Country watch list

country(ies) on positive watch list

Iceland (A4)

Risk assessment

A major economic and financial crisis

Iceland suffered a major financial crisis punctuated by a growth shock of over ten points between 2007 and 2010: household disposable income fell sharply, their capital and financial assets shrank in value, and unemployment soared from 1% of the working population in 2007 to over 8% in 2010. In 2009 alone, corporate investment was cut back by over 50%. Exports conversely benefited from the sharp Icelandic krona depreciation in 2008 and 2009. To cope with its many major difficulties, Iceland turned to the IMF for support in 2008: The resulting agreement expired this past 31 August.

Economic growth has become positive again

Iceland's ordeal has blossomed into a success story. The objective of consolidating public sector finances has been achieved with the public deficit reduced from 8.6% of GDP to 4% and a public debt representing 100% of GDP scheduled to begin to come down next year. And the country's foreign debt, although inarguably still an inordinately high (251% of GDP), has nonetheless eased from its gargantuan proportions in 2008 when it represented 564% of GDP. Thanks to controls on capital movements, the krona exchange rate has steadied with the currency now expected to undergo only a mild depreciation as those restrictions are gradually lifted. Although price inflation seemed about to be brought under control early in the year (1.9% compared to 12% in 2008), it surged to 5% in July, in phase with the rise of raw material prices. The central bank consequently tightened monetary policy for the first time since the crisis last August, setting its key rate at 4.5%. The three main banks (Glitnir, Kaupthing and Landsbanki) have been restructured and recapitalized: the first two, renamed Islandsbanki and Arion, are now owned by their creditors while the third is 80% state-owned.

Positive economic growth is expected to resume in 2011 with a 2.5% expansion expected to be driven by household consumption and corporate investment. Although exports will make only modest gains, imports will surge in phase with domestic demand. The current account balance will come back to a healthy position with a surplus representing about 2.2% of GDP after several years with deficits ranging from 10% to 20% of GDP.

Recovery bolstered by resolution of the Icesave dispute

The dispute involving the Icesave digital bank, a Landsbanki subsidiary, has been resolved: the United Kingdom and the Netherlands had demanded that Iceland reimburse British and Dutch depositors for losses suffered in the Icesave bankruptcy. After two settlement agreements were rejected in referendums held in March 2010 and April 2011, the Icesave parent company Landsbanki announced, perhaps in response to pressure exerted by Iceland's partners, that it had set aside the funds necessary for the reimbursements without calling on government financial support.

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Argentina (C)

Risk assessment

Strong growth despite uncertainty surrounding elections

Argentina recorded a strong economic recovery in 2010 albeit accompanied by higher inflation. The upturn was driven by renewed consumer and private investor confidence spurred by accommodating policies and the rise of prices for exported raw materials. Despite the improvement in demand from the main client countries (China and Brazil), the foreign trade contribution to growth was negative due to the acceleration of imports in response to domestic demand. The economic rebound was underpinned by a strong supply side. Particularly the farm sector, which had been affected by drought during the preceding season, recorded exceptional growth.

GDP growth will likely remain strong in 2011, with continuing support from expansionary policies in the run-up to the presidential election in autumn. Despite government incentives, however, the political uncertainties could, to some extent, give rise to a wait-and-see attitude on the part of investors. On the supply side, farm production is expected to continue to rise, especially in the case of corn, wheat and oleaginous grains thanks to large investments in the sector. Soybean production is expected to level off. Industrial production could continue to be handicapped by electric power failures. The banking system meanwhile proved very resilient to the crisis. The banks remain well-capitalized, liquid and profitable with the proportion of nonperforming loans in decline. In this context, financing conditions are expected to ease for private companies and corporate payment behaviour recorded by Coface is likely to improve.

Improving financial situation

The public sector deficit is expected to continue to widen in 2011 in view of the expansionary fiscal policies implemented to enhance the re-election prospects of President Cristina Fernandez Kirchner. After the agreement reached in June 2010 with the private creditors left out of the 2005 debt restructuring negotiations, government authorities have confirmed their intention to negotiate a settlement of Argentina's arrears with the Paris Club member countries among its creditors. In this context, the perception of Argentina sovereign risk has been improving. Restoring a normal situation on payments after the default by Argentina in 2001 would put an end to 10 years of virtual financial isolation.

Despite strong growth of imports, the current account balance is expected to remain in surplus in 2011. Outflows of private capital constitute a recurrent factor of uncertainty in evaluating Argentina's external financing needs, which could accelerate in the run-up to the presidential elections. Foreign exchange liquidity crisis risk has been held within manageable limits, however, relative to the substantial level of foreign exchange reserves. But the reserves are expected to contract, however, with the government likely to draw on them to repay foreign debt.

Political uncertainties since the death of former President Nestor Kirchner

President Cristina Fernandez Kirchner has been weakened as a result of her defeat in the 2009 midterm elections. The government has then lacked a parliamentary majority and been exposed to attempts at obstruction by the opposition. The death on 27 October 2010 of former President Nestor Kirchner, who was said to be behind key policy decisions, opened a tense and uncertain interval in the run-up to the presidential elections late 2011. A major change in economic policy options until then appears very unlikely. After the Kirchner and Fernandez administrations, business circles reportedly would now prefer less state interventionism and greater orthodoxy, which could enhance the chances of a more liberal administration coming into power. 

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Ghana (C)

Risk assessment

Growth spurred by the start-up of oil production

Growth recovered in 2010 without reaching pre-crisis levels. In 2011, though, economic growth will likely receive a significant boost when the new oil fields start producing. The traditionally strong economic sectors will also contribute: agriculture (especially cocoa), gold mining, and the service sectors (notably telecommunications and construction). High cocoa and gold prices will provide an additional lift.

Investment will be underpinned by the plan for road infrastructure improvement to be financed by a first drawdown on a $13 billion credit line from China. This line will also be allocated to energy, agriculture and the food-processing industry. Foreign investment related to oil exploration and production is expected to be particularly dynamic

A ripple effect from the start-up of oil production will likely benefit private consumption even with households still faced with 10% inflation driven by the new oil revenues and the rise in electricity and petrol prices.

The Bank of Ghana's monetary policy will remain restrictive.

Uncertainties surrounding the management of the new oil wealth

The economic growth surge and the new oil revenues are not expected to result in a significant reduction in the public sector deficit, which has, however, fallen considerably since John Atta Mills and his National Democratic Congress Party came into power in 2009. Incompressible expenses, especially wages in the public sector where the remuneration system has just been reformed to the benefit of employees absorb all ordinary, ongoing revenues, leaving little fiscal room for manoeuvre.

In addition, payment arrears to local suppliers increased again in 2010, and catch-up settlements will ultimately be necessary. Finally, uncertainty persists over management of the new oil wealth. The events surrounding the sale by the owners of the Jubilee offshore oil field, with both the government and Ghana National Petroleum Company intervening, can be explained by concerns about ensuring adequate control over oil revenues in face of foreign operating companies. The persistent public deficit is going to weigh on national debt, which represented 68% of GDP in 2010, with over half owed to foreign countries.

External deficit financed by both investment and foreign loans

Exports are expected to benefit from higher gold, cocoa and oil prices. Imports will also increase with the purchase of equipment and services related to the development of transport and oil infrastructures. Dividend payments to oil companies will also increase, whereas remittances from expatriate workers are expected to remain stable. Overall, the current account deficit, although in decline, is expected to remain large.

The deficit is expected to be covered by foreign direct investment and by loans from foreign governments, international organisations, and private banks. These loans, more than half of which are not on concessionary terms and which are contracted mainly by the public sector, will consequently increase total foreign debt, which has grown considerably since its reduction in 2006 under the MDRI debt relief programme.

However, with the forecast 25% increase in official GDP figures by inclusion of part of the informal economy, and with the prospect of the increase in oil revenues, the increase in public and foreign debt can be justified insofar as it is related to investments aimed at improving economic potential. That Ghana requested and obtained financial assistance from the IMF in 2009 and since then has submitted to regular checkups, augurs well for success on that score.

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Sierra Leone (D)

Risk assessment

Strong growth but accompanied by growing inflation

High agricultural production, especially of rice, coffee, and cocoa, contributed substantially to the strong economic growth in 2010. The services sector (construction) also recorded dynamic performance. And the rise of raw material prices, particularly of diamonds, resulted in a real rebound in exports. But exports of mineral resources remain modest, however, due to persistent difficulties with extraction and transport. The country experienced an increase in domestic prices associated with the introduction of a 15% tax on goods and services, in compliance with conditions imposed by the IMF in June 2010 for the granting of a three-year $45 million credit facility. This year, economic growth will receive a boost from infrastructure investments.

Crucial support of the international community

The trade balance is structurally in deficit, with Sierra Leone forced to import food goods representing 7% of GDP, in addition to capital goods imports. Both fiscal and current accounts are deeply in deficit. But the country is endowed with large foreign-exchange reserves. Although Sierra Leone was granted complete cancellation of public debt in 2006 under the HIPC and MDRI programs, the debt has climbed to 30% of GDP, a level that will only be sustainable if the country diligently refrains from taking on further non-concessional debt. The international community has maintained a high level of development aid, representing a third of GDP compared to just 10% on average for all countries included among the least advanced. In that regard, China took its commitments in Sierra Leone to a new level with the purchase by the Chinese state-controlled company Shandong Steel of a 25% stake in the Tonkolili iron-ore production company in June 2010.

A persistent level of poverty despite the relative improvement in governance

Despite strong growth in past years, Sierra Leone is still one of the poorest countries in the world, with GDP per capita barely reaching $700. The IMF has given priority to infrastructure modernization (remediation of roads and electricity networks, improved access to water and to the sewage system) and development of the private sector. The efforts being made are expected to pave the way for the return of foreign direct investment. For that to happen, however, it will be up to the public authorities to enhance transparency and keep up their efforts to stem corruption. President Koroma and his government should remain in power until 2012, with the political situation normalized since the end of the Civil War in 2002 and the general elections in 2007. The prospect of elections in 2012 could, however, stoke unrest in a population riven by ethnic divisions and who have benefited little from the economic dynamism in the wake of the Civil War.

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Ukraine (D)

Risk assessment

A fragile recovery

Ukraine's macroeconomic situation stabilized in 2010, thanks especially to the ease of the political turmoil early in the year, renegotiation of the oil contract with Russia, and resumption of IMF support. But despite the good performance in export sectors (metallurgy, machine tools, and petrochemicals) and the upturn in private consumption, GDP growth was still constrained with investment limited by the credit crunch and the government forced to adopt austerity policy. Moreover the farm sector suffered from a summer drought. In 2011, the economic recovery will continue but growth is nonetheless expected to slow down with production remaining below its 2008 level: The base effect will be much less favourable than in 2010 and the hryvnia appreciation has wiped the competitiveness gains resulting from the devaluation. The effort to reduce public spending (3.7% of GDP) will also be a crucial factor. It will notably affect civil service wages and some government subsidies. These measures, in conjunction with an inflation upsurge marked by a 50% increase in the price of gas for households (the second such increase since August 2010), will undermine consumption. Nevertheless the upcoming European football championships in 2012 will  be likely to speed up infrastructure projects and galvanize investment. The end of the banking crisis, if it is borne out, could also spur domestic demand.

Heavy dependence on international aid

By end 2010, Ukrainian authorities had, overall, reached the initial public-deficit-reduction objectives set by the IMF on the fiscal deficit or the state-controlled company Naftogaz deficit. The cost of the banking sector recapitalization impacted the 2010 budget. In 2011, the IMF conditions call for a two-point reduction in the fiscal deficit and impose a series of far-reaching structural reforms - tax code, pension system, public administration, energy sector - which are delicate political issues. Their implementation will be crucial to maintaining the aid from the IMF and the market confidence: Although the conclusion of the second confirmation agreement with the IMF in July 2010 enabled the Ukrainian government and several companies and banks to issue Eurobonds once again, access to international capital markets would close virtually instantly if the IMF aid were to be frozen. But that is something Ukraine cannot afford to let happen in view of its limited foreign-exchange reserves. The banking system remains weak. It suffered losses for the second consecutive year in 2010 due to provisions for nonperforming loans which still high. At end 2010, some ten banks had yet to comply with the requisite prudential ratios.

The policy of President Yanukovych in question

The election of President Viktor Yanukovych put an end to the paralysis of the domestic political scene thanks to the formation of a parliamentary coalition and a credible government, which produce tangible results in 2010. In the international arena, diplomatic relations with Russia improved substantially due to the close ties of the Ukrainian executive with the Kremlin. And a new conflict over gas seems very unlikely in the near term. But the new regime also gives preference to a greater centralization of power and a weakening of the opposition, which entails risks. The Ukrainian-speaking and pro-Western fringe of the population would not tolerate a "too" privileged relationship with Russia even though the European integration policy has not been called into question.  Protest movements and social unrest thus seem likely. Deficiencies in terms of governance and corruption currently place the country at critical levels of risk.

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country(ies) on negative watch list

Japan (A1)

Risk assessment

Strong growth in 2010 driven by a spectacular rebound in exports 

Japan surprised everyone with the acceleration, albeit limited, in household consumptions (1.9%), spurred by the very reactive fiscal policy pursued by the authorities and the spectacular rebound in exports (up 24%) in 2010, which benefited from strong demand from the other Asian economies (54% of shipments). Exports thus made back ground lost during the crisis. Economic growth surged in 2010, up 4%, a pace not achieved since 1991.

The effects of the earthquake and the tsunami will persist until the end of 20011

In the fourth-quarter 2010, economic growth stalled, affected by the contraction in both exports, hobbled by the appreciation of the yen, and household consumption, affected by expectations that the disposable income might begin to stagnate, or even decline, again. It was in that context of economic weakness that Japan was hit by the earthquake and tsunami in March 2011. Compounded by nuclear fears, the two cataclysms subjected the country to a shock of unprecedented violence, reflected by a growth contraction of 0.9 and 0.5 per cent in the first ans second quarters of 2011. Breakdowns in the supply of electricity and water, in conjunction with the destruction of road, port, and rail infrastructure have affected production not only by factories operating in the stricken regions (the four counties affected represent 6.2% of GDP) but also in administrative subdivisions supplied with energy by nuclear power plants located in north-eastern Japan and which are more industrialized (Kanagawa and Shizuoka). The sectors that have suffered most include automotives, electronics, steel, pharmaceuticals, and food. So exports, where a slowdown was already expected before these dramatic events, should decelerate for months to come. This particularly concerns sales to China, South Korea, and Taiwan of electronic components and other intermediate products essential in the assembly of finished products notably intended for Japan, the United States, and Europe. The existence of excess production capacity in Japan could nonetheless partially mitigate that negative effect. The price competitiveness of Japanese products moreover continues to suffer from the strength of the yen. This trend could be curbed, however, by the monetary policy pursued by the Bank of Japan, which has very large foreign exchange reserves at its disposal for use in limiting the Japanese currency appreciation and thereby supporting exports. Households suffer from this new and unprecedented crisis, which should have a lasting effect on their confidence even if national solidarity and cohesiveness will ensure that support will be provided to those that suffered most. Their spending is thus also expected to decrease this year especially with household savings having declined considerably in past years to a level in 2010 representing about 2.5% of disposable income.  However, the negative effects slightly faded during summer, with activity driven by reconstruction. But it should be less dynamic in 2011 than expected since political debate is delaying the vote of the budget dedicated to these expenses. Electricity shortages are still affecting a number of businesses over the entire territory (shutdown of Fukishima and other reactors) and radioactive contamination hampers reconstruction projects. In this context, growth is expected to remain constrained in 2011 (-0.3%).

Smaller companies seem to be the most vulnerable

Large Japanese and foreign groups have production units in the regions affected by the earthquake and tsunami. But many smaller subcontracting companies and high technology hubs also have production facilities there. The electric-power rationing still in effect could result in losses, particularly in the manufacturing of products for the electronic component sector were Japan provides 21% of world production and which entails very high precision work. Subcontracting companies may, furthermore, be faced with increases in input costs they will be unlikely to be able to pass on to customers since they are locked in by annual contracts. The pressure on their margins will consequently increase. Even before the onset of the financial crisis, companies in this category had been giving signs of serious weaknesses (low profitability, overdependence on one large customer, difficult access to credit). This situation contrasts with that of large companies, which have largely been able to reconstitute their cash flow (up from about 60% mid-2009 to over 115% late last year). The continuing strength of the yen in conjunction with lessons drawn from this latest catastrophe could serve as a catalyst to the already broad movement to delocalize manufacturing facilities abroad, which would tend to weaken subcontracting companies even more. And even if the risk of nuclear contamination either fails to materialize or remains limited in scale, consumers might nonetheless be likely to remain wary of any product whatsoever "made in Japan". That will particularly be the case for agri-food industries. The impact of the massive catastrophe on the environment (radioactive radiation, petrochemical complexes in flames), besides the public health issues it will generate, will have a long-lasting effect on farming activity. The number of bankruptcies has decreased in 2010 (-12.4 per cent) and in the first quarter of 2011 (-5.3 per cent), but has not recovered its pre-crisis level. Coface payment incident experience is satisfactory.

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Czech Republic (A2)

Risk assessment

Growth dependent on European demand

The recovery is expected to continue in 2011 but remain constrained by the weak growth of demand from the euro zone, which absorbs 67% of Czech exports. The withdrawal of measures in support of household consumption in Western Europe, particularly the scrapping incentive, is expected to particularly affect the automotive parts manufacturing sector (20% of exports). Exports of IT and electronic equipment and pharmaceuticals, meanwhile, are expected to remain steady. Foreign direct investment, which made a crucial contribution to the dynamism of the Czech economy before the crisis, will remain sluggish. However, the increase in orders late 2010 augurs well for a slight increase in domestic investment in 2011, particularly in the IT equipment sector. This trend will be supported by a well-regulated banking sector that is endowed with a large deposit base and that remained solvent and liquid during the crisis. And household consumption, although buoyed by a decline in the unemployment rate to under 7%, will nonetheless remain severely constrained by the tightening of fiscal austerity measures.

Financial equilibrium maintained

The fiscal consolidation measures undertaken early 2010 will continue this year. The government, which was rebuked by the European commission late 2009, will have to bring the fiscal deficit down to 3% by 2013. But the increases in VAT and excise tax and the reduction in social contributions proved to be insufficient. The central government is thus expected to make substantial spending cuts this year (reductions in wages and social transfers and cancellation of various subsidies introduced in 2010, like those involving the energy efficiency sector), especially since it has been unable to control the increase in spending by local authorities. But the low risk premium imposed until now by the markets will, however, facilitate matters in holding down the cost of debt service. Public-sector debt, which has increased by over 10 points of GDP since 2007, will remain sustainable at 43% of GDP. The current account deficit will remain under control moreover, with the structural trade surplus only eroded by the repatriation of profits by multinationals.

Reforms in a difficult social context

The legislative elections in May 2010 gave a clear majority to the centre-right parties. The resulting coalition, led by Petr Necas of the Civic Democratic Party (ODS), undertook to reduce the deficit and accelerate structural reforms. Social unrest over the austerity measures resulted, however, in defeats in the local and senatorial elections in October 2010. These setbacks will not necessarily prevent adoption of key measures since Senate vetoes can be overturned by the Assembly. But the major strikes in the public-sector late 2010, in a country where such demonstrations are exceptional, if they are followed up, could delay reform implementation.

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Slovenia (A2)

Risk assessment

Growth limited by the sluggishness of European demand

After a severe recession in 2009, the rebound in 2010 was moderate. And in 2011, the Slovenian economy will still not return to pre-crisis levels of activity due to the sluggishness of European demand even though it will remain buoyed by relatively resilient German foreign demand, which will spur in particular the automotive, home appliance, and pharmaceutical sectors. Tourist activity (10% of GDP) will similarly remain dynamic. Economic growth is, however, expected to gradually stabilise in favour of private domestic demand. Railway infrastructures in particular will likely benefit from public investments financed by European funds. With little exposure to toxic assets and benefiting from the support of their European parent companies, the banks have proven resilient to the crisis. They will be able to cope with the gradual withdrawal of government guarantees on loans, which are nonetheless likely to grow albeit moderately in view of the constraints on demand: the job picture has notably become much bleaker with unemployment increasing from below 5% before the crisis to nearly 8% in 2010.

Regaining control over the public sector deficit will be a very gradual process

Since the third quarter 2008, the government has implemented three successive stimulus plans targeting the financial sector, companies, and households with the public deficit widening in consequence. Restoring compliance with the Maastricht criteria, particularly a public sector deficit not exceeding 3%, will notably require a speed-up of pension reform, which is not expected, however, before 2013. But although public sector debt has increased sharply since 2008, growing from 23% of GDP to the near 40% ratio expected in 2011, it will stay far below the 60% limit stipulated in the Maastricht Treaty.

The trade balance is structurally in deficit due to the high import content of exports, but it is offset by the services balance surplus resulting from large tourism revenues. Foreign direct investment inflows, which represent 3% of GDP, only cover financing needs to a limited extent. In this context, foreign debt - mostly private - has been high, exceeding 110% of GDP. Slovenia could find its refinancing capacity restricted as a result of a crisis of confidence among foreign investors. But with its foreign debt denominated almost entirely in euro, exchange rate risk is virtually non-existent.

A stable political environment despite a lack of consensus on reforms

The territorial dispute between Slovenia and Croatia, over an access to the sea, is expected to be settled by an international authority as a result of the Slovenian referendum in June 2010 giving preference to a third party referee solution.

The political environment is stable with the country governed by a coalition of centre-left parties likely to stay in power until the next legislative and presidential elections, scheduled in 2012. The members of the coalition disagree nonetheless on the extent of the reforms to be undertaken, and the lack of a consensus could slow progress on implementing them, especially those that apply to modernisation of the pension system and the job market.

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Slovakia (A3)

Risk assessment

Growth led by foreign direct investment (FDI) and infrastructure projects

Slovakia's relatively small and very open economy made a significant rebound in 2010, driven by stock replenishment and exports, mainly of electrical equipment and vehicles. This recovery was, however, limited by rising unemployment (up from 9% to 14%), credit terms still restrictive, and production overcapacity. In 2011, new greenfield investments and continuing infrastructure projects (8% of GDP) are expected to buoy up economic activity. Nevertheless, on-going budget consolidation is expected to penalise both public sector and household consumption, already affected by growing unemployment. In this perspective, dependent as it is on the vitality of foreign demand for durables (automotives and electronic goods), growth is unlikely to return to pre-crisis levels in the short term.

Fragile public finances

Slovakia was able to enter the Eurozone in 2009 thanks to its relatively robust external position, controlled public finances, and limited inflation. After deteriorating sharply due to contra cyclical policies implemented since 2009, the fiscal deficit is likely to contract significantly in 2011, thanks to the end of anti-crisis measures and an expected tax hike. However, it will still exceed EU-prescribed limits. In this context, public debt has risen significantly, although it will stabilise at a sustainable level in 2011 (44% of GDP).

The current account deficit contracted sharply during the crisis, and is expected to remain at around 3% of GDP. In 2011, the trade balance surplus and remittances will be unable to offset the services and revenues balance deficit. Half of the country's financing needs will be met by direct foreign investments, which will pick up after falling off during the recession.

In 2011, the financial situation for banks is expected to remain favourable in terms of liquidity, solvency and profitability, even though the latter has fallen well below pre-crisis levels.

A weak centre right coalition in power

The left-wing coalition led by the Smer-SD party lost the legislative elections in June 2010. An alliance between four centre right parties has made it possible to form a new government under the leadership of Iveta Radicova. The new team is likely to accord greater importance to budget consolidation, given the tension surrounding public finances within the EU. The stability of the government is not, however, guaranteed, due to the absence of a clearly identified coalition leader and lack of credibility in the fight against corruption. This may hinder the implementation of crucial policy measures, in particular improvements in the education system and pension reform.

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South Africa (A3)

Risk assessment

Continued moderate growth

After contracting in 2009, the economy recovered moderately in 2010 with household demand offsetting investment sluggishness and a negative foreign-trade contribution. In 2011, the economy is expected to accelerate (+3.5%). Household consumption will sustain its moderate growth buoyed by the higher incomes resulting from recent wage increases. But its future growth will remain constrained by the extent of household debt (77% of their disposable income), a gloomy job picture, and the increase in the cost of electricity and other public services. Investment by private companies, whose financial situation is generally solid, is expected to resume. But the recovery will likely be timid, however, due to the extent of unused production capacity, the uncertainties surrounding both the future trend in domestic demand and in the mine exploitation regime where the authorities have tended to be more interventionist than in the past.

Tightening fiscal policy

Public-sector investment is expected to be less dynamic. The launch of some large transport and energy projects could be delayed even though the lack of capacity in those areas tends to limit growth potential. Conversely, health and education-related spending is expected to continue to grow. And provision has also been made for further increases in civil service wages, which absorb 47% of fiscal revenues. In the end, however, higher fiscal revenues generated by the growth of corporate profits, the increase in customs revenues, and the measures taken to combat tax evasion are expected to enable a reduction in the fiscal deficit.

Inflation under control thanks to the firmness of the rand

Inflation continued to ease in 2010 with the decline in prices for imported products. And it is expected to accelerate slightly in 2011 in phase with the increases in wages and electricity prices, thus remaining within the 3% to 6% target. The increasing cost of imported products is expected to be limited as a result of the stabilisation of world energy prices and the support given to the rand by international financial interests seeking higher returns on their investments.

A current account deficit despite excellent raw-material sales performance

Although the strong rand will continue to undermine manufactured product exports (vehicles, textiles), shipments of minerals and metals will likely further benefit from the strong demand from China and continuing high prices. Despite the growth of imports of machinery, vehicles, and consumer products, foreign trade is expected to be in balance. The current account deficit could nonetheless widen slightly. After the football World Cup, the tourism balance of trade showed its habitual deficit. With the crisis over, repatriation of dividends by foreign investors has been increasing. The same applies to customs-duty clearing payments on behalf of neighbouring SACU member countries. The current account deficit is expected to be covered as in the past by portfolio investments, which are likely to provoke episodes of volatility in the rand, due to their inherent volatility.

Despite laborious progress on social issues, the ANC still enjoys wide public support.

The election in April 2009 of Jacob Zuma, the ANC candidate supported by the Communist Party and the unions, spawned great hopes among the population. But the Zuma government's room for manoeuvre is limited. While maintaining monetary and fiscal discipline, it has not only to accommodate both the unions and business circles but also to muzzle dissension within the ANC itself. Progress on security and public health issues has been laborious at best, which has stoked public unrest. It is true that the policy of positive discrimination, notably implemented in the civil service and state-controlled companies, has enabled the emergence of a black middle class, the so-called "blacks diamonds". But the Black Economic Empowerment policy has also sparked some resentment among a fraction of the population that harbours the feeling that BEE policy only serves to enrich elite circles close to the ANC. Despite these disappointments, the ANC continues to derive great legitimacy from its status as the "liberation party". The main opposition party, the Democratic Alliance, trails far behind. It has only been successful in taking the leadership in the province of Western Cape thanks to the composition of the population there.

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Portugal (A4)

Risk assessment

An economy plunging back into recession in 2011 as austerity measures start to bite

Rising taxes in conjunction with reductions in social security benefits and civil service wages, as well as tighter credit conditions, had a negative impact on domestic demand in the second half of 2010, leading to a slowing of the economy from the last quarter. The tightening of fiscal austerity measures has plunged the economy back into recession in 2011. GDP fell in the first and second quarter year-on-year. Domestic demand is in free fall. Only the decline of imports together with strong exports has prevented an even more drastic economic contraction. The decline in household consumption has become significant while investment contraction is accelerating. The domestic demand indicators continued to deteriorate in July-August 2011. Only exports and tourism held onto positive territory. These trends are expected to continue over the coming quarters, especially given the additional fiscal pressure. In an environment already marked by high household debt and significant unemployment (12% of the economically active population), consumption will continue to contract. Flagging demand, sluggish credit, weak profitability and weak company cash flow does not bode well for a pick up in investment. Moreover, foreign demand is expected to decrease slightly. Nevertheless, the contraction in purchases abroad means that the contribution of foreign trade to growth will remain strongly positive. The current account deficit could be reduced to a little less than 7% of GDP in 2011, having averaged over 10% in 2009 and 2010.

Macroeconomic imbalances which forced the country to seek international support

The cost of the initial measures of economic support, compounded by the impact of a severe recession, resulted in 2010 in a widening of the fiscal deficit and a very sharp increase in public sector debt to levels exceeding 90% of GDP. Compared to Greece, Portugal was quicker to implement fiscal consolidation measures and, unlike the situation in Ireland, there was no speculative property bubble and thus none to burst and inflict losses on banks. However, there has been a sharp rise in tensions in the Portuguese debt market, where interest rates have reached record levels. Following on the heels of Greece and Ireland, already beneficiaries of bailouts by Europe and the IMF in 2010, Portugal had no choice but to seek external support. And the country obtained a three-year loan of €78 billion (52 billion from the European Union and 26 billion from the IMF). Portugal successfully underwent a review of its austerity programme by its international funding partners last August, thus qualifying for the release of a third loan tranche. Despite the progress made, the Portuguese economy has nonetheless remained handicapped by low productivity, a lack of competitiveness, and a high overall level of debt. The low productivity is attributable to a relatively inflexible labour market, a cumbersome regulatory framework, a lack of competition, and a relatively unskilled labour pool. In conjunction with a sharp rise in wages, the prevailing low level of productivity has undermined competitiveness. Portugal has lost market share and has been running one of the largest current-account deficits in the euro-zone. The country's foreign debt has grown sharply as have household and corporate debt. Portuguese banks have become dependent on financing extended by the ECB and have considerably increased their holdings in public debt securities. The economic and financial deterioration has been compounded by a political crisis: The opposition's refusal to ratify a new fiscal austerity plan prompted the socialist prime minister to resign. The elections in early June 2011 were won by the centre right, who must now pursue the austerity programme and implement reforms, at the risk of disrupting social cohesiveness.

Weakened companies

Coface has recorded a noticeable rise in late payments and bankruptcies are increasing more quickly. The sectors most affected included ready-to-wear clothing, textiles, leather, construction, and furniture. The slowdown in construction has persisted, while turnover continues to fall in the retail sector, except in food. Textile production continues to trend down. And it will have to make further investments in new production methods and technologies to be able to meet competition from India and China. Only food, Portugal's main industrial sector, seems to be holding up relatively well in the crisis. Major efforts have been made on modernization and innovation. The sector moreover has the capacity to explore new markets and to make necessary adjustments. It nonetheless remains very fragmented, dependent on raw materials, and subject to pressure exerted by mass distribution with which it has to cope. And in the automotive sector (subsidiaries of foreign groups) although the outlook for exports (97% of output) has appeared relatively bright, domestic sales will suffer from the recession.

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Tunisia (A4)

Risk assessment

Political uncertainties and many social and economic challenges to overcome

After the eviction in mid-January 2011 of the ex-president Ben Ali, who had been in power since 1987, an interim national union government was formed with the particular aim of organising elections for the formation of a constituent assembly. 

The outcome of these elections, postponed until the end of October 2011, is uncertain, insofar as around 80 parties have been formed in the vacuum left by the dissolution of the ex-presidential party, the Democratic Constitutional Assembly, with the possibility that the Islamist party Ennahda could become the main beneficiary of the situation. 

Furthermore, the new authorities are faced with multiple social and economic challenges.  Unemployment, which affects around 15% of the population and particularly young graduates, is still a major issue.  This fuels a considerable sense of frustration and led to the protests which caused the fall of the old regime. In addition, the fruits of growth are unequally distributed, not only socially but also geographically, and a regional development programme favouring the interior of the country, which is underprivileged in relation to the coastal areas, is planned by the authorities. 

Activity dependent upon the changes in the political situation

Activity has dropped significantly since the beginning of 2011 due to the political uncertainties, even though the transfer of assets of the Ben Ali Trabelsi family (commercial and automobile distribution, hotel management, air transport, banks) is being realised without paralysing it. By sector, the most notable decline is in tourism (which represents directly or indirectly the livelihood of 1.5 million Tunisians), with a fall of around 45% in the first quarter; then comes industry, with a drop of nearly 10% in production. Furthermore, foreign direct investments decreased by a quarter over the first four months. Conversely, the agricultural sector (8% of GDP) stood up well, with good harvests forecast. Overall, the Tunisian economy could narrowly escape the recession in 2011 (+0.5%), assuming a gradual recovery in activity during the second half of the year, with private investment in particular, which had been curbed by the nepotism of the ex-presidential clan, possibly picking up.

Deterioration in twin deficits mitigated by international financial aid

At the G8 summit at the end of May 2011, Tunisia was granted the promise of additional financial support to cover the forecast increase in deficits on its public and external accounts. In this respect, loans totalling $1.35 billion are planned, with the World Bank and the African Development Bank having promised $500 million each; and the French Development Agency $275 million. Loans from the European Investment Bank and the Arab Fund for Economic and Social Development are expected to be added to this.  This mitigates the sovereign risk and the risk of a balance of payments crisis. The budget deficit will increase, on the one hand because of the drop in activity that must automatically lead to a drop in tax revenues and on the other, because of an increase in expenditure resulting from the various measures taken to improve quality of life and reduce unemployment, subsidies on the prices of some basic commodities and, later on, the possible resumption of public investment.  Nevertheless, for several years the level of the public debt - primarily contracted with multilateral institutions at concessional terms - has reduced in relation to GDP and is close to the average for comparable emerging markets (around 45%). 

It is likely that there will be a downturn in exports in 2011, due to political uncertainties, weakness of demand from the EU (particularly Italy and Spain) and the war in Libya; these countries are among Tunisia's principal trade partners and the exploration of new markets, particularly in Africa, will probably be delayed. Conversely, the relative robustness of domestic demand could result in an increase in imports, particularly of raw or semi-finished products, and therefore by an increase in the trade deficit. In addition, although expatriate remittances should be maintained, tourist revenues are likely to see a catastrophic fall (of around 50% compared to 2010) and overall the current deficit should deteriorate very significantly. In addition, this deficit is likely to be only partially covered by foreign direct investment flows, with Tunisia running the risk that it will represent a less attractive target for these, at least temporarily. 

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Mozambique (B)

Risk assessment

Growth fuelled by foreign investment

Economic growth will remain strong in 2011. Thanks to continued foreign investment in the mining sector and infrastructure, investment will again make a very strong contribution to growth. Hospitality and catering will benefit once again from a recovery in tourist activity. Farm production is expected to grow provided the weather is good.

Subsidies facilitate keeping the social peace

Inflation - after surging to 14% in 2008-2009 with the metical depreciating against the rand and farm prices soaring - will be unlikely to exceed 5% in 2011. The tightening of monetary policy, stabilisation of the metical, and the subsidizing of basic necessities will take care of that. Conversely fiscal policy is expected to remain accommodating with the development of social aid and the rise of subsidies for bread petrol, water, and electricity after the bloody riots in September/October 2010 Their cost will largely depend on trends in exchange rates and international prices. Despite the increase in ordinary revenues attributable to the improvement in tax collection and the growth of payments associated with foreign investments, the proportion of aid in the revenues will again reach 40%.

Despite the growth of exports, international aid remains essential

The current account deficit will remain large despite improvement in the terms of trade. Although sales abroad - not only of aluminium and coal but also of gas and electricity to South Africa - will doubtless grow, imports will increase even more. Purchases associated with implementation of mining and infrastructure projects will develop while firm prices will inflate the bill for oil and agricultural commodities, which to a very large extent are imported from South Africa. Payments to foreign service-providers and dividend payments to foreign investors will increase. The inflows of grants, concessional loans, and foreign investments particularly from Australia, Brazil, India, and China are essential in covering the external deficit. With the IMF approval the authorities have decided to resort to non-concessional financing and partnerships with the private sector to accelerate projects with export-potential like those in electricity and transport. At this juncture a €700 million credit line (only half of which is concessional) has already been concluded with Portuguese financial institutions. This transaction is expected to result in an increase in foreign debt (essentially public) whose repayment is expected to be facilitated by the development of exports. The situation would be infinitely more comfortable however if capital flight could be capped.

Political stability, but with governance still difficult

Facing a weakened, disorganized opposition, President Armando Guebuza and his Frelimo Party (Frente de Libertação de Moçambique), re-elected in October 2009 to lead the country, exercises well-established power. The confusion between the party in power and the State is, however, a source of concern to donor countries. The performance of Mozambique in terms of corruption, regulations, respect for law and order, and administrative efficiency has been poor. But the progress made on crucial issues - education, water conveyance, and health - albeit starting from a low level, in conjunction with relatively good performance in the allocation of funds, has, however, prompted donors to maintain the flow of financial aid.

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Venezuela (C)

Risk assessment

After two years of recession, sluggish growth in 2011

The country in 2010 showed the worst performance in South America, staying in recession. Despite the rebound in oil prices, activity remained hampered by the sluggishness of the petroleum industry and a crisis in the electricity sector while heterodox policies have generated massive inflation and undermined consumption and investment.
In 2011, the Venezuelan economy has recovered the path of growth, but it has remained sluggish after two years of recession. Growth is sustained by consumer spending which is supported by increased public spending thanks to high oil prices. However oil production is decreasing by lack of investment while the recurrent power cuts have constrained the recovery capabilities of the industrial sector. In the absence of reforms and appropriate measures, inflationary pressures have persisted while the lack of investor's confidence has fuelled continuous capital flight, hampering domestic engines of growth, private consumption and investment. Unemployment has remained high.

Public finances under strain and increased risk of a liquidity crisis

Budgetary policy has remained expansionary in 2011, in anticipation of the 2012 presidential elections. The public sector balance should continue to post a large deficit despite high oil prices. The government has no more stabilization funds and public financial management remains marked by the recourse to extra-budgetary commitments, via the National Development Fund (FONDEN) and PDVSA, the publicly-owned oil company. The opaque nature of public accounts, mismanagement of oil revenues, the impact on government spending of the current series of nationalizations (estimated at $20 billion, or over 9% of GDP), and the unpredictability of President Chavez (as regards the willingness to pay) result in significant sovereign default risk.

Despite a very large current account surplus, official foreign currency reserves have dwindled. This reflects CADIVI's efforts to support the currency, which remains overvalued, notwithstanding its devaluation early 2010. Despite strengthened exchange controls, capital flight has persisted. The Bolivar's depreciation on the grey market reflects a crisis of confidence in the national currency that could lead to a foreign exchange liquidity crisis and a new devaluation of the official exchange rate.

  A deteriorating banking sector

The key indicators of the banking system remained relatively satisfactory in 2010 despite the crisis, but they could deteriorate in 2011. This situation stems from ongoing government interference and constraints (seven banks were nationalised in 2009). The deterioration in the quality of bank portfolios observed late 2010 could accelerate in 2011.

  A precarious political environment

The radical policies of President Chavez, in economic matters (increasing interventionism and nationalisations) as well as in political arena, affect governance, the business environment and private enterprise. Moreover corruption and insecurity have reached alarming levels.

While the legislative elections of September 2010 constituted a setback for H. Chavez (loss of the two-thirds majority), they do not prevent the government from keeping a simple majority, or from pursuing heterodox economic policies. But the outlook is uncertain in view of the President health.

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