Country Risk Barometer - COFACE...Country Risk Barometer Q1 2016 2 The global economy is...

luggish growth, absence ofinflationary pressures, evermore expansionary mone-tary policies and increasedvolatility in financial markets;these are four elements

characterising the global economy inearly 2016. This phenomenon seemsrecent for all countries with one exception:Japan, which has been bogged down inthis situation for about 20 years. The les-sons from the Japanese “guinea pig” givelittle ground for optimism: although mon-etary policy has been highly expansionaryfor a long time, it has been insufficient tojump-start growth, as providing cheapcredit to kick-start demand is of no use in

absorbing the excess capacity on the sup-ply side. And as time passes, its detrimen-tal side effects are increasingly visible, asthe excess liquidity it creates is giving riseto volatility in financial and real estatemarkets. So it seems very difficult for acountry that has fallen into the stagnationtrap to pull out of it. This is of small con-solation for companies: despite the weakgrowth outlook, the fact that financingconditions remain very favourable enablesthem to survive in a “Japanised” economy.This is confirmed by the decline in com-pany insolvencies in most advancedeconomies over the last few months,despite a moderate level of growth inactivity.

In addition to this Japanisation trend, theglobal economy in early 2016 is stillaffected by the impacts of the erraticcommodity price fluctuations on emerg-ing countries. After Latin America andAfrican countries, it is the turn of the Middle East and Asia to suffer, which hasled Coface to assign a negative outlook to the A4 country rating for Saudi Ara-bia as well as to the A2 rating of Kuwait, to downgrade Oman to A4, Kazakhstanto C, Malaysia to A 3 and Armenia to D.Obviously not forgetting Japan, which isnow in A2.

S

MARCH 2016PANORAMA Country Risk BarometerQ1 2016

2The global economy is “Japanising”

8BarometerCountry risk assessmentchanges

10Countries reports10 countries

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

2.7

0.7

1.0

0,30,5

0.2

2.6

0.6

0.9

0.30.5

0.2

2.8

0.9

0.9

0.10.5

0.3

2.5

1.0

0.9

0.30.3

0.0

2.5

1.1

0.8

0.50.3

-0.2

3.1

1.4

0.9

0.20.30.4

4.3

0.9

0.40.6

0.7-1.9

0.7

-0.6

-0.7-0.1

2 COUNTRY RISKPANORAMA

GROUP

THE GLOBAL ECONOMY IS “JAPANISING”

Global activity is unlikely to rebound significantlyin 2016 (+2.7%, after +2.6%, see charts n°1 and 2),marked by the slight slowdown in advancedeconomies and the weak recovery in emergingcountries. The beginning of the year has beenmarked by increased volatility in the markets,especially in financial markets with a fall in equitymarket indices as well as in the oil market, with theoil price falling below the USD 30/bbl threshold.Nevertheless, a certain lull seems to have returnedsince the mid-February low: financial markets havestabilised and the price of Brent has rebounded to

close to USD 40 in mid-March (see charts n°3, 4, 5and 6).

The risks weighing on the international scenarioremain unchanged and on the downside: morepronounced slowdown than expected in Chineseactivity, increasing political risk, commodity pricetrends. However, the risk of new episodes of finan-cial turmoil seems to be increasing, particularlygiven the abundance of global liquidity, amplifiedby the ECB’s recent monetary easing decision.

March 2016

Forecasts

Chart n°1

Contributions to world

growth (%)

Chart n°2

Growth forecasts (%)

Sources: IMF, national statistics andCoface calculation

Source: Coface

5

4

3

2

1

0

-1

-2

-3

10

8

6

4

2

0

-2

-4

2008 2009 2010 2011 2012 2013 2014 2015 2016

1.7

1.1

0.60.1-0.1 0.0

�

�

�

� ��

� �

20152016

1.5 1.61.1 1.4

3.53.9

2.4 2.0

6.96.5

7.5 7.3

-3.8-3.0

-3.5

-1.5

0.5 0.5

2.21.8

3.22.6

0.61.11.4 1.5

United StatesOther avancedOther emerging

Eurozone ChinaWorld growth�

Advanced countries

Eurozone

France

Germany

Italy

Spain

United Kingdom

Japan

United States

Emerging countries

Brazil

Russia

India

China

-1.0

1.9 1.7

�

1.7

3COUNTRY RISKPANORAMA

GROUP

ADVANCED ECONOMIES: FINANCIAL TURMOIL AND MONETARY ACTIVISM

1

Growth remains positive, but is expected to slowdown slightly in the United States this year (2.0%after 2.4% in 2015). This is explained by the prob-lems of energy sector companies facing low oiland gas prices, the expected slowdown in growthin the automotive sector, whose sales have nowreturned to their pre-crisis level, and more gener-ally the slowdown in activity in the other manufac-turing sectors that are negatively affected by thestrong dollar.

The February employment report confirms thisassessment: the US economy remains in goodhealth overall, but some vulnerabilities are appear-ing. It still shows a high number of jobs created(242,000 in February after 172,000 in January). Indetail, the mining sector unsurprisingly continuesto destroy jobs (171,000 since the September 2014peak!), while the balance has been zero on averagein the manufacturing sector in the last three

months. This sector remains negatively affected bythe high level of the dollar and weak externaldemand. The rise in the employment rate (62.9%in February) is consequently driven by service sec-tors, with education, retailing and leisure toppingthe ranking.

All in all, household consumption and investmentin construction will remain the main US growthdrivers this year, underpinned by a low unemploy-ment rate (stable at 4.9% in February) and modestpurchasing power growth enabled by limited wageincreases (+2.2% year-on-year last month) andinflation (+1.7% year-on-year(1)). But another effectof this wage growth, although it is moderate, isthat it is hurting companies' earnings and thereforethe outlook for corporate investment, since itexceeds the rise in productivity gains (+0.5% peryear on average since 2010 for hourly per capitaproduction).

The referendum on whether or not to keep thecountry in the EU will be held on 23 June. Its out-come is very uncertain, despite the fact thatprime minister Cameron is likely to campaign forstaying in the EU thanks to the agreement he hasobtained with the European Council. This situa-tion is also contributing to the markets' volatilityat the start of the year: the pound sterling hasdepreciated slightly, i.e. by more than 4% againstthe dollar between the beginning of January andmid-march. In this context of uncertainty, compa-nies will probably adopt a wait-and-see behav-iour despite positive financial conditions (strongbalance sheet, credit support) and the country'sattractiveness is likely to decrease in the eyes ofinvestors. Several confidence indices and surveyshave also been weakening in the last few months.

In the event of a Brexit, the country will accordingto the Lisbon treaty have two years to actuallyexit the Union. There are numerous possible sce-narios for an exit; the country should then haveto establish new trade, legal and regulatory rules.That is likely to result in a loss of activity (andtherefore to a deterioration in the public financesituation), a depreciation of the pound with anincrease of inflationary pressures as well as adecline in FDI. The quantitative impact on growthis difficult to estimate and varies according to thescenarios considered. A study from the Centre forEconomic Performance estimates that in the caseof a small increase in costs linked to trade barri-ers, the loss of revenues would amount to 1.1% ofGDP (versus 3.1% in the pessimistic scenario witha sharp increase in costs)(2).

(1) PCE index excluding food and energy prices (2) Ottaviano et al., 2015, “Should we stay or should we go? The economic consequences of leaving the EU”, CEPR

In the United States, industry is runningout of steam, but not services

In the United Kingdom, the risk of aBrexit is threatening the economy

The situation remains poor as indicated by the fallin activity in the fourth quarter (-0.3% in quarter-on-quarter terms) and economic indicators (busi-ness and household confidence, Nikkei…) arepointing down since the start of the year. Thesluggishness of consumption is particularly wor-rying because of the lack of upswing in wages,while it seems a necessary condition to ensure asustainable rebound in activity. Companies arestill failing to redistribute their increasing profits.In addition, the steep depreciation of the yenagainst the dollar has not had any noteworthypositive impact on exports: the transmission toexport prices has not functioned properlybecause companies have been rebuilding their

margins(3). Note nevertheless that the yen hasappreciated by nearly 6% against the dollar sincethe beginning of the year, mainly explained by itssafe haven status. More generally speaking, theimpact of the measures implemented to boostactivity (in addition to Abenomics, monetary pol-icy easing with an unexpected switch to negativeinterest rates in January) will probably remainlimited and we should not expect activity toimprove significantly (+0.5% forecasted thisyear). Lastly, the lack of upward pressures on theoil price should not help the country reach its 2%inflation target, as reflected by the Bank ofJapan's downward revision of its inflation fore-casts (but also growth forecasts) in October 2015.

On the whole, the eurozone maintained its paceof activity in the last part of 2015, as the goodperformances of domestic demand in relativeterms offset the mixed performance of foreigntrade. The zone posted a growth rate of 1.5% forthe full year. The labour market and lending con-ditions improved in most countries. Accordingly,according to the January 2016 survey under-taken by the European Central Bank (ECB),compared with the situation seen during thefourth quarter of 2015, eurozone banks reportthat the easing of lending conditions and credit

conditions continue. Furthermore, demand in allloan categories continued to increase, especiallyfor business loans, mainly owing to the low levelof interest rates. At the same time, the bankshave significantly reduced their participation inthe latest TLTROs (the ECB’s targeted longer-term refinancing operations), to a large extentexplained by the absence of funding constraints.

Some economic indicators are neverthelesspointing down, for example the PMI businessconfidence indices which have tended to deteri-orate over the last few months (weaker eco-nomic growth for the last 13 months in February)and the deflationary pressures persist: consumerprices in the eurozone fell 0.2% in February.Against this backdrop, growth is expected tocontinue at a slightly more moderate rate thaninitially forecast in 2016, and GDP growth isunlikely to exceed 1.6%. We have revised ourgrowth forecasts downwards, particularly forGermany due to less buoyant exports to emerg-ing countries, and for Italy due to the noticeablereduction in carry-over growth at end-2015(weak productive investment and slight slow-down in consumption).

2016 will remain under pressure as there arenumerous sources of risk. Financial marketswere very volatile in January-February (see chartn°3). Equity markets fell markedly under theimpact of the Chinese slowdown and the oilprice slump, accentuated by the problems ofItalian and Portuguese banks. Government bondyields for the most highly indebted southerneurozone countries have risen markedly, with aconsiderable surge in Greece (difficult negotia-tions with the international creditors over pen-sion reform) and in Portugal (risk that the

(3) According to Ree, Hong, Shoi (2015), “Should Korea worry about a permanently weak yen?” and the IMF, the transmission of changes in the exchange rateto export prices occur over five years in Japan

Chart n°3

European financial markets: European values

Source: DatastreamLast available data: 15 March 2016

Japan: welcome to the negative interest rate club

In the euro zone, concern in financialmarkets and ECB activism

600

500

400

300

200

100

0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Index

Stoxx 600 indexStoxx banks index


GROUP

austerity measures may be called into question,see chart n°4). The risk of political instability hasnow even reached Ireland (which, however, didnot result in a rising risk premium) where, after

Greece, Portugal and Spain in 2015, the outgoinggovernment paid the price for the reforms andausterity in the February 2016 elections. As inother countries - and in the absence of a stablemajority - it will now be more difficult to governthan in the past. There is no doubt that risk aver-sion in the euro zone (by also taking intoaccount the threat of a British exit from theEuropean Union) has increased. At this stage,however, wealth effects on households seem lim-ited (see Inset) and the scenario of a slump inEuropean growth will in all likelihood be avoided.Growth will remain resilient as long as domesticdemand holds up. Barring an extended loss ofconfidence among households and companies,consumption should continue to be driven bythe fall in unemployment and the low level ofinflation. The low level of interest rates and therebuilding of companies' margins should boostinvestment. Moreover, the ECB's recent decisionin early March (cut in the three interest rates and extension of the securities purchase pro-gramme) send a mixed signal; and the impact onthe real economy will probably be limited givennotably the already abundant liquidity. Lastly,after the significant turbulence at the start of theyear, a certain calm has returned to the equitymarkets and the sovereign bond market.

Chart n°4

Euro area periphery: 10 year government bond yields

Source: ReutersLast available data: 15 March 2016

Household consumption little affected by the recent fall in equity markets at this stage

Inset

rather than in financial asset prices. Thiseffect varies according to the countryand according to the proportion of prop-erty and financial assets that householdshold in their portfolios. The proportion of financial assets in household portfoliosis 52% in the United States, 34% in Germany, 28% in France and 20% in the United Kingdom (source: OECD).The IMF estimates that, accordingly, thewealth effect is twice as strong in the

United States as in Europe and Japan.However, the estimates of the magnitudeof these wealth effects vary significantly.

Angrisani et al. (2015) (1) found an elas-ticity of household consumption tochanges in financial wealth of 0.22. Caseet al. (2013) estimated an elasticity of0.02 and Caroll et al. (2011) of 0.04. InFrance, Chauvin and Damette (2010) (2)

calculated an elasticity of 0.1. In a studyfrom June 2015, the ECB (3) calculatedsmall but significant wealth effects. A 1euro change in household wealth isaccompanied by a 0.8 to 1 cent changein consumption in France and a 5 centchange in the United States and theUnited Kingdom.

From end-December 2015 to mid-February 2016, the S&P 500 fell by 10%,the LSE by 19%, the CAC40 by 15% andthe Nikkei by 17%. So by applying theECB's estimates we find a per householddecline in consumption of 50 euro in theUnited States, 100 euro in the UnitedKingdom and 15 euro in France duringthe period from end-December 2015 tomid-February 2016. Not enough to jeop-ardise the growth momentum at thisstage.

Theoretically, when asset prices rise,households' wealth tends to increasebecause of an increase in expected rev-enues from assets (property and finan-cial), increasing their consumption. Thisis what is called the wealth effect.

This effect has been observed empiri-cally. Various studies have shown thatthe wealth effect was greater when itwas due to a rise in property prices

(1) Angrisani et al., 2015, « The effect of housing and stock wealth losses on spending in the great recession », RAND labor and population, Working paper 1101(2) Chauvin et Damette, 2010, « Effets de richesse : le cas français », Economie et statistique n° 438-440(3) Arrondel et al., 2015, « Wealth effetcs on consumption accross the wealth distribution: empirical evidence », ECB, Working paper series n° 1817

Source: Bureau of Economic AnalysisLast available data: Q4 2015

Wealth effects United States (%)

40

35

30

25

20

15

10

5

0

4

4.5

5

5.5

6

10

8

6

4

2

2008 2009 2010 2011 2012 2013 2014 2015 2016

85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15

Ratio wealth-revenues (inverted scale)Saving rate

ItalySpainPortugalGreeceIreland


GROUP

%

In China, the government has announced agrowth rate of between 6.5 and 7% this year(versus 6.5% for Coface) and continues to bol-ster growth, as shown by the fresh 50bp cut inthe required reserve ratio and the fiscal stimuluspackage that is expected to generate a fiscaldeficit of 3% of GDP this year (versus 2.3% lastyear). Moreover, net capital outflows tend toweaken and the country continues to learn interms of market rules (another bond default bya Chinese company). However, that did not dis-suade Moody's from putting the country on neg-ative watch given its public debt dynamics, thefall in foreign exchange reserves and doubtsover the implementation of reforms.

In the Middle East, oil-exporting countries con-tinue to face the fall in the oil price with more orless difficulties. Their fiscal and current-accountdeficits are increasing and non-hydrocarbonactivity is suffering from the negative externali-ties. While the latest banking results for 2015 stillshow relatively solid balance sheets in the Gulfcountries, banking risk has nevertheless tendedto increase in the zone (note, for example, a tight-ening of banking sector liquidity in Saudi Arabia):given the noteworthy deterioration in economic

performances, lending could decrease, depositsslow down and non-performing loans increase,leading to a worsening of financial institutions'situation and negative spillover effects on activity.The consequences of the fall in energy prices inexporting countries are indeed considerable, asthe IMF emphasises (4). According to the organi-sation, the fall in energy prices and the expectedweakness of prices in the future are expected to have an impact of 2 ¼ percentage points ofGDP on average on energy-exporting countries,and potential growth could be reduced by two-thirds of a percentage point. On a more positivenote, the effective lifting of sanctions in Iran inJanuary should pave the way for an upturn inactivity (increase in exports and oil productionand positive repercussions on the rest of theeconomy; return of investors), which nonethe-less will be limited by the low oil price. The Brentprice hit a low of USD 29 on 11 February, but amonth later it had climbed to USD 40. Pricesseem to have hit a floor because some produc-ers may be willing to curb their production, andbecause of cuts in Iraq, Nigeria and the Emiratesand also the fall in non-OPEC countries' produc-tion and the recent weakening of the dollar (see chart n°5). Given the fundamental surplus

EMERGING COUNTRIES STILL CANNOT SEE THE END OF THE TUNNEL

2

Chart n°5

Oil market: price and Oil VIX

Sources: Datastream, ICE, CofaceLast available data: 15 march 2016

(4) Aslam et al., (February 2016), IMF Working Paper, “Trading on their terms? Commodity exporters in the Aftermath of the Commodity Boom”

120$

100$

80$

60$

40$

20$

0$

120

100

80

60

40

20

0

2013 2014 2015 2016

OVIX (right scale)Brent spot $WTI spot $


GROUP

Chart n°6

Emerging markets: MSCI

100 = january 2013

Sources: MSCI, DatastreamLast available data: 15 march 2016

(high supply and stocks, muted demand), arebound is unlikely in the short term (accordingto the futures curve, the oil price should be lessthan USD 40 on average this year).

The outlook in Latin America is still difficult, atleast in the short term. In Argentina, the countrycould face a recession this year after the depre-ciation of the peso and the reduction in electricity-related subsidies, measures decided by the newgovernment. Moreover, the agreement reached inFebruary by president Macri with the vulturefunds (payment of USD 4.6 bn) marks a histori-cal turning point and indicates that the countryin the near future will return to international cap-ital markets, an access it has not had since its2001 default. Investor confidence will thereforeprobably gradually return. Venezuela is strugglingto survive. It succeeded in meeting its latestrepayments, but the country is on the brink ofthe abyss. Despite the opposition's victory in thegeneral elections in end-2015, the president hasdecreed a state of “economic emergency”,

which led him to devalue the bolivar against thedollar by 58% and the gasoline price has beenincreased to 6 bolivars from 0.097 bolivars, whileremaining extremely low. Inflation is explosive.The IMF even estimates that it should reach720% this year. The Brazilian situation is hardlyimproving as illustrated by the fall in activity inthe fourth quarter (-1.4% in quarter-on-quarterterms and 3.8% year-on-year) and the two-notch downgrade by Moody's of the Brazilianrating to Ba2 (speculative category) with nega-tive outlook.

We also note that concerns have increased inSouth Africa: the country's fiscal credibility couldbe called into question given the ambitiousobjectives of the new budget for fiscal year2016/2017, amid increased risk of recession,which would lead to another downgrade by therating agencies, all the more as political unrest(weakening of president Zuma) and social unrest(particularly because of the rise in unemploy-ment and inflation) is gathering momentum.

110

100

90

80

70

60

2013 2014 2015 2016


GROUP

Armenia: D

• The economy suffers from Russia’srecession. According to the CentralBank of Armenia, remittances fell by35.8% in 2015, as the number ofArmenians working in Russia felt by5%.

• Increase in the political and social risk:Serzh Sargsyan’s second term as pre-sident is marked by a significantdegree of political instability. Socialsituation is deteriorating due to gro-wing frustration linked to corruption,country's poor economic perfor-mance and crackdown on protesters.

Japan: A2

• The economy doesn’t succeed torecover and take away the deflationrisk, in a context of low oil price,China’s slowdown and weak wagegrowth.

• Leading indicators (industrial produc-tion, business confidence, retail sales,Nikkei…) don’t point to a rebound inthe coming months.

• Ineffective economic policies so far:Abenomics fail at boosting GDPgrowth so far and the additionalmonetary easing of the BoJ (the keyinterest rate is now negative) is unli-kely to have a significant impact onthe real economy.

BAROMETER

COUNTRY RISK ASSESSMENT CHANGES

Country risk assessments

March 2016

ASSESSMENT EITHER DOWNGRADED, OR REMOVED FROM POSITIVE WATCH LIST OR PLACEDUNDER NEGATIVE WATCH LIST

country Country risk Country risk previous new

Armenia C D

Japan A1 A2

Kazakhstan B C

Kuwait A2 A2

Malaysia A2 A3

Oman A3 A4

Saudi Arabia A4 A4


GROUP

• Country risk assessment assessesthe average risk of paymentdefaults by companies in a givencountry. This evaluation combineseconomic and political prospects ofthe country, Coface payment expe-rience and business climate assess-ment. This evaluation has 7 grades:A1, A2, A3, A4, B, C, D and can bewatch listed (positive, ascendingarrows in the table; negativedescending arrows).

• Oil and gas revenue, which roughlyaccounts for 85% of total fiscal reve-nue, decreased by 36.3% in 2015.With one of the highest breakeven oilprices in the GCC (Gulf CooperationCouncil), Oman is likely to record asizeable fiscal deficit (20 % in 2016).The current account is also exposedto oil export contraction and shouldsuffer from a wide deficit (close to17%).

• To offset the drop in oil prices, thegovernment of Oman has ramped upoil production, pushing its output torecord levels but the effect should belimited as production capacities areclose to their peak, and extractioncosts require constant investment toremain low.

• The strong US dollar and the persis-tence of low oil prices pose risk to thesustainability of the peg.

Saudi Arabia: A4

• In 2016, Saudi Arabia’s economy hasbegun to feel the negative effects ofthe decline in oil prices: non-oil acti-vity moderates, the fiscal deficitincreases and the decrease in depo-sits of the banking system, especiallygovernment ones, weigh on the ban-king system and the economic acti-vity.

• Leading indicators point to a slow-down of the non-oil economy: ATMtransactions, business confidence andprivate sector credit growth, have allbeen slipping since the beginning ofthe year. Saudi Purchasing Managers’Index (PMI) reached a low point inJanuary (53.9) before picking upslightly in February (54.4) but itremains well below its long-run ave-rage (58.8).

• The sizeable fiscal deficit registered in2015 is expected to increase signifi-cantly in 2016 on the back of low oilprices.

• Falling foreign reserves have led tothe issuance of Saudi Arabia’s firstsovereign bonds since 2007.

Kazakhstan : C

• Growth is hampered by the slump inoil price and delays at the offshoreKashagan oilfield.

• Exports are hit by the downturn inChina’s growth, recession in Russiaand low price of oil.

• The central Bank announced inAugust introduction of free floating ofthe tenge, leading to a 20% deprecia-tion against the dollar, followed by afurther 20% depreciation betweenAugust and November, weighing oncompanies and banks that are highlyindebted in foreign currency.

Kuwait : A2

• Even though oil market downturn hasa lesser impact on Kuwait economythan in other GCC countries (lowbreakeven price), an increase in shortterm risk is expected. Indeed, publicfinances should be eroded by low oilprices. This will result in additionalexpenditure and capital spendingcuts which remain a key driver ofgrowth.

Malaysia: A3

• The Malaysian economy relies onexternal demand and is affected bythe economic slowdown observed inChina and the US. The economy isalso impacted by the drop in commo-dity prices notably oil prices.

• Household demand remains sustai-ned but is slowing down, in a contextof high household debt (level anddebt service).

• Despite reforms initiated by thegovernment (GST at 6 % since April2015, cut in subsidies), public debt isstill high.

• Political risk is increasing and investorconfidence is hurt by the scandal rela-ted to the sovereign fund 1MDB.

Oman: A4

• As the economy is highly vulnerableto the sharp decline in oil prices. GDPgrowth is likely to slow significantlythis year ; non-oil growth is expectedto slow over 2016-2017.


GROUP

ARGENTINA10

Weaknesses

� Dependency on the prices of agricultural commodities

� Budgetary policy not very rigorous� Mediocre business environment� Insufficient investment in energy and transport� The State has had no access to internationalfinancial markets since 2001

Imports of goods, as a % of total

Brazil Euro-zone

UnitedStates

ChileChina

B

21%

11%

7%6%

4%

2

Brazil China UnitedStates

BoliviaEuro-zone

2

22%

16%15%

3%

14%

Exports of goods, as a % of total

The policy adjustment should lead to thecontraction of activity in 2016

Private consumption should be particularly affectedby the first results of the internal policy adjustmentmanaged by the new president Maurico Macri. Itshould slow under the impact of the peso’s depreci-ation, which affects the purchasing power of house-holds that depends on many imported goodsbecause of the weakness of local production. Thereduction in subsidized tariffs on electricity (theprice could reach up to 700%), gas and transportshould also contribute to the decline in the purchas-ing power. On the public consumption side, a revivalof activity by the government seems already com-promised: local authorities are committed to reducepublic spending in order to redress public accounts.The wait-and-see approach of investors should con-tinue, despite the signing of a historic agreement inprinciple with the “vulture funds” in February 2016that should enable the country to regain access tointernational capital markets in the first half of thisyear. Investors should expect a more favorable legalframework, notably the reform of the judicial systemthat was already mentioned by the president, but hasnot been yet debated in Congress. External trade,the manufacturing industry in particular (especiallycars) should also be affected by the Brazilian eco-nomic crisis, the largest trading partner of Argentina.By contrast, agricultural exports should grow at leastin volume due to the lifting of taxes on agriculturalexports (except for soybeans), but remain affectedby low commodity prices. Finally, inflation isexpected to increase in line with the recovery inenergy prices. Its progress will also depend on theability of the government to gradually remove theindexation of wages and restore the operationalindependence of the central bank.

Public and current account deficits will notbe eliminated in the short term

In 2015, there was a widening in public deficit under theeffect of increased spending prior to the election. Thegovernment, fearful of the repetition of social unrest,increased the budget for energy subsidies, as well aswages and remuneration for a range of jobs. In 2016,the government will likely apply tightened fiscal andmonetary policies. The first measures already takenwere to remove capital controls for commercial trans-actions and let the peso fluctuate freely, leading to asharp depreciation (30%) of the largely overvaluedlocal currency, and also to remove taxes on agro prod-ucts (except for soya) and industrial exports. Bringingthe growing deficit under control will not be an easytask given the important share of subsidies. The previ-ous government was paying huge subsidies on energyand transport prices, sectors neglected by privateinvestors because of the lack of protection offered bythe legal system. The country continues to be excludedfrom the international markets and will have to con-tinue making use of bilateral financing, mainly fromChina, to finance its public deficit. The government will

likely work to solve the dispute between Argentina andthe ‘Vulture Funds’ during 2016 in order to regainaccess to external private finance and avoid recourseto issuing money to finance the deficit. The lack of amajority in the Congress will, however, be an additionalobstacle as any decision relating to any agreementmust be submitted to that body. In terms of foreign trade, the country remainsextremely dependent on energy imports because ofinvestment shortfalls in the sector, despite its abun-dance of natural resources (oil and gas). Agriculturalexports (soya, maize and wheat), which account foralmost 60% of all export sales, should rise as a result ofthe depreciation of the peso and the removal of taxes,but harvests could be reduced because of weatherevents associated with the “El Nino” phenomenon.Exports of manufactured goods (in particular automo-tive) are likely to decline, hit by the slowdown indemand in Brazil (the leading export market). As aresult, the current account deficit should rise slightly in2016. The resolution of the conflict with vulture fundsshould nevertheless allow the country to borrow oninternational markets at a cheaper price and be able tofinance its current account deficit in absence of suffi-cient level of FDI.

The arrival of the Right to power marks theend of ‘Kirchnerism’

Elected in November 2015 with 51.4% of the votes,the new President, Mauricio Macri, a Liberal, led theRight to power for the first time in twelve years. ThePresident, who is part of the “Cambiemos” coalition,is not, however, supported by a majority in Congressand will have to form alliances to get his reformsthrough. He is facing a number of challenges, in par-ticular that of restoring an economy shaped by pop-ulist policies and State interventionism. He canalready boast of an important victory in resolving theconflict with the vulture funds. He hopes to be ableto restore the relations with the country’s tradingpartners and rebuild the confidence among investorsthat was undermined by commercial protectionism,nationalisations and the failure to comply with therulings of the International Centre for Settlement ofInvestment Disputes (ICSID) in the context of thepolicies implemented by the previous administration.These changes are, however, going to encounterresistance from the powerful trade unions and Pero-nist factions still leading the Congress.

RISKASSESSMENT

COFACE ASSESSMENTS

TRADEEXCHANGES

C

C

Country risk

Business climate

Medium termVERY

HIGH RISK

2013 2014 2015 (f) 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) 42.7(f): forecast

GDP per capita (US dollars-2014) 12,735

2.9 0.5 1.7 -0.5

26.0 23.9 30.0 38.0

-3.7 -5.4 -7.1 -5.5

-0.8 -1.0 -2.1 -2.3

40.2 45.2 52.1 55.0

Strengths

� Natural, agricultural, energy and mineral resources� Education level higher than the regional average� Qualified labour

CHINA11

Strengths Weaknesses

� External accounts benefitting from industrialcompetitiveness and diversification

� Sovereign risk contained: public debt mainlydomestic and denominated in local currency

� Gradual move up-market � Development of services� Infrastructure development

� High volatility in the stock market � Social tensions linked to rising inequality� The share of consumption in GDP remains weak:rebalancing the Chinese growth model remains achallenge in the medium term

� Aging population and gradual drying up of thepool of cheap and abundant labour

� Overcapacities in certain industries and highdebt level of corporates

� Fragile Chinese banks� Government’s strategy is ambiguous on arbitrating between reform and growth

� Environmental problems

UnitedStates

Hong-Kong Japan SouthKorea

Euro-zone

E

17%16%

11%

6%

4%

Euro-zone

SouthKorea

UnitedStates

AustraliaJapon

1

10% 10%

8%

5%

8%



Further slowdown in 2016

The Chinese economy is expected to continue slowingin 2016. The authorities are implementing reformsneeded to rebalance growth in favour of consumptionand services. This is however hitting the profits of com-panies with large overcapacities and with high levelsof debt. Despite the ongoing monetary easing sinceNovember 2014 and the expansionary budget meas-ures, investment is likely to remain limited in 2016. Ascompanies are heavily indebted, the monetary relax-ation is proving ineffective and the volatility of thefinancial markets could undermine confidence levelsof among investors and consumers. In this context ofa slower rise in disposable incomes, household con-sumption is likely to slacken somewhat. Despite thevery rapid expansion in online sales, retail sales are los-ing momentum. Although there was a rise in property prices in themain cities in 2015, the construction related sectors arelikely to remain flat because of high inventory levels. Acollapse in the housing market is however not verylikely, as the authorities have the capacity to intervenein the event of a severe shock. The growth of the serv-ices sector, in particular financial, is also continuing. Exports are however expected to continue sufferingthe weakness of global demand. Nevertheless down-ward pressures on the yuan could improve the com-petitiveness.

The credit risk of companies is increasing

Although the level of public debt is sustainable, that oflocal municipalities is high (at around a third of GDP)and remains opaque. In order to reduce the financialcosts for local government and kick-start infrastructuredevelopments, the government has implemented aswap programme that allows the conversion of shortterm credits into long term bonds. In addition, corporates are highly indebted and theexpansion of shadow banking makes it very difficult toevaluate. In June 2015, the debt of companiesaccounted for 201% of GDP. On top of this and despitethe monetary policy easing, SMEs frequently have torely on shadow banking at exorbitant rates, given theirdifficulty in securing financing.In this context there has been a gradual decline in thequality of banking assets which are also under-esti-mated because of the scale of shadow banking. Theofficial ratio of non-performing loans reached 1.59% atthe end of the third quarter 2015, its highest level since2009. The credit risk has increase significantly, high-lighted by the growing number of defaults on the Chinese bond market. Thus, in April 2015, China hasexperienced its first SOE default with the photovoltaiccompany Baoding Tianwei. These events have not, sofar, led to any signs of panic. The introduction of realbankruptcy risk is inevitable and will reduce moral hazard generated by government interventions. In the

context of the economic slowdown, the solvency ofmore fragile borrowers will still need to be monitoredin 2016. Following a rise of more than 110% between November2014 and June 2015, the Chinese stock marketsrecorded a significant correction during summer 2015.Shares lost more than 43% in less than 3 months beforefirming up slightly. Since the beginning of 2016, volatil-ity is high on the FX and stock markets and the stockmarket reference index has lost more than 17%. Admit-tedly this market correction can be seen as a healthydevelopment after such a sharp rally disconnectedfrom corporates’ fundamentals, volatility and equityprice deflation have generated additional risks. Theheavy use of margin finance (investors borrow moneyto buy shares) has increased the credit risk and couldworsen the downwards spiral.

Business climate continues to suffer shortcomings

Whilst reaffirming the supremacy of the ChineseCommunist Party (CCP), the Central Committee ses-sion of the CCP in October 2014 concluded withdecisions relating to an improvement in the state oflaw. In addition, the 5th plenum of the CommunistParty, which was held in October 2015, ended theone child policy and reaffirmed the desire on the partof the authorities to develop the social protectionsystem. However, the national security reform projecthas caused concern among some NGOs and foreigninvestors. Despite a seamless transition from the pre-vious administration, President Xi Jinping wieldsunprecedented authority over the CCP, particularlyfollowing the anti-corruption campaign which tar-geted the highest-ranking party dignitaries. However,the Xi Jinping – Li Keqiang administration is facingboth social and ethnic unrest. The country has seenan increasing level of worker activism which causedthe authorities to publish a guide on the develop-ment of “harmonious work relations”. Finally, majorshortcomings in term of governance persist, partic-ularly concerning access to company balance-sheetsand legal protection for creditors.

RISKASSESSMENT

COFACE ASSESSMENTS

TRADEEXCHANGES

A4

B

Country risk

Business climate

Medium termLOW RISK

2013 2014 2015 (f) 2016 (f)

GDP growth (%)




Public debt (% GDP)*


Population (billion of persons-2014) 1.4(f): forecast * Comprising central and local debt (excl. financing vehicles)


7.7 7.3 6.9 6.5

2.6 2.0 1.5 1.8

-1.1 -2.1 -2.3 -3.0

2.5 1.7 2.4 3.3

39.4 41.1 43.2 46.0

12

IRAN

StrengthsWeaknesses

� Substantial reserves of oil and gas (second andfourth in the world respectively)

� Very low external debt� Strategic position in the sub-region

� Sanctions broadly maintained by the UN, theUnited States and the EU because of the Iraniannuclear programme

� High inflation� Social tensions� Unfavourable business climate


China India Japan SouthKorea

Turkey

39/%

16%14%

9%7%

UAE China India SouthKorea

Euro-zone

3

33%

28%

8%

5%5%


Recovery expected after the lifting of sanctions

After a slowdown in 2015, the lifting of sanctions fol-lowing the entry into force of the Joint Comprehen-sive Plan of Action (JCPOA) in January 2016 shouldlead to an economic recovery notably trough arebound of exports. Iran’s return to the global marketwill mainly benefit to oil exports. UE embargo hassignificantly hindered Iranian’s oil production, esti-mated at 3 Mb/d in 2015. According to the IAE itshould increase to 3.7Mb/d in 2016 and 4.4 Mb/d in2020 thanks to the revival of oil sector. The non-oileconomy will also benefit from the lifting of sanc-tions. The production of non-oil sectors will takeadvantage from the increase of households and busi-nesses’ confidence. However, the positive impact ofsanctions’ removal could still be limited by the weak-ness of oil price that should constrain export rev-enues and postpone new investments in the sector.Following an observable slowdown in 2015, key sec-tors such as automotive and construction shouldexperience a gradual recovery in 2016. In the mediumterm, structural rigidities including high inflation anda downward trend in capital productivity will con-tinue to weigh on growth.

Public finances adversely affected by the low price of hydrocarbons The Iranian authorities have gradually diversified theirfinancing sources under the sanction. Also, the fall inhydrocarbon prices has had a less negative impact onpublic accounts than in other oil-producing countries.Nevertheless, the cumulative effects of the fall in activ-ity in 2015 and in commodity prices have driven up thefiscal deficit. While the sluggishness of the oil marketis likely to continue in 2016, the budget balance willprobably improve. The expected recovery following thelifting of sanctions should increase non-oil revenues.Likewise, oil revenues will increase thanks to growth inexport volumes. Investment could nevertheless weighnegatively on public finances. It is expected that thelifting of sanctions will enable the government toimplement a set of infrastructure projects under thesixth five-year development plan. The Iranian debtremains low and is predominantly owed to state-owned banks. The government should also benefitfrom its assets frozen abroad.

Resilient external accounts

The current account should remain positive underthe cumulative effect of the lifting of the restrictionsand a fall in transaction costs for exports. Neverthe-less, the positive repercussions of the lifting of sanc-tions could be limited. First, Iranian exports remainhighly dependent on the hydrocarbon sector andindustrial sectors dependent on oil production. Also,the low oil prices are likely to curb the growth in oilexport revenues in spite of increasing volumes. Sec-ond, exports could be constrained by an apprecia-tion of the exchange rate resulting from capitalinflows. FDI should increase without necessarilyreturning to their pre-2012 levels.

The Iranian banking system suffered from structuralweaknesses already before the tightening of thesanctions. The state-owned banks play an importantrole and remain under-capitalised. The exclusion ofIranian banks from SWIFT has increased this vulner-ability by freezing Iranian banks’ assets abroad andby limiting foreign-currency deposits. The centralbank, in agreement with the IMF’s recommendations,intends to recapitalise troubled banks and to over-haul the banking system in accordance with interna-tional prudential legislation.

Towards international opening

On January 16, 2016, after the Atomic InternationalAgency approved the report on Iranian nuclear pro-gram, sanctions against Iran were lifted. Sanctionremoval was one of the main issue of the February(2016) elections which had to determine the mem-bers of the new parliament (Majlis) and the assemblyof experts (clerical body that appoints the SupremeLeader). These elections have been a success forPresident Rohani’s supporters. The participation ratestood at 62% and the hard liners were mainlydefeated. The new parliament is expected to favourreforms but mainly economic ones. Furthermore, Iranian market wills stay difficult toaccess because of an unfavourable climate businessthat should limit foreign investment. Iran is still underother international sanctions regime (financing ofterrorism and the violation of human rights).

RISKASSESSMENT

COFACE ASSESSMENTS

TRADEEXCHANGES

D

C

Country risk

Business climate

Medium termVERY

HIGH RISK

2013 2014 2015 (f) 2016 (f)

GDP growth (%)


Budget balance (% GDP)*


Public debt (% GDP)


Population (millions of persons-2014) 77.8(f): forecast * Tax year starting on 21 March


-1.9 4.3 0.5 3.8

34.7 15.5 15.1 11.5

-0.9 -1.1 -2.9 -1.6

8.2 4.5 2.4 1.5

15.4 15.8 16.4 15.3

13

KAZAKHSTAN


� Expected increase in oil exports thanks toexploitation of Kashagan oil field

� Abundant foreign direct investments � Strategically positioned between Asia andEurope

� Economy reliant on commodities (oil, gas, uranium and iron)

� Fragility of the banking system � Persistent shortcomings in legal and institutional framework

� Risk of political instability if succession to President Nazarbayev is rushed


Euro-zone

China Romania TurkeySwitzerland

53%

13%

6%4% 3%

Russia China UnitedStates

UkraineEuro-zone

5

32%

26%

15%

3%3%


Growth curbed by the oil price collapse

Activity, which slowed sharply in 2015, is expected toremain very weak in 2016. Industrial output, domi-nated by the oil sector, has hardly grown. The startof operations at the offshore Kashagan oilfield is stillbeing hit by severe delays and may not happenbefore the end of 2016. The start of production mayallow a speed up of growth from 2017.Major investment projects, especially work on theEXPO-2017 international exhibition are expected tosustain activity in construction and services. Con-sumption, the main growth driver, will be limited (aswill investment) by the squeeze on credit as well asby rising prices. Exports are likely to suffer from theeconomic slowdown in China and the recession inRussia, but primarily from the weak oil price. Inflation, fuelled by the effect of the tenge againstthe dollar, could exceed the upper limit of the targetrange (6-8 %) set by the central bank (NBK). Pricecontrols on certain foodstuffs could be lifted,increasing upward price pressure. In this context, thecentral bank is expected to keep interest rates high(16% in October 2015) to limit inflation.

Budget and current account deficits whichappeared in 2015 unlikely to narrow in 2016

Budgetary receipts, over half of which derivefrom the oil sector, are likely to be affected byonly marginal growth in hydrocarbon produc-tion and low oil prices. The depreciation of thecurrency could, however, offset the drop in oilrevenue in dollar terms as it is denominated intenge in the budget. Non-oil tax receipts willincrease slightly. Public sector wage rises, ini-tially planned for 2015, have been announcedfor 2016. The infrastructure projects, more-over, are likely to be maintained. However, thisspending is likely to be financed mostly by theoil fund (NFRK) and pensions funds, limitingits impact on the budget, although the Stateis expected to continue to support indebtedpublic companies (in particular the nationalenergy company, KazMunaiGaz). Oil exports (75% of total) are unlikely toincrease, given the production difficulties andlow oil prices. Demand is also expected toremain sluggish on Kazakhstan's main mar-kets: the EU, China and Russia. Imports areexpected to be constrained by a low internaldemand. After the NBK decided to introduce a floatingexchange rate system in August 2015, trigger-ing a more than 20% slide in the tenge, thecurrency continued to weaken and lost almost

50% against the dollar during 2015. Thedownward pressure is expected to last until2016,and the volaitility of the exchange reatewill remain high.The country remains exposed to externalshocks, with most bank and corporate debtdenominated in foreign exchange. However,foreign exchange reserve levels (5 months ofimports, excluding gold) and the assets of theNFRK (USD 63 billion at the end 2015, i.e.about 30 % of GDP) mean there is some lee-way in liquidity terms. The banking sector is very weakened by theimpact of the depreciation on bank debt andthe worsening quality of the portfolio. Theweigh of deposit (more than half) and loans(around 30%) demonimated in foreign cur-rency is a source of vulnerability of the sector.

The issue of President Nazarbayev's succession remains a source of uncertainty

Since 1991, the country has been led by NursulatanNazarbayev and his party (Nur Otan), which holds abig majority of seats in the Assembly. NursulatanNazarbayev was re-elected for a fifth term in April 2015with 98% of the votes cast. In January 2016, PresidentNazarbayev announced early Parliamentary electionsin March 2016 (initialy scheduled in 2017). If there is littledoubt about the result due to the lack of real opposi-tion, the speeding up of the electoral timetable may bejustified by the president’s desire to obtain a new legit-imacy. There is still uncertainty as to the country's polit-ical stability due to the risk of conflict which couldbreak out between the different government factions,if the president's (74 yers-old) succession had to berushed in the event of his being unable to remain inpower. There is growing popular discontent over low wages,rising prices and corruption. Organised mass protestsare, however, still unlikely especially since the securitymeasures, tightened in response to fears of terrorismand religious extremism, limit the opportunities forlarge-scale protests. Despite real progress, the business climate is greatlyhampered by State interference in the economy, ineffective institutions and corruption.

RISKASSESSMENT

COFACE ASSESSMENTS

TRADEEXCHANGES

C

B

Country risk

Business climate

Medium termMODERATE

RISK

2013 2014 2015 (f) 2016 (f)

GDP growth (%)


Budget balance (% GDP)*


Public debt (% GDP)


Population (millions of persons-2014) 17.4(f): forecast * Including Oil Fund transfers (NFRK)


6.0 4.3 0.9 1.0

5.8 6.7 6.3 8.6

5.0 1.8 -3.2 -2.5

0.4 2.8 -3.2 -2.5

12.9 14.9 18.3 18.8

14


� Diversified exports� Dynamic services sector� Good infrastructures, high level of R&D� Investment supported by development of localfinancial market and broader access to foreigndirect investments

� Economy dependent on external demand � Budgetary revenues heavily reliant on perfor-mance of gas and oil sector

� Very high stock of bank credit to private sector � Erosion of economy's price competitiveness lin-ked to high labour costs

� Persistent regional disparities


Singapore China UnitedStates

Euro-zone

Japan

14%

12%11%

8%

6%

China Singapore Japan UnitedStates

Euro-zone

1

17%

13%

9%8%8%


Sluggish global demand should continue toweigh on activity

After having been less dynamic in 2015, activityshould continue to slow in 2016. Low commodityprices will continue to drag on exports of hydrocar-bons. Nonetheless, diversification of the economyshould mitigate the shock on growth. The countryalso exports high value-added manufactured prod-ucts. However exports of electronic goods have beenhit by China’s slowdown. And demand from theUnited States is expected to remain lively but shouldsuffer the economic slowdown in the US. Besides,despite high debt levels, household consumption isexpected to remain robust: unemployment is likelyto remain contained, the poorest households willbenefit from social transfers, social contributionshave been lowered and inflation is likely to remainmodest, despite the ringgit's depreciation, due todeclining food prices. Meanwhile, the ripple effects of the Economic Trans-formation Programme will continue to be positive forprivate and public investment with, in particular, theconstruction of a high speed rail link connecting Sin-gapore to Kuala Lumpur. Finally, the sectors linked to tourism are expected tocontinue to suffer from the effects of the twoMalaysian Airlines disasters which occurred in 2014,and the worsening security context in Borneo. Nevertheless the government has eased conditionsfor entry of tourists coming from China. Manufactur-ing, moreover, is likely to continue to be hit by a lackof competitiveness.

The budget balance is improving, despitethe weakness of hydrocarbons prices whilethe external position remains sound

In 2016, the budget deficit is likely to keepdeclining. The government introduced VAT at arate of 6%, extended the property tax andreduced subsidies for electricity, sugar andpetrol. These measures will help offset the fall infiscal revenues linked to low hydrocarbon prices.The improved budget balance should enablethe public debt to be reduced, which, however,will remain at a high level. Moreover, theMalaysian State is also exposed through contin-gent liabilities which could represent 15% ofGDP. Meanwhile, the current account surplus is likelyto slightly decrease because of the worseningtrade balance, which is explained by low com-modity prices and the slowdown in Chinesedemand.Even if the high level of foreign exchangereserves (close to 6 months of imports) ensuresMalaysia has a good capacity to resist suddenflights of capital, the ringgit is under pressure in

a context of global financial turmoil because ofthe drop in oil prices and the political scandallinked to the sovereign fund 1MDB and affectingthe Prime Minister. Nevertheless, the US FederalReserve should delay the tightening of its mon-etary policy which should enable to containcapital outflows. Finally, the banking sector is still adequatelycapitalised and liquid. Nevertheless, high house-hold debt levels and the banks' exposure to for-eign assets are a risk.

The prime minister has been weakened by the 1MDB scandal

Despite the victory of the Prime Minister's party,Barisan Nasional (BN), the general elections of May2013 confirmed a redistribution of political forces andthe rise in power of the opposition initiated duringthe 2008 elections. Nonetheless the legitimacy of Prime Minister, Najib Razak, was confirmed by his victory during the party's internal elections inOctober 2013. However, suspicions of corruption, ofembezzlement and poor management of the 1MDBpublic investment fund have weakened the primeminister since July 2015. The attorney general hascleared Najib Razak but the anti-corruption agencyappeled against this decision and foreign jurisdic-tions are also investigating the case. A former primeminister called for the resignation of Najib Razakwho dismissed his deputy and the former attorneygeneral. However, he continues to benefit from hisparty's support. Internal elections within the primeminister's coalition will not take place until after the2018 parliamentary elections. Despite these scandals,the country is expected to continue benefitting froma business climate made favourable in particular bythe quality of its regulations. Lastly, the NB is keen to use its One Malaysia pro-gramme to end the New Economic Policy introducedin 1969 - positive discrimination measures favouringthe Bumiputra (indigenous Malays) - and seen, inparticular, as a disincentive to foreign investment.However, community tensions remain below the sur-face due to religious and ethnic diversity.

RISKASSESSMENT

COFACE ASSESSMENTS

TRADEEXCHANGES

A2

A3

Country risk

Business climate

Medium termLOW RISK

2013 2014 2015 (f) 2016 (f)

GDP growth (%)




Public debt (% GDP)




4.7 6.0 5.0 4.5

2.1 3.1 2.4 3.8

-4.3 -3.6 -3.5 -3.2

3.5 4.3 2.5 2.0

55.9 55.2 55.6 53.6

MALAYSIA

15

PORTUGAL


� Quality infrastructure� Tourist attractiveness� Sector and geographic diversification initiated,research and innovation capacities

� Declining labour unit costs and reforms

� Limited scale of the manufacturing industry, spe-cialisation in sectors with low added value (tex-tile-clothing. mineral products and metal ores.metals. food products)

� High level of public and corporate debt� Rigid labour market and limited domestic com-petition, low investment

� Deteriorating bank asset quality andprofitability


Spain Germany Angola UnitedKingdom

France

24%

12% 12%

6% 6%

Spain Germany Italy NetherlandsFrance

33%

12%

7%5%5%


Recovery lacks dynamism

After a deceleration in activity in the second half of2015, the economic climate indicator of the nationalinstitute of statistics remained hesitant in early 2016.Growth is less vigorous than in Spain and remainsbelow the euro area average. The recovery, initiallyexport-driven, has spread to the domestic marketbut it lacks dynamism mainly due to a slowdown injob creation and a significant private debt. Theunemployment rate has declined but tended to sta-bilize late last year and early this year (at 12.2%). Thelack of vitality of the labour market should persistand consumption slow slightly in 2016 despite amore expansionary fiscal policy and an increase inthe minimum wage. Corporate deleveraging and aless favorable external environment should also limitinvestment growth. Foreign trade contribution togrowth would remain slightly negative due to risingimports.

Corporate debt remains high and the rise in non-performing loans is hitting bank profitability

Corporate margins began to improve from summer2009 onwards thanks to wage restraint and employ-ment restructuring. However, insolvencies, recordednotably in construction and trade sectors, rose slightlyin 2015 after falling significantly in 2014. The numbershad more than tripled between 2007 and 2013. Whilst slightly lower, corporate debt remains high (118%of GDP at the end of September 2015) and is a drag oninvestment. Overall, the banking sector has improvedits solvency since 2012 and is benefiting from betterfinancing terms, but the growth in non-performingloans is undermining its profitability and limiting its abil-ity to lend to viable companies. Two issues continue toweight on the sector: the failure of Banif in 2015 andthe sale, expected by the summer of 2017, of NovoBanco, established in 2014 at the time of the rescue ofBanco Espírito Santo.The international ¤78bn bailout plan (by the EU andthe IMF) implemented in May 2011 has reached a posi-tive conclusion. Portugal’s access to bond markets wasfully restored before the expiry of the plan (June 2014)without having to rely on a precautionary credit line (itis currently subject to a post-program monitoring).Economic activity has recovered, the public accountsalleviated and the imbalance in the external accountsreduced. However, whilst the government was able, inMarch 2015, to make an early repayment on some ofthe IMF loans, the burden of public debt and the scaleof the financing needs of the government continue topose significant risks for the viability of this debt, with

a dynamic that remains highly sensitive to macro-economic shocks. The debt market remains volatile asevidenced by the temporary but notable rise in sover-eign interest rates in February 2016 linked to the risk ofa fiscal loosening.

An increasingly fragile political context

The Social-Democrat Party (SDP) won the parlia-mentary elections on 4 October 2015 but without anabsolute majority. After negotiations lasting a num-ber of weeks, the President, Anibal Cavaco Silva(SDP) confirmed the Prime Minister, Pedro PassosCoelho (SDP), in office. However the left (Socialistand Communist Parties and the left block) united forthe first time in 40 years and placed a censuremotion before Parliament, leading to the fall of thegovernment on 10 November. On 24 November, after asking the Socialist Party (SP)for guaranties on the stability of a future governmentas well as clarifications on compliance with the coun-try’s budgetary commitments, the President wasobliged to name the leader of the SP, Antonio Costa,as Prime Minister. However, the parliamentary left-wing coalition does appear fragile, with the allies ofthe SP calling for the end of the austerity policies. Bythe way, the left-wing members of the Parliamenthave adopted a high-rik budget in February 2016which plans to loosen the grip of budget rigor whilereducing deficits. Moreover, the Communist Party willnot abandon the idea of restructuring the country'sdebt.Finally, Portugal will be weakened by structural limi-tations (low level of investment, high level of debtand bottlenecks) that make it necessary to continuewith reforms. Although progress has been made inthis area, Portugal continues to lag behind relative toits peers in terms of labour flexibility and internalcompetition. The efficiency and the discipline of thepublic sector in terms of payments needs improving,as well as the operation of the insolvency processand the procedures for restructuring corporatedebts.

RISKASSESSMENT

COFACE ASSESSMENTS

TRADEEXCHANGES

A4

A2

Country risk

Business climate

Medium termVERY

HIGH RISK

2013 2014 2015 (f) 2016 (f)

GDP growth (%)




Public debt (% GDP)




-1.1 0.9 1.5 1.3

0.4 -0.2 0.5 0.6

-4.8 -7.2 -4.2 -3.7

1.4 0.5 1.0 1.0

129.0 130.2 129.1 129.0

16

SAUDI ARABIA


� A quarter of global oil reserves and largest OPECproducer

� Predominant regional economic and political role� Economy going through a diversification processand more open since joining the WTO end-2005

� Solid financial situation � Robustness of the banking system

� Significant dependence on the hydrocarbon sec-tor where there is little job creation, and growingdomestic energy consumption

� High unemployment rate among Saudi nationals � Governance weaknesses hampering the businessclimate

� Unstable geopolitical environment


China Japan SouthKorea

Euro-zone

UnitedStates

E

13% 13% 13%

10%9%

Euro-zone

China India SouthKorea

UnitedStates

1

20%

13%12%

5%

8%


An economy that is suffering from therepercussions of the fall in hydrocarbonprices

After decreasing in 2015, Saudi Arabia’s growth willdecline further in 2016. Early in 2016, oil price hasreached its lowest level since 2009 and this trend willcontinue to weigh negatively on the Saudi oil indus-try. Moreover, the agreement between oil-producingcountries including Saudi Arabia and Russia to freezetheir oil production in order to weigh on the marketsupply will induce a stagnation of the local hydrocar-bon sector growth in 2016, limiting the sector'sprospects oil prices stay low. The petrochemicalindustry marked by the decline in value added in thehydrocarbon sector should also suffer from theweakness of the oil market. Non-hydrocarbongrowth which has made it possible to curb the eco-nomic slowdown is likely to worsen in 2016. The sig-nificant government spending that has beenundertaken has been a support factor for activityparticularly via the increase in civil servant pay. Thesemeasures have had a significant effect on householdconsumption given the weight of the public sectorin the labour force. Without any significant austeritymeasures, the 2016 budget announced a shift in eco-nomic policy stimulus. Social spending should bemaintained with an increase in the education budget,but public investment should decrease. The CEDA(Council for Economic and Developmental Affairs) incharge of economic policy will have to approve allpublic investments in excess of SAR 100 million.Household consumption will remain robust, but willprobably suffer from the repercussions of the wagestagnation. in particular among civil servants. With ashortfall of 1.25 million housing units, the outlook forthe construction sector remains positive eventhough there are still administrative obstacles pre-venting a real upswing in activity. Inflation is expected to surge in 2016 due to anincrease of domestic oil prices following the 2016budget reform. These should have effects on theprices of other groups of goods such as transport orconstruction.

Increase in the fiscal deficit but improve-ment in the current account balance

Growth in domestic demand for hydrocarbons will alsoreduce oil revenues. Non-oil revenues will shrink asactivity slows down. Customs duties can be expectedto be adversely affected by the slowdown in imports.Government spending will weaken only partially in2016. Current expenditure will remain constrained bythe size of the public payroll and by the policy of hiringyoung Saudi graduates. However, investment spendingwill be given priority and certain projects could bepostponed. Energy subsidies have also been reviseddownwards further to the increase of the oil price atthe pump of 50 %. Besides, the framework of the fiveyears development plan presented with the 2016budget will include a set of structural reforms in orderto rationalize the public spending, the accent being put

on a bigger synergy between the public and privatesector an increase of the number of privatizations aswell as a modernization of public services. To offset thedecline of oil revenues, the authorities should encour-age the use of SAMA’s financial reserves and therecourse to external debt after that an increase in gov-ernment domestic debt that has led to tightening liq-uidity in the banking in 2015. Saudi Arabia is expectedto borrow $ 10 billion in 2016.The current accountdeficit will continue to rise sharply. The slowdown ofimports will hardly offset the effects of low price oncrude oil exports. FDI may also slowdown due to aweaker investor confidence following the country’sdowngrade by several rating agencies.

New sovereign for a new political era

The country’s recent political history has beenmarked by the death of king Abdallah in January2015. Crown prince Salman ben Abdelaziz Al Saoudwas made king of the Saudi kingdom on 23 January2015. This change of sovereign has led to a changein Saudi policy in both domestic and external terms.From a domestic policy viewpoint, king Salman hascarried out a significant reshuffle by appointingPrince Mohammed Ben Nayef, a former minister ofthe interior. as crown prince instead of his half-brother prince Mokrin. Likewise, the son of KingSalman Mohamed bin Salman has been appointedsecond in line to the throne. He also kept his func-tions as minister of defence and became presidentof the CEDA. The concentration of power within thistriumvirate has enabled the sovereign to bypass cer-tain rigidity in the monarchy and impose measuresthat had been suspended until now. such as theopening of the stock market to foreign investors.Nevertheless, criticism has been voiced against thenew order. especially after the two accidents thataffected Mecca in September 2015 and which costthe life of more than 800 pilgrims. At the externallevel, the kingdom has involved itself directly in theYemenite political crisis by leading a coalition of Arabcountries made up of its allies. The stalemate of theconflict in Yemen is creating a risk not only for inter-nal security but for Saudi public finances.

RISKASSESSMENT

COFACE ASSESSMENTS

TRADEEXCHANGES

A4

B

Country risk

Business climate

Medium termLOW RISK

2013 2014 2015 (f) 2016 (f)

GDP growth (%)




Public debt (% GDP)




2.7 3.6 3.4 1.2

3.5 2.7 2.0 3.9

8.7 -0.5 -14.2 -17.8

15.3 7.8 -7.9 -12.0

2.2 1.6 1.8 17.3

17

SOUTH AFRICA


� Economic and political power� Natural resources (gold, platinum, coal, chromium,etc.)

� Developed services sector (in particular financial) � Legal system provides protection for investors

� Poverty, inequalities, sources of social risks(crime, demonstrations)

� High level of unemployment and shortages ofskilled labour

� Infrastructure shortcomings (transport, energy)� Dependence on volatile foreign capital flows


Euro-zone

China Japan BotswanaUnitedStates

15%

10%

7%

5% 5%

Euro-zone

China UnitedStates

NigeriaSaudiArabia

21%

16%

7%

5%

7%


Sharply slowing economy

Growth in the South African economy is likely tokeep on slowing in 2016. Industrial output will con-tinue to be handicapped by persisting power supplyproblems and low mining sector prices. Agriculture,which was badly hit by droughts in 2015, could againsuffer as a result of El Niño in 2016. Services activity(finance, retail) will remain dynamic. Household consumption is expected to be held incheck by debt, high inflation, as well as the near stag-nation in wages and social spending. Private invest-ment is likely to remain low, limited by high interestrates (raised to 6.25% in November 2015), and thelack of vitality in demand (internal and external) andreduced margins, in particular because of morecostly inputs due to the depreciation of the rand. Thegovernment however should be continuing with itsinfrastructure projects. Finally, exports are likely tostruggle given the weakness in demand, thus limitingtheir contribution to growth. Inflation could increase in 2016. Higher electricityprices, the cost of food (as a result of the drought)and other products more heavily taxed (drinks, fuel,tobacco), as well as the ongoing depreciation of therand are likely to boost inflationary pressures, despitelow oil prices. The relative weak level of internaldemand, combined with strict monetary policy,could however prevent it going above the ceiling setby the central bank (6%).

No room for manoeuvre in terms of thebudget and persisting current accountdeficit

The South African government is looking to bring itsbudget deficit under control and stabilise its debt inorder to avoid any further decline in its credit rating,resulting in the loss of its “investment grade” rating. Thechallenge is not inconsiderable given the feebleness ofeconomic activity which is dragging down tax receipts.The budget announced in February 2016 provides fornew tax rises, following that of 2015 (on the revenues).Savings could be made thanks to freeze in public sec-tor wages. However, the infrastructure expenditurecommitments would be difficult to revise, given thescale of the country’s needs (electricity production),and the cost of repaying the debt is growing. Supportfor certain state-owned companies, in financial difficul-ties (Eskom), could also be a burden on public finances,even though some of the spending is expected to befunded by the sale of State shareholdings (for instancein Vodacom). The debts of these companies willincrease the already high level of public debt, althoughthe structure of this (mainly local and long term) helpsto mitigate the risk of overindebtedness.

The current account balance could deteriorate in 2016.Higher US interest rates but above all uncertaintiesconcerning the economic and political situation of thecountry, could, by increasing the rate of capital with-drawals, weigh on the current balance and on the theexchange rate for the rand which already dropped 25%against the dollar in 2015. Exports are likely to be heldin check by weak external demand, whether in China(the leading trading partner) or the EU, the lack ofcompetitiveness of its industry and low prices for min-erals (over 50% of exports, particularly gold and plat-inum), despite some recovery. A contraction in imports,due to the lack of vitality in internal demand, couldhowever more than make up for the export situation.The banking sector, impaired by the concentration ofloans to already heavily indebted households, couldcontinue to suffer with the slowing of the economy.

Ongoing political tensions and worseningbusiness climate

Despite the comfortable victory of the ANC in theMay 2014 elections, doubts remain concerning thepolitical and social development of the country.J.Zuma’s authority seems to be more and more chal-lenged, after allegations of misappropriation and theremoval of the Finance Minister and hesitation forappointing his successor at the end of 2015. has tocompromise with the other at the same time as hisauthority is being increasing questioned, which Lackof legitimacy, growing internal divisions inside theANC and between different members of the rulingalliance (COSATU, Communist Party) are reducingthe ability of the government to define and imple-ment reforms. The continuing failure to satisfy people’s expectations in terms of overcoming unem-ployment, poverty and corruption, remains a sourceof social instability. Strikes and demonstrations,which were mostly focused on the industrial sector(mines, metallurgy, etc.) are spreading (students inOctober 2015), and are evidence of growing generaldiscontent.South Africa has modern legal and financial systemsand its ranking by certain World Bank indicators interms of governance (rule of law, voice and account-ability) tends to improve. Failings in terms of training,criminality and corruption are however handicappingthe business climate.

RISKASSESSMENT

COFACE ASSESSMENTS

TRADEEXCHANGES

B

A4

Country risk

Business climate

Medium termMODERATE

RISK

2013 2014 2015 (f) 2016 (f)

GDP growth (%)




Public debt (% GDP)


Population (millions of persons-2014) 54.0(f): forecast Fiscal year : April to May


1.9 1.4 1.3 0.6

5.8 6.1 4.8 6.0

-4.3 -3.9 -3.8 -3.9

-5.8 -5.4 -4.0 -4.7

43.3 46.0 48.4 49.8

UNITED KINGDOM18


� Oil and gas production covering three-quarters ofenergy needs

� High-tech sectors (aeronautics, pharmaceuticals)� Low corporation tax

� Dependence of the economy on financial services� High levels of debt and public deficit� High level of private debt� Risk of EU exit


Germany UnitedStates

Switzerland FranceNetherlands

11%

10%

8%

7% 7%

Germany China UnitedStates

FranceNetherlands

15%

9%

8%

6%7%


Growth based on solid foundations

After reporting better performances than many ofmajor advanced economies in 2015, UK growthshould decline in 2016 against the backdrop of risinguncertainty linked to a possible “Brexit” (leaving theEuropean Union) which could way on business andhousehold confidence. It will still be sustained by pri-vate consumption, associated with wage growth (theminimum wage increased by 3% at the end of 2015)and the ongoing improvement of the labour marketsituation (unemployment rate around 5% at end2015), all of this in a favourable context of low bor-rowing costs and lower savings rate. However, thesedrivers will weaken slightly, given the expected slightinflation rebound. The rise in property prices in 2015(almost 8%) could continue in a context of still lim-ited supply, which will sustain consumption but limitopportunities for first-time buyers and will not helpbring down the high level of household debt (125%of GDP). The risk of a property bubble thereforeneeds watching. Investment on the other hand willbe supported by the solid financial position of busi-nesses and advantageous financial conditions. TheFunding for Lending Scheme will, meanwhile, beextended until January 2018 and the amount whichbanks can borrow will gradually be reduced. How-ever it should be hampered by the weakening busi-ness confidence. Investors could indeed adopt await-and-see approach due to the “Brexit” risk. Largeinfrastructure projects remain however a priority forthe authorities (£100 billion in spending by 2020announced, i.e. 5% of GDP in 2015), especially with aview to achieving a recovery in productivity, whichremains a key issue. External trade will continue topenalize activity with higher wage costs limitingcompetitiveness gains, so exports will rise onlyslightly due to the modest euro zone recovery. Thistrend is unlikely to offset the liveliness of imports,buoyed by domestic demand. Inflation struggled to stay in positive territory in 2015,in particular because of the drop in commodityprices and the appreciation of the pound sterlingagainst the euro. In 2016, it is expected to slightlyrise, as the drop in energy prices comes to a halt,wages rise, reduction in spare capacity and lessupward pressure on the pound against the euro.Monetary policy is unlikely to be tightened by theend of this year.

Fiscal consolidation remains a government priority

The government is still on a programme of fis-cal consolidation, even if the deficit is reduc-ing more slowly than expected. This is beingcarried out through spending cuts (publicsector wage moderation, cuts in health spend-ing). On the revenue side, the budget includestax cuts on investments as well as lower cor-poration tax (down from 20% to 18% by2020), and the gradual abolition of the levyon banks' balance sheets, which will, however,be replaced by an 8% levy on banks' profits.The budget deficit will accordingly comedown in 2016.The current account balance will improveslightly in 2016, on the back of the modest eurozone recovery, which will permit a reduction inthe income deficit and increased exports offinancial services (London still being the world'sleading financial centre) and goods. Coupledwith lively imports, the trade balance shouldultimately remain stable overall.

Risk of “Brexit” cannot be ruled out

The Conservative Party won a majority in the May2015 Parliamentary elections, bringing to an end fiveyears of coalition with the Liberal Democratic Partyand also strengthening the fiscal consolidation policyconducted by the Chancellor, George Osborne. TheLabour Party has been weakened as a result. The ref-erendum on Britain’s membership of the EU will takeplace on June 23. If the country decides to leave theEU, it will be forced out two years afterwards accord-ing to the Lisbon treaty. The magnitude of the effectwill depend on the definition of the new rules interms of trade, legal and regulation. According to aCentre for Economic Performance study , a smallincrease in trade cost could reduce income by 1.1% ofGDP (against 3.1% in case of strong increase). The country has risen two places in the Doing Busi-ness rankings and is in first place among the G7countries. The business climate is improving: it takesonly 4.5 to set up a business (compared with an aver-age of 20 in other countries), with a cut in corpora-tion tax and increased exemptions on social securitypayments helping improve the country's attractive-ness.

RISKASSESSMENT

COFACE ASSESSMENTS

TRADEEXCHANGES

A2

A1

Country risk

Business climate

Medium termVERY

HIGH RISK

2013 2014 2015 (f) 2016 (f)

GDP growth (%)




Public debt (% GDP)




2.2 2.9 2,2 1,8

2.6 1.5 0,0 0,8

-5.7 -5.7 -4,4 -3,5

-4.5 -5.1 -5,0 -4,7

86.2 88.2 88,6 89,1

19

VENEZUELA


� Considerable reserves of oil along the Orinocoriver and offshore gas potential

� Geographical proximity with the United States,the primary export market for Venezuelan oil

� Influence in the Caribbean region through thePetroCaribe initiative

� Assets (including in the United States) belongingto the national oil company PDVSA

� Growing active population

� The economy is extremely dependant on oil andgas as well as Chinese loans

� Runaway inflation� Incompetence of the national oil companyPDVSA

� Opaque and discretionary management of oilrevenue

� Shortage of foreign currency and goods � Delays in payment for current trade


UnutedStates

India Singapore CubaChina

35%

17%

13%

7%

4%

UnitedStates

China Euro-zone

ArgentinaBrazil

18%

13%

10%

5%

9%


Economic activity set to continue shrinking in 2016

Economic activity in Venezuela is expected to con-tinue shrinking in 2016. On the one hand, it is stillaffected by the erosion of household purchasingpower due to the rising inflation and, secondly, bythe persistent decline oil prices which limits publicspending on various social benefits for the disadvan-taged. Industrial activity will continue to be held backbecause of the backlog in terms of productioncapacity and the low level of diversification associ-ated with the difficulties of obtaining imported cap-ital equipment and intermediate products. Theproductive capacities of the agriculture sector, suf-fering from insufficient investment and neglect infavour of the oil sector, will also slow any upturn inactivity. The stalling in private investment shouldcontinue despite the likely gradual removal of importand currency restrictions. Caution among local andforeign investors because of legal uncertainty is alsolikely to lead to further outflow of capital from thecountry. Inflation is likely to remain high, fuelled bythe rapid expansion in the money supply and thebolivar’s strong depreciation faced to the dollar.

Very worrying fiscal and external vulnerabilities

In 2016, the fall in the price of oil - which is responsiblefor almost half of budget revenues, will be the mainchallenge facing the public finances. Continually weakoil prices will seriously limit the government's room formanoeuvre and make the danger of a Venezuelandefault on foreign debt increasingly plausible. Thecountry narrowly avoided a default in 2015 thanks toChinese loans and once again, managed to honor itsdebt deadline in February 2016 (USD 1.5 billion). Thetwo most important settlements (around 4.8 billionUSD) are scheduled for October and November of thisyear. The chaotic economic situation associated withthe arrival of opposition into power during the legisla-tive elections, which took place on December 2015, hasobliged the president to operate a tighter fiscal policy.

In terms of foreign trade, oil accounts for 96% ofVenezuelan export earnings. Persistently low oil pricestogether with declining production, a result of lowinvestment, are going to continue to impact on the cur-

rent account balance in 2016. In addition, the volumesdelivered to China (subject to opaque contracts) arealso likely to increase, at the same time as the out-standing Chinese loans these volumes are used torepay. Paradoxically, oil products are also the secondlargest item in Venezuelan imports because of the inef-ficiencies of its local refineries. The lack of competitive-ness of the almost non-existent manufacturing sectoris another factor inhibiting the growth of non-oilexports. FDI is at a very low level because there isuncertainty about the country's legal framework andrecourse to bilateral loans cannot restore the balanceof payments, leading to a decline in its reserves and thesoaring of US dollar on the parallel market.

No economic strategy from right’s party in Venezuela

The MUD (Mesa Unitaria Democratica) coalition of25 opposition parties won a majority of seats in theDecember 2015 parliamentary elections, bringingto an end the left dominated movement created byformer President Hugo Chavez sixteen years ago. Despite the enthusiasm for this victory, the oppo-sition seems not to have an alternative strategy toredress the country's economic and political crisisin which it is immersed. Opposition seems moreinterested in reforming constitution which aim is torevoke the President Nicolas Maduro’s mandate.This benefits the current president who decided toenact an “emergency economics’ plan” in January2016 for a period of 2 months renewable (the Pres-ident can dictate economic, political and social’smeasures during this period). One of the first stepswas to increase the price of oil (oil super now costs6 bolivars per litre against 0,097 bolivars), a firstfor almost 20 years (although the price remainsparticularly low). It also authorized a devaluation of58% of one of the three rates of exchange prevail-ing in the country, used for the purchase of essen-tial goods, which aim would be to boost localproduction. While necessary, these measures seemstill insufficient to redress the economic situationof the country which depends heavily on the evo-lution of oil prices.

RISKASSESSMENT

COFACE ASSESSMENTS

TRADEEXCHANGES

D

D

Country risk

Business climate

Medium termVERY

HIGH RISK

2013 2014 2015 (f) 2016 (f)

GDP growth (%)




Public debt (% GDP)




1.3 -4.0 -5.7 -5.0

40.6 62.1 180.6 204.0

-14.4 -14.9 -24.3 -25.0

2.4 5.2 -3.0 -4.0

52.0 51.8 52.9 52.9

COFACE SA1, place Costes et Bellonte92270 Bois-ColombesFrance

www.coface.com

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