Moody's Credit Outlook - November 1

7/31/2019 Moody's Credit Outlook - November 1

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MOODYS.CO

1 NOVEMBER 2012

NEWS & ANALYSISHurricane Sandy 2 Hurricane Sandy Will Likely Spur a Small Pick-Up in Consumer-

Products Sales

Hurricane Sandy Will Boost Home-Improvement Retailers, HurtHalloween Vendors

Hurricane Sandy Dashes P&C Insurers Hopes for a Quiet Endto Year

Hurricane Sandy Will Test Municipalities and Not-for-ProfitEnterprises Liquidity

Corporates 9 Hong Kongs Curbs on Property Investments Are Credit Negative

for Developers

Infrastructure 11

E.ON and RWE Sell UK Nuclear Joint Venture and Reduce Debt, aCredit Positive

Banks 12

Danske Banks Capital Raise Is Credit Positive for Creditors Tax on Term Deposit Interest Will Be Credit Negative for

Bulgarian Banks

Bank of Israels Loan-to-Value Limit Is Credit Positive forIsraeli Banks

New Hong Kong Property Stamp Duty Is Credit Positive for BanksInsurers 17 Increase in Capital Rules Is Credit Positive for US Life Insurers Mexican Government Proposes New Credit Positive

Insurance Framework

Sovereigns 21

Japans Impasse Over Deficit-Financing Bill Is Credit NegativeSub-sovereigns 22

Tepics Inability to Pay Year-End Bonuses Is Credit Negative

CREDIT IN DEPTHIMF Loan Repayments Strain Pakistans Finances

The government of Pakistans fifth loan repayment occurs against the

backdrop of a sluggish economy and looming external and fiscal risks.

Although the countrys official international reserves will cover debt

payments that are due in 2013, Pakistans buffer to external financial

shocks or a loss of domestic confidence is thin, thus highlighting its

reliance on multilateral or bilateral funding.

RECENTLY IN CREDIT OUTLOOK Articles in last Mondays Credit Outlook Go to last Mondays Credit Outlook

Click here forWeekly Market Outlook, our sister publication containing

Moodys Analytics review of market activity, financial predictions, and

the dates of upcoming economic releases.
http://www.moodys.com/http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_146739http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_146739http://moodys.com/wmohttp://moodys.com/wmohttp://www.moodys.com/viewresearchdoc.aspx?docid=PBC_146739http://www.moodys.com/


2/31

NEWS & ANALYSISCredit implications of current events

2 MOODYS CREDIT OUTLOOK 1 NOVEMBER 20

Hurricane Sandy

Hurricane Sandy Will Likely Spur a Small Pick-Up in Consumer-Products SalesConsumer-products companies will likely see a pick-up in sales from Hurricane Sandy. However, formakers of batteries, appliances, mattresses and beverages, the bump will be small and temporary and

will not lead to a material improvement in the companies financials or credit metrics. The biggest

winners will be battery companies Spectrum Brands, Inc. and Energizer Holdings Inc. because batter

are a meaningful part of their business.

Below, we outline the likely effects of the storm on several consumer-products subsectors.

Batteries:Energizer Holdings Inc.(Baa3 negative),The Procter & Gamble Companys (P&G, Aa3

stable) Duracell brand andSpectrum Brands Inc.(B1 stable) likely saw sales increase in advance of th

storm as consumers, preparing for power outages, stocked up on batteries and lighting sources.

Increased battery sales will have little effect on the companies overall financial performance, given thcompanies size and diversity. However, any increase does help offset the companies weak US battery

sales.

Cleaning and durable products:The Clorox Company(Baa1 stable),Whirlpool Corporation(Baa3stable),Mohawk Industries Inc.(Ba1 positive),Sealy Mattress Company(B2 review for upgrade)

andSerta/Simmons Holdings(B2 stable) will likely see a sales increase in the days and weeks after th

storm as consumers clean up and replace water-damaged appliances, carpets and mattresses.

The lift for consumer-durables companies, though brief, will more than offset the sales lost from

consumers inability to shop during the storm. However, the financial effect of the increased sales on

each company is not likely to be significant, because the affected consumers are a relatively small

percentage of each companys overall operations.

Beverages: Soft-beverage companies, particularlyThe Coca-Cola Company(Aa3 stable),PepsiCo, In

(Aa3 negative) andDr Pepper Snapple Group, Inc.(Baa1 stable) and to a lesser degree beer compani

such asAnheuser Busch InBev SA/NV(A3 positive),Molson Coors Brewing Company(Baa2 stable)

andConstellation Brands, Inc.(Ba1 stable), will also experience a sales boost in the affected regions a

consumers on the East Coast filled their pantries before the storm.

Extended residential power outages could also spur a slight and temporary increase in the sale of shelf

stable beverages including juices, waters, teas and carbonated soft drinks produced by many beverage

and some food companies. Sales of powdered milk and ultra-heat treatment (UHT) milk (the latter i

small part ofDean Foods Companys [Ba3 review for downgrade] portfolio) likely also increased as

fresh milk cannot be kept without refrigeration.

However, closures of retail stores owing to storm conditions or power outages could put a temporaryhold on post-storm sales, which could offset the pre-storm sales boost. And if flooding disrupts produ

deliveries and retailers ability to restock, beverage sales would also be hurt.

evin Cassidyice President - Senior Credit [email protected]

anice Hofferber, CFAenior Vice [email protected]

nda Montagenior Vice [email protected]
http://www.moodys.com/credit-ratings/Energizer-Holdings-Inc-credit-rating-822474417http://www.moodys.com/credit-ratings/Energizer-Holdings-Inc-credit-rating-822474417http://www.moodys.com/credit-ratings/Energizer-Holdings-Inc-credit-rating-822474417http://www.moodys.com/credit-ratings/Procter-Gamble-Company-The-credit-rating-621000http://www.moodys.com/credit-ratings/Procter-Gamble-Company-The-credit-rating-621000http://www.moodys.com/credit-ratings/Procter-Gamble-Company-The-credit-rating-621000http://www.moodys.com/credit-ratings/Spectrum-Brands-Inc-credit-rating-600020985http://www.moodys.com/credit-ratings/Spectrum-Brands-Inc-credit-rating-600020985http://www.moodys.com/credit-ratings/Spectrum-Brands-Inc-credit-rating-600020985http://www.moodys.com/credit-ratings/Clorox-Company-The-credit-rating-184400http://www.moodys.com/credit-ratings/Clorox-Company-The-credit-rating-184400http://www.moodys.com/credit-ratings/Clorox-Company-The-credit-rating-184400http://www.moodys.com/credit-ratings/Whirlpool-Corporation-credit-rating-825000http://www.moodys.com/credit-ratings/Whirlpool-Corporation-credit-rating-825000http://www.moodys.com/credit-ratings/Whirlpool-Corporation-credit-rating-825000http://www.moodys.com/credit-ratings/Mohawk-Industries-Inc-credit-rating-600064110http://www.moodys.com/credit-ratings/Mohawk-Industries-Inc-credit-rating-600064110http://www.moodys.com/credit-ratings/Mohawk-Industries-Inc-credit-rating-600064110http://www.moodys.com/credit-ratings/Sealy-Mattress-Company-credit-rating-600039466http://www.moodys.com/credit-ratings/Sealy-Mattress-Company-credit-rating-600039466http://www.moodys.com/credit-ratings/Sealy-Mattress-Company-credit-rating-600039466http://www.moodys.com/credit-ratings/SertaSimmons-Holding-LLC-credit-rating-823211635http://www.moodys.com/credit-ratings/SertaSimmons-Holding-LLC-credit-rating-823211635http://www.moodys.com/credit-ratings/SertaSimmons-Holding-LLC-credit-rating-823211635http://www.moodys.com/credit-ratings/Coca-Cola-Company-The-credit-rating-185500http://www.moodys.com/credit-ratings/Coca-Cola-Company-The-credit-rating-185500http://www.moodys.com/credit-ratings/Coca-Cola-Company-The-credit-rating-185500http://www.moodys.com/credit-ratings/PepsiCo-Inc-credit-rating-600000http://www.moodys.com/credit-ratings/PepsiCo-Inc-credit-rating-600000http://www.moodys.com/credit-ratings/Dr-Pepper-Snapple-Group-Inc-credit-rating-820804468http://www.moodys.com/credit-ratings/Dr-Pepper-Snapple-Group-Inc-credit-rating-820804468http://www.moodys.com/credit-ratings/Dr-Pepper-Snapple-Group-Inc-credit-rating-820804468http://www.moodys.com/credit-ratings/Anheuser-Busch-InBev-SANV-credit-rating-600058098http://www.moodys.com/credit-ratings/Anheuser-Busch-InBev-SANV-credit-rating-600058098http://www.moodys.com/credit-ratings/Anheuser-Busch-InBev-SANV-credit-rating-600058098http://www.moodys.com/credit-ratings/Molson-Coors-Brewing-Company-credit-rating-209200http://www.moodys.com/credit-ratings/Molson-Coors-Brewing-Company-credit-rating-209200http://www.moodys.com/credit-ratings/Molson-Coors-Brewing-Company-credit-rating-209200http://www.moodys.com/credit-ratings/Constellation-Brands-Inc-credit-rating-137762http://www.moodys.com/credit-ratings/Constellation-Brands-Inc-credit-rating-137762http://www.moodys.com/credit-ratings/Constellation-Brands-Inc-credit-rating-137762http://www.moodys.com/credit-ratings/Dean-Foods-Company-credit-rating-600016161http://www.moodys.com/credit-ratings/Dean-Foods-Company-credit-rating-600016161http://www.moodys.com/credit-ratings/Dean-Foods-Company-credit-rating-600016161http://www.moodys.com/credit-ratings/Dean-Foods-Company-credit-rating-600016161http://www.moodys.com/credit-ratings/Constellation-Brands-Inc-credit-rating-137762http://www.moodys.com/credit-ratings/Molson-Coors-Brewing-Company-credit-rating-209200http://www.moodys.com/credit-ratings/Anheuser-Busch-InBev-SANV-credit-rating-600058098http://www.moodys.com/credit-ratings/Dr-Pepper-Snapple-Group-Inc-credit-rating-820804468http://www.moodys.com/credit-ratings/PepsiCo-Inc-credit-rating-600000http://www.moodys.com/credit-ratings/Coca-Cola-Company-The-credit-rating-185500http://www.moodys.com/credit-ratings/SertaSimmons-Holding-LLC-credit-rating-823211635http://www.moodys.com/credit-ratings/Sealy-Mattress-Company-credit-rating-600039466http://www.moodys.com/credit-ratings/Mohawk-Industries-Inc-credit-rating-600064110http://www.moodys.com/credit-ratings/Whirlpool-Corporation-credit-rating-825000http://www.moodys.com/credit-ratings/Clorox-Company-The-credit-rating-184400http://www.moodys.com/credit-ratings/Spectrum-Brands-Inc-credit-rating-600020985http://www.moodys.com/credit-ratings/Procter-Gamble-Company-The-credit-rating-621000http://www.moodys.com/credit-ratings/Energizer-Holdings-Inc-credit-rating-822474417http://www.moodys.com/credit-ratings/Energizer-Holdings-Inc-credit-rating-822474417


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Hurricane Sandy Will Boost Home-Improvement Retailers, Hurt HalloweenVendors

Hurricane Sandy will be credit positive on retailers that sell equipment and provisions that consumer

use to weather the storm and its aftermath, while it will be credit negative for those that sell Hallowegoods and other discretionary items. However, we do not expect it to have a material effect on retail

sales.

For home-improvement retailers such asThe Home Depot Inc.(A3 stable) andLowes CompaniesInc.(A3 stable), Hurricane Sandy will drive a significant increase in sales. Consumers rushed to these

stores to stock up on essentials and buy equipment for storm preparations. The stores will benefit

further in the aftermath as consumers seek supplies for home and building repairs. These companies

will benefit from heavy sales of generators, flash lights, batteries and plywood.

Beyond home-improvement stores, other retail categories stand to benefit from heavy sales of flashlights, batteries, food, water and other essentials, including drug stores such asWalgreen Co.(Baa1

negative) andRite Aid Corporation(Caa1 stable). Supermarkets such asThe Great Atlantic & Pacifi

Tea Co. Inc.(A&P, Caa1 stable),Koninklijke Ahold N.V.(Baa3 stable), which operates the Stop &Shop and Giant chains, andTops Holding Corporation(B3 stable) will also benefit, although storesthat have power outages may experience product spoilage that could partially offset the benefits of

stockpiling by shoppers. Warehouse clubs such asCostco Wholesale Corporation(A1 stable),Wal-

Mart Stores Inc.s (Aa2 stable) Sams Club and BJs Wholesale Club Inc., and discounters such as W

Mart andTarget Corporation(A2 stable) will gain as consumers stockpile critical goods. Most of BJ

Wholesale stores are in areas affected by the storm.

For retailers with a heavy concentration of Halloween sales, such asSpencer Spirit Holdings Inc.(B2

stable) andParty City Holdings, Inc.(B2 stable), the disruption in store traffic just before the

dampened Halloween festivities will hurt revenue and earnings. Many consumers will choose to stay

indoors rather than make last-minute Halloween purchases. This is particularly disappointing for the

retailers because this is the second consecutive year that the eastern US has had major storminterruptions before Halloween.

For many retailers, the aftermath of the storm will reduce store traffic as consumers focus on tendingtheir homes and communities. Many people who were in the storms path remain without electrical

power and flooding is widespread. Some stores have been closed. In coming days, inventory restockinand supply chain operations will be affected in some locations because flooding will limit access to

roads and freight rail traffic could see some disruption.

As shoppers in the affected region focus on the storm, other discretionary spending will fall and not b

recouped. The additional purchases for storm preparation and repairs will strain some consumers

discretionary spending budgets.

Department stores, apparel, and specialty retailers will see slower store traffic on the East Coast,although consumers who are not affected by power outages may shop online instead. The timing of t

storm, at a slower seasonal time between the peak back-to-school and holiday seasons, may limit a

more severe effect on apparel sales in the fourth quarter. We continue to expect to a low-single-digit

percentage increase in apparel sales, consistent with overall economic growth, in the fourth quarter.

Margaret Taylorice President - Senior Credit Officer1.212.553.0424

[email protected]

ohn Paul McMullenssociate Analyst1.212.553.7295

[email protected]
http://www.moodys.com/credit-ratings/Home-Depot-Inc-The-credit-rating-373800http://www.moodys.com/credit-ratings/Home-Depot-Inc-The-credit-rating-373800http://www.moodys.com/credit-ratings/Home-Depot-Inc-The-credit-rating-373800http://www.moodys.com/credit-ratings/Lowes-Companies-Inc-credit-rating-454600http://www.moodys.com/credit-ratings/Lowes-Companies-Inc-credit-rating-454600http://www.moodys.com/credit-ratings/Lowes-Companies-Inc-credit-rating-454600http://www.moodys.com/credit-ratings/Lowes-Companies-Inc-credit-rating-454600http://www.moodys.com/credit-ratings/Walgreen-Co-credit-rating-806000http://www.moodys.com/credit-ratings/Walgreen-Co-credit-rating-806000http://www.moodys.com/credit-ratings/Walgreen-Co-credit-rating-806000http://www.moodys.com/credit-ratings/Rite-Aid-Corporation-credit-rating-647100http://www.moodys.com/credit-ratings/Rite-Aid-Corporation-credit-rating-647100http://www.moodys.com/credit-ratings/Rite-Aid-Corporation-credit-rating-647100http://www.moodys.com/credit-ratings/Great-Atlantic-Pacific-Tea-Co-IncThe-credit-rating-346500http://www.moodys.com/credit-ratings/Great-Atlantic-Pacific-Tea-Co-IncThe-credit-rating-346500http://www.moodys.com/credit-ratings/Great-Atlantic-Pacific-Tea-Co-IncThe-credit-rating-346500http://www.moodys.com/credit-ratings/Great-Atlantic-Pacific-Tea-Co-IncThe-credit-rating-346500http://www.moodys.com/research/Koninklijke-Ahold-NV-Credit-Opinion--COP_600010093http://www.moodys.com/research/Koninklijke-Ahold-NV-Credit-Opinion--COP_600010093http://www.moodys.com/research/Koninklijke-Ahold-NV-Credit-Opinion--COP_600010093http://www.moodys.com/credit-ratings/Tops-Holding-Corporation-credit-rating-821779260http://www.moodys.com/credit-ratings/Tops-Holding-Corporation-credit-rating-821779260http://www.moodys.com/credit-ratings/Tops-Holding-Corporation-credit-rating-821779260http://www.moodys.com/credit-ratings/Costco-Wholesale-Corporation-credit-rating-600012498http://www.moodys.com/credit-ratings/Costco-Wholesale-Corporation-credit-rating-600012498http://www.moodys.com/credit-ratings/Costco-Wholesale-Corporation-credit-rating-600012498http://www.moodys.com/credit-ratings/Wal-Mart-Stores-Inc-credit-rating-806500http://www.moodys.com/credit-ratings/Wal-Mart-Stores-Inc-credit-rating-806500http://www.moodys.com/credit-ratings/Wal-Mart-Stores-Inc-credit-rating-806500http://www.moodys.com/credit-ratings/Wal-Mart-Stores-Inc-credit-rating-806500http://www.moodys.com/credit-ratings/Target-Corporation-credit-rating-223000http://www.moodys.com/credit-ratings/Target-Corporation-credit-rating-223000http://www.moodys.com/credit-ratings/Target-Corporation-credit-rating-223000http://www.moodys.com/credit-ratings/Spencer-Spirit-Holdings-Inc-credit-rating-822137668http://www.moodys.com/credit-ratings/Spencer-Spirit-Holdings-Inc-credit-rating-822137668http://www.moodys.com/credit-ratings/Spencer-Spirit-Holdings-Inc-credit-rating-822137668http://www.moodys.com/credit-ratings/Party-City-Holdings-Inc-credit-rating-823185707http://www.moodys.com/credit-ratings/Party-City-Holdings-Inc-credit-rating-823185707http://www.moodys.com/credit-ratings/Party-City-Holdings-Inc-credit-rating-823185707http://www.moodys.com/credit-ratings/Party-City-Holdings-Inc-credit-rating-823185707http://www.moodys.com/credit-ratings/Spencer-Spirit-Holdings-Inc-credit-rating-822137668http://www.moodys.com/credit-ratings/Target-Corporation-credit-rating-223000http://www.moodys.com/credit-ratings/Wal-Mart-Stores-Inc-credit-rating-806500http://www.moodys.com/credit-ratings/Wal-Mart-Stores-Inc-credit-rating-806500http://www.moodys.com/credit-ratings/Costco-Wholesale-Corporation-credit-rating-600012498http://www.moodys.com/credit-ratings/Tops-Holding-Corporation-credit-rating-821779260http://www.moodys.com/research/Koninklijke-Ahold-NV-Credit-Opinion--COP_600010093http://www.moodys.com/credit-ratings/Great-Atlantic-Pacific-Tea-Co-IncThe-credit-rating-346500http://www.moodys.com/credit-ratings/Great-Atlantic-Pacific-Tea-Co-IncThe-credit-rating-346500http://www.moodys.com/credit-ratings/Rite-Aid-Corporation-credit-rating-647100http://www.moodys.com/credit-ratings/Walgreen-Co-credit-rating-806000http://www.moodys.com/credit-ratings/Lowes-Companies-Inc-credit-rating-454600http://www.moodys.com/credit-ratings/Lowes-Companies-Inc-credit-rating-454600http://www.moodys.com/credit-ratings/Home-Depot-Inc-The-credit-rating-373800


4/31



Hurricane Sandy Dashes P&C Insurers Hopes for a Quiet End to Year

Insured loss estimates from Hurricane Sandy are still in the early stages, although catastrophe modelifirms have released preliminary estimates. EQECAT published an estimate of $5-$10 billion on 29

October, while on 30 October AIR Worldwide published an estimate of $7-$15 billion. Assuming thultimate losses are not dramatically beyond these ranges, the event will not jeopardize capital for maj

property and casualty (P&C) insurers, although it will negatively affect fourth-quarter earnings, and

may cause capital volatility for smaller regional insurers (which we generally do not rate).

We expect the companies in Exhibits 1-3 to bear the brunt of the losses based on their market sharesfor particular lines in heavily exposed states on or near the coast and in the center of the storms path

State Farm (unrated),The Allstate Corporation(senior debt A3 negative),The Travelers Companies

Inc.(senior debt A2 stable), andLiberty Mutual Insurance Company(surplus notes Baa2 stable) allhave high market shares in the affected areas. However, as large national writers, these companies hav

diversified exposures and strong capital bases to withstand weather-related volatility.

EXHIBIT 1

Top 10 Homeowners Insurers in States Heavily Exposed to Hurricane SandyInsurance Financial

Strength Rating Market Share (2011)Direct Premium Writt

2011 ($000

State Farm Unrated 17.2% $1,863,93

Allstate Aa3 negative 13.9% 1,497,08

Travelers Aa2 stable 9.6% 1,026,65

Liberty Mutual A2 stable 7.6% 792,38

Chubb Aa2 stable 6.2% 666,1

Nationwide Mutual A1 stable 5.6% 618,76

Erie Insurance Group Unrated 4.6% 478,68

USAA Aaa stable 3.4% 354,6

Tower Group Unrated 2.1% 230,99

MetLife Unrated 1.6% 178,2

Note: Reflects premiums for Delaware, Maryland, New Jersey, New York, Pennsylvania and Washington, DC.

Sources: SNL Financial LC, Moodys

aul Bauer, CFAice President - Senior Credit [email protected]
http://www.moodys.com/credit-ratings/Allstate-Corporation-The-credit-rating-600010717http://www.moodys.com/credit-ratings/Allstate-Corporation-The-credit-rating-600010717http://www.moodys.com/credit-ratings/Allstate-Corporation-The-credit-rating-600010717http://www.moodys.com/credit-ratings/Travelers-Companies-Inc-The-credit-rating-654550http://www.moodys.com/credit-ratings/Travelers-Companies-Inc-The-credit-rating-654550http://www.moodys.com/credit-ratings/Travelers-Companies-Inc-The-credit-rating-654550http://www.moodys.com/credit-ratings/Travelers-Companies-Inc-The-credit-rating-654550http://www.moodys.com/credit-ratings/Liberty-Mutual-Insurance-Company-credit-rating-445777http://www.moodys.com/credit-ratings/Liberty-Mutual-Insurance-Company-credit-rating-445777http://www.moodys.com/credit-ratings/Liberty-Mutual-Insurance-Company-credit-rating-445777http://www.moodys.com/credit-ratings/Liberty-Mutual-Insurance-Company-credit-rating-445777http://www.moodys.com/credit-ratings/Travelers-Companies-Inc-The-credit-rating-654550http://www.moodys.com/credit-ratings/Travelers-Companies-Inc-The-credit-rating-654550http://www.moodys.com/credit-ratings/Allstate-Corporation-The-credit-rating-600010717


5/31



EXHIBIT 2

Top 10 Commercial Property Insurers in States Heavily Exposed to Hurricane Sandy (Fire,Allied, Non-Liability Commercial Multi-Peril, Inland Marine)

Insurance FinancialStrength Rating Market Share (2011)

Direct Premium Writt2011 ($000

Liberty Mutual A2 stable 8.4% $761,6

Travelers Aa2 stable 8.1% 733,09

Chubb Aa2 stable 6.0% 540,13

AIG A1 stable 5.3% 479,74

FM Global unrated 3.9% 348,48

Assurant A2 stable 3.6% 325,39

CNA A3 positive 3.5% 314,7

Hartford Financial A2 stable 3.3% 301,18


Farmers (Zurich) A2 stable 3.1% 279,8

Note: Reflects premiums for Delaware, Maryland, New Jersey, New York, Pennsylvania and Washington, DC.


EXHIBIT 3

Top 10 Automobile Insurers in States Heavily Exposed to Hurricane Sandy (Personal andCommercial Auto Physical Damage)

Insurance FinancialStrength Rating Market Share (2011)

Direct Premium Writt2011 ($000

GEICO (Berkshire Hathaway) Aa1 stable 15.9% $1,705,42

Allstate Aa3 negative 14.9% 1,596,00

State Farm unrated 13.3% 1,426,02

Liberty Mutual A2 stable 6.2% 658,78


Progressive Aa2 stable 5.8% 615,84

Erie Insurance Group unrated 5.5% 590,75

Travelers Aa2 stable 4.4% 471,0

USAA Aaa stable 4.1% 434,53

NJ Manufacturers unrated 2.8% 300,0

Note: Reflects premiums for Delaware, Maryland, New Jersey, New York, Pennsylvania and Washington DC.


The P&C industry as a whole is currently at a level of relative capital strength, with good risk-adjuste

capitalization, moderate financial leverage, and earnings that have benefited from price increases andrelatively low weather-related losses through the first three quarters of the year. So, despite the negativ

earnings effect of Hurricane Sandy, we expect that major insurers can absorb such losses without

harming capital strength. In addition, the event will likely help support price increases going into

2013.

We expect the majority of insurance losses to stem from homeowners policies, commercial property

coverages and business interruption (e.g., commercial multi-peril, allied, fire, inland marine), and to


6/31



some degree automobile policies. Storm surges cause significant economic losses, but flood damage is

typically not covered by homeowners policies, although this often becomes an area of dispute when

the immediate cause of loss (wind versus flood) is unclear.

Generally, homeowners losses make up a large portion of hurricane/storm losses. However, in thiscase, the relatively moderate wind speeds involved should limit structural damage to houses. Instead,damage to homes will likely be primarily from falling trees or minor damage to roofing and siding,

rather than the destruction of complete buildings. Power outages will lead to secondary claims such a

sump pump failure (an optional coverage in most homeowners policies) causing water damage. In

addition, the need to evacuate multiple coastal areas will lead to insurance payments to coveradditional living expenses. Water damage to automobiles could be higher than normal owing to

flooding.

Commercial lines insurance will face losses from flooding, which is typically an optional commercial

coverage. In addition, business interruption and direct damage to property from wind will be sources

of loss. For Hurricane Irene in 2011, which also caused extensive flooding on the East Coast,

commercial losses accounted for roughly one third of total insured losses, which tallied to $5.3 billionaccording to Swiss Re Sigma. Commercial losses could make up a larger portion of total losses from

Hurricane Sandy, given the widespread storm surge, extended period of rain, and concentration of

damage in New York City and other urban areas.

For large national insurers, we expect that losses from Hurricane Sandy for the most part will remain

within primary layers, so that little earnings or capital relief will be gained through reinsurance cover


7/31



Hurricane Sandy Will Test Municipalities and Not-for-Profit Enterprises Liquidit

Hurricane Sandy made landfall on the East Coast on Monday, leaving in its wake storm-relateddamages that some municipal leaders have described as the most severe they have ever experienced in

their region. Local governments face the credit negative risk of unbudgeted costs for flood control,cleanup, sheltering evacuees, emergency services and rebuilding damaged infrastructure. In extreme

cases, strains on liquidity could occur if recovery costs exceed budget and federal reimbursements are

delayed. Public transit systems may be particularly challenged, because they face large cleanup costs iaddition to lost revenue during the period in which they are inoperable. Some enterprise credits such

hospitals, higher education institutions and housing projects are also affected.

As with hurricanes Isaac and Irene, US municipal issuers have an extremely strong track record of

recovering from natural disasters without impairments to bondholders. The immediate disruptions othese disasters tend to cause short-term liquidity problems but subsequent spending from insurance,

federal aid, state support and private charitable donations is very simulative for local and regionaleconomies. Automated payment systems, when set up and working properly, ensure timely debt servi

payments.

Most affected local governments have contingency reserves for weather events, and will also be eligibl

for aid from Federal Emergency Management Agency (FEMA). For disaster areas, the federalgovernment pays 75% or more of various emergency costs and up to 75% for hazard mitigation

projects. States decide how to allocate the non-federal share of cleanup costs. President Barack Obamhas already authorized emergency funding for Massachusetts, Rhode Island, Connecticut, New York

Pennsylvania, New Jersey, Maryland, Delaware, Maryland, West Virginia, Virginia, and Washington

DC. Private non-profit organizations such as higher education institutions and healthcare facilities th

provide services to the general public are also eligible for FEMA assistance.

States sometimes assist with delays in federal reimbursement. After Hurricane Isaac, the state

ofLouisiana(Aa2 stable) signaled a willingness to help issuers bridge gaps in cash flows with revenue

anticipation notes. In the aftermath of Hurricane Irene, the state ofVermont(Aaa stable) acceleratedlocal aid and allowed local banks to borrow from the state Municipal Bond Bank to fund short-term

loans to municipalities for cleanup efforts.

Storm related credit risks include the following:

Upfront cleanup costs exceed budgeted contingencies. Excess costs not offset by immediaterevenues will force issuers to use reserves or cut other expenditures. These excess costs will reducefund balances.

A lag in aid from higher levels of government. Even for eligible issuers whose costs are mostlyreimbursed, the aid often comes months and sometimes more than a year after the costs are incurreFor issuers with sufficient liquidity, we do not expect such instances to significantly affect long-termratings.

Delays in insurance reimbursements. Elevated risk of mortgage delinquencies or foreclosures ashomeowners seek to finance repairs while awaiting insurance funds for damaged properties securinstate housing finance agency programs.

an Seymour, CFAssociate [email protected]

ill Fitzpatrickice President - Senior Credit [email protected]
http://www.moodys.com/credit-ratings/Louisiana-State-of-credit-rating-600024555http://www.moodys.com/credit-ratings/Louisiana-State-of-credit-rating-600024555http://www.moodys.com/credit-ratings/Louisiana-State-of-credit-rating-600024555http://www.moodys.com/credit-ratings/Vermont-State-of-credit-rating-600005989http://www.moodys.com/credit-ratings/Vermont-State-of-credit-rating-600005989http://www.moodys.com/credit-ratings/Vermont-State-of-credit-rating-600005989http://www.moodys.com/credit-ratings/Vermont-State-of-credit-rating-600005989http://www.moodys.com/credit-ratings/Louisiana-State-of-credit-rating-600024555


8/31



Hospitals in affected areas are likely to report negative effects from the hurricane. Those negativeeffects include a significant decline in patient volume this week, the closures of outpatient clinics aphysicians offices, and inpatient admissions only handling emergency cases. In addition, there willbe expenses for overtime staffing of emergency workers and the immediate costs ofcleanup. Insurance may cover a lot of the costs associated with storm-related damage, but is unlikelto cover all of what will likely be higher expenses for the period.

Vulnerability of several classes of debt. Classes of debt, including sales and special tax revenuebonds, and revenue bonds supported by the operations of healthcare, educational, housing and othenterprise entities may be more vulnerable owing to factors such as appropriation risk and thecyclical nature of revenue streams. Issuers of revenue bonds will be most immediately affected byincreased expenditures.


9/31



Corporates

Hong Kongs Curbs on Property Investments Are Credit Negative for DevelopersLast Friday, the Hong Kong government announced that it would introduce a new buyers stamp du(BSD) and amend current special stamp duties (SSD) that it first imposed in November 2010. These

measures are credit negative for Hong Kong property developers because the new SSD will slow dow

property sales, which in turn will weaken developers cash flow. Affected developers include Sun Hun

Kai Properties (Capital Market) Limited(A1 negative),Nan Fung International Holdings Limited(Baa3 stable), Henderson Land Development Co. Ltd. (unrated) and Cheung Kong (Holdings)

Limited (unrated).

Under the new scheme, the government will introduce an additional 15% BSD for foreign and

corporate homebuyers on top of the SSD. The holding period for property projects that are subject to

SSD will extend to three years from two years. In addition, the government will raise the existing SSD

for residential properties by five percentage points across all three holding periods (see exhibit).

EXHIBIT 1

Changes to Hong Kongs Special Stamp Duties

Holding period Less than 6 months 6-12 months 12-24 months 12-36 months

Old SSD 15% 10% 5% Nil

New SSD 20% 15% 10%

Source: Hong Kong Inland Revenue Department

The new BSD, which targets non-local and corporate buyers, aims to curb investment demand from

mainland China investors, who have been one of the major driving forces behind the rise in property

prices in the past few years. Under the new scheme, these buyers would have to take a more cautiousapproach because the changes would require them to speculate on market trends for a longer period

and at higher transaction costs, thereby discouraging purchases.

In addition, many homebuyers for whom these properties are their main residences will likely stay on

the sidelines given the uncertainties about how the amendments would affect property prices, and the

possibility the government will take further measures to cool the property market.

Preliminary data from property agents indicate that property sales dropped or slowed down over the

weekend following last Fridays announcement. According to Midland Realty, the number oftransactions recorded from the top 15 housing estates decreased by 52% to 13 on 27-28 October

versus the previous weekend.

When the Hong Kong government first introduced the SSD, transaction volume within a month

(including first and secondary transactions) decreased 26%, while the consideration paid for properti

declined 28%, according to the statistics of Land Registry (Exhibit 2).

elvin Tsuissociate [email protected]

aven Tsangice President - Senior [email protected]
http://www.moodys.com/credit-ratings/Sun-Hung-Kai-Properties-Capital-Market-Ltd-credit-rating-600047013http://www.moodys.com/credit-ratings/Sun-Hung-Kai-Properties-Capital-Market-Ltd-credit-rating-600047013http://www.moodys.com/credit-ratings/Sun-Hung-Kai-Properties-Capital-Market-Ltd-credit-rating-600047013http://www.moodys.com/credit-ratings/Sun-Hung-Kai-Properties-Capital-Market-Ltd-credit-rating-600047013http://www.moodys.com/credit-ratings/Nan-Fung-International-Holdings-Limited-credit-rating-822751508http://www.moodys.com/credit-ratings/Nan-Fung-International-Holdings-Limited-credit-rating-822751508http://www.moodys.com/credit-ratings/Nan-Fung-International-Holdings-Limited-credit-rating-822751508http://www.moodys.com/credit-ratings/Nan-Fung-International-Holdings-Limited-credit-rating-822751508http://www.moodys.com/credit-ratings/Sun-Hung-Kai-Properties-Capital-Market-Ltd-credit-rating-600047013http://www.moodys.com/credit-ratings/Sun-Hung-Kai-Properties-Capital-Market-Ltd-credit-rating-600047013


10/31



EXHIBIT 2

The Effect of the Special Stamp Duties on Transaction Volume and Prices

Agreements for Sale and Purchase of Building Units December 2010 November 2010 Month-over-Month Chan

Number of transaction 11,790 15,967 -26Consideration (HKD million) 53,412 74,026 -28

Source: Land Registry of Hong Kong

The higher stamp duties will likely affect developers performance if they have recently launched new

projects or do so in the near future. Sun Hung Kai Properties, which has several projects planned for

sale in the near term, is among those that would be affected.

Nevertheless, we do not expect a substantial drop in property prices immediately for two reasons. Firshome demand in Hong Kong remains strong amid a low supply of new flats during the past few year

and the SSD could increase investors holding period, which in turn would lower supply in the

secondary market. Second, interest rates will remain low in light of the ample market liquidity after t

US Federal Reserves recent round of quantitative easing, which encourages investment in fixed assets


11/31



Infrastructure

E.ON and RWE Sell UK Nuclear Joint Venture and Reduce Debt, a Credit PositiveLast Tuesday,E.ON AG(A3 stable) andRWE AG(A3 negative), the giant European power groups,agreed to sell their 50/50 UK nuclear power joint venture, Horizon Nuclear Power (unrated),

toHitachi, Ltd.(A3 stable) of Japan for 696 million (roughly 866 million). The deal, which will n

each partner 433 million, is credit positive for both companies because it will reduce debt and is a

further step towards completion of their asset disposal programmes.

The transaction follows RWEs sale two weeks ago of its 20% licence interest in the Edvard Grieg oiland gas development in Norway for up to 283 million, including a contingent payment of up to 3

million based on achievement of certain operational milestones. On Tuesday, RWE also completed a

658 million sale of its indirect 24.95% stake in water utility Berliner Wasserbetriebe (unrated).

RWEs aggregate proceeds of 1.374 billion from the three deals is just under 20% of its 7 billion

disposal target, and will reduce the companys approximately 14 billion net debt (as of the end ofJune) by roughly 10%, a credit positive for RWE.

The deal is also credit positive for E.ON because its 433 million share of the proceeds from the sale

Horizon will reduce its approximately 21 billion net debt (as of the end of June) by roughly 2%, an

will bring it closer to completing its target of 15 billion of disposals by the end of 2013. Combinedwith other asset sales, including this years sale of OGE, its gas transmission network,1 proceeds from

the programme will have reached almost 13 billion upon completion of the deal, which the

companies expect will occur in the fourth quarter.

RWEs and E.ONs progress on their asset disposal programmes is credit positive because it reduces

their leverage in response to the negative earnings pressure both companies are facing. As with other

European utilities, lower electricity prices and narrower margins on gas-fired generation will likely

reduce E.ONs and RWEs cash flows from power generation over 2012 and 2013 versus 2011. Inaddition, like other nuclear power producers in Germany, E.ON and RWE will be required to pay th

nuclear fuel rod tax that we estimate will be in the range 700-800 million a year for E.ON and 40

million a year for RWE in 2012-13.

The sale also benefits the UK government because it restores momentum to plans to attract investmein new nuclear power plants to replace the UKs ageing nuclear fleet. Hitachi will continue to pursue

plans to build new nuclear power stations at Wylfa in Wales and Oldbury-on-Severn in Southwestern

UK.

1 SeeE.ON Sells Its Gas Transmission Network, Reducing Debt, Weekly Credit Outlook, 21 May 2012.

iel Bissetenior Vice [email protected]
http://www.moodys.com/credit-ratings/EON-AG-credit-rating-600010489http://www.moodys.com/credit-ratings/EON-AG-credit-rating-600010489http://www.moodys.com/credit-ratings/EON-AG-credit-rating-600010489http://www.moodys.com/credit-ratings/RWE-AG-credit-rating-635550http://www.moodys.com/credit-ratings/RWE-AG-credit-rating-635550http://www.moodys.com/credit-ratings/RWE-AG-credit-rating-635550http://www.moodys.com/credit-ratings/Hitachi-Ltd-credit-rating-372300http://www.moodys.com/credit-ratings/Hitachi-Ltd-credit-rating-372300http://www.moodys.com/credit-ratings/Hitachi-Ltd-credit-rating-372300http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_142185http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_142185http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_142185http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_142185http://www.moodys.com/credit-ratings/Hitachi-Ltd-credit-rating-372300http://www.moodys.com/credit-ratings/RWE-AG-credit-rating-635550http://www.moodys.com/credit-ratings/EON-AG-credit-rating-600010489


12/31



Banks

Danske Banks Capital Raise Is Credit Positive for CreditorsOn Tuesday,Danske Bank A/S(Baa1 stable; C-/baa2 stable)2 announced it was raising approximatelDKK7 billion of equity. The execution of the issue, which was completed by Wednesday, increased t

banks core Tier 1 capital ratio by approximately 0.8 percentage points ahead of the upcoming stricte

Basel III capital requirements, a credit positive. We expect that improving the banks capital cushion

will further improve Danske Banks access to senior unsecured creditors following intermittently poo

access to such funding by Danish banks during the financial crisis.

At the end of September, Danske Banks core Tier 1 capital ratio was 12.7% of risk weighted assets,

calculated using the Basel II internal rating based approach, excluding transition floors. The capital

raise contributes to the bank reaching its newly stated core Tier 1 capital ratio target of 13%. The ba

has not paid dividends since 2008, and does not intend to pay dividends in 2012.

The capital increase is particularly relevant given the following challenges that the bank faces:

Increasing the buffer against asset quality deterioration. In recent years, Danske Bank has bookedelevated impairments on loans, particularly to Danish small and medium-size enterprises, commerciareal estate, and agriculture. In addition, Danske Banks operations in Ireland and Northern Ireland

have been loss-making since 2008.

Funding additional collateral for covered bonds. Danish law requires banks to increase the collateral

pool of covered bonds, which can be funded through capital, when house prices decline. The

requirement for supplementary capital in Danske Banks mortgage subsidiary, Realkredit Danmark,increased to DKK40.8 billion at the end of September, from DKK34.5 billion at the end of 2011. T

average Danish house price has fallen 19% over the five years since housing prices peaked at the end

June 2007, and further price declines could lead to further increases in collateral requirements.Alternatively, Danske Bank could fund such over-collateralisations through junior covered bonds and

bank guarantees, as it has done in the past.

Meeting increased regulatory requirements. The European Union Capital Requirements Directive I

which implements Basel III guidance,3 generally increases the level and quality requirements of bank

capital. These increased requirements will gradually go into effect starting in 2013.

Conditions for unsecured funding should improve. At the end of September, 7% of the banks total

funding consisted of senior unsecured funding, and because increased capital improves conditions forunsecured senior creditors, we expect the availability and pricing of unsecured funding to improve fo

Danske Bank with the capital raising. Year to date, the bank successfully issued DKK30 billion in the

senior unsecured market. In addition, the bank has used central bank long-term liquidity; at the end

September it had drawn about DKK35 billion on the three-year Danish central bank liquidity facilityand about DKK40 billion on the European Central Bank facility.

2 The bank ratings shown in this report are the banks deposit rating, its standalone bank financial strength rating/baselcredit assessment and the corresponding rating outlooks.

3 SeeBanks Will Need Significant Capital To Meet New Basel III Requirements; A Credit Positive,Weekly Credit Outlook,September 2010.

Oscar Heemskerkice President - Senior Credit [email protected]
http://www.moodys.com/credit-ratings/Danske-Bank-AS-credit-rating-230500http://www.moodys.com/credit-ratings/Danske-Bank-AS-credit-rating-230500http://www.moodys.com/credit-ratings/Danske-Bank-AS-credit-rating-230500http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_127628http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_127628http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_127628http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_127628http://www.moodys.com/credit-ratings/Danske-Bank-AS-credit-rating-230500


13/31



Tax on Term Deposit Interest Will Be Credit Negative for Bulgarian Banks

On 25 October, the Bulgarian Parliament approved at first reading4 the introduction of a 10% tax oninterest earned on term deposits, effective in January. This tax is credit negative for Bulgarian banks

because it will reduce households incentives to save at banks, thereby increasing banks funding costs

The tax would be imposed on interest earned on term deposits, with depositors paying at the end of

the month following the quarter for which interest was due. The banks would be responsible for

withholding the tax and paying it to the government. The government estimates that the tax will

generate around BGN120 million (61 million), or approximately 0.4% of term deposits in the

system.

As term deposits are predominantly sourced from the household sector, which composed 79% of the

systems term deposits as of June 2012 versus 21% for the corporate sector, household depositors

would be most affected by the new law.DSK Bank PLC(Baa3 negative; D/ba2 negative)5

andRaiffeisenbank (Bulgaria) EAD(Ba1 stable; D-/ba3 stable) are equally vulnerable given thepredominance of term deposits in their deposit base at around 56% and 59%, respectively. By

comparison,Corporate Commercial Bank ADs (Ba3 stable; D-/ba3, stable) term deposits are 38% oits deposit base.

Banking system deposits grew by 34% between the end of 2008 and August 2012, supporting the

systems liquidity, reducing banks reliance on wholesale funds, and improving the ratio of gross loanto deposits to 100% from 120% during the period (see exhibit below). In an attempt to maintain the

deposits against the backdrop of the new tax, banks may raise interest rates, although such a move

would hurt interest rate margins and profitability. Shorter term deposit inflows could also increase

maturity mismatches between assets and liabilities, while lower deposit growth would increase banks

reliance on more volatile interbank funding.

Year-over-Year Changes of Bulgarian Banks Deposit Balances and Loan-to-Deposit Ratios

Source: Bulgarian National Bank

4 Approval at first reading means that Parliament approved the measure at the first hearing. Before year-end, Parliament hold a second hearing to approve the 2013 state budget and revote on the adoption of the taxation on deposits.

5 The ratings shown are the banks deposit rating, its standalone bank financial strength rating/baseline credit assessment athe corresponding rating outlooks.

80%

85%

90%

95%

100

105

110

115%

120

125

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2008 2009 2010 2011 Aug-2012

Dep osit Gr owth Year -o ver -Year - lef t axis L oan s/Dep osits - r igh t axis

lena [email protected]
http://www.moodys.com/credit-ratings/DSK-Bank-PLC-credit-rating-600066980http://www.moodys.com/credit-ratings/DSK-Bank-PLC-credit-rating-600066980http://www.moodys.com/credit-ratings/DSK-Bank-PLC-credit-rating-600066980http://www.moodys.com/credit-ratings/Raiffeisenbank-Bulgaria-EAD-credit-rating-820226616http://www.moodys.com/credit-ratings/Raiffeisenbank-Bulgaria-EAD-credit-rating-820226616http://www.moodys.com/credit-ratings/Raiffeisenbank-Bulgaria-EAD-credit-rating-820226616http://www.moodys.com/credit-ratings/Corporate-Commercial-Bank-AD-credit-rating-821333090http://www.moodys.com/credit-ratings/Corporate-Commercial-Bank-AD-credit-rating-821333090http://www.moodys.com/credit-ratings/Corporate-Commercial-Bank-AD-credit-rating-821333090http://www.moodys.com/credit-ratings/Corporate-Commercial-Bank-AD-credit-rating-821333090http://www.moodys.com/credit-ratings/Raiffeisenbank-Bulgaria-EAD-credit-rating-820226616http://www.moodys.com/credit-ratings/DSK-Bank-PLC-credit-rating-600066980


14/31



Bank of Israels Loan-to-Value Limit Is Credit Positive for Israeli Banks

Last Monday, the Bank of Israel issued a draft directive setting maximum limits on loan-to-value rati(LTV) of housing loans made by local banks. The new directive is credit positive for Israeli banks

because it, along with previous Bank of Israel measures, will help contain the risk inherent in thebanks housing loan portfolios by ensuring higher collateral coverage for banks. Moreover, we expect

any loss of business or fee income resulting from the new measures to be moderate and of secondary

importance from a credit perspective.

The directive calls for housing loans to have LTVs of no more than 70%, or 75% for first-timehomebuyers. The maximum for loans on investment properties is 50%. The new directive builds upo

previous measures that the Bank of Israels Banking Supervision Department has taken, including

limiting the floating interest rate component of a housing loan to one-third of the total loan, requirina 0.75% loan-loss provision for new loans with LTVs of more than 60%, and requiring a 100% risk

weighting (for the calculation of the banks capital adequacy ratio) for loans of more than NIS800,00

and LTVs of more than 60%.

The new directive comes on the same day that the Bank of Israel cut its interest rates by 25 basis pointo 2.0% and as both the number of property transactions and the size of mortgages have grown. Thes

factors are fueling the risk that house price inflation could develop into a crisis. The Israeli HousingPrice Index has already appreciated by some 62% in nominal terms between the end of 2007 and Jun

2012, while housing loans outstanding increased by 71% over the same period and accounted for 29of all credit as of June 2012, according to the Bank of Israel. However, mitigating the risks associated

with those trends is a full-recourse legal structure in Israel, conservative underwriting standards, the

Bank of Israels hands-on approach and the macro-prudential measures discussed above.

Mizrahi Tefahot Bank(A2 negative; C-/baa2 negative)6 has the highest exposure to mortgage loans,

accounting for 60% of its total on-balance sheet credit exposures as of June, followed byBank Leum

(A2 stable; C-/baa2 stable), whose mortgage book accounted for 23% its total on-balance sheet credi

exposures, andBank Hapoalim(A2 stable; C-/baa2 stable) at 18%.

However, Leumi and Hapoalim also have significant exposures to the construction and real estatesector, which displays a high correlation with the housing credit portfolio. These portfolios account f

an additional 16% of both banks total credit exposure.Israel Discount Banks (A3 negative; D+/baa

stable) andFirst International Bank of Israels (A3 stable; D+/baa3 stable) combined exposure to

housing loans and the construction and real estate sector is 28% and 34% of their total credit

exposures, respectively.

6 The bank ratings shown in this report are the banks deposit rating, its standalone bank financial strength rating/baselcredit assessment and the corresponding rating outlooks.

onstantinos Kypreosice President - Senior Credit [email protected]
http://www.moodys.com/credit-ratings/Mizrahi-Tefahot-Bank-credit-rating-600017651http://www.moodys.com/credit-ratings/Mizrahi-Tefahot-Bank-credit-rating-600017651http://www.moodys.com/credit-ratings/Bank-Leumi-credit-rating-87235http://www.moodys.com/credit-ratings/Bank-Leumi-credit-rating-87235http://www.moodys.com/credit-ratings/Bank-Hapoalim-BM-credit-rating-87210http://www.moodys.com/credit-ratings/Bank-Hapoalim-BM-credit-rating-87210http://www.moodys.com/credit-ratings/Bank-Hapoalim-BM-credit-rating-87210http://www.moodys.com/credit-ratings/Israel-Discount-Bank-credit-rating-600017650http://www.moodys.com/credit-ratings/Israel-Discount-Bank-credit-rating-600017650http://www.moodys.com/credit-ratings/Israel-Discount-Bank-credit-rating-600017650http://www.moodys.com/credit-ratings/First-International-Bank-of-Israel-credit-rating-600017649http://www.moodys.com/credit-ratings/First-International-Bank-of-Israel-credit-rating-600017649http://www.moodys.com/credit-ratings/First-International-Bank-of-Israel-credit-rating-600017649http://www.moodys.com/credit-ratings/First-International-Bank-of-Israel-credit-rating-600017649http://www.moodys.com/credit-ratings/Israel-Discount-Bank-credit-rating-600017650http://www.moodys.com/credit-ratings/Bank-Hapoalim-BM-credit-rating-87210http://www.moodys.com/credit-ratings/Bank-Leumi-credit-rating-87235http://www.moodys.com/credit-ratings/Mizrahi-Tefahot-Bank-credit-rating-600017651


15/31



New Hong Kong Property Stamp Duty I s Credit Positive for Banks

On 26 October, the Hong Kong government announced new measures aimed at curbing speculativedemand for residential properties and stabilizing prices. The new measures, effective 27 October,

introduced for the first time a 15% buyers stamp duty (BSD) on residential property purchases bynon-local persons and local and overseas corporations. In addition, the government also raised the ra

of a special stamp duty (SSD) already in place, and extended its coverage period (see Exhibit 1).

EXHIBIT 1

New or Adjusted Property Taxes in Hong Kong

Buyers Stamp Duty New O

Buyers Stamp Duty on residential properties acquired by non-Hong Kong permanent residentsand local and overseas corporate entities

15% N/

Properties purchased and resold within six m onths 20% 15

Properties purchased and resold between seven and 12 months 15% 10

Properties purchased and resold between 13 and 24 months 10% 5

Properties purchased and resold between 25 and 36 months 10% N/

Source: Hong Kong Inland Revenue Department

These latest measures are credit positive for banks because they reduce the risk of further fund inflow

into an already overheated residential property market that could set the stage for a subsequent crash.

The government last month tightened its property lending rules7 immediately after the latest moneta

easing by the US Federal Reserve. These latest measures are a meaningful follow-up.

The BSD directly targets non-local buyers, who have absorbed a significant portion of Hong Kongsnew home supply. According to Centaline Property Agency, one of the largest property agencies in

Hong Kong, non-resident buyers from mainland China between January and September accounted f23.1% of primary home transactions, and 8.6% of secondary home transactions. Meanwhile, non-

resident buyers from mainland China accounted for 28.3% of all transactions in the luxury sector,compared with 10.4% in the mass market sector. We expect the new BSD to reduce the participation

from foreign buyers, thereby moderating overall demand.

The increase and extended coverage of the existing SSD will add to the transaction costs of buyers

making speculative bets. We also note that the BSD applies to corporate purchases of residential

properties regardless of nationality, an attempt to close a potential loophole in which speculators set u

companies to trade properties to bypass the SSD levies.

Residential property values in Hong Kong have appreciated 17% in the first eight months of 2012,according to governments statistics (see Exhibit 2). Property values have risen further since early

September. These follow-up measures are a response to the renewed risks of further property priceappreciation.

7 SeeNew Prudential Measures in Hong Kong Are Credit Positive for Banks,Credit Outlook, 20 September 2012.

herry Zhangssociate [email protected]

onny Hsuice President - Senior [email protected]
http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_145615http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_145615http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_145615http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_145615


16/31



EXHIBIT 2

Hong Kong Private Property Price Index (1990 = 100)

Source: Rating and Valuation Department, Hong Kong Government

During 19-24 October, the Hong Kong Monetary Authority, the territorys de facto central bank, so

a combined HKD14 billion in exchange for US dollars in four intervals as the local currency hit itsupper bound under the currency board arrangement. The strength of the Hong Kong dollar is a

manifestation of the inflow of funds into the territory following the latest round of the US Federal

Reserves monetary easing. Monetary conditions in Hong Kong remain very accommodating, and

quantitative easing measures in the US will likely further contribute to excessive liquidity conditions the Hong Kong banking system. The latest government measures to dampen demand for residential

properties will make banks less vulnerable in the event of a severe property market downturn in the

future.8

8 According to the Hong Kong Monetary Authority statistics, residential and commercial property related loans accounted 51.5% of domestic bank loan exposure as of June 2012.

100

120

140

160

180

200

220

Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-1

Special Stamp Duty introduced in Nov 2010


17/31



Insurers

Increase in Capital Rules Is Credit Positive for US Life InsurersLast Friday, the National Association of Insurance Commissioners (NAIC) adopted more conservativassumptions and scenarios for year-end 2012 modeling of non-agency residential mortgage-backed

securities (RMBS) and commercial mortgage-backed securities (CMBS). The new assumptions are

credit positive because they will increase the regulatory capital that US life insurers will be required to

hold. However, that benefit is partially offset by the disincentive for insurers to invest in two of the

better yielding asset classes in a low-yield environment.

The NAICs Valuation of Securities (VOS) task force, which provides regulatory leadership and

expertise on investment risk, approved a change to the parameters of the baseline economic scenario

and adjusted the weightings of the alternative scenarios that were more aggressive and conservative

relative to the baseline. Projections under multiple scenarios are weighted and used to determine the

amount of required capital for certain structured securities held by insurance companies. Theadjustments capture the potential for worse scenarios than last years downside scenarios.

The NAICs preliminary estimate of the industry-wide effect for life insurers of the new scenario

weightings is for NAIC risk-based capital (RBC) to increase to 3.2% from 2.7% for RMBS and to

1.0% from 0.9% for CMBS. The higher capital requirements, which will affect insurers in their

preparation of year-end 2012 statutory financial statements, are credit positive for the capital adequacof the insurance industry. However, the additional capital requirements will increase the amount of

capital for insurers to hold RMBS and CMBS relative to other investments. That increase may

discourage insurers from maintaining existing holdings in these asset classes and from making future

purchases.

In response to the persistently low interest rate environment, life insurers are constantly searching for

investments that provide sufficient yields to meet their long-term liabilities. US life insurers holdingsof RMBS and CMBS equaled approximately 10% of their investment portfolios as of year-end 2011

Some recent purchases at deep discounts to par have provided relatively attractive yields and carry

significant cushion to absorb potential credit losses.

The exhibit below presents the 10 insurers with the largest combined holdings of non-agency RMBS

and CMBS as a percentage of regulatory capital as of year-end 2011. The new RMBS and CMBS

requirements will have the greatest effect on these insurers capital adequacy.

hachar Gonenssistant Vice President - A [email protected]
mailto:[email protected]:[email protected]


18/31



Insurers Year-End 2011 Holdings of Non-Agency RMBS and CMBS as a Percentage ofRegulatory Capital

Insurance GroupInsurance FinancialStrength Rating [1] Carrying Value $ millions

Carrying Value as PercentYear-End 2011 Statutory Capi

American Financial Group Inc. A3 positive $5,230 417

Goldman Sachs Group Inc. A3 negative 1,504 332

Phoenix Companies Inc. Ba2 positive 1,842 191

CNO Financial Group Inc. Baa3 stable 3,319 190

Allianz SE A2 stable 9,412 178

Great-West Insurance Group Aa3 stable 2,850 173

Jackson National Life Group A1 stable 4,861 166

Ameriprise Financial Inc. Aa3 stable 5,071 166

Delphi Financial Group Inc. A2 stable 899 134

Americo Life A3 stable 544 133

[1] Insurance financial strength (IFS) ratings and outlooks are for the lead US life insurance subsidiary as of 30 October 2012.

Source: Moodys and SNL Financial LC. Contains copyrighted and trade secret materials distributed under license from SNL, for recipients internal

use only.


19/31



Mexican Government Proposes New Credit Positive Insurance Framework

On 25 October, Mexican President Felipe Caldern submitted to the Mexican Senate a new legal anregulatory framework for insurers and surety companies. The new framework will strengthen the

insurance industrys legal, regulatory and capital rules, a credit positive for policyholders andcreditors. However, small and midsize insurers, such as Seguros Latinoamericana, S.A. (unrated),

Seguros Centauro, S.A. de C.V. (unrated), Sericios Integrales de Salud Nova, S.A. de C.V. (unrated),

will find it challenging to meet the new laws requirements.

In process for several years, the new set of rules will replace the current law dating from 1935. The nlaw establishes the adoption of Solvency II, which entails new capital requirements for companies in

line with the intrinsic risk associated with their specific lines of business. That would be an

improvement over current regulatory-based, risk-adjusted capital guidelines. The new law also wouldreinforce insurers and surety companies solvency positions, although small and midsize insurers will

find it challenging to meet the requirements and will require additional capital injections to meet the

new standards. The Mexican governments aim is for the law to take effect in January 2014.

The new law includes mandatory adoption of more stringent corporate governance standards, such athe incorporation of independent board members and more professional management practices, that

also would be challenging for small and midsize insurers to meet. Some insurers will have to undertaksubstantial investments and significant organizational changes to meet the new requirements, which

could jeopardize their business continuity. Thus, we expect the new law to initiate a consolidations in

the industry.

In the case of surety (fianza) companies, this new regulation will combine existing lines of business

with lines that are new to the Mexican marketplace. Under this proposal,fianzacompanies would be

regulated jointly with credit insurance and will create a new business line called seguro de caucin(surety insurance).To operate this new type of product,fianzacompanies may require the creation of

new company (with a specific license to operate it).

This new product will increasefianzacompanies penetration because it does not stipulate or require

guarantees or other forms of collateral, as is necessary in the traditional fianzaproduct. Moreover, th

potential new product lines would complement the current portfolios of insurers currently engaged in

the surety and credit insurance sectors improving their scale and product breadth.

Exhibits 1 and 2 list the top 10 insurance and surety companies in Mexico.

os Montaossistant Vice President - A nalyst52.55.1253.5722

[email protected]


20/31



EXHIBIT 1

Top 10 Insurance Companies in Mexico (MXN millions)

Company

GrossPremium

Written 2011

Net Income

2011

Total Assets

2011

Shareholders'

Equity 2011

Mark

Share 20

1) Metlife Mxico 36,365 4,253 103,609 23,016 12.6

2) Grupo Nacional Provincial 31,488 701 65,694 6,177 10.9

3) AXA Seguros 28,055 413 55,808 7,928 9.7

4) Seguros Inbursa 19,342 843 55,866 7,601 6.7

5) Seguros BBVA Bancomer 15,922 3,096 46,082 7,064 5.5

6) Seguros Monterrey New York Life 13,569 709 49,549 4,715 4.7

7) Seguros Banamex 12,388 1,279 41,317 5,587 4.3

8) Qulitas, Ca. de Seguros 11,236 835 14,925 2,564 3.9

9) Seguros Banorte Generali 10,176 665 15,919 2,701 3.5

10) Mapfre Tepeyac 9,440 177 15,595 1,899 3.3

Source: Comisin Nacional de Seguros y Fianzas (CNSF).

EXHIBIT 2

Top 10 Surety Companies in Mexico (MXN millions)

Company

GrossPremium

Written 2011Net Income

2011Total Assets

2011Shareholders'

Equity 2011Mark

Share 20

1) Fianzas Monterrey 1,526 399 3,175 1,228 21.0

2) Fianzas Guardiana Inbursa 1,346 119 4,025 2,430 18.6

3) Afianzadora Aserta 1,123 157 1,681 619 15.5

4) Afianzadora Sofimex 1,026 262 2,043 1,049 14.1

5) Afianzadora Insurgentes 670 57 2,319 699 9.2

6) Primero Fianzas 436 89 1,014 247 6.0

7) Chubb de Mxico, Ca. Afianzadora 353 13 776 222 4.9

8) Fianzas Dorama 270 90 842 450 3.7

9) Fianzas Atlas 267 72 1,473 861 3.7

10) Mapfre Fianzas 82 4 158 60 1.1

Source: Comisin Nacional de Seguros y Fianzas (CNSF).


21/31



Sovereigns

Japans Impasse Over Defici t-F inancing Bill Is Credit Negati veLast Friday, Japans Ministry of Finance (MOF) and Japanese government bond (JGB) primary dealemet to discuss how failure to pass the deficit financing bill would disrupt the JGB market. Passage of

the bill has been stymied by a political fight between Prime Minister Yoshihiko Noda and the

opposition Liberal Democratic Party (LDP) over the timing of a general election, highlighting risks

toJapans (Aa3 stable) stable government bond market. The threat that the political impasse will forc

the MOF to cancel a bond auction is credit negative.

LDP members in the lower house of the Diet have delayed passage of the deficit-financing bill, holdi

it hostage to their demand that Mr. Noda dissolve the Diets lower house and hold a general election

much sooner than the constitutionally required date at the end of August 2013. Without the deficit-

financing bill, a 2.3 trillion auction of 10-year JGBs scheduled for 4 December is in jeopardy. A

cancellation of that auction would be the first cancelled 10-year JGB auction in 25 years.

Smooth operation of the JGB bond market is crucial to maintaining confidence in the Japanesegovernments capacity to manage stable JGB issuance and service its outstanding debt. Not only is

Japans gross general government debt the highest of any advanced country, but its gross financing

needs are also the most burdensome of any advanced country. The International Monetary Fund

(IMF) estimates that Japans total debt refinancing plus new budget deficit financing in 2012 was59.4% of GDP.9 That compares with other highly indebted governments such as Spain, which has

gross refinancing requirements of 30.1%, and the US, which requires 26.3%.

The paradox of the JGB market is that the most heavily indebted government can issue debt at the

lowest cost of any government, including that of the US, which benefits from having the pre-eminen

global reserve currency. This reflects the strong home bias and large stock of financial savings in Japan

An outright JGB default is not on the horizon.10 In September, Jun Azumi, Japans then-financeminister, said that if the Diet does not pass the bond issuance bill, the government would begin

deferring non-vital spending to maintain flexibility. The government has made assurances that the

political impasse would not affect debt service because it has adequate funds in a special account.

However, subsidies and tax transfers to local governments are being affected.11

9 IMF Fiscal Monitor October 2012.10 SeeCensure and Political Stalemate in Japan Are Credit Negative, Credit Outlook, 3 September 2012.11 SeeJapans Support for Regional and Local Governments Is Credit Positive,Credit Outlook, 10 September 2012.

om Byrneenior Vice President - Regional Credit [email protected]
http://www.moodys.com/credit-ratings/Japan-Government-of-credit-rating-423746http://www.moodys.com/credit-ratings/Japan-Government-of-credit-rating-423746http://www.moodys.com/credit-ratings/Japan-Government-of-credit-rating-423746http://www.imf.org/external/pubs/ft/fm/2012/02/pdf/fm1202.pdfhttp://www.imf.org/external/pubs/ft/fm/2012/02/pdf/fm1202.pdfhttp://www.moodys.com/viewresearchdoc.aspx?docid=PBC_145202http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_145202http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_145202http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_145409http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_145409http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_145409http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_145409http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_145202http://www.imf.org/external/pubs/ft/fm/2012/02/pdf/fm1202.pdfhttp://www.moodys.com/credit-ratings/Japan-Government-of-credit-rating-423746


22/31



Sub-sovereigns

Tepics Inability to Pay Year-End Bonuses Is Credit NegativeOn Tuesday, Hctor Gonzlez Curiel, the mayor of the municipality ofTepic(B3/B3.mx negative)declared that his administration would not be able to pay the year-end bonus to its workers. This is

credit negative because it shows that severe liquidity pressures in the municipality persist roughly one

year after the municipality missed payments on its debt.

The year-end bonus payment to the municipalitys 4,000 workers is mandated by law. Tepic, the

capital city of the state ofNayarit(Ba3/A3.mx negative), requested the state act as a joint-obligor inorder to contract new debt to meet these payments. The municipality estimated the required amount

at MXN92 million, or roughly 9% of the municipalitys 2012 budget.

Significant fiscal imbalances leading to a structural reliance on short-term financing have become a

characteristic trait of Tepic. A year ago, when Mr. Gonzlez Curiels administration took office, the

municipality missed some interest and principal payments on its long-term bank loans owing to a

severe liquidity shortage. Although Tepic recently refinanced a large portion of its short- and long-tedebt to ease some of the pressure, the mayors announcement shows that the refinancing solution wa

short-lived and that the municipality continues to struggle to return to fiscal balance.

Tepics credit quality is poor and its debt levels remain high. With the new funding, Tepics debt

outstanding will rise to MXN560 million from MXN470 million, or a relatively high 50% of 2012

total budgeted revenues. The municipality services its debt using federal transfers that flow fromNayarit to the creditors without reaching the municipalitys coffers, thereby limiting creditors

exposure to municipal credit risk. As a result, debt service payments are senior to operating

expenditures.

This event supports our view that Tepics inability to rein in expenditures leaves the municipality, likothers in Mexico, structurally reliant on short-term financing. It also shows the speculative profile of

most of municipalities in Mexico and their relatively poor governance and management practices.

drian Javier Garzassistant Vice President - A [email protected]

imena Rubiossociate [email protected]

lejandro Olivoice President - Senior Credit [email protected]
http://www.moodys.com/credit-ratings/Tepic-Municipality-of-credit-rating-807904423http://www.moodys.com/credit-ratings/Tepic-Municipality-of-credit-rating-807904423http://www.moodys.com/credit-ratings/Tepic-Municipality-of-credit-rating-807904423http://www.moodys.com/credit-ratings/Nayarit-State-of-credit-rating-600053343http://www.moodys.com/credit-ratings/Nayarit-State-of-credit-rating-600053343http://www.moodys.com/credit-ratings/Nayarit-State-of-credit-rating-600053343http://www.moodys.com/credit-ratings/Nayarit-State-of-credit-rating-600053343http://www.moodys.com/credit-ratings/Tepic-Municipality-of-credit-rating-807904423


23/31

CREDIT IN DEPTHDetailed analysis of an important topic


IMF Loan Repayments Strain Pakistan as Pressure on Government Finances Rises

The government of Pakistans fifth loan repayment takes place against a backdrop of sluggish econom

growth and looming external and fiscal risks. Prominently included in such risks is $7.5 billion in

repayments to the International Monetary Fund (IMF) between October 2012 and November 2015most of which falls due in 2013.

The government of Pakistan could in effect refinance such obligations if it were to seek a new progra

with the IMF, but current indications are that this will not happen. Pakistans most recent program

with the IMF, a stand-by loan arrangement struck in November 2008, went off track before it was

fully disbursed and expired in September 2011.

Although official international reserves have fallen in the past year, at $9.8 billion they are currently

adequate to cover debt payments falling due in 2013, but will continue to come under pressure from

continued loan repayments. Pakistans buffer to external financial shocks or to a loss of domestic

confidence in the rupee would be thin. This fragility in the external payments position highlights

Pakistans high reliance on multilateral or bilateral financing, that has proven to be unstable over receyears.

The fiscal picture looks equally bleak. After missing the fiscal 2012 original deficit target of 4% by a

large margin ( the deficit finally came in at 6.6% ), the budgeted deficit of 4.7% for fiscal 2013 is lik

to see slippage as well, due to optimistic revenue assumptions and an expenditure overshoot. Given th

paucity in external financing, higher deficits are increasingly being financed through monetization,

fuelling inflationary risks and crowding out private sector credit. Price pressures have been muted for

now, allowing the central bank to loosen monetary policy and prop growth, but the scope for further

easing appears limited.

Pakistans deteriorating balance of payments position was a key driver behind Moodys one-notch

downgrade of the countrys foreign and local currency bond ratings Caa1 from B3 in July 2012.12 Th

rating recognizes a weakened credit profile, which correlates to a 35.2% likelihood of default over theupcoming two years, rising to 40.9% over the next five years.13

A Weak Macro Backdrop

The macro-environment remains lackluster and characterized by stagflation. Although growth in fisc

2012 edged higher to 3.7% from 3.0% in fiscal 2011, trends were fuelled largely by consumption,

owing to a higher incomes from a bumper agricultural crop and a stable uptick in remittances from

workers overseas. Investment growth, however, fell deeper 8.6% year over year, posting a contraction

for the fourth consecutive year.

The main constraints to growth remain a protracted energy crisis that has deterred investment; high

government borrowing and high inflation both of which undermine private-sector investment, and

policy uncertainty from contentious politics. Given that these hurdles are unlikely to be resolvedanytime soon, we expect growth to remain much weaker than what Pakistan achieved in the years

immediately before the global financial crisis and in the 3%-4% range in fiscal 2013.

12 SeeMoody's Downgrades Pakistan's Government Bond Ratings to Caa1, Outlook Negative, 13 July 2012.13 See default tables inSovereign Default and Recovery Rates, 1983-2012H1, 30 July 2012.

om Byrneenior Vice President - Regional Credit [email protected]
http://www.moodys.com/research/Moodys-downgrades-Pakistans-government-bond-ratings-to-Caa1-outlook-negative--PR_250645http://www.moodys.com/research/Moodys-downgrades-Pakistans-government-bond-ratings-to-Caa1-outlook-negative--PR_250645http://www.moodys.com/research/Moodys-downgrades-Pakistans-government-bond-ratings-to-Caa1-outlook-negative--PR_250645http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_144320http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_144320http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_144320http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_144320http://www.moodys.com/research/Moodys-downgrades-Pakistans-government-bond-ratings-to-Caa1-outlook-negative--PR_250645


24/31



EXHIBIT 1

Trends in Real GDP Growth and the CPI (% Year over Year)

Source: Federal Bureau of Statistics, IMF, Moodys Investors Service

Balance of Payments Is Becoming Precarious

Pakistans current account has historically been in deficit for over a decade, barring a few years.

However, averaging 1.4% of GDP during fiscal 2000-10, deficits are limited in comparison with the

B-median average of 4.7% (Exhibit 2). Following a small surplus in fiscal 2011 ( 0.1% of GDP), the

current account slipped back into deficit in fiscal 2012 (2%). This was on the back of a contraction i

export growth owing to lower cotton prices (Pakistan is a net exporter of cotton and textiles), coupled

with a continued rise in oil-related import growth. Remittances, which were up 17.7% in fiscal 2012

offset to some extent the widening trade deficit, thereby limiting the deterioration in the current

account balance.

Trends on the capital account also weakened, with foreign direct investment (FDI) flows slowing to

less than $1 billion, and portfolio outflows (both debt + equity). This resulted in a reserve drawdownof $3.3 billion.

We think that prospects for fiscal 2013 are unlikely to show an improvement. Latest trends on the

current account point to a surplus during July-September period of fiscal 2013. But with export

growth in low single-digits and a contraction in import growth, it is too soon to call this a trend

exports dipping back into the red, or oil prices edging higher could result in the current account

posting a deficit yet again. Moreover, trends in remittances need to be closely tracked, with growth

moderating to 9.2% during July-September period of fiscal 2013 from 24.6% during the same perio

in fiscal 2012.

On the capital account, a thawing of relations with the US resulted in a disbursement of long-delayed

coalition support funds (CSF)14

in August 2012 totaling $1.1 billion. These, coupled with auctionproceeds from 3G licenses worth $850 million, will provide some buffer. However, much of this is

likely to be offset by loan repayments to the IMF, which total $2.8 billion in fiscal 2013. Even

assuming some recovery in FDI and portfolio flows, the BoP is likely to stay under pressure: we expe

to see a further drawdown to reserves to the tune of $3.4 billion during the financial year.

14 The CSF was established in 2001 to support US allies for costs incurred in the fight against extremist violence. In 2011, tUS froze $800 million of funding to Pakistan, or 40% of its military support, owing to policy disagreements

0

5

10

15

20

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13F

GDP (%YoY) CPI (%YoY, Avg)


25/31



EXHIBIT 2

Current Account Balances (% of GDP)

Source: SBP and Moodys Investors Service

EXHIBIT 3

Capital Account Composition ($ millions)

Source: SBP and Moodys Investors Service

Although reserves remain more than adequate to fulfill external debt payments coming due over the

next year, a continued deterioration in the current account coupled with weak capital flows would

ultimately weigh on reserve adequacy. While the External Vulnerability Indicator (EVI) was at a

prudent of 32.3% in fiscal 2012, it could climb rapidly if reserve hemorrhaging continues.

EXHIBIT 4

IMF Repayment Schedule (SDR millions,$ millions)

Principal Interest TotalTotal in USD

millions

Fiscal 012 588 104 692 1,068

Fiscal 2013 1,726 67 1,793 2,767

Fiscal 2014 2,063 24 2,087 3,220

Fiscal 2015 819 7 826 1275

Fiscal 2016 37 0 38 58

Assuming US$1=0.65 SDR (Rate as on Oct 22, 2012)

Source: IMF

EXHIBIT 5

Trends in FX Reserves ($ billions)

Source: SBP

Fiscal Slippage Is Likely to Continue in Fiscal 2013

Fiscal deficits have been high and persistent over the last decade (averaging close to 5% of GDP

between fiscal 2000 and fiscal 2010 versus the B median average of 2.8%). This is because ofstructurally weak revenue collections the revenue to GDP ratio is at a very low 12.4%, the lowest in

our rating universe afterGuatemala(Ba1 stable) andBangladesh(Ba3 stable); and sticky expenditure

on subsidies, defense and interest payments. Circular debt of the energy sector has further strained

public finances. These arise as lower tariffs and delayed payments from consumers prevent power

generation/distribution companies from paying suppliers, and are estimated at about 3% of GDP.

-12

-10

-8

-6

-4

-2

0

2

46

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13F

Pakistan B Median

-2

0

2

4

6

8

10

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

F Y 1 3 F

Other FDI Capital A/c Eq uity Flows Debt Flo

13

14

15

16

17

18

19

20

Oct-10

Dec-10

Feb-11

Apr-11

Jun-11

Aug-11

Oct-11

Dec-11

Feb-12

Apr-12

Jun-12

Aug-12

O c t - 1 2
http://www.moodys.com/credit-ratings/Guatemala-Government-of-credit-rating-600011455http://www.moodys.com/credit-ratings/Guatemala-Government-of-credit-rating-600011455http://www.moodys.com/credit-ratings/Guatemala-Government-of-credit-rating-600011455http://www.moodys.com/credit-ratings/Bangladesh-Government-of-credit-rating-806356877http://www.moodys.com/credit-ratings/Bangladesh-Government-of-credit-rating-806356877http://www.moodys.com/credit-ratings/Bangladesh-Government-of-credit-rating-806356877http://www.moodys.com/credit-ratings/Bangladesh-Government-of-credit-rating-806356877http://www.moodys.com/credit-ratings/Guatemala-Government-of-credit-rating-600011455


26/31



For fiscal 2012, provisional numbers peg the deficit at 6.6% (excluding debt consolidation of 1.9% o

GDP), unchanged from fiscal 2011, but a large slippage from the governments original budgeted

target of 4% (which was revised twice during the course of the year, to 4.7% and then 5.5%).

EXHIBIT 6

Trends in the Fiscal Deficit (% of GDP)

Sour

Moody's Credit Outlook - November 1

Documents

Transcript of Moody's Credit Outlook - November 1