. And his position has been consolidated by the victory of his party, the Movimiento al Socialismo, in Congress, facilitated by the divisions in the ranks of the conservative opposition. Reforms intended to increase welfare assistance and strengthen the government's role in the economy are thus expected to go forward. President Morales' second term in office could nonetheless be tempered by some degree of pragmatism.

Top

Ukraine (D)

Risk assessment

Rebound after a severe recession

Financial aid from the IMF saved Ukraine from financial disaster but did not avoid a harsh contraction of the Ukrainian economy in 2009. The country emerged from recession in the first quarter of 2010 thanks to the recovery of foreign demand and some very favourable base effects. The terms of trade also improved. The strength of the recovery is however at risk since it is heavily reliant on external factors (demand from Russia and Europe, steel and, gas prices, for example). The euro depreciation coupled with higher inflation in Ukraine caused the real hryvnia exchange rate to appreciate since the beginning of the year and erased part of the competitiveness gains obtained by the devaluation of the Ukrainian currency end 2008. Growth could slow down in the second half of 2010, as favourable base effects fade.

Heavy dependence on multilateral assistance

The IMF restored its lending to Ukraine, which had been suspended in the fall of 2009, by approving a new USD 15,15 billion stand-by arrangement in July. This loan will enable Ukraine to repay Russian state-owned bank VTB the USD 2 billion short-term facility it granted in June. It will then be used to finance public deficit in 2010 and to rebuild National Bank's foreign exchange reserves from 2011. This new agreement follows the revision of the state budget performed at the beginning of July, based on more realistic assumptions than those used in the original version passed in April. The governement agreed to carry out a 50% increase on the domestic price of gas, which coupled with the 30% decline obtained on gas imports from Russia, will reduce the deficit of state company Naftogas to 1% of GDP in 2010 and then to 0% in 2011. Funding from the European Union and the World Bank, which were linked to IMF agreement, should be released soon. Short-term prospects are significantly improved and Ukrainian corporates will gradually regain access to international capital markets.

Political stabilization tilted eastward

The political situation has appreciably improved since the election of Viktor Yanukovych to the presidency last February. The new president succeeded in quickly establishing a parliamentary coalition, and in giving the country its first fully-fledged government in over a year. Close to the Kremlin, the new executive has been realigning Ukrainian diplomacy eastward. The improved relations with Russia, very tense under the previous government, will likely benefit a Ukrainian economy heavily dependent on its neighbour. However, the rise in unemployment, wage arrears and the political situation exacerbate social tensions. Moreover, poor governance and endemic corruption place the country at a high level of risk.

Top

country(ies) on negative watch list

Luxembourg (A1)

Risk assessment

After being hard hit on account of its dependence on the financial markets, the economy has recovered

The economy suffered badly from the crisis on account of its specialisation in financial services focused purely on international business (40% of GDP), and, to a lesser extent, in a few industries such as steel, metallurgy and glass whose outlets are concentrated on the European automotive and construction markets.

But after five quarters in decline the economy surged in the 2009 third quarter year before slumping this year. The upturn was driven mainly by exports with domestic demand remaining sluggish.

Exports have rebounded with financial markets and world trade firm up. Stock market consolidation and the return of foreign investor confidence have had a positive impact on capital inflows and accordingly on commissions charged in connection with mutual fund and private banking management. The return to better times for the car industry and the restoration of demand for steel, both in terms of price and volume, have induced a pick up in industrial exports.

Despite the recovery of industrial production to pre-crisis levels, a revival of corporate investment will nonetheless be unlikely before year end. The household spending trend has, however, become positive again with wages about to benefit from an automatic adjustment for inflation. Housing construction, which suffered little from the crisis, has maintained steady growth. Unemployment - especially with layoffs mainly affecting cross-border workers - has been limited, even after integration of the impact of jobs lost in connection with the transformation of the working-hours reduction and partial unemployment.

The fiscal adjustment plan, announced in May, will have only a limited impact this year. The public financial deficit will widen with public investment spending maintained at high levels and corporate income tax reflecting the time-lagged negative impact of the crisis. That negative trend notwithstanding, public sector debt will represent just 19% of GDP and the deficit 3%.

Company solvency deterioration was limited and contained

Company payment behaviour has shown limited worsening centred on the transition period between 2008 and 2009. The fact that the economy enjoyed four years of strong growth between 2004 and 2007 is a factor. An improvement has been underway since early this year. Nevertheless, commercial information remains difficult to obtain, which explains Coface's "business environment" rating.

Top

Greece (A3)

Risk assessment

Greece is facing a highly difficult financial situation

The European Commission accepted the Programme of Stability and Growth established by the Greek government intended to bring the public deficit down to 2.8% of GDP and public debt to 117.4% of GDP in 2012. The Commission however tied this agreement to certain recommendations. Greece calculates the amount of savings which it intends to realise as €16 billion, namely approximately 6.5 % of its GDP.  On 25 March the members of the euro zone specified the conditions of their support for Greece (coordinated bilateral loans and a loan from the IMF). On 23 April, the Greek government has formally asked for the activation of EU-IMF financial rescue package.

Recession will be deep

We forecast a contraction of growth in 2010 (-4%)

The austerity programme implemented by the Greek government carries risks:
- An extended recession with a pronounced credit crunch to households and businesses. The commitments of the Greek government for fiscal policy will deeply impact growth, as the deficit should go from 14% in 2009 to 8.7% in 2010 and 3% in 2012. Economic activity is crucial to consolidation of public sector finance (in a period of growth, the effect on the public sector balance is greater than in the other euro zone economies). Meanwhile, the measure intended to improve tax collection will only produce results very gradually with the grey economy currently representing about 30% of GDP and tax evasion remaining extensive.
Moreover, Greek banks hold a high proportion of Greek bonds. But with the risk premium on the bonds increasing, their value on balance sheets has declined. Furthermore, the cost to Greek Banks of borrowing in financial markets results directly from the cost paid by Greece. The banks could thus experience a new shock and be led to restrict credit to companies and businesses (75 per cent GDP) even further. In February, credit to businesses has posted a 2 per cent annual increase, whereas it was growing by 25% last autumn.

- Social risk will be associated with implementation of the new programme. Drastic measures, like a wage freeze or cancellation of personal and corporate income tax exemptions, will doubtless elicit negative reactions from Greek households with unemployment expected to increase to as much as 10% of the working population. Greece is already contending with labour strikes even though the approved programme is not yet in effect. The social unrest could grow moreover and destabilise the country.

The Greek economy strengths will not fully be operative

- world leading shipowner, a sector bound to benefit from the recovery of world trade; but for the time being overcapacities are important and shipping companies’ margins are impacted
- tourism sector is depending on European households’ expenditures (German, Italian and British mainly, the latest having to cope with the pound depreciation) and in competition with the Turkish offer.
- Exports of goods mainly to South East Europe will continue being undermined by the low level of demand in this area.

Top

Portugal (A3)

Risk assessment

The success of the austerity plan will necessarily depend on the growth rate

All growth engines stalled in 2009 except for public spending. The budget deficit deepened significantly last year and public debt grew substantially (85% of GDP), in proportions less marked, however, than in case of Greece. Under pressure from the financial markets (Fitch Rating downgraded Portugal’s long-term debt rating from AA to AA- on 24 March) and the European Union, the Socrates government obtained a favourable vote on a motion of support for its Austerity Plan, in spite of no absolute majority in Parliament and thanks to the abstention of the Social Democrat party. The objective of the public finance reform measures is, via budget cuts and the likely privatisation of a number of public enterprises, to bring the public deficit back down to 2.8% of GDP in 2013. The success of this plan depends heavily on the level of economic activity (officially forecast to grow by 0.7% in 2010), but the structural weaknesses of the economy point to very weak growth in the years to come.

Recovery will not show up in 2010

The economy slightly contracted in the 4th quarter 2009 (down 0.2% quarter on quarter), after a better performance in the third quarter (0.7 %). Private demand depressed growth potential and several factors will continue to undermine households in 2010: the persistence of high debt (around 120% of disposable income), the rise of unemployment with a high proportion of the working population active remaining under-skilled, erosion of purchasing power with wages in decline and higher taxes, and an ongoing credit crunch.

In this context, households will dip into savings (9.6% of disposable income in 2009) to cover current spending and repay debt. And residential investment will remain stalled. Intent on restoring their profitability and not taking on additional debt, companies will continue to postpone investments this year. Although the drop in manufacturing production, the main support of exports along with tourism, will not be as steep this year, demand from the main client countries — Spain (30% of sales abroad), Germany, France, United Kingdom — will remain soft, which will keep exports from making a fully-fledged recovery. Domestic demand will slow imports with the current account deficit tending to stabilise in consequence albeit at a still nettlesome level.

Large investment projects will underpin the public works sector

Bankruptcies continued to grow at a high rate in 2009 (up 36% in nine months). The weakest sectors like construction, wholesaling, and retail will suffer again this year from household spending trade-offs. The quest for the lowest prices will prompt European buyers to give preference to subcontractors in Asian countries in purchasing clothing articles and leather supplies. Automotive partsmakers and mechanicals will remain under pressure. Tourism will continue to suffer from the relatively weak consumption recovery in the United Kingdom and Spain, the countries from which most visitors come. Public works sectors should be hampered by the cancellation of  private investment projects and public-private partnerships which were scheduled to start in 2010 (new Lisbon airport, dams, and railway infrastructure, for example). Energy and food product exports will outperform again this year.

Top

South Africa (A3)

Risk assessment

Weak economic recovery, despite the World Cup, after the first recession since 1992

Exiting the recession during the third quarter 2009, the South African economy should show only a modest recovery, less than 3%, in 2010 (compared to an average of 5 % over the period 2003-2008). Household consumption (64% of GDP) should remain depressed because of the high unemployment rate which rose from 23 % to 24 % during the recession. The increase in electricity prices (25%) should also weigh on disposable income. In addition, the Central Bank, which decreased its intervention rate in March, 2010 to 6.5% (after a reduction from 12% to 7% between December, 2008 and June, 2009), will have not enough margin of manoeuvre to envisage a new reduction because of continuing inflationary pressures. In this context, companies will reconstitute only very gradually their stocks, especially as production capacities remain widely under-utilised. Furthermore, sectors depending significantly on exports (automotive, textiles) will suffer from an appreciation of the rand. Also, despite the increases in exports of platinum and tourist receipts, net foreign trade will contribute negatively to growth, because of the rebound of imports. The crisis also emphasised the structural weaknesses of the country. The chronic shortage of energy, due to delays in investment, is a brake on faster recovery in production levels, especially in the mining sector. Accordingly, with a 5% increase, public investment in transport and energy infrastructures, in particular within the framework of the preparation for the 2010 World cup, along with welfare expenditures will provide the main driving force for growth. In this context, Coface monitoring records are expected to reflect a slight improvement in payment behaviour. Inflation will likely continue to ease in 2010 but remain above the 3%-6% range targeted due to accommodating monetary policy and increases in electricity prices.   

Fiscal room for manoeuvre - a liquidity crisis avoided

Continuation of the government’s counter-cyclical policy in 2010/2011 will result in a 4.7% fiscal deficit, nonetheless in decline. It will be partly covered by multilateral institutions, especially by a five-year $300 million loan granted by the African Development Bank. The low level of public sector and foreign debt will moreover facilitate financing the rest of the deficit in domestic and international markets. South Africa has thus issued a 10-year $1.5 billion Eurobond that has been well subscribed. Although the current account deficit will likely remain high, affected by imports of capital goods and semi-durables and by profit repatriation by foreign investors, it will continue to be largely covered by inherently volatile portfolio investment inflows, which depends on the level of world liquidity and the global trend of investor risk aversion. After the period of very high volatility late 2008, early 2009, the Rand is expected to continue to gain strength in 2010, thanks to the export rebound and the continuation of carry trade transactions.

With social risk remaining significant, Jacob Zuma's election has inspired great hope

The election to South Africa’s highest office, in April 2009, of ANC president Jacob Zuma backed by the Communist Party and the unions, attests to the high expectations of the South African people for a better distribution of the fruits of growth. Despite measures of positive discrimination and promotion of historically underprivileged population segments (Black Economic Empowerment), which have fostered the emergence of a black middle class — the so-called Blacks Diamonds, the South African society remains among the world’s most inegalitarian. The new leader’s capacity to reconcile policy apt to reassure markets with policy on social redistribution in favour of the historically underprivileged (agrarian reform, positive discrimination) has raised some doubts. An already tense social situation, evidenced by the xenophobic violence that irrupted in June 2008 in the townships of Johannesburg and Cape Town, could deteriorate further as a result of the elimination of over 400,000 jobs in sectors directly affected by the global recession. And the success achieved in staging the World Cup in June this year will be a decisive test of Jacob Zuma’s capacity to federate the rainbow nation.

Top

Spain (A3)

Risk assessment

The recession is receding

The recession that followed a decade of strong growth - and imbalances - has given way to stability this year. Domestic demand is undermined by still massive household and corporate debt with the economy remaining weighed down by a slumping residential property sector that continues to play a major role in the economy. Foreign trade, however, has been trending up.

Domestic demand continuing to hold back the economy

Consumption has remained sluggish. Under pressure from the markets, fiscal policy has been tightened with the withdrawal of the temporary measures contained in the 2008-2009 stimulus plans compounded by a VAT increase, a 5% reduction in civil service wages, and cancellation of the childbirth allowance. Other cost-savings measures will be effective from 2011. With their debt exploded and housing wealth receding, households have considerably increased their savings rate - from 10% in 2007 to 19% in 2009. And savings banks, their traditional loan providers, have become very cautious in view of their own deteriorated position which compelled them to regroup. With the numerous job losses in construction, in the related industries and distribution businesses as well as in real estate services, unemployment has risen to a record level (over 20% of the working population). But the decline in consumption has not been as great as might be expected in view of the unemployment particularly affecting certain (often overlapping) labour categories: youth, fixed-term, and immigrants. And family solidarity and the underground economy come into play.

Housing investment is declining further. New homes up for sale - with construction completed or not - are very numerous. The market is however not flooded, yet, with banks, owners of a high proportion of the stock, preferring to delay putting homes on the market until conditions improve. Investment by companies, themselves very indebted, remains weak. Despite European financing public sector investment, particularly in infrastructures, is not expected to grow further due to the spending cutbacks, not only by the federal government but also by autonomous regions and town councils.

Foreign trade alone continues to make a positive contribution thanks to a marked reduction in the trade deficit. Exports have taken off again with imports remaining at low levels. The weakening of the euro could result in higher tourist revenues.

Even a slight resumption of growth will not come before 2011, however, until the excesses associated with property have faded. Until then, the markets will remain circumspect as to the capacity of the authorities to effectively reduce the deficit.

Corporate solvency remains problematic

Corporate payment behaviour has deteriorated sharply since 2008. Whereas the number of payment defaults recorded by Coface seems to have peaked in summer 2009, insolvencies registered by the Instituto Nacional de Estadistica are still increasing, however. The construction and property services sector has been responsible for 33% with intermediate goods production and wholesaling also affected (about 15% each). Automotives, textiles, as well as the production and distribution of home furnishings have also been vulnerable. The regions affected most include Catalonia, Valencia, Madrid, and Andalusia where overheating was concentrated.

A slow improvement process is expected to engage before the end of the year. The elimination of jobs is expected to "mechanically" cause unit labour costs to fall and productivity to rise, enabling Spanish companies to gain in profitability.

Top

Thailand (A3)

Risk assessment

Persistent political instability

Since the coup that toppled Thaksin Shinawatra in September 2006, the political situation has been shaky. The pro Thaksin party (the Pue Thai) supported mostly by the rural population (two-thirds of the total population) is opposed by the Democratic Party backed by the urban population and the army. Late 2008, after the ousting of two pro-Thaksin governments, the leader of the Democratic Party, Abhisit Vejjajiva, was elected prime minister. But the political tensions and demonstrations persisted in 2009 and in early 2010. Tensions and demonstrations are expected to continue in H2 2010 due to the intensity of the cleavage, which could increase in the run-up to the succession of King Rama IX, who is past 80 and in poor health. A respected moral authority, the king personifies stability and continuity in the nation's political life, and the question of his succession could exacerbate the uncertainty clouding Thailand's political future.

Recession in 2009 but a rebound in 2010

The Thai economy fell into recession in 2009 as a result of the political turmoil and the crisis. Exports decelerated due to the decline in demand from the main trading partners (United States, Japan, European Union and Australia). And private consumption remained sluggish affected by the rise of unemployment and the loss of confidence. Moreover, investment lacked dynamism amid the credit crunch and the uncertainty over the political scenario. On the supply side, manufacturing production contracted with the electronics, automotive, and construction sectors particularly affected. And performance slumped in services, particularly tourism, transport, communications, wholesale and retail sales. In agriculture (rice, corn, rubber) and the food industry, production suffered from the drop in prices from their levels in 2008.

Thanks to expansionary monetary and fiscal policies, however, growth rebounded in Q1 2010 (12% y/y). This trend should be maintained all over 2010. Investment will be buoyed by construction projects - roads, water distribution system - and aid to smaller companies provided under the stimulus plan. Private consumption will benefit from increased social spending (education, health), the growth of rural incomes (largely attributable to the rise of raw material prices) and subsidies to needy households. And exports - automotive, electronics, farm products, and tourism - will likely trend up again. However, tourism especially in Bangkok may still suffered from the political uncertainties.

A solid financial position

The fiscal deficit grew in 2009 as a result of the implementation of a vast $45-billion three-year stimulus plan representing 6% of GDP each year. Although the deficit will likely remain high this year, public sector debt is nonetheless expected to remain at sustainable levels.

Although the current account surplus increased considerably in 2009 with imports declining more rapidly than exports, it is expected to shrink this year due to the recovery of imports, fuelled by the rebound of domestic demand. Despite the recurrent political instability, net foreign direct investment will remain positive as will net portfolio investment, which stabilised in 2009 after becoming negative in 2008 in the wake of the Lehman Brothers bankruptcy. And thanks to high foreign exchange reserves (expected to cover eight months of imports this year), Thailand will have the means to defend the baht, even in case of sudden capital flight.

The weaknesses of the banking sector have moreover been easing as attested by the reduction in non-performing loans, improvement in supervision and adoption of international standards for risk management and transparency.

Top

Croatia (A4)

Risk assessment

Recovery impeded by high debt

After several years of strong growth driven by large capital inflows and a credit boom, the economy suffered in 2009 from the international financial crisis and the contraction of world trade. The resulting drop in domestic demand and exports triggered a severe recession. With the easing of the external financial constraint and the improvement in economic conditions in the European Union, a slight upturn is, however, expected in 2010. The upturn is nonetheless shaping up to be very limited as a result of the high level of private sector debt. The revival of the credit market will likely develop very gradually even if an adequately capitalised banking sector held up relatively well in the crisis. The rise of unemployment will weigh on private consumption. And public spending is not expected to increase much in view of the low level of tax revenues and the government's large refinancing needs. Since September 2008, the deteriorating economic conditions have been associated with a sharp increase in late payments reflected in Coface monitoring records. The sectors affected most include chemical/ agri-chemicals, automotives, electrical equipment, and capital goods, especially construction-related.

A slight improvement in external accounts but a deterioration in public sector finances

The sharper decline in imports than exports made it possible, however, to reduce the current account deficit in 2009 and offset a debt amortisation peak. The slow recovery in domestic demand, which will impede imports, and the growth of tourism revenues will likely make it possible to stabilise the external deficit in 2010. Even with capital inflows also in decline, this trend will ease Croatia's external vulnerability somewhat and slow the growth of private sector debt abroad. Meanwhile private domestic debt also increased with a high proportion denominated in foreign currency. Companies are consequently exposed to appreciable exchange rate risk (the kuna is subject to a managed floating rate regime). Despite financial consolidation measures, meanwhile, the public sector deficit increased sharply as a result of the drop in tax revenues. Efforts will have to be made by authorities to rationalise and slow the growth of public spending with government debt reaching 40% of GDP.

Challenges to be taken up by the ruling party

The government, led by the HDZ conservative party will be facing major challenges. In October 2009 Croatia resumed the admission negotiations with the European Union stalled since end 2008 as a result of Slovenia's veto in connection with the dispute over the maritime and land border in the Gulf of Piran. The two governments have agreed to submit the dispute to international arbitration but the possible holding of referendums on this issue, particularly in Slovenia, could complicate matters. Moreover, EU admission still depends on implementation of several measures intended to strengthen the rule of law and combat corruption more effectively. And the party in power, itself weakened by Prime Minister Ivo Sanader's unexpected resignation in July 2009, will have to work to hold the government coalition together.

Top

Latvia (B)

Risk assessment

A brutal recession

After several years of strong growth spurred by abundant credit, the cycle reversed in the 2007 second half. The deterioration of economic conditions gained momentum as the international financial crisis gained in intensity in 2008. The bursting of the property bubble, the contraction of credit, the waning of foreign capital flows, and the recession gripping the main export markets resulted in an unprecedented contraction of GDP in 2009. Sectors associated with construction and consumption and sectors that export have particularly suffered. The economy is expected to continue to contract until mid-2010. Although handicapped by a loss of competitiveness, exports are expected to be the first to revive while domestic demand will remain constrained by the surge of unemployment, the fall of wages, and the corporate and household deleveraging process. This will be compounded by the fiscal adjustment in progress (with projects financed by the EU spared, however, by the austerity policy) and the dampening effect on banking activity of the strong growth of non-performing loans. Investment and consumption will continue to trend down in 2010. That will contribute, however, to stemming the recovery of imports.

An unavoidable adjustment

Very vulnerable as a result of the scale of its imbalances (property bubble, abyssal current account deficit, very high foreign debt - especially the debt abroad of banks - and excessive private sector foreign currency debt with the banking system), Latvia's difficulties piled up amid the upheaval triggered by the financial crisis. Severe pressure on the euro-peg regime compelled the central bank to intervene in the foreign exchange market and one banking institution succumbed to the liquidity crisis. In this context, Latvia had to call for international financial aid (the support provided by the IMF, the EU, and other multilateral institutions total €7.5 billion). The situation grew even tighter with the postponement of the second tranche of the IMF loan in March 2009 due to the inadequacy of the cuts in public spending at that juncture and the failure of an attempt to place Treasury bills in June associated with rumours of devaluation. The tensions eased end November 2009 after the government obtained parliament's approval of a 2010 budget revision integrating measures advocated by financial backers. The multilateral assistance enables the country to offset the outflows of private capital with foreign financing needs fortunately strongly contracting as a result of the collapse of imports (the current account even went into surplus). The amount of foreign debt remains nonetheless high in relation to GDP as a result of the economic downturn and the risk of devaluation has not dissipated.

A degree of continuity in economic policy but increased social risk

The government that took office in March 2009 became a minority administration one year later after the largest party pulled out of the center-right coalition over disputes about how to handle the recession. This administration is likely to survive until parliamentary elections due in October 2010, thanks to the cooperation it can count on from opposition. The next governments are expected to remain dominated by centre right parties. The social environment remains tense, however, with the riots triggered in Riga in January 2009 still fresh in memory.

Top

Viet Nam (B)

Risk assessment

Good resilience to the crisis with strong growth expected this year

Economic growth remained satisfactory in 2009 thanks to expansionary monetary and financial policies. But private consumption suffered from the growth of unemployment, the drop in remittances, and the slowdown of FDI. Net export made a positive contribution to economic growth, however, with imports contracting more than exports. On the supply side, while agriculture achieved stable performance, manufacturing, services, and construction suffered slowdowns. Besides, oil production increased sharply thanks to the good performance of new fields. Finally, inflation eased in a context of a decline in raw material prices compared to 2008 and less dynamic domestic demand. However; in the 2009 fourth quarter, the upward pressure on prices increased and the Central Bank raised its key rate by one basis point in November.

In Q1 2010, GDP growth rebounded to 5.8% y/y. For the rest of the year, economic growth could accelerate, buoyed by a rebound of investment and private consumption thanks to the expected decline in unemployment and growth of incomes. Inflation could rise again as a result of the excess liquidity generated by the interest rate reductions and the expected increase in raw material prices. The tightening of monetary policy could thus be accentuated in 2010. In this context, Coface monitoring records of corporate payment behaviour are expected to remain stable. There are nonetheless persistent deficiencies in terms of financial data transparency and claim collection.

Weak financial position

After increasing sharply in 2009 as a result of the economic slowdown and the stimulus plan, the fiscal deficit will likely remain substantial in 2010. The public debt will likely grow and half of it is denominated in foreign currency, which makes it vulnerable to exchange rate risk. Sovereign default risk increases in consequence.

The current account deficit is moreover expected to remain high in 2010 with only 50% covered by FDI. Vietnam will thus remain very dependent on financial markets. The high volatility of portfolio investments that developed in the wake of the Lehman Brothers bankruptcy will likely remain limited in 2010. And loans from the Asian Development Bank and the World Bank are expected. However, the low level of foreign exchange reserves makes the country very vulnerable to sudden capital flight.

In this context, exchange risk has tended to grow. In 2009, dong was subject to downward pressures. Government authorities thus increased the dong fluctuation band several times (plus or minus 5% as of March 2009) and devalued the currency four times: in June 2008 (by 2.4%), in December 2008 (by 3%), in November 2009 (by 5%) and in February 2010 (by 3,3%). Moreover, the authorities decided in November 2009 to reduce the dong fluctuation band in order to anchor exchange-rate anticipations. On the black-market, however, the dong is still traded far below official parity. Government authorities could thus devalue the dong again in 2010. Vietnamese banks are very vulnerable to exchange rate risk as a result of their extensive dollarization. They have been weakened moreover by a high rate of non-performing loans and a lack of transparency and oversight, notwithstanding recent progress including an increased openness to foreigners and initial privatisations of state banks.

Persistent deficiencies in the business environment

The Communist Party continues to exercise complete control over political, economic, and social life in the country. Problems with governance and especially corruption nonetheless remain Vietnam's Achilles heel.

Top

Honduras (C)

Risk assessment

A new President elected, following the first military coup in Central America for over twenty years

With the eviction by the Army of President Manuel Zelaya (Liberal Party), at the end of June 2009, the designation of a de facto president, Roberto Micheletti, then the election at the end of November of a new president, Porfirio Lobo, of the right-wing National Party, the democratic institutions of the country were relatively weakened. This reversal drew the condemnation of international organisations (Organisation of American States, United Nations) and most South American countries (including Brazil and Argentina), but, since then, the United States, Colombia, Costa Rica, Mexico, Panama and Peru have recognized the validity of the presidential ballot. With this determinant backing, the new governmental team, in office since February 2010, will have as its objective the rapid restoration of diplomatic relations and the lifting of international economic sanctions towards a country that is heavily dependent on international assistance. Numerous challenges will remain. Indeed, while the ex-president Zelaya was approaching the end of his mandate, a number of dossiers were hardly opened, such as the improvement of education and healthcare, the modernisation of infrastructures (energy, transport, telecommunications), the intensification of the fight against insecurity and corruption, and the reform of the judicial system.

Economic problems in the wake of the political crisis

A contraction of the economy took place in 2009, by reason not only of the recession in the United States, the country's principal trading partner, but also because of a drop in public and private investment and in household consumption, in the aftermath of the political events. Growth should revive in 2010, owing to the recovery in the United States and international recognition of the new government. The revival will have the effect of improving the confidence both of households and businesses and of supporting domestic demand. In any case, inflation will be fed by the increase of world raw materials prices and the depreciation of the local currency.

 The main exports, coffee and bananas, remain exposed to world price fluctuations and textile production has to confront severe foreign competition. Imports, still weighed down by the oil bill, do not benefit any more, for political reasons, from the preferential agreement with Venezuela (Petrocaribe). Moreover, the small increase expected in remittances from expatriates will not enable the containment of the current account deficit. In addition, the major part of this deficit can be financed only by bilateral or multilateral aid, which is going to be re-established after the suspension provoked by the political crisis. Negotiations with the IMF, relative to the continuation of the stand-by agreement expired in April 2009, have started again and should be completed during the second half of 2010.

Top

Jamaica (C)

Risk assessment

Persistant recession

The economy cannot escape a new recession in 2010, after more than a decade of growth weakened by a succession of diverse shocks. Indeed, the agricultural, mining and tourist activities are going to regress again in 2010, because of the moderate recovery in the United States, on which the country is dependent for a third of its exports, as well as for remittances from expatriates and tourism. The weight of the national debt and the structural weaknesses of the country also limit the prospects of growth.

 Furthermore, inflation will continue to run at a high rate (over 10%) and will weigh on the competitiveness of the economy. Inflation will be fed by higher prices for oil and foodstuffs, as well as by the depreciation of the currency.

Huge public debt deficit and recourse to the IMF

The Prime Minister Bruce Golding, of the Jamaica Labour party, in office since the end of 2007, is still faced with a dramatic economic and social situation, by reason mainly of the catastrophic state of public finances. The main objective of economic policy, never-endingly postponed, remains the reduction of the impressive public debt, representing approximately 140% of GDP, with 40% owed abroad. Servicing this debt alone absorbs half the budget. To avoid default in the short term, the only way out appeared to be an appeal to the IMF, in February 2010, which could, however, be politically risky because of the conditions imposed by this institution, i.e. budgetary austerity, privatisation of public enterprises etc.

 Huge deficit on external accounts

 The deficit on external accounts should remain high, as the moderate recovery in the United States, the country's main trading partner, will not be sufficient to have a positive impact. Imports, inflated by the higher cost of oil, which represents a quarter of all imports, will widely exceed exports, due also to the weakness of world prices for bauxite and the decline of the sugar industry. The widening trade gap will be accompanied by the quasi-stagnation of both remittances from expatriates (originating essentially in the United States and Great Britain) and income from tourism. The result should be a continuing large current deficit, which should be covered only for one fifth by the flows of foreign direct investment (in particular from Brazil and Spain). For the balance, appealing to international capital markets will be difficult and expensive, notably for short-term financing.

In such a critical context, the February 2010 agreement with the IMF should ensure the return of a minimum of confidence, and facilitate loans from the main international financial institutions (World Bank, Inter- American and Caribbean Development Banks) and help reduce the flight of capital out of the country.

Top

Venezuela (C)

Risk assessment

Stagflation in prospect, after January 2010 devaluation

After having suffered its first recession since 2003, caused by the drop in oil prices and the world economic crisis, the Venezuelan economy should experience a new contraction in 2010. In a context of crisis of electricity supply, practically the only motor will be public spending, with flat household consumption and continuing under-investment.

With inflation still strong, the economy is set for a period of stagflation. The inappropriate fiscal, monetary and exchange policies, combined with insufficient production capacity, will continue to put pressure on prices. Given notably the inflation rate disparity with the country's major trading partners, the government announced a devaluation in January 2010, by formalizing two exchange rates, according to the "priority" status of the sectors, along with specific and parallel market rates.

Deteriorating public finances and increasing risk of a liquidity crisis

With a larger room for manoeuvre, thanks to the devaluation, and an expectation of higher oil prices, fiscal policy is meant to be expansionist in 2010, given legislative elections in September. However, priority should still be given to current expenditure, particularly on social spending, whereas infrastructure investment should be constrained. Besides, the government has not created any stabilisation fund and public finance management remains marked by recourse to extra-budgetary commitments, through the National Development Fund (FONDEN) and the state oil company Petróleos de Venezuela (PDVSA).

 Still, foreign debt should remain manageable, but oil prices remain the essential variable factor in the solvability and the willingness of the country to pay its debts. Also, the risk of a liquidity crisis is increasing, due to slippage in certain short-term debt ratios along with continuing capital flight and the drawing on foreign exchange reserves, which should continue, to some extent, to be tapped for the benefit of FONDEN and PDVSA.

Political power appearing still firmly in place

The "21st century socialism" proclaimed by President Chávez is leading to ever-increasing state interventionism, further nationalisations and increased barriers to private initiative, in a business environment blighted by lack of predictability, problems of corruption and the halting of foreign investment flows. His success in the February 2009 referendum is allowing the President to re-present himself at the end of 2012. Before then, the September 2010 legislative elections will provide a new test for Hugo Chávez. Economic problems, as well as problems in the electricity sector and growing insecurity, should increase public discontent. However, the political opposition, while denouncing these failures and the increasing authoritarianism of the regime, remains divided.

Transfer problems appearing

After the devaluation, the foreign exchange mechanism managed by the Comisión de Administración de Divisas CADIVI, according to the "priority" status of the goods, should make it even more difficult for certain private businesses to honour their foreign commitments. Certain sectors should suffer from import restrictions (automotive, wines and spirits, tobacco, maintenance, technical assistance...). Consequently, recurring payment problems should tend to get worse and transfer problems are appearing.

Top