coface panorama barometro riesgo pais q3 -octubre16en

he beginning of the summerwas on everyone’s mind,and the idea that the UnitedKingdom could leave theEuropean Union (EU)seemed unlikely. The Brexit

shock of 23 June shook the globalfinancial markets. All eyes then turnedto the UK, but the British Prime MinisterTheresa May has only just announced hatshe will trigger Article 50 before the endof March 2017. The process of withdraw-ing from the EU will then begin, and willtheoretically take two years, but in realitycould prove much longer. Unsurprisingly,this shock has prompted us to revise ourevaluation of the country down to A3,with significant uncertainty weighing onagents’ confidence and a potentially wor-rying negative impact when the UK actu-ally leaves the EU.

Beyond Brexit, a number of uncertain-ties continue to weigh on the globaleconomy. Weak global trade is again atthe centre of discussion, and a strongrecovery is not expected. In addition, oilprices did not recover significantly andare barely over USD 50 per barrel forBrent, which has led to further down-grades of several countries whoseactivities are closely related to trendson the oil market and, more generally,to commodities (Nigeria, Oman, Mon-golia, Trinidad and Tobago). The lastOPEC meeting on 28 September led toan agreement on a production level ofaround 33 million barrels a day (Mbd).Called “historic”, this agreement is how-ever unlikely to threaten the existenceof weak market fundamentals, and willonly lead to a moderate rise in oilprices. This is all the more true since

OPEC countries must still agree ontheir production targets on 30 Novem-ber, and they must then respect them.This is no small challenge, with short-term needs often taking priority overlong-term reason. In addition, at theend of the year, the focus will be on theFed, which could raise rates at its mon-etary policy committee meeting inDecember.

There is however some relative goodnews from Brazil and Russia. Althoughthese economies continue to face avery difficult situation, the low point inmacroeconomic terms seems to bebehind them, and these countries nowlook set to gradually enter a period of convalescence. This has not yet,however, been reflected in signs ofimprovement at company level.

T

OCTOBER 2016PANORAMA Country Risk Barometer Q3 2016

2Concern again focusedon oil prices, theemerging market thermometer

9BarometerCountry risk assessmentchanges

10Country reports10 countries

Concern again focused on oil prices, the emerging market thermometer

By Coface Group EconomistsCOFACE ECONOMIC PUBLICATIONS

ALL OTHER GROUP PANORAMAS ARE AVAILABLE ONhttp://www.coface.com/News-Publications/Publications

http://www.coface.com/News-Publications/Publications

2 COUNTRY RISKPANORAMA

GROUP

CONCERN AGAIN FOCUSED ON OIL PRICES,THE EMERGING MARKET THERMOMETER

After a summer start agitated by Brexit, a precarious calm has returned to the markets

The Brexit shock of 23 June triggered a fall onequity markets, Europe’s in particular. The mainstock market indices fell, and the Euro Stoxx 50shed almost 9% in a day. These recovered however,before again being hit, to a lesser extent, by the publication of European banks stress tests on29 July (fall of 2% on 2 August for the Euro Stoxx50). Since then, a degree of calm seems to havereturned, and several national stock market indiceshave returned to their pre-Brexit levels (this is nothowever the case in a number of more fragilecountries, such as Italy or Greece).

In this uncertain environment, the BoE (Bank ofEngland) and the BoJ (Bank of Japan) did not hes-itate to ease their monetary policy. The bank of England, especially, cut its key interest rate to 0.25% on 4 August (the first reduction since2009), decided to purchase good quality corpo-rate bonds worth GBP 10 billion and to increasequantitative easing by GBP 60 billion to GBP 435 billion over six months. The Bank of Japanextended its exchange traded funds purchase pro-gramme at the end of July to JPY 6 billion, from

JPY 3.3 billion previously, in order to stimulate theeconomy. Its statement is also increasingly lessfocused on achieving the less and less tenable 2% inflation target. The BoJ also announced in September that it was committed to continuinggovernment bond purchases to maintain the 10-year sovereign rate at around 0%. As regardsthe raising of US interest rates, which remains akey issue, the probability of a rate hike in Decem-ber was estimated at 57% on 5 October, accordingto the Fed fund futures trajectory. Thus, companiescontinue to operate in an environment of very low,if not negative rates, which has led to extremelyadvantageous financial conditions, but also a risein the banking risk, which must be monitored (seeinset 1 on page 4).

Downside risks on the global economy have thusincreased. The UK’s decision to leave the EU hasmade forecasts even more uncertain. It will have anegative impact on the confidence of privateagents, and not just the British(1), although the finaleffect will of course depend on the conditions ofthe agreement between the UK and the EuropeanUnion. The price of Brent is also not expected torise sharply, according to our forecasts (USD 44 in2016 and USD 51 in 2017), and this is despite theagreement in Algiers on 28 September on theOPEC production quota of 33 Mbd. In fact, even ifthis signal momentarily triggered a rally in priceson the markets, fundamentals remain weak (seechart n°1) and the rebalancing between supply anddemand will not take place overnight: OECDstocks peaked at 32.5 Mb in July, and globaldemand is not likely to be particularly dynamic.Although non-OPEC supply is falling (for themoment, but it could recover if prices rise again),OPEC production is nearing or beating records(Kuwait, UAE, Saudi Arabia, Iran). Russia alsoraised the possibility of a freeze or a reduction ofits production, but must prove itself. Productiontargets by country will be defined at the nextOPEC meeting on 30 November, and this is likelyto be a difficult exercise. Moreover, judging by pastexperience, it is not a foregone conclusion thatcountries will respect the quotas, as their short-term concerns often prevail over their compliancewith the agreement.

October 2016

Sources: EIA, Thomson Reuters, Coface calculation

(1) Coface Study “Will political risk “spoil the party” in 2017?” September 2016

Chart n° 1Oil: Fundamentals still in surplus

140

120

100

80

60

40

20

0

3

2

1

0

-1

-2

-3

2009 2010 2011 2012 2013 2014 2015 2016

MbjUSDBrent spot price (monthly average) 3 months average Demand-Supply gap

Advanced countries

Euro zone

France

Germany

Italy

Spain

United Kingdom

Japan

United States

Emerging countries

Brazil

Russia

India

China

3COUNTRY RISKPANORAMA

GROUP

Furthermore, global trade continues to disappoint,as evidenced by the strong downwards revisionsof the latest growth forecasts from the WorldTrade Organization, which now publishes a rangefor 2017 (between +1.8% and +3.1% in 2017 after+1.7% in 2016) (2). The downwards revision by morethan a third to growth in global trade raises questions. According to the Bank of France (3),

notwithstanding the fall in trading costs, the slow-down can be explained by the drop in demand inthe eurozone, and the rebalancing of Chinesegrowth towards domestic demand (productionresponds more to the needs of domesticdemand). The authors nevertheless consider thatthe unitary elasticity of global trade to long-termgrowth is not in question. Trade is therefore onlylikely to take off again gradually next year, as high-lighted by two studies conducted by the FrenchEconomy and Finance Ministry (Treasury Dpt) (4)

and the IMF(5), and its growth is unlikely to be sus-tainably stronger than that of global activity.Finally, as noted by the IMF and CEPII (6), there isan increased risk of protectionism, with anincreasing number of measures in this regard,even though for the moment they are only likelyto affect a limited portion of global trade. Forexample, the ratio of trade openness (7) fell by 6.6pts of GDP between 2007 and 2015, and the num-ber of taxes on trade as well as regulatory barriershave increased since the crisis (see chart n°2).

In this context, our growth forecasts remain fairlymuted (+2.5% in 2016 and +2.6% in 2017),marked by stability in advanced countries(around 1.6%, as in the eurozone) and animprovement in emerging countries (+4.2%, then +3.7% in 2017), chiefly owing to the end ofrecession expected in Brazil and in Russia (seechart n°3).

(2) WTO, "Trade in 2016 to grow at slowest pace since the financial crisis”, press release, 27 September 2016. There have been marked downwards revisions in Latin America, Asia and the US.

(3) Banque de France, Rue de la Banque no. 30, “The role of China in the trade slowdown”, September 2016(4) DG Trésor , Trésor Eco no. 166, “How to explain the weakness in global trade?” April 2016(5) Aslam et al, IMF, “Keeping the wheels of trade in motion”, September 2016(6) Sébastien Jean, CEPII, “Growth in global trade below WTO expectations. As forecast!” Note of 29 September 2016(7) Calculated as the ratio of the sum of the value of exports and imports to GDP in dollars.

Chart n° 2Global trade: Increase in protectionism

Chart n°3Growth rate (%)

Source: Coface

60

45

30

15

0

10

8

6

4

2

0

-2

-4

8

6

4

2

02000 2002 2004 2006 2008 2010 2012 2014

Openness totrade

(% of GDP)

Barriers and taxes(indices)

Sources: World Bank, Fraser Institute Economic Freedom of the World Index

Openness to tradeRegulatory trade barriersTaxes on international trade

201520162017

1.91.51.6 1.6 1.7 1.6

1.11.5

1.8 1.7

0.60.91.0

3.23.0

2.3 2.21.9

0.90.50.5

0.8

2.4

1.61.5

3.4

-3.8-3.4

4.2

0.6

-3.7

-1.0

0.8

7.36.9

6.56.1

7.5 7.5

3.7

1.41.3

Inset n°1

What is the impact of negative rates on companies?

Which central banks are applying negative rates?While economic theory has little roomfor the idea of negative interest rates,nine central banks currently have anegative interest rate policy (NIRP).Historically, Switzerland and Swedenhad already crossed the Rubicon bytemporarily applying a NIRP: in the1970s for the former, in 2009 for thelatter. Currently, the countries with aNIRP account for a quarter of globalGDP. The Danish Central Bank (DNB)was the first to introduce it on a lastingbasis in 2012. It was followed by theECB in 2014, Switzerland (SNB), Swe-den (SR) and Norway (NB) in 2015and finally Japan (BoJ), Hungary(MNB), Bulgaria and Bosnia Herze-govina in 2016.

The application of the NIRP howevervaries according to the rate targetedand the reason why this policy was putin place. In the case of the ECB, theBoJ and the DNB, the deposit rate wastargeted, while the SR, in addition tothe deposit rate, also put its key lend-ing rate in negative territory. While anumber of central banks adopted aNIRP in response to weak domesticdemand and a lower inflation levelthan their target (ECB, BoJ, SR), others wished to limit the effects ofthe excesses associated with non-

conventional monetary policies inorder to limit the appreciation of theircurrencies that serve as safe havencurrencies (DNB, SNB).

What are the transmission mechanisms?In theory, the introduction of a NIRPtriggers an increase in household con-sumption and private investment, andimproves companies’ price competi-tiveness. The first effect is explainedby two transmission channels: theinterest rate and the asset portfolio.The introduction of a NIRP indirectlyaffects credit. Growth in lending picksup through the fall in the interbankrate, which, then, triggers a decline inall rates and more favourable financingconditions in the bond markets. Thesecond effect (assets portfolio) is dueto the ECB’s asset purchase pro-gramme (or those of the other centralbanks with a QE policy). The massivepurchase of sovereign bonds lowerslong-term rates and flattens the wholeyield curve. With yields not sufficientlyattractive for investors, they areswitching to other assets, notablyequities and real estate. The resultingwealth effect and the increase in lend-ing thus have a positive impact ondemand and investment. The gain incompanies’ price competitiveness isdue to the exchange rates transmis-

sion mechanism. Faced with a partic-ular country introducing a NIRP, andthereby discouraged from investing inthat country’s currency, investors willseek superior returns elsewhere. Thecurrency of the country in questionloses its appeal, weighing on theexchange rate, which depreciates, andthereby improves companies’ pricecompetitiveness.

Have these effects really been seen?According to the Bank Lending Survey(BLS) of July 2016 conducted by theECB, lending conditions for companieshave again improved, and demand forcredit continued to rise in the secondquarter of 2016 (see chart n°4). Growthin lending to companies has thuspicked up sharply since the introduc-tion of the ECB’s NIRP, from a contrac-tion of 2.6% yoy at the end of May 2014to an expansion of 1.3% at the end ofJuly 2016. The ECB estimates that theNIRP has contributed approximatelyone percentage point to growth inlending to companies since July 2014(Rostagno (8)). In addition, the surveyon the access to finance for enterprises(SAFE) conducted by the ECB in June2016 shows that the availability ofexternal financing sources for PMEs isimproving again and that banks aremore prepared to grant them credit.The improvement in the macroeco-nomic environment in the eurozoneand the introduction of the NIRP had apositive impact on several compo-nents of GDP. Growth in householdconsumption rose from 1.3% in the sec-ond quarter of 2014 to 2.1% in the firstquarter of 2016, while growth in privateinvestment rose from 1.7% to 3.8% inthe same period. The impact on theeuro/dollar exchange rate was also significant, with a depreciation of 18%from June 2014 to August 2016. Thedepreciation of the euro seems how-ever to be of greater benefit to south-ern countries (Spain, Italy, Portugal),which have a lower range level thannorthern countries (Germany, theNetherlands).

Are banks heading for a fall in profitability?A negative effect could howeveremerge if the negative interest rateenvironment continues for a long time,to the extent that lending to companies

(8) Rostagno and others., 2016, “Breaking through the zero line : the ECB’s negative interest rate policy”, Presentation at Brooking Institution “Negative interestrates: lessons learned… so far”), 6 June, available on: https://www.brookings.edu/events/negative-interest-rates-lessons-learned-so-far/

Chart n° 4Enterprises: conditions of credit and credit demand in the eurozone

Note: Blue and orange curves show the changes occured, whereas green and yellow curves shows the changesanticipated by the banks

Last available data: Q2 2016, expected for Q3 2016

80

60

40

20

0

-30

-40

-60

Net percentages

NIRP’s introductionJune 2014

T1 2003

T3 2003

T1 2004

T3 2004

T1 2005

T3 2005

T1 2006

T3 2006

T1 2007

T3 2007

T1 2008

T3 2008

T1 2009

T3 2009

T1 2010

T3 2010

T1 2011

T3 2011

T1 2012

T3 2012

T1 2013

T3 2013

T1 2014

T3 2014

T1 2015

T3 2015

T1 2016

T3 2016

Credit standards last quarterLoan demand last quarterCredit standards next quarterLoan demand next quarter

Source: ECB


GROUP

https://www.brookings.edu/events/negative-interest-rates-lessons-learned-so-far/

Inset n°1 (continued)

What is the impact of negative rates on companies?

and households depends on the prof-itability of lending transactions, whichis falling. The introduction of the NIRPhas flattened the interest rate curve. It is this phenomenon that reduces abank’s net interest margin(9) and whichtherefore leads to a fall in profitability.The loss in investor confidence and inbanks’ willingness to grant loans couldtrigger a slowdown in lending growth.The BLS shows in fact that 80% ofbanks questioned believe that theNIRP has contributed to the drop intheir net interest income(10). For exam-ple, Commerzbank has quantified thecost of the NIRP on its income frombank loans at EUR 161 million. The IMFestimates that even if the NIRP has upto now only had a weak impact onbanks’ net interest margin (a drop of 50 basis points in the interest rate would lead to a drop of sevenbasis points in the net interest mar-gin), the threshold from which theNIRP becomes counter-productive is

approaching. The ECB and other cen-tral banks have adopted a number ofmeasures to limit the negative impactof the NIRP on banks’ profitability: theincrease in QE and the introduction of the TLTRO 2 by the ECB in March2016; the introduction of a system thatsets several levels of deposit rate(thereby only taxing surplus deposits)for the BoJ, the DNB and the SNB. In addition, the BoJ is committed tocontinuing its government bond pur-chase programme in order to maintainthe 10-year sovereign rate at 0%. Com-mercial banks have been able to offsetthe negative impact of the NIRP up tonow by increasing lending volumes,although they are still limited by regu-lation, the fall in interest expenditureand risk provisions, and capital gains.

Will the NIRP have other negative effects?The weakness of interest rates hasabove all redistributed the resources

of net savers to net borrowers. As netborrowers have a marginally superiorpropensity to consume than netsavers, this supports consumption inthe economy. However, this effectcould conversely prompt certainsavers to increase their savings to off-set the loss in remuneration from theircapital, thereby reducing their con-sumption. Finally, the NIRP could ulti-mately have an impact on financialstability. The banks could in fact wishto increase their exposure to risk bylowering the quality of requirementsfor a loan, or by increasing lending toSMEs (as the SAFE survey suggests)in order to generate more revenue.Historically, SMEs have recordedhigher default rates than medium-sized and large companies. In addition,the risk relating to the emergence of“zombie” companies, whose activitycan only be maintained through loansat artificially low rates, must also bemonitored (11).

(9) Difference between the interest rate at which a bank lends and the interest rate at which it refinances itself on the various capital markets.(10) Measures a bank’s profitability. Balance between loans and deposits.(11) Banque de France, Rue de la Banque no. 29, “Are insolvent firms being kept afloat by excessively low interest rates?” September 2016

In the UK, Brexit is a determining factor. Thegrowth performance was undoubtedly better thanexpected in the first half, owing to the resilienceof private consumption, and this despite the lackof momentum in investment. Growth is expectedto come in at 1.9% this year, according to our fore-casts. The government has clearly indicated thatit wishes to limit the negative impact of Brexit:even though no emergency budget has beenpassed, stimulus measures are likely to be intro-duced by the end of the year (budget statement)and the BoE reacted quickly through monetaryeasing. In light of these measures, associated witha central scenario of a favourable agreement withthe EU, we forecast growth of around 0.9% nextyear, in line with the BoE’s forecast (1.0%). Forcompanies, a positive surprise may come fromforeign trade, on the back of the sharp deprecia-tion of sterling (at a 31 year-low against the dollarat the beginning of October), which could supportexports but have a negative impact on consump-

tion by triggering a rise in inflation. In addition,even with companies having adopted a wait-and-see attitude in relation to production and invest-ments, the expected decline in growth may leadto a less significant drop in insolvencies this yearand a rise next year (respectively -3.8% in 2016versus -9.6% in 2015, and +6.3% in 2017 by our estimates, see chart n°5). Finally, the risk on theproperty sector should be monitored followingthe freezing of property funds this summer. 75%of SMEs use their commercial real estate assets ascollateral, and the risk of transmission to the bank-ing sector is significant: according to the BoE, a drop of 10% in commercial property prices isassociated with a drop of 1% in global investment.Furthermore, the high level of household mort-gage debt (132% of available income), as well asthe overvaluation of prices by 34.6% according to the OECD, are causes for concern. The bankingsector is, however, better capitalised than in thepast.

Beyond Brexit, banking and political risks still remain the causesfor greatest concern in Europe


GROUP

In the US, after a blip in the first quarter, activitypicked up again slightly in Q2 on an annualisedquarterly basis (+1.4% after +0.8%). Consump-tion is less robust, the situation for companieshas not improved, and improvement on theemployment front is still being offset by lessimpressive job creation (less than 200,000 amonth). Japan continues its usual strategy, withthe extension of its policy mix, both monetary(cf. supra) and budgetary (announcement at thebeginning of August of a stimulus packagetotalling USD 130 billion, i.e. 3% of GDP, mainlytargeting infrastructure and deprived house-holds), in order to offset the weakness in privateinvestment, even though in May, it had decidedto delay the new VAT hike to 2019. Despite thesemeasures, the outlook is not expected toimprove significantly in the short term.

Growth posted a modest performance in theeurozone in 2Q (+0.3% in Q2 after +0.6%),mainly owing to lacklustre domestic demand.The results were disparate, however: Germanyand Spain held up well, and this year areexpected to post growth rates slightly higherthan expected previously, while France and Italyregistered near-zero growth, and forecastsremain stable or have been cut.

Beyond the impact of Brexit, concerns over thehealth of certain banks have grown. In fact,while the results of stress tests released on 29 Julyshow the good overall resilience of the 51 bankstested, they also highlight the difficulties ofaround a dozen of them, particularly in Italy.Their non-performing loans account for 12% oftheir portefolio, the Italian composite bankingindex fell (see chart n°6) and MPS (Monte deiPaschi di Siena), the country’s third largest bank,would have a CET1 ratio of -2.2 % in a stressedscenario. However, the bail-out plan approved bythe ECB, which will see the bank’s capitalincrease by EUR 5 billion and EUR 9.2 billion indoubtful loans sold, has reassured investors.Other banks, notably Irish (RBS) and German(Deutsche Bank and Commerzbank), are amongthe lowest rated. The exercise was however lim-ited in various ways. First, Greek and Portuguesebanks were not included in the sample, and sec-ond, the Brexit risk and the low interest rateenvironment do not seem to have been takeninto consideration. The IMF also states thatbanks are in a better situation in terms of capi-talisation and liquidity, but highlights thatDeutsche Bank represents one of the biggestsystemic risks for the global financial system (12)

(the markets were furthermore extremely nerv-ous at the end of September, and the share pricehas fallen by more than 50% since the beginningof the year).

Moreover, Italy also faces a rise in political risk,relating to the referendum on constitutionalreform intended to limit the Senate’s power (inorder to reduce obstruction), likely to be heldbefore the end of the year. The latest opinionpolls offer little visibility over the outcome, with30.1% planning to vote “yes”, 34.1% “no” and35.8% “undecided” according to a survey con-ducted by EMG Acqua on 19 September. The lat-est statements suggest that Renzi would notnecessarily resign in the event of a “no” vote, butif he did resign, this would trigger more uncer-tainty on the future of Europe, which is currentlyalready being questioned. Political risk is also anissue in Spain, where the situation remainsextremely delicate, as the country is still withouta government. The resignation of the leader ofthe socialist party could however create morefavourable opportunities. Nevertheless, this fragile political environment does not seem tobe having a strong negative impact on Spain’seconomy for the moment, and the country wasgiven an extension until 2018 to reduce its publicdeficit below the 3% of GDP threshold (13).

Chart n° 5UK: heading towards an increase in insolvencies

Chart n° 6Italy: Difficult banking situation

(12) IMF GFSR, April 2016(13) Coface Study “Will political risk “spoil the party” in 2017?” September 2016

05-2016

06-2016

07-2016

08-2016

09-2016

10-2016

11-2016

12-2016

01-2017

02-2017

03-2017

04-2017

05-2017

06-2017

07-2017

08-2017

09-2017

10-2017

11-2017

9.0%

4.5%

0.0%

-4.5%

-9.0%

110

90

70

50

30

10

13%

11%

9%

7%

5%

3%

2.5%

2.0%

1.5%

1.0%

0.5%

BankruptciesGDP

Sources: Nationales statistics UK, Coface

2010 2011 2012 2013 2014 2015 2016

Last data available: July 2016 (NPL) et August 2016 (Index)

Sources: Central Bank of Italy, Datastream

Index Italy BanksNon performing loans


GROUP

Brazil shows signs of improvement, although itis still mired in a difficult economic situation. Infact, activity is still slowing, with growth of -0.6%qoq in Q2 (after -0.4% in Q1), but at a muchslower pace than last year (an average of -1.5%per quarter). Nevertheless, the situation remainsfragile, as evidenced by the most recent indus-trial production index to be published, whichdeclined by 3.8% mom in August, the heaviestfall since January 2012 and a much more nega-tive figure than anticipated by consensus. The political environment is gradually becomingclearer with the approval by Congress on 31 August of the impeachment of Dilma Rouss-eff. Former president Lula is also set to standtrial in connection with the Petrobras corruptionscandal. Thus, the outlook seems to be improv-ing slowly, with an upturn in financial indicatorssince the beginning of the year (exchange rate,stock market, spreads), and a fall in inflation that suggests that the key interest rate will becut soon, hence a slight rise in growth can beexpected next year (growth of +0.6% in 2017, fol-lowing 3.4% in 2016 according to our estimates).Russia also seems to have reached a low againsta backdrop of oil price stability in the last sixmonths and, consequently, the rouble, too.

In Turkey, besides more attacks, the attemptedcoup triggered a purge, and the tourism industry(around 4% of GDP and accounting for morethan 16% of job creation over the years 2009-2013) was significantly affected by the height-ened insecurity. Tourism arrivals fell 40% in July(see chart n°7). Private consumption, the growthdriver of the economy, now seems to be showingsigns of weakness (retail sales down 2.7% yoy inJuly, the month of the attempted coup). This hasprompted us to revise down our growth fore-casts to 3.0% both for 2016 and 2017. With thecountry facing a significant external financingrequirement, exchange rate trends should bemonitored (all the more so against a backdropof a possible tightening in US monetary policy).The decline of the institutional environment andthe business climate is likely to begin to affectinvestment. However, the lira did not collapseagainst the dollar during the attempted coup,and the ongoing reconciliation with Russia,Egypt and Israel is likely to boost trade. Therecent downgrade of Turkey’s sovereign ratingby Moody’s in September to speculative statusis cause for concern.

Turning now to Asia, in China, the economic situation stabilised in the first half (growth of+6.7%), but the imbalances have still not beencorrected, notably in terms of continued lendinggrowth. In this context, the BIS’s latest report inSeptember confirms our fears regarding thebanking situation: the report highlights thecountry’s financial overheating, with a credit toGDP gap of 30.1, i.e. a very high level of risk (thehighest of the 23 countries studied), with a levelof 10 indicating that a banking crisis is probablein the next three years. This level is also highcompared for example with Japan (4.1) andother emerging countries, such as Brazil (4.6).

In India, the situation also remains delicate andis to be monitored, although the latest BIS reportdoes not indicate a high risk. Banking reform isa positive factor, and should clean up balancesheets. The first law on bankruptcies adopted inMay 2016 should help creditors in this process,because it authorises the banks to take controlof insolvent companies. The risk weighing oncompanies is solely related to large public com-panies, particularly in the infrastructure andcommodities sectors. SMEs could however suffermore as a result of the situation, because even iftheir balance sheets are healthier, they may dobusiness with large firms.

Nigeria was in recession in the first half of theyear. The situation remains extremely delicatefor the country in view of the importance of oiland gas to export revenues (90% of the total)and budget receipts (75% of the total). Growthin the country is therefore expected to be nega-

Mixed news on emerging markets

Chart n° 7Turkey: Tourist arrivals

2010 2011 2012 2013 2014 2015 2016

40%

30%

20%

10%

0%

-10%

-20%

-30%

-40%

-50%

Source: Turkstat

(y-o-y % change)


GROUP

Last available data: July 2016

Inset n°2

Such a good performance for Central Europe?

Central Europe compares favourably to the eurozone and other emerging regionsGrowth in central European EUmember states (3.4% in 2015) compares favourably with that of the eurozone (1.6%), Latin America(-0.7%), Arab countries (2.6%) andSub-Saharan Africa (3.0%), but iswell below that of emerging Asiancountries (6.6%). The regionalpublic deficit is close to that of theeurozone (2.4% of GDP versus 2%),but was weaker than in other emer-ging regions (3.7% in emergingAsian countries, 7% in Latin Ame-rica, 11.2% in Arab countries, and4.1% in Sub-Saharan Africa). Itspublic debt (50.2% of GDP) wasmuch lower than that of the euro-zone (93.2%) and close to those ofother emerging regions (46.4% inemerging Asian countries, 56.4% in Latin America, 37.6% in Arabcountries and 38.4% in Sub-SaharanAfrica). Its current account balancerecorded a surplus of 0.6% of GDP,which is better than Latin America(-3.6%), Arab countries (4.5%), Sub-Saharan Africa (5.9%), but belowthe eurozone (3%) and emergingAsian countries (2%).

High growth in Central Europe:domestic demand combineswith exportsHousehold consumption is stronglysupported by the rise in wages,increasing employment, tax cuts,and possibly, new social benefits.Private investment offset thedecline in public investment due tothe transition between two Euro-pean funding programmes, thanksto subsidised loans and tax cuts(Hungary, Romania), foreign directinvestment (Slovakia) and a reco-very effect (Bulgaria). Accommoda-tive budgetary and monetarypolicies are facilitated by weak or

negative inflation, as well as mode-rate budget deficits. Sales on wes-tern European markets have held upwell. The countries strongly integra-ted in the German production chainsuch as the Czech Republic, Hungaryand Slovakia are benefiting from the strength of German householdconsumption and the satisfactoryperformance of German exports.Owing to the strong presence of theautomotive industry, these countries,along with Romania, are benefitingfrom the boom on the European pas-senger car and commercial vehiclemarket. Exports performed well onoverseas markets, thanks to theweak euro with which local curren-cies, for the countries that are notyet part of the eurozone, fluctuate intandem.

Close integration in the European manufacturingindustry, particularly in theGerman oneWith generally more than 50% ofexports heading towards the euro-zone and more than 25% to Germany,and exports representing nearly50% of GDP for Poland and Romania,but double in Slovakia, Hungary andthe Czech Republic, dependence onthe western European economy ishigh. The links are particularly deve-loped in the automotive and house-hold appliance sector, where inte-gration in the German productionchain is evident. The presence ofwestern Europe is also strong in theretail sales and banking sectors.European manufacturers are attrac-ted by the region’s geographicaland cultural proximity, as well as awell-trained workforce that makes itmore competitive. Furthermore, EUcohesion funds will represent anaverage of 2.7% of regional GDPover the next seven years. Againstthis backdrop of close integration,

the anti-European sentiment innumerous central and eastern Euro-pean countries, fuelled by themigration crisis and exacerbated bythe Brexit vote and the populist andnationalist discourse of local politi-cians, is a bad sign for investors. Thereform of the European asylum sys-tem and the directive on postedworkers are being vigorously oppo-sed in most countries, while theEuropean Commission is criticisingthe rule of law in Poland and in Hun-gary. However, the risk of beingfined or of losing the right to vote,not to mention the exclusion of acloser union on the one side, andthe importance of the region forEuropean manufacturers (German)on the other, could lead to compro-mises.

But economic policy will not be able to support domes-tic demand indefinitelyIf continued, tax and social givea-ways could lead to a deterioration inthe budgetary situation, and callinto question the progress madesince the crisis. This risk was high-lighted by the IMF in particular inthe case of Romania and Poland,where the deficit is nearing 3% ofGDP, the level above which it isconsidered excessive by the EU.According to the EU’s growth andstability pact, the European Councilmay therefore decide on a fine anda partial suspension of Europeanfunding. The regional accommoda-tive monetary policy is enabled bythe recent drop in energy prices, aswell as the stances of the Fed andthe ECB. If one of these two factorschanges, the local monetary policyauthorities will probably tightenpolicy again in order not to see theircurrencies depreciate against theeuro, to maintain inflows and to holdinflation in check.


GROUP

tive, impacted by both the fall in oil prices perbarrel and its stabilisation at a low level on theone hand, and a sharp drop in oil productionrelating to tensions with the Movement for theEmancipation of the Niger Delta (MEND) on theother. Its decision to introduce more flexibilityinto its exchange rate in June led to a fall in thenaira, but the spread with the exchange rate onthe parallel market persists, notably as a result

of ongoing foreign exchange controls. Thisexplains our decision to downgrade the country.

Conversely, the outlook for Central Europeremains more positive than in other zones.Growth is expected to come in at 3% this yearand next, notably owing to favourable economicfactors but also the absence of significant imbal-ances (see inset n°2 page 8).

• Production of natural gas and crudepetroleum fell by 11.6 % and 9.5 %respectively in January-May 2016 yearon year, driven primarily by mainte-nance and upgrade of energy compa-nies.

• This trend is expected to continuegiven the maturing oil fields, mainte-nance activity by the companies in thesector, and also the impact of lowerinternational energy prices.

Mongolia: D• The country is highly impacted by thedrop in commodity prices and the Chinese economic slowdown (morethan 90 % of Mongolian exports aredirected toward China). GDP growthcame from 17.3 % in 2011 to 2.3 % in 2015(0.5 % expected in 2016).

• Macroeconomic fundamentals con-tinue to deteriorate and the authoritieshave acknowledged that public debt issignificantly higher that what older fig-ures showed.

• The currency has sharply depreciatedand the country, on the verge of a bal-ance of payment crisis, requested IMF’sintervention.

Nigeria: D• Nigeria's GDP is set to shrink on anannual basis in 2016.

• Fiscal revenues (around 75 % comingfrom the oil and gas sector) are hit bythe slump in oil price and decrease in oilproduction, hindered by sabotages ofoil facilities in Niger Delta.

• Since June 2016, when the Central Bankof Nigeria introduced some flexibility inexchange rate, the naira has lost more35 % of its value against the dollar.

• The reduction in oil exports (90 % ofthe total), consequence of the com-bined effect of decrease in volume andprice, led to shortage of foreign curren-cies with severe impact on industrialproduction.

BAROMETER

COUNTRY RISK ASSESSMENTS CHANGESASSESSMENT EITHER DOWNGRADED, OR REMOVED FROM POSITIVEWATCH LIST OR PLACED UNDER NEGATIVE WATCH LIST

October 2016

Country risk COUNTRY new

United Kingdom A3

Oman B

Trinidad and Tobago B

Mongolia D

Nigeria D

Oman: B• External shock due to the drop in oiland gas prices: Omani economyslowed considerably in 2016. The sul-tanate, heavily dependent on thehydrocarbon sector (35 % of GDP) isimpacted by the low prices. Omanmanaged to maintain high growth ratein 2015 thanks to large public invest-ment which have limited the initialshock. However, public spendingincreased amid contractions in oil rev-enues generated significant publicdeficit in 2016 (around 17 % of GDP).The decrease in spending has led tobudget cuts on some infrastructureprojects which had a negative impacton non-oil sector.

• In 2017, the economy should continueto slow. Consumer confidence is weak-ening, investment growth is expectedto moderate with lower public expen-ditures. Moreover, twin deficits areexpected to remain significant, con-straining the government ability to tapon international debt markets.

Trinidad and Tobago: B• The contraction in activity that beganin 2014 in the wake of the collapse in oiland gas prices continues to deepen in2016.

• The sharp price decrease stronglyaffected the energy sector (oil and nat-ural gas production), the key driver ofthe economy (approximately 40 % ofGDP, 50 % of fiscal income and morethan 80 % of merchandise exports).

United Kingdom: A3• The exit of the UK from the EuropeanUnion (Brexit) will have a negativeimpact on activity, even if its magnitudewill depend on the exit process. In ourcentral scenario, growth should onlyreach 0.9 % next year.

• The lack of details on these exitmodalities brings some uncertainty,which will lead to the report of con-sumer and investors’ decisions anddrag on growth.

• Authorities are worried about the Brexitimpact on activity as highlighted by thedecrease in the BoE key rate to 0.25 %for the first time since 2009 and theextension of the quantitative easingprogram. Stimulus measures areexpected before the end of the year.

Country risk assessments

Country risk assessment assessesthe average risk of paymentdefaults by companies in a givencountry. This evaluation combineseconomic and political prospectsofthe country, Coface paymentexperience and business climateassessment. This evaluation has 8grades: A1, A2, A3, A4, B, C, D, EThis scale included so far only 7notches. An eighth category hasbeen created to add granularity in analyzing country risk: some of the countries belonging to thecategory D are now included in thisnew category E synonymous withextremely high credit risk.


GROUP

10

AUSTRIA

Strengths Weaknesses

l Central position in Europe and attractive standardof living

l Industrial and tertiary sector diversification l Non-price competitiveness thanks to family companies and niche products

l Low household and corporate debtl High rate of employment and low youth unem-ployment (role of apprenticeships and 'flexicurity')

l 30% of energy consumed is renewable l Tourism assets

l Dependence on German and central/eastern European economic cycles

l Banking sector very exposed to countries of central, eastern and south-eastern Europe

l Lack of risk capital and insufficient R&Dl Multiple levels of government and administration(Federal State, Länder, municipalities)

l Low employment rate of older people with effective retirement age under 60

l Low demographic growth with insufficient birthrate

Germany Italy UnitedStates

SwitzerlandFrance

30%

7%5% 5%

4%

Germany Italy Czechrepublic

NetherlandsSwitzerland

42%

6% 5% 4%4%

Exports of goods, as a % of total

Confirmation of the recovery in 2016

While growth is expected to be modest, it will betwice as fast as in 2015. Its main driver will be mostlyprivate consumption and investment. Income taxreform implemented in January 2016 will allow Aus-trians to save up to 5 billion euro (a relief of around1000¤ per worker or retired), thus consumption willstrongly increase in the coming months if individualsdo not save their extra income. The increase in othertaxes intended to finance this reform is expected tohave a weak recessive effect. Besides, refugees andtheir integration will also give a boost to the domes-tic demand and in fine to growth. Investment, whichhas become positive in 2015, is likely to increaseslightly again even though this forecast is based onuncertain climate linked to presidential election inDecember, moderate growth of the euro zone fol-lowing the Brexit announcement and, eventually,challenges faced by the Austrian banking sector.Public expenditures will continue to increase due tothe ongoing banking sector restructuring, althoughit is evolving along the right path. Exports of indus-trial equipment, construction machinery, automotiveparts and vehicles (these three sectors alone makingup 40% of the total), chemicals and agro-food prod-ucts, but also tourism, IT and financial services areexpected to benefit from more robust demand onEuropean markets and from the weak euro, whichwill offset the sluggishness on distant emerging mar-kets. However, with imports increasing in line withdomestic demand, trade's contribution to growth islikely to be zero.

Fiscal consolidation pending

Fiscal policy will be neutral in 2016. The reform ofincome tax involving the creation of three new taxbrackets and the cut in the rate on low incomes willcost the equivalent of a bit more than 1% of GDP. Thepresence of refugees will result in estimated additionalspending between 0.1 and 0.2%. This is expected to beoffset by the fight against tax evasion, an increase inthe median VAT rate from 10 to 13% on entertainment,hotels… and in the tax on capital income from 25 to27.5%. The objective of achieving structural budgetaryequilibrium (i.e. excluding cyclical effects) from 2016set out in the 2012 fiscal package is in jeopardy, as theexpected deficit will nearly reach 1%. However, from2017, the country will be obliged under its Europeancommitments to make an effort representing annually1.25% of GDP aimed at bringing its debt down to the60% threshold over twenty years. Savings on pensionsand health insurance (gradual raising of the retirementage, tougher eligibility criteria for incapacity benefits)will be limited. The involvement of the Länder and themany municipalities (1/3 of public spending) could dis-appoint, given that they draw most of their resourcesfrom federal taxation. Nonetheless, subsidies, especiallyon transport, which represent 4% of GDP, are a poten-tial source of saving. Consolidation will be a major issuefor the Grand Coalition of social democrats from the

SPÖ and conservatives from the ÖVP until the nextelections in 2018. The problem is that neither party isable to agree on how to proceed: the SPÖ are in favourof increasing contributions, while the ÖVP would preferto cut spending. The restructuring is conditioned by theassumption that the bank rescue programme, at theorigin of 25% of the debt, is coming to an end. The posi-tion of the banks, whose assets in Central and EasternEurope represent 33% of GDP, has greatly improved.Against a background of a cyclical upturn, their activityin Central and Eastern Europe is again profitable over-all. 90% of their outstanding loans are covered by localdeposits. Nonetheless, 37% of their regional assets arelocated in countries classified as speculative. Moreover,while their situation is very favourable in the CzechRepublic, Slovakia and Poland, it remains mediocre inHungary, Rumania, and Croatia and poor in Russia,where they have considerable assets and high levels ofnon-performing loans.

Robust trade in services surplus and fragiletrade surplus in goods

The modest current account surplus covers a robustand significant surplus on trade in services (3% ofGDP) and a weak, probably temporary, surplus ontrade in goods. In recent years, businesses have beenconfronted with an erosion of their productivity whilelabour costs have been rising. Moreover, they arefaced with service costs made relatively high by thelack of available labour and competition. This is likelyto affect their price competitiveness and result inseveral German clients, especially in the automotivesector, going to countries in Central and EasternEurope for their supplies. At the moment, their tech-nological edge, proximity to Germany, low energyand credit costs, as well as the depreciation of theeuro is protecting them. This was reflected in a 5%decrease in company insolvencies in 2015, whichmight slightly level up in 2016 if the trend of the firsthalf rolls on.

RISKASSESSMENT

COFACE ASSESSMENTS

TRADEEXCHANGES

A1

A1

Country risk

Business climate

Medium termVERY

HIGH RISK

2013 2014 2015 2016 (f)

GDP growth (%)

Inflation (yearly average) (%)

Budget balance (% GDP)

Current account balance (% GDP)

Public debt (% GDP)

MAIN ECONOMIC INDICATORS

Population (millions of persons-2014) 8.5(f): forecast

GDP per capita (US dollars-2014) 51,433

0.3 0.5 0.8 1.4

2.1 1.5 0.9 1.9

-1.3 -2.7 -1.8 -0.8

2.1 2.1 2.9 2.2

80.8 84.2 86.0 87.0

Imports of goods, as a % of total

11

COLOMBIA

Strengths

Weaknesses

l Access to two oceansl Large population (nearly 50 million)l Abundant natural resources (agricultural and mineral)

l Considerable tourism potentiall Prudent economic policyl Institutional stabilityl Sound banking system

l Sensitive to raw materials prices and the American economic cycle

l Road and port infrastructure deficienciesl Problematic security situation linked to drug trafficking

l Educational and healthcare shortcomingsl Large informal sector (60% of jobs)l Lack of skilled labour and low productivityl Legislative, judicial and administrative delays, corruption

l Structural unemployment, poverty and inequality

UnitedStates

Euro-zone

Panama IndiaChina

26%

14%

11%

7%

5%

UnitedStates

China Mexico BrazilEuro-zone

2

29%

18%

12%

4%

8%



Slowdown in activity in 2016

In 2016, activity is expected to suffer again from theweakness in commodity prices, oil prices in particu-lar, and the slowdown in private consumption. Thecountry's economic performances are effectivelyclosely tied to hydrocarbon exports (nearly 50% ofthe country’s exports) and to a lesser extent miningand agricultural activity. The weak price of hydrocar-bons, which generates about a third of state rev-enues, is likely to curtail public investment whilehousehold consumption is affected by the risinginflation and unemployment that affects their pur-chasing power. Private investment primarily intended for the energysector is expected to remain sluggish due to weak oilprices and rates hikes by the central bank for tentimes, after the increase decided in September 2015.The increase in production capacity of the largestrefinery of the country should however help toincrease industrial production. The tourism sector isalso expected to benefit from progress on the peacedeal with the FARC.Inflation is expected to increase, particularly affectedby rising food prices due to the drought that hasgripped the country in the first half of this year,caused by El Niño.

Budget and current account deficits stilllarge

The public deficit deepened in 2015, hit by the fall in oilprices, which represent almost a third of State income.This trend is set to continue in 2016 due to the persist-ent weak of hydrocarbon prices. Despite an expected reduction in investment spending,the anticipated increase in current spending becauseof higher transfers to the regional governments, stipu-lated under the constitution, is likely to reduce the cen-tral government's room for manoeuvre. Colombia, witha reputation for fiscal rigour and an orthodox economicpolicy, is committed to respecting the law on budget-ary equilibrium adopted in 2011, which provides for thereturn of the central government's structural deficit to1% of GDP by 2022. The plan to abolish net worth taxand the financial transactions tax, which had beenpostponed to 2018-2019, could, therefore, be cancelled. Regarding foreign trade, the current account deficit isexpected to decline thanks to the reduction in importsof consumer goods, affected by the depreciation of thelocal currency. Imports of oil derivatives are alsoexpected to reduce given the increase in production ofthe refinery Refica (in Cartagena). However, oil exportsshould remain low affected by both lower prices andlower US demand. Exports of minerals, especially coalare also affected by the weak prices.

Important advances in peace negotiationswith the FARC

On June 2016, the Colombian government and theRevolutionary Armed Forces (FARC) took a furtherstep in the peace process with the signing of a his-toric ceasefire and disarmament agreement of therebellion. This is an important step in the negotia-tions initiated by President Santos since 2012. Thisagreement will be subject to approval of the peoplethrough a plebiscite scheduled for October 02th. The desire of both sides to put an end to the conflictbodes well and is a major step forward for Colombia.The Colombian authorities are talking of a peace dealbeing signed in March 2016 and believe that animprovement in the security climate could have apositive impact on the economy of somewherebetween 1 and 2% of GDP. A positive outcome to thepeace talks does not mean that Colombia will be freeof its internal problems such as drug trafficking andcrime. The guerrillas are only indirectly linked to drugtrafficking and to the drug traffickers and emergingcriminal bands (BACRIM), which are also involved inthe trafficking of narcotics. In the long term, however,the peace deal should strengthen the institutionalframework, help boost investment and the country'ssocial development.

RISKASSESSMENT

COFACE ASSESSMENTS

TRADEEXCHANGES

A4

A4

Country risk

Business climate

Medium termMODERATE

RISK

2013 2014 2015 2016 (f)

GDP growth (%)




Public debt (% GDP)




4.8 4.4 3.1 2.0

2.0 2.9 5.0 7.3

-0.8 -1.7 -2.8 -3.1

-3.3 -5.2 -6.5 -6.0

37.7 44.2 49.3 49.3

12

GABON


l 5th largest oil producer in Sub-Saharan Africa; 2nd largest African timber producer; aiming to bethe world's leading manganese producer

l Economic diversification efforts undertakenunder the “Plan Gabon Emergent”

l Economy highly dependent on the oil sectorl Re-emergence of budget and current account deficits

l High cost of production factors linked to infra-structure inadequacy (transport and electricity)

l High unemployment and widespread povertyl Fragile political environment


China Japan Australia United States

Euro-zone

E

16%15%

11% 11%

8%

Euro-zone

China Benin United Kingdom

UnitedStates

42%

12% 11%

2%4%


Growth hit by oil price collapse

Growth declined sharply in 2015 under the impact offalling oil prices and the significant drop in oil outputas a result of strikes and the rehabilitation of a num-ber of wells. There was then the impact of cuts ininvestment spending which the government wasobliged to make to keep the public finances undercontrol. Growth is expected to continue to decline in2016 to 3.2%. However, the rise in spending to easesocial tensions before the presidential electionshould boost private consumption, and foreign loansshould reinforce investment projects in agricultureand value added industry. Public sector wage hikesin 2014-2015 fuel the increase in prices, thereforeinflation should increase in 2016. Inflation shouldincrease in line notably with the rise of the wage bill.The discovery of new oil deposits did not compen-sate for the gradual depletion of older wells and thecountry has to deal with a decline in its oil produc-tion. Low oil prices prospects and the decrease in oilproduction are the source of the slowing down inpublic investment, thus efforts to diversify and mod-ernise the economy, undertaken by the authorities aspart of the Plan Stratégique Gabon Émergent(PSGE), could be impeded.Despite the country’s oil wealth, poverty (30% of thepopulation live below the poverty line) and unem-ployment levels remain high (19.7% in 2014). Thiswealth did not translated into a real improvement inliving conditions of the population as a result of largenumber of obstacles to development such as inade-quate infrastructure, in particular transport, short-ages of skilled labour and poor business climate,constraints that could one day be overcome if theobjectives of the PSGE are achieved.

Public and external accounts into the red

On the fiscal front, the fall in oil receipts, which providedover 45% of government revenues in 2014, forced thegovernment to cut public spending as of 2014. Thereduction reached 14% in 2015 but should be muchsmaller in 2016, as a result of the upcoming elections.Capital spending in particular has been regularlyrevised downwards although the government statedthat it does not want to cut this too heavily in priorityareas (transport and information and communicationtechnologies). The budget surplus narrowed in recentyears as a result of the huge increase in public invest-ment resulting from the launch of the PSGE. With thefall in oil prices and the downward trend in oil produc-tion, this surplus turned into a deficit in 2015. Govern-ment debt has more than doubled since 2012, from20% to 44% of GDP in 2015 (exceeding the 35% of GDPdebt ceiling). Furthermore, Gabon has to deal withhigher borrowing costs on the bond markets.

In 2015 the country recorded its first current accountdeficit since 1999 as a result of the sharp decline in oilexports (80% of sales of goods abroad until 2014), andthis despite the fall in imports associated with reducedpublic demand and global prices for basic products.Exports are expected to keep declining, still affectedby low oil prices and lower oil production, offsetting thegrowth of manganese and wood exports. Thus the cur-rent account deficit should widen even if imports coulddip due to the fall in real incomes. The deficit in the balance of invisibles would slightly diminish as theslowdown in activity will reduce the demand for serviceimports.

Deteriorating political situation since the August 2016 presidential election

The disputed re-election of Ali Bongo, in August2016, triggered violent clashes between supportersof the opposition candidate and security forces inseveral cities across the country. The ConstitutionalCourt, however, confirmed the victory of the incum-bent President on September 23. This decision wascoldly received by the international community, towhich the opponent Jean Ping appealed. The Euro-pean Union election observation mission regrets thatthe Court was not able to rectify the "obvious anom-alies" observed during the counting of votes. Restor-ing public confidence in the country’s institutions willnot be easy. The political situation is all the morevolatile given that parliamentary elections areplanned for December 2016.

RISKASSESSMENT

COFACE ASSESSMENTS

TRADEEXCHANGES

C

C

Country risk

Business climate

Medium termRATHER HIGH RISK

2013 2014 2015 2016 (f)

GDP growth (%)




Public debt (% GDP)




5.6 4.3 4.0 3.2

0.5 4.5 0.1 2.5

1.8 2.7 -2.3 -4.8

11.6 8.1 -2.8 -7.2

29.2 32.2 43.9 49.6

13

INDIA


l Diversified growth driversl Sound fundamentals: high level of savings andforeign investments

l Effective private sector in services l Moderate external debt and satisfactory foreignexchange reserves

l Lack of infrastructure and shortcomings in theeducation system

l Cumbersome bureaucracy and persistent politicaldeadlocks

l Net importer of energy resources l Rising debt of private companiesl Weak public finances l Persistent uncertainties over the Kashmir issue


UnitedStates

Euro-zone

Hong Kong ChinaUAE

13%12%

10%

4% 4%

China Euro-zone

UAE UnitedStates

SaudiArabia

13%

8%7%

5%6%


Growth will again be driven by consumption

Activity is likely to remain vigorous during the fiscalyear 2016/17. The Indian economy will continue tobenefit from the low level of commodity prices andthe effects of the initial reforms Narendra Modi’s gov-ernment has undertaken, aimed at promoting theIndian manufacturing sector, attracting FDI andreducing the constraints that are weighing on theeconomy.Household consumption, the main driving force ofactivity, will probably remain buoyant. It will benefitfrom an increase in wages paid to federal civil ser-vants and the improvement in the financial integra-tion of the lowest-income households. In addition, in2016-2017, agricultural production will be boosted byabove average monsoon rains, which should main-tain low prices and, thus, support consumption. Fur-thermore, despite the accommodating monetarypolicy conducted by the central bank (RBI), with thekey interest rate lowered by 150 basis points to 6.5%since January 2015, private investment struggle totake off. Indeed, RBI’s reform encouraging banks torecord their non-performing loans (between 7% and8% of total outstanding credit) on their balance sheetwith a 100% provisioning by March 2017, as well asovercapacity will weigh on investment. However, theinfrastructure development programme, particularlyin the areas of roads, railways and electricity wouldenable important public investments. Nevertheless,the budgetary constraints and the delays relating tothe land reform will slow the progress of these proj-ects. Moreover, exports are likely to continue to sufferfrom a lack of competitiveness and from the slug-gishness of global demand, even if the services sec-tor, especially the high-technology, will continue topost good performances.Inflation will remain under control in 2016-2017,thanks in particular to the moroseness of commodityprices, first and foremost food, oil and gold.

Public finances remain fragile, but externalaccounts are under control

Despite the determination of the authorities aided bylow energy prices reducing the burden of subsidies, thefiscal deficit and the public debt remain significant.Authorities recapitalized public banks (75% of bankingassets) up to 3.4 billion dollars in July 2016, but the pur-suit of the banks’ balance sheet cleaning desired by thenew governor of RBI, Urjit Patel, may take an additionaleffort. The potential implementation in 2017 of a federalVAT, substituting to a pile of local taxes, may requirecompensations from the federal budget to the benefitof aggrieved federated states. In this context, the saleof frequency to telecom operators and further privati-zations could help control the deficit.

The current-account is expected to remain under con-trol despite the slowdown in exports. Indeed, the lowlevel of commodity prices should make it possible tokeep a lid on imports cost. Helped by comfortable for-eign exchange reserves (almost 9 months of importsin 2016) and the rise in FDI and portfolio investmentsfostered by regulations easing, this should contributeto maintain the stability of the rupee.

Conflictual relations with Pakistan and fizzling reforms

Following the general elections in May 2014 whichgave a resounding victory to the BJP (BharatiyaJanata Party), N. Modi was appointed prime ministerand his party holds the absolute majority in the lowerhouse of parliament. Elections that have been heldin several important states have initially confirmedthe BJP’s popularity, but the party has subsequentlyhad several electoral setbacks, notably in Delhi andin the state of Bihar, and is threatened in Gujarat. Themain opposition party, the National Congress, con-tinues to dominate the upper chamber, delaying thereforms expected by the business community, whichreacted very favourably to the election of Mr Modi. The relationship with Pakistan remains tense due tothe Kashmir issue, a region disputed by the twocountries. Violent confrontations between demon-strators and the police in the Indian Kashmir havestopped discussions between the two governments,already undermined by the attack of an Indian base,in the state of Punjab, in January 2016.Finally, despite the undertaken reforms, with, in par-ticular, the modernization of bankruptcy law and theforthcoming introduction of a federal VAT, the busi-ness environment will continue to suffer from per-sistent gaps. The opening to FDI in pharmaceuticals,civil aviation and single brand retail encountersstrong difficulties of application. Some key measurespromised by the Prime Minister, such as the relax-ation of rules on land expropriation and the labormarket, are blocked by the Parliament.

RISKASSESSMENT

COFACE ASSESSMENTS

TRADEEXCHANGES

A4

B

Country risk

Business climate

Medium termFAIRLY LOW RISK

2013/14 2014/15 2015/16 2016/17 (f)

GDP growth (%)*


Budget balance (% GDP)**


Public debt** (% GDP)*


Population (billion of persons-2014) 1.3(f): forecast * Takes into consideration changes in GDP calculation method introduced in February 2015** Includes federal public debt and debt for local authorities. Fiscal year: April – March


6.9 7.3 .7.6 7.5

9.4 5.9 4.9 5.3

-7.7 -7.0 -7.2 -7.0

-2.6 -1.3 -0.8 -1.3

65.8 66.1 67.2 66.5

14

ITALY

Strengths

Weaknesses

l Relatively high economic weight of industryl High-end products (fashion, home wares, foodproducts, mechanical engineering)

l Moderate debt levels of private sector; high savings capacity

l Variety of tourism assets

l Weak profitability of small companies and banksl Inadequate private and public investmentl High level of structural unemployment (9%), par-ticularly among the young (40%)

l Low participation rate of women / lack of facili-ties for early childhood

l Sizeable informal economy (20%)l Inefficient public sectorl Backward Mezzogiorno region


Germany France UnitedKingdom

SwitzerlandUniutedStates

13%

11%

7%

5% 5%

Germany France Nertherlands SpainChina

16%

9%

7%

5%6%


Companies continue to struggle

After a prolonged recession, the Italian economyreturned to moderate growth. However, the recoveryremains weakened by the subdued world growth, aswell as the rise of uncertainty and financial marketvolatility on the back of the UK vote to leave the Euro-pean Union (EU). Economic growth is expected to bearound 0.9 % in 2016. Despite sluggish activity in thesecond quarter and the damage from the earthquakethat struck central Italy on August 24, the main vectorfor this will be domestic demand which benefits fromgrowing confidence. With low inflation and easiercredit, household consumption should be boosted bythe improving jobs situation and the unemploymentrate, below 12% in 2016, in step with the reforming ofthe labour market (the Jobs Act in 2015) Investmentis also expected to record a slight growth, on average,for the year as a whole. However, banking issues couldlimit the investment recovery, unless there is astrengthening of banks and companies balancessheets. The moderate growth in European demand,the weakness of the euro and the fall in imported oiland gas prices should offset the rise in imports, con-sequent on strengthening domestic demand, and thedepressed state of emerging markets, helping to pro-duce a small positive contribution from trade. Insol-vencies have decreased by 30% on the first quarter of2016 compared to the previous year. Neverthelesscompany profitability will remain weak, especiallyamong the smaller companies that form the basis ofthe economic fabric. These continue to be subject toa high level of tax and charges, an ineffective publicsector, in particular in the centre and south of thecountry, and the unwillingness to lend by the banks.Despite reforms, the legal system is slow (taking upto seven years for liquidation).

Massive public debt and delayed budgetaryreform The government is focusing on recovery ahead of fiscalconsolidation. Moreover the European Commission hasallowed more budgetary flexibility; this represents abudgetary margin of 0.85% of GDP in 2016. In addition,the Commission has granted a margin of 0.1 point forthe security costs and to manage the migratory crisis.The public debt is likely to remain high and reach 133 % of GDP this year, thus constraining the govern-ment’s ability to manoeuvre. The government is lookingto increased growth and lower rates to boost receiptsand limit interest payments on the debt, currently run-ning at 4% of GDP. The country will remain vulnerableto a loss of confidence by the market and a change inEuropean monetary policy, although the relatively longterm maturity of the debt and the fact that residentshold 53% of it, limit the risk.

A current account surplus

Despite the energy deficit equal to 2.5% of GDP,trade in goods and services is in surplus by 3% ofGDP. This performance relies on famous brands, atop-end positioning and niche products in a varietyof sectors as diverse as industrial and electricalequipment, clothing, leather goods, optics, jewellery,food products, home wares, automotive vehicles andmedicines. Tourist income is significant thanks to the

extensive tourism heritage, but this is offset by asizeable deficit in terms of transport. The balance oftrade surplus easily covers debt interest paymentsand the remittances of foreign workers.

A current account surplus

Despite the energy deficit equal to 2.5% of GDP, tradein goods and services is in surplus by 3% of GDP. Thisperformance relies on famous brands, a top-end posi-tioning and niche products in a variety of sectors asdiverse as industrial and electrical equipment, clothing,leather goods, optics, jewellery, food products, homewares, automotive vehicles and medicines. Tourist income is significant thanks to the extensive tourismheritage, but this is offset by a sizeable deficit in termsof transport. The balance of trade surplus easily coversdebt interest payments and the remittances of foreignworkers.

A weakened banking system

Non-performing loans represent a high level of theportfolio 18% (EUR 360 billions). Some banks in par-ticular are at risk: from January to July 2016, the Italianbank stock index has lost 50% of its value. Deeply affected, Monte dei Paschi di Siena has recorded a lossof 80% of its stock price over the past year. The ECBapproved the rescue plan, involving the sale of 9.2 bil-lion euros of non-performing loans and to raise capitalworth of 5 billion. Unsurprisingly, the stress test results,issued on July 29th, underscored the weakness of thebank (in the sample MPS is viewed as the most at risk).

Reforms to solve the problem of governmen-tal instability and legislative inertia

The reforms of the Prime Minister, Mr. Renzi, dependon a fragile centre-left coalition between the PartitoDemocratico (PD) and Nuovo Centro Destra (NCD)parties, as well as occasional allies. The improvementsin the economic situation and the impossibility of win-ning a clear majority with the current proportional vot-ing system discourage political formations fromseeking fresh elections. The dispersal of the right andthe divergences between its leaders, S. Berlusconi forForza Italia and M. Salvini for Lega Nord, are not likelyto encourage the NCD to join them. This could allchange in July 2016 with the entry into force of thenew electoral law, known as Italicum, which includes amajority bonus system, then followed in the autumn2016 with the holding of the referendum on the endingof the bicameral system that would turn the UpperHouse into a consultative chamber. However, theItalicum may be amended. Moreover, Mr Renzi weak-ened his position by personalizing the referendum. Ifhe does not succeed, he is at risk of being overturned.Currently (September 2016), the populist Five StarMovement, which won the municipal elections in Romaand Turin a short time ago, is catching up with the PM’sparty in the polls for the parliamentary elections (normally due in 2018).

RISKASSESSMENT

COFACE ASSESSMENTS

TRADEEXCHANGES

A3

A2

Country risk

Business climate

Medium termVERY

HIGH RISK

2013 2014 2015 2016 (f)

GDP growth (%)




Public debt (% GDP)




-1.8 -0.3 0.6 0.9

1.2 0.2 0.1 0.2

-2.9 -3.0 -2.6 -2.7

0.9 1.9 2.1 2.3

128.9 132.5 132.6 133.0

15

NIGERIA


l The leading African power in terms of GDP andthe country with the largest population in Africa

l Significant hydrocarbon resources and largeagricultural potential

l Low level of public and external debts

l Highly dependent on oil revenues (90% of exports and 75% of tax revenue)

l Low fiscal receipts: 6% of GDPl Insufficient refining, gas and electrical capacitiesdue to price control

l Ethnic and religious tensions l A negative impact on the business climate from insecurity and corruption


Euro-zone

India SouthAfrica

JapanBrazil

30%

15%

10%

6%4%

China Euro-zone

India Unitedkingdom

UnitedStates

26%

15%

10%

3%5%


Activity in the non-oil sector will not tocompensate for slump in oil activity

Activity in construction, traditionally dynamic inNigeria, is dampened by the postponement of publiccapital expenditure program. Activity in the manu-facturing sector could furthermore, be limited byerratic electricity supply as well as currency controlsrestricting the importing of 41 types of goods. Oilproduction is likely not to increase in 2016, owing,both, to attacks on petroleum infrastructures byrebels (Niger Delta Avengers) in the Niger Delta, pro-ducing the majority of Nigerian oil, and low prices.Furthermore, the lack of a legal framework (negoti-ations between executive and legislative for theadoption of the Petroleum Industry Bill expectedsince 2008 are suspended) discourage investment inthe sector. Overall, investment, already affected byinsecurity and administered prices is likely to declinebecause of weak domestic demand and the interestrate of the central bank (CBN) increased from 12 to14 % in July 2016. With oil production value droppingby a third, the contribution made by net exports togrowth should be slightly negative. Private consump-tion is expected to remain limited by the high levelof inflation. Price increase is expected to be fuelledby the pass-through of imported goods inflationrelated to the sharp devaluation of the naira, triggeredby the dropping of its peg to the US dollar, but aboveall by the rise in administrated prices. In the end, 2016growth is expected to be negative, a first since 1984.

The budget deficit would worsen, but thecurrent account deficit would stabilize

Despite the drop in its revenues, with around 75% com-ing from the oil and gas sector, the widening of thepublic deficit should be limited because the devalua-tion leads to an increase in the naira equivalent of oilreceipts in dollar which is only partly consumed by theeffect of the rise in inflation on expenditure. Either waythe government decided to increase expenses, notablyin infrastructures, which the country lacks. However, thebudget being adopted more than four months after thebeginning of the year, the enforcement of the invest-ment program lags behind.The cut in the heavy subsidies on food and fuel pricesis slowed down by legislators’ reluctance and legalrecourse.The current account deficit that emerged in 2015 is notexpected to widen. The reduction in oil exports (90%of the total), attributed to the combined effect of vol-ume and price, is likely to be offset by the fall of importsdue to higher import prices and decline in investment.Moreover, repatriation of dividends will be less impor-tant. Downward pressure on the naira pushed the CBN tointroduce measures during 2015 prohibiting the pur-chasing of currencies for the importing of certain

goods, with the aim of protecting its reserves (approx-imately 5 months of imports). The situation becomingunbearable the CBN had to put an end to the dollarpeg and to let the naira float on June 20th 2016.Between this date and mid-September, the naira lostmore than 35 % of its value against the dollar. Despitethe implementation of a flexible exchange rate regime,CBN reserves the right to intervene on the markets andmaintains foreign exchange control measures enforcedin summer 2015 on about 40 products, thus maintain-ing the existence of a parallel market. The banking sector, heavily exposed to the oil and gassector (around a quarter of all loans) is feeling the ram-ifications of lower oil prices, as well as the problems ofaccessing foreign currency met by some companies.As a result of persistent mistrust of foreign investorsand local actors shortage of foreign currencies is likelyto last.

Confrontations with Boko Haram jihadists andsabotages in the petroleum area

The victory of Muhammadu Buhari and his newlycreated AII Progressive Congress party in the 2015elections represents a real change of power after thedomination of the People’s Democratic Party since1999. The new President has made fighting corrup-tion one of his priorities (Nigeria was in 194th placeout of 215 in 2014 in the World Bank classification).Considerable efforts will be needed within theadministration of the 36 federated states, which haveadopted bad habits when oil wealth was abundant.Expectations within the population are huge withregard to the new President, particularly in this area.An overly slow implementation of reforms, but alsoa too fast reduction in subsidies in the context ofsluggish growth, could give rise to increased socialtensions and instability.The security situation remains very unstable in thenorth-east of the country under attacks from theBoko Haram radical Islamist movement. In the Nigerarea, the greatest provider of oil, rebels ask for a bet-ter distribution of resources and sabotage oil instal-lations. The president being a Muslim from the northdoesn’t make negotiations any easier.

RISKASSESSMENT

COFACE ASSESSMENTS

TRADEEXCHANGES

D

D

Country risk

Business climate

Medium termFAIRLY

HIGH RISK

2013 2014 2015 2016 (f)

GDP growth (%)




Public debt (% GDP)




5.4 6.3 2.7 -1.5

8.5 8.0 9.0 15.0

-2.3 -1.8 -3.7 -4.4

3.6 0.2 -3.1 -3.1

10.5 12.4 14.4 17.0

16

RUSSIA

Strengths Weaknessesl Abundant natural resources (oil, gas and metals)l Skilled labour forcel Low public debt and comfortable foreignexchange reserves

l Assertion of regional and energy power

l Increased rentier nature of the economyl Lack of competitiveness of the industrial sectorl Weak private banking sectorl Weak infrastructuresl Declining demographyl Persistent deficiencies in the business climate


Euro-zone

China Japan BelarusTurkey

39%

8%

5%4% 4%

Euro-zone

China Belarus JapanUnitedStates

29%

18%

7%

4%4%


Economy to shrink again in 2016

The recession in Russia is expected to continue butwill be less severe in 2016. Growth decreased by 1.2%in the first quarter 2016 and 0.6% in the second (yearon year). Private consumption, the main growthdriver, is likely to remain constrained by a slowerincrease than in the past of nominal revenues, a rel-atively restrictive fiscal policy and the preference ofhouseholds, noted at the beginning of the year, fordeleveraging instead of consuming. Investment willremain limited by the lack of business owners' confi-dence, high interest rates (10% in September 2016),as well as by ongoing restrictions on financing in for-eign currency imposed as part of western sanctions,extended for six months (to the end of January2017). Budget constraints will limit the support forpublic investment. Spending increase in the hydro-carbon sector and defence may slow down. Inflation could slow, mainly due to the strengtheningof the ruble, but the consequences of the embargoplaced on the purchase of certain products in Europeand Turkey, extended to the end of 2017, may keepthe prices of imported goods, especially food, rela-tively high.

Worsening fiscal and current account balance

The fiscal deficit is expected to slightly deepen in 2016.Low oil prices are likely to continue to put pressure onhydrocarbon revenues (50% of total), while weak activ-ity will curtail non-oil revenues. The draft 2016 budget,based on an oil price of $ 50/barrel, includes a slowincrease in pensions (4%) and a freeze on public sectorwages, with a view to limiting the deterioration in thepublic finances and State indebtedness. The defencebudget is, nonetheless, likely to continue to rise mod-erately. However, the State has comfortable foreignexchange reserves to cover this thanks to (reserve andsovereign) funds already called on in 2015, but stilltotalling almost USD 105 billion (9% of GDP) in August2016. The government launched early July 2016 the pri-vatisation program with the sale of 11% in the diamondcompany Alrosa but suspended the sale of participa-tion of the oil producer Bashneft and the shipping com-pany Sovcomflot on September 2016... The current account surplus is expected to stabilise in2016. Exports, largely dominated by hydrocarbons (2/3of revenues), are likely to remain constrained by lowexport prices. The weak competitiveness of Russianproducts could, moreover, limit non-oil exports, despitethe fall of the rouble. However, depressed domesticdemand, the maintenance of sanctions and embargoson certain European and Turkish products, should keepimports in check. FDIs are not likely to rebound in theabsence of a real improvement in the situation inUkraine and in governance.

The stubbornly low oil price (to which the roubleexchange rate is strongly correlated) and due dates forexternal debt repayments (about USD 47 billion in thesecond half of 2016), are expected to maintain down-ward pressure on the rouble, the volatility of which hasincreased since the introduction of a floating exchangerate regime since the end of 2014. Russia's externaldebt (90% bank and business debt) is sharply lower (-20% between end 2014 and end 2015) and the highlevel of foreign exchange reserves (about 12 months ofimports in August 2016) limits the risks of default, with-out ruling this out for some businesses and/or banks. The banking sector's solvency and liquidity risk hasincreased significantly as a result of the worseningquality of the portfolio in a context not only of an eco-nomic crisis, but also the high cost of financing associ-ated with the international sanctions which stop themajor banks from accessing the financial markets.

A political situation expected to remain stable and persistent shortcomings in thebusiness environment

Vladimir Putin's popularity nationally increased withthe Russian intervention in Crimea in March 2014.There is however, discontent within the populationand the tensions could rise further in a context ofeconomic downturn. The regime's increasingly toughstance reflected, notably, in the State's increasedcontrol of the media and the Internet, nonethelesssignificantly limits opposition movements’ ability toorganise and express themselves. The parliamentaryelections held in September 2016 confirmed thedominance of the presidential party, United Russia(54% of the votes) but with a weak turnout (48%down from 60% in 2011).Shortcomings relating to the protection of propertyrights, weak governance and lack of corporate trans-parency significantly weaken the business environ-ment. Despite some progress, Russia is ranked 168th(out of 215) on the World Bank's governance indica-tor, the corruption perceptions index, which is arecurrent weakness.

RISKASSESSMENT

COFACE ASSESSMENTS

TRADEEXCHANGES

C

C

Country risk

Business climate

Medium termMODERATE

RISK

2013 2014 2015 2016 (f)

GDP growth (%)




Public debt (% GDP)




1.3 0.6 -3.5 -1.0

6.5 11.0 15.0 8.4

-1.3 -1.2 -3.0 -3.8

1.6 2.3 5.0 5.0

13.1 16.3 17.7 18.4

17

SPAIN


l Reform efforts (labour market, banking sector,insolvency, …)

l Improved competitiveness and strengthenedexport sectors

l Improved financial situation of businessesl High-quality infrastructurel Significant tourism potential

l Still high level of private and public debts, verynegative net external position

l Duality of labour market, high level of structuralunemployment

l Large number of relatively unproductive smallcompanies

l Fragmented political landscape, national unityweakened by the rise in separatism


France Germany Italy UnitedKingdom

Portugal

16%

11%

8%7% 7%

Germany France China NetherlandsItaly

13%12%

6%

5%

6%


Domestic demand continues to drive growth

Spanish economic activity recovered strongly in2015, partly reflecting the depth of the recession fol-lowing the financial crisis. Growth was driven bydomestic demand, which was underpinned by animprovement in the labour market and restored con-sumer confidence, combined with lower oil pricesand looser credit conditions. Deleveraging in the pri-vate sector had only a limited impact on domesticdemand (corporate and household debt decreasedfrom 218% to 169% of GDP between Q2 2010 and Q12016). Although unemployment remains high, therate has declined significantly since 2013 to 19.6% inJuly 2016. The property market rallied from early2014 onwards, while company bankruptcies beganto decrease from Q2 2013. The political parties’ fail-ure to form a new government since December 2015has so far not affected the recovery. GDP increasedfrom 0.8% in Q2 2016, extending similar gainsrecorded over the three preceding quarters. Despitethe likelihood of a slowdown beginning during thesecond half year, growth should reach 3% in 2016.Private consumption (almost 58% of GDP) shouldremain the leading growth driver, while investmentshould continue to benefit from favourable financingconditions and satisfactory export growth. However,confidence among business managers and con-sumers has trended lower since peaking in 2015.The current account, which has been positive since2013, continues to show a surplus. This is due to thefall in oil prices, lower debt servicing costs andhealthy exports, notably of services (tourism andbusiness services), amid heightened competivenessresulting from reduced labour costs and a moderaterecovery in export markets, including the euro zone,which absorbs 50% of sales.

Healthier companies and banks but heavypublic debt

Exporting companies managed to fare well during thecrisis. Companies more dependent on the domesticmarket have started to recover, including in the con-struction sector. Lower labour costs and the disappear-ance of loss-making companies have led to a recoveryin corporate profitability.A significant number of measures were taken to rescuethe banking sector, which was heavily impacted by aproperty bubble bursting and the recession. In January2014, Spain successfully exited the European bailoutpackage which had enabled the recapitalisation of thesector, which saw its solvency reinforced and the qual-ity of its asset portfolio improved. Weak lending activityand persistently low interest rates are nonethelessweighing on its profitability. Furthermore, the privati-sation of certain banks was delayed and Spain’s “badbank” continues to post losses. Moreover, Banco Pop-ular Espaňol S.A. is one of the five European financialinstitutions which scored the worst results during the stress tests carried out by the European BankingAuthority in July 2016.

Sovereign risk remains significant despite improving, asillustrated by the continued fall in borrowing costs onthe bond market, where 10-year rates eased to 0.9% on22 September 2016. In August 2016, the Europeanauthorities, that ultimately decided not to fine Spain forfailing to respect its objectives, granted two extra yearsfor the deficit to be reduced to below 3% of GDP (i.e. 2018). Although the public debt ratio has stabilised,it remains at a high level (almost 100% of GDP).

Fragmented political landscape and persistent separatist tensions

The December 2015 legislative elections markedthe end of bipartisan politics. The parliament wasfinally dissolved after four and half months ofunsuccessful negotiations between the four majorpolitical parties (PP, PSOE and two new parties,Podemos and Ciudadanos). Fresh elections wereheld in June 2016, leading once again to a hungparliament. The members of parliament refused toback the conservative leader Mariano Rajoy informing a government, whereas the socialist partyis unable to muster a left-wing majority. If the MPsfail to nominate a government by the end of Octo-ber 2016, a third election will have to be held inDecember 2016. Final rounds of talks regarding thenational parliament may take place following theresult of the regional elections in the Basque regionon 25 September and a confidence vote in the Cat-alonian parliament on 29 September (which rein-forces the unity of the separatist ranks). It is farfrom certain that they will succeed however.

RISKASSESSMENT

COFACE ASSESSMENTS

TRADEEXCHANGES

A4

A1

Country risk

Business climate

Medium termVERY

HIGH RISK

2013 2014 2015 2016 (f)

GDP growth (%)




Public debt (% GDP)




-1.7 1.4 3.2 3.0

1.5 -0.2 -0.6 -0.4

-6.9 -5.9 -5.1 -4.6

1.5 0.9 1.4 1.8

93.7 99.3 99.2 99.4

18

TURKEY


l Substantial current account deficit and insufficientdomestic savings

l Dependence on foreign capital, notably portfolioinvestment

l Foreign-currency debt among companies andbanks, accentuating their exposure to currency risk

l Significant share of the informal economyl Delicate external and domestic political situation(Kurdish question, Syrian and Iraqi conflicts, coupattempt)

l Authoritarian drift of the executive


Euro-zone

Iraq UnitedStates

RussiaUnitedKingdom

29%

7%6%

4% 4%

Euro-zone

Russia UnitedStates

IranChina

27%

10% 10%

4%5%


Growth likely to decrease in 2016, weakened by the fall in tourism activity

Growth is likely to decrease in 2016. Indeed, foreigntourism activity which represents almost 10% of GDPwill halve. Moreover, the troubled political contextboth internal (conflict between the power and Kur-dish rebels, terrorist attacks, attempted coup) andexternal (war in Syria and in Iraq) will continue toweigh on internal and external demand. However,household consumption would remain the maindriver, supported by rising wages (minimum wageincreased by 30% on January 1st) and employment,as well as several measures aimed at encouragingcredit and partially compensate for the loss oftourism revenues. Private investment alreadyaffected by the less favourable financial situation forcompanies which, particularly in the manufacturingsector, have seen the cost of their imported inputsand debt service increase due to the depreciation ofthe lira, could suffer from degraded context,. Externaltrade should contribute negatively to growth, owingto the lasting impact of Russian sanctions on exportsand the disaffection of foreign tourists. Inflation will probably remain high in 2016, well abovethe central bank’s 5% target, mainly as a result of ris-ing food prices fostered by the weakening of the cur-rency, bottlenecks in agriculture and the lack ofcompetition in retailing. The central bank could beconstrained to end the downward cycle in rates inorder to not weaken the lira and promote importedinflation. In the case of new deterioration in the polit-ical situation, the central bank might even tighten itspolicy.

Solid public finances, but still fragile external accounts

The weight of public debt should remain low and thefiscal deficit modest despite subsidized air transport tobolster tourist arrivals, increased public payroll in touristregions in order to reduce unemployment, and monthlyallowance of 100 lira disbursed to companies for eachwage under 2250 lira to partly offset the increase ofthe minimum wage. The payment of 3 billion euroscheduled in the agreement reached with the EU forrefugee management, if held, would slightly offset expenses incurred.Despite two years of decline the current account deficitremains high. It might rise again. The increase in saleson the European market, driven by the lira depreciation,and the reduction in the energy bill could be largely off-set by the Russian sanctions lasting impact on foodsales and construction contracts (sanctions adoptedfollowing the destruction of a Russian military jet byTurkish artillery on November 2015, but officially liftedin August 2016), as well as the free fall in the numberof foreign visitors. Managing this current deficit willremain a major challenge: due to the weakness of FDIand the lack of domestic savings, the country depends

on foreign portfolio investment whose volatility ispotentially increased by the deterioration of the politi-cal situation. The currency is especially high for Turkishcompanies as they have a high level of short-term debtin foreign currencies. The country’s foreign exchangereserves could prove to be insufficient in the event ofsudden capital outflows.

Strengthening of the President in a difficultregional environment

Ironically, the attempted coup of July 15th 2016 couldstrengthen, at least in the short term, PresidentRecep Erdoğan’s position. He ordered massive oppo-nents arrests, thousands of soldiers, magistrates,journalists and teachers suspected of involvement inthe coup and/or connivance with Fethullah Gülen,who is himself charged with the instigation of thecoup. The state of emergency was declared for 3 months from the 27th of July, allowing the presidentto govern through decrees which, after beingapproved by the Parliament dominated by theIslamic-conservative party of the president (AKP),will be exempted from the Constitutional Court con-trol. Nevertheless, the political polarisation of thesociety, the Kurdish question and the Syrian conflictspillovers onto the national stage (terrorism,refugees) remain major issues, while the army isweakened.Despite signs of brightening (normalisation of rela-tions with Israel, reconciliation with Russia andEgypt, lifting of international sanctions against Iran),the Turkish foreign policy will remain complicated.There is the concern to curb the strengthening of theKurds in Syria, supported by Western countries intheir fight against ISIS, while Turkey is also combat-ing ISIS, and to maintain its NATO member obliga-tions despite the recent deterioration of relationswith the United-States and the European Unionabout Syria and the rule of law.

RISKASSESSMENT

COFACE ASSESSMENTS

TRADEEXCHANGES

B

A4

Country risk

Business climate

Medium termMODERATE

RISK

2013 2014 2015 2016 (f)

GDP growth (%)




Public debt (% GDP)




4.2 2.9 4.0 3.0

7.5 8.9 7.7 7.7

-1.3 -1.5 -1.3 -1.6

-7.7 -5.5 -4.5 -4.9

36.1 33.5 32.9 32.0

l Healthy public financesl Demographic vitality and qualified labour forcel Key regional positionl Market with 75 million inhabitants and risingmiddle class

l Healthy and robust banking sector since the2002 reforms

19

UNITED KINGDOM


l Oil and gas production covering three-quarters ofenergy needs

l High-tech sectors (aeronautics. pharmaceuticals)l Low corporate tax

l Uncertainties about consequences on the EU leavedecision

l Dependence of the economy on financial servicesl High levels of debt and public deficitl High level of private debt


Germany UnitedStates

Switzerland FranceNetherlands

11%

10%

8%

7% 7%

Germany China UnitedStates

FranceNetherlands

15%

9%

8%

6%7%


Uncertainties related to “Brexit” will weighon short term growth

Growth has been resilient during the first half. Nev-ertheless, on June 23th, the UK voted in favour ofleaving the EU (52% has voted to leave. 48% toremain), calling into question the continuation ofthis trend. In the short term uncertainty and volatil-ity are likely to prevail on financial markets. In thiscontext consumer and business confidence hasalready deteriorated sharply, which could weigh onprivate consumption, moreover penalized in thefuture by the gradually increasing inflation (throughthe depreciation of the sterling against the dollarand the euro). Nonetheless, the “Brexit” shock willessentially impact private investment which hasalready shown weak performances since the begin-ning of the year. The lowering of interest rate by theCentral bank (BoE) in August to 0.25% for the firsttime since 2009 and the bond purchase pro-gramme aim to prevent the expected activity slow-down. Moreover, this confidence shock might implya price correction on the real estate market,notably commercial. Early July, a number of Britishproperty funds have frozen their transactions. Therisk of transmission to the banking sector is highdue to the number of SMEs which rely on realestate as collateral to secure their borrowings. Therisk is however subdued by a strong capitalizationof the banks. Furthermore, household indebtednessis important (125% of GDP) and the risk of a hous-ing bubble burst needs to be monitored, despite ofless deteriorated real estate indicators. A positivepoint, the exporting sectors should benefit fromthe sterling depreciation to gain in price competi-tiveness.

Fiscal consolidation, a government priorityin the past years, could be questioned

The government is still on a programme of fiscalconsolidation, even if the deficit is reduced slowerthan expected. This is being carried out throughspending cuts (public sector wage moderation.cuts in health spending). On the revenue side thebudget includes tax cuts on investments as well aslower corporate tax (lowered to 15% after the vote).

If for the time being no emergency plan has beenannounced, a deterioration of public finances islikely to happen considering the economic slow-down, and stimulus measures could be imple-mented before the end of the year. The current account deficit hit a record high in 2015and should not significantly improve this year:import prices should increase with the sterlingdepreciation which reached a low point against thedollar in July. However in a second step this depre-ciation should help to gain in price-competitivenessand therefore boost exports, and imports shoulddecrease with the internal demand slowdown.

Strong uncertainties over UK’s future

David Cameron announced his resignation the dayafter the vote, replaced by Theresa May, formerHome Secretary, in July 2016. Article 50 of the Lis-bon treaty. which regulates the process of with-drawal from the EU, should not be activated by thebeginning of 2017. May announced her willingnessto negotiate a new deal before invoking the article.Three types of agreements are possible: (i) EEAmembership, like Norway, with a full access to thesingle market but loosing voting rights on regula-tory framework and EU decisions –the most likelyscenario-; (ii) a “customized” bilateral agreement,like Switzerland, which establishes access to thesingle market for specific sectors and (iii) WTOrules with existing custom tariffs and no access to the single market.Moreover Scotland announced its wish to remain inthe EU (in accordance with its vote) and a new ref-erendum could take place with the risk of leavingthe UK. Northern Ireland’s case could be an issuetoo.The country has gained two places in the DoingBusiness rankings and is in first place among theG7 countries. The business climate is improving: ittakes only 4.5 days to set up a business (comparedwith an average of 20 in other countries), with a cutin corporation tax and increased exemptions on social security payments helping to improve thecountry's attractiveness.

RISKASSESSMENT

COFACE ASSESSMENTS

TRADEEXCHANGES

A2

A1

Country risk

Business climate

Medium termVERY

HIGH RISK

2013 2014 2015 2016 (f)

GDP growth (%)




Public debt (% GDP)




1.9 3.1 2.2 1.9

2.6 1.5 0.0 0.8

-5.7 -5.6 -4.2 -4.4

-4.4 -4.7 -5.4 -5.9

86.0 87.9 89.0 89.9

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