stuck in low gear 10countrie changes assessment changes … · The devaluation of the yuan on...

or the fourth consecutiveyear, global growth willfail to exceed 3%. At thebeginning of the yearhowever, this target didnot appear unattainable,

as the highly expansionary monetarypolicies in place, combined with the fallin the oil price and less restrictive fiscalpolicies, were expected to effectivelyaccelerate growth. But this was not thecase. Who is at fault? Chiefly theemerging markets, with Russia and

By Coface Group Economists

Brazil in deep recession, and withgrowth slowing down more rapidlythan expected in China, while failing totake off in South Africa or in Turkey.Many of the commodities exportingcountries are also struggling. In thiscontext, emerging currencies havedepreciated sharply against the dollar.One minor consolation: India is the onlymajor emerging economy which is nota disappointment, with a growth rate ofover 7% this year and next year.

In this context, Coface is downgradingseveral country assessments amongemerging markets, particularly in LatinAmerica, which will be in recession thisyear: Brazil, Ecuador, Chile and Trinidadand Tobago. The level of risk has alsoincreased in Malaysia, Tunisia andArmenia. In contrast, outlook for Hun-gary has been upgraded to positive, asa symbol of central Europe which isbenefitting from the timid Eurozonerecovery.

F

SEPTEMBER 2015PANORAMA

COFACE ECONOMIC PUBLICATIONS

Country Risk BarometerQ3 2015

2Global growth stuck in low gear

6BarometerCountry risk assessmentchanges

17BarometerCountry risk assessment changes

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

8Countries reports10 countries

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

2 COUNTRY RISKPANORAMA

GROUP

GLOBAL GROWTH STUCK IN LOW GEAR

ADVANCED ECONOMIES: THE RECOVERY IS UNDERWAY, BUT REMAINS FRAGILE

1

Growth outlook remains strong for the US. Afterthe brief downtick recorded during the firstquarter resulting from number of temporary fac-tors (fall in energy sector investment, harshweather conditions, etc.), the economy ralliedsharply from Q2 onwards (+0.9% q/q), driven byboth household consumption and investments.Consumer spending remains underpinned by thedecline in the unemployment rate, householddebt being lower than pre-crisis levels and cheappetrol prices. Investment also seems to be gain-ing momentum, as illustrated by the strong

increase in durable goods orders in July andcontinued buoyancy in the property sector.There are nonetheless two clouds on the hori-zon. The strong dollar is likely to continue weigh-ing on exporting companies and the continuedslide in the oil price this summer could have con-trasting effects on the US economy by the endof the year. This was the case at the beginningof the year, when gains in terms of householdpurchasing power due to lower petrol prices,were partially offset by lower investment in theenergy sector.

September 2015

Forecast

2008 2009 2010 2011 2012 2013 2014 2015 2016

2.9

0.30.3

0.6

0.9

0.9

2.6

0.2

0.6

0,3

0.9

0.6

2.7

0.9

0.9

0.20.5

0.3

2.6

1.0

0.9

0,50.3

-0.1

2.5

1.1

0.8

0.50.3

-0.1

3.1

1.4

0.8

0.20.30.4

4.2

1.7

0.9

0.4

0.6

0.7

-1.9

0.7

-0.6

-1.0

-0.7-0.1

1.7

1.1

0.60.1-0.1

�

�

�

�

� � ��

�

United StatesOther avancedOther emergents

Eurozone ChinaGlobal growth�

Global growth: Contributions by region (% and % points of GDP)

sources: IMF and Coface forecasts

5

4

3

2

1

0

-1

-2

-3

3COUNTRY RISKPANORAMA

GROUP

In the eurozone, successive quarters have recordedpositive growth indicators: +0.3% q/q during the2nd quarter, after +0.4% between January andMarch. Multiple factors are supporting the euro-zone economy: lower unemployment (10.9% inJuly, down 0.7 point of percentage over one year),less rigorous budgetary policies and a low inflationrate, which is benefitting household consumption,combined with a highly expansionist monetary pol-icy leading to a gradual increase in private sectorcredit (+1% annualised in July). Economic growthrates lack consistency however. Although growthin Spain should exceed 3% this year, it will be moremoderate in Germany (+1.6% expected in 2015 and2016) and particularly France (+1.1% and +1.4%

respectively) and in Italy (+0.8% and +1.3%). Furthermore, the fall in the oil price is maintaininginflation at a low level and helping restore corpo-rate margins. Paradoxically however, wider mar-gins do not necessarily mean a sharp recovery ininvestment. Corporate investment hinges chieflyon business confidence, which has been tested tothe full recently, starting with the Russian crisisduring the summer of 2014, which weighed tem-porarily on investment (particularly in Germany),followed by the risk of Greece exiting the euro-zone this spring, while incertitude over Chinesegrowth is currently worrying company managersand delaying investment decisions.

Major emerging economies posted disappoint-ing performances once again in the 2nd quarterof 2015. Growth was broadly less dynamic thanduring the 1st quarter, due to weaker commodi-ties prices and currency depreciation against thedollar.

The headlines were essentially dominated bysuspicions of further weakness in Chinesegrowth, where the government fears it will notmeet its year’s 7% growth target. Although theslowdown in investments continues and theexport growth rate is losing pace, fears arefocused mainly on household consumption, eventhough the slowdown in consumer spending isless marked than in investment. Growth in avail-able household income is effectively much less

dynamic (+5% annualised in the 2nd quarter com-pared to +13% at the end of 2012). However, eventhough the risk of a hard landing has increased,it is still nonetheless relatively unlikely for thetime being, as economic fundamentals remaingenerally healthy, the jobs market appears rela-tively resilient and property prices have stoppeddeclining. The authorities still have significant lee-way, as illustrated by their repeated intervention,particularly the cuts in reference rates and reduc-tions in reserve requirements ratios.

Furthermore, several major emerging economiesare in recession, such as Russia, which is underpressure from the weak oil price, economic sanc-tions and geopolitical issues. The continued slidein the oil price is driving the rouble lower and the

EMERGING ECONOMIES: CONTINUED DISAPPOINTING GROWTHHAS LED TO VOLATILITY AMONG FINANCIAL MARKETS

2

1.9 2.01.5 1.6

1.11.4 1.6 1.6

0.81.3

3.12.6 2.3

2.0

0.81.3

2.5 2.5

3.5

4.2

6.76.2

-2.5

-3.5

-1.0

7.27.5

-0.5

20152016

20152016

GDP growth forecast (%)

Source: Coface

Advanced

Eurozone

France

Germany

Italy

Spain

United Kingdom

Japan

United States

Emerging

China

Brazil

Russia

India

8

6

4

2

0

-2

-4


GROUP

central bank is therefore attempting to preventthe public deficit from deteriorating further. Therecession in Brazil is also a major cause for con-cern as the domestic economy remains weigheddown by weaker commodities prices, a restric-tive policy mix (increase of interest rate to14.25% and measures of fiscal consolidation) andcorruption scandals (Petrobras) which led toprotests against the president Dilma Rousseffthis summer. The loss of investment grade statushas exacerbated the risks of a flight of capitaland put further pressure on the exchange rate.

The situation has also deteriorated in other majoremerging economies. Business activity has alsocontracted in South Africa. All sectors have beenhit, in a context of persistent structural weak-nesses. Turkey is facing a deteriorating politicalsituation. Having failed to form a government inJune, fresh elections have been set for November1st and the situation remains particularly tense. The country is also weakened by its persistentlyheavy current account deficit and a high inflationrate, combined with mounting private debt levels(currency risk therefore remains high, with theTurkish lira to US dollar at a low point).

India is the only outstanding exception, confirm-ing its healthy results, benefiting particularly froman improved trade balance due to the reducedenergy bill. However, a more dynamic economicrecovery is being hampered by poor weather con-ditions and weak external demand.

Emerging economies are not expected to make asignificant recovery given the leading indicatorsalready published for the 3rd quarter. This is par-ticularly the case in China, where the official PMIbusiness confidence index fell to 49.7 in August,i.e. below the 50 threshold, which indicates aneconomic contraction.

In this deteriorating macroeconomic context,financial markets were highly turbulent duringthe summer, triggered by turmoil in the Chinesemarket.

Overall, stock markets posted weak perform-ances. The composite MSCI emerging index hasplummeted since May (-37% between the highsrecorded on June 12th and September 6th), par-ticularly in Asia. The Chinese stock market effec-tively collapsed as the speculative bubble burstand undermined confidence, which then spreadto all other global financial markets. Despite thisnegative signal, the actual role of the stock mar-ket in Chinese growth remains limited, as house-holds own few stock assets and a relatively smallnumber of private Chinese companies issueequities as a means of raising funds.

Pressures on spreads also widened significantlyacross all emerging markets, particularly LatinAmerica. Furthermore, currencies continued todepreciate against the dollar as risk aversion gen-erally increased, combined with domestic factors.The devaluation of the yuan on August 11th trig-gered anxiety among financial markets, in thecontext of a deteriorating Chinese economy, butalso represented a further step in the processtowards financial liberalisation. Currencies depre-ciated heavily in Asia, especially in Indonesia andMalaysia, and also in Latin America, particularly inColombia and Brazil (the currency fell by 33%between January and August 2015 and no longerappears over-valued) and also in Russia, Turkeyand South Africa, where the domestic currencieshit low points.

Shanghai Shenzhen CSI 300 Index

Sources: China Securities Index Company, Thomson Reuters

6 000

5 000

4 000

3 000

2 000

2.5

2.0

1.5

1.0

0.5

12-2014 01-2015 02-2015 03-2015 04-2015 05-2015 06-2015 07-2015 08-2015 09-2015

CSI (Index CLS) Margin transactions (RS, CNY trillion)


GROUP

Risks weighing on emerging economies aremainly bearish. They include:

• a more marked slowdown than expected in theChinese economy, which would impact not onlycountries in which exports towards China repre-sent a significant proportion of their GDP (partic-ularly in Asia), but also commodities-exportingcountries (which may be hit by a volume effectand also a price effect if commodities prices fall);

• monetary tightening in the US: certain coun-tries are more vulnerable, particularly those witha heavy current account deficit, which havealready been impacted by capital flight duringthe summer of 2013 following the Fed’s taperingannouncement, and also countries characterised

by weak currency reserves and more generallyhigh external risk (large foreign-currency denom-inated debt);

• a further fall in commodities prices, as the dropin the oil price would continue for example toweigh on countries which are dependent on theiroil resources, particularly in terms of exports andalso through a deteriorating budgetary situation(Russia, Venezuela and to a lesser extent SaudiArabia and the United Arab Emirates). Inversely,net oil-importing countries (Turkey, India andChina) would benefit from an improvement intheir current account balance via a reducedenergy bill (particularly in Asia). The US WTI oilprice hit a low point this summer, as did the priceof copper and soya.

Commodity prices100 = 01/01/2013

Sources: LME, ICIS Pricing, Department of agriculture US

Latin America: Exchange rates vs USD100 = january 2010

Sources: Central banks, Reuters

80

100

120

140

160

180

200

140

120

100

80

60

40

20

01-2010

01-2013 07-2013 01-2014 07-2014 01-2015 07-2015

07-2010 01-2011 07-2011 01-2012 07-2012 01-2013 07-2013 01-2014 07-2014 01-2015 07-2015

Depreciation MexicoBrazilColombiaPeruChile

CopperAluminumNickelIronSoyaOil Brent


GROUP

Hungary : BÏ

• Solid growth (+3% in 2015 and +2,4%in 2016), not only due to one off factors.

• Household CHF loans issue solved.

• Tight integration with German manu-facturing.

• Diversified exports.

• Satisfactory business environment,almost as good as Poland’s or CzechRepublic’s.

BAROMETER

COUNTRY RISK ASSESSMENT CHANGES

ASSESSMENT EITHER UPGRADED, OR REMOVED FROM NEGATIVE WATCH LIST OR PLACED UNDER POSITIVEWATCH LIST

Country risk assessments

Country Country risk Country risk previous new

Hungary B BÏ

September 2015

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

Country Country risk Country risk previous new

Armenia C C

Brazil A4 B

Chile A2 A3

Ecuador B C

Malaysia A2 A2

Trinidad and Tobago A3 A4

Tunisia BÏ B

• 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).


GROUP

Malaysia : A2

• The Malaysian economy relies onexternal demand and is affected bythe Chinese slowdown and the drop incommodity prices notably oil prices.

• Household demand remains sustainedbut is slowing down

• Household debt (level and debt ser-vice) is very high

• Despite reforms initiated by the gov-ernment (VAT at 6% since April 2015,cut in subsidies), public debt is stillhigh

• Investor confidence is hurt by thescandal related to the sovereign fund1MDB.

Trinidad and Tobago : A4

• The economy is affected by the per-sistence of low oil prices.

• The energy sector (oil and naturalgas production) is the key drive inthe economy (approximately 40% ofGDP, 50% of fiscal income and morethan 80% of merchandise exports).

• Infrastructural developments andgas supply issues which affected theenergy sector in 2014 is continuingin 2015.

• Energy and non-energy sectors haveboth contracted in the first quarter.

• Tourism activity is affected by thedecline in Venezuelan visitors.

Tunisia : B

• Tunisian economy may plunge into arecession in 2015 as a result of theeconomic chocks caused by to thetwo deathly attacks that had hit thecountry in March and June. The per-sistent risk of terrorist strikes andthe enduring social tension havedampened the possible benefitsfrom the post-transition confidenceboost.

• As for the depressed economic con-dition, external imbalances areexpected to worsen. The currentaccount deficit is expected at 8.5%of GDP in 2015.

Chile : A3

• The economy is affected by the per-sistence of low copper prices and theslowdown in Chinese economy (themain destination of Chilean copper).

• Industrial output has contractedmainly due to the copper productiondecline and investments are notexpected to rebound given the out-look for minerals prices.

• Household consumption is expectedto slow down due to increasing infla-tion and unemployment.

• Labor reform which aims tostrengthen labor union’s bargainingpower and corruption scandalsengulfing the President and herclose entourage is contributing todeteriorate business environment.

Ecuador : C

• The economic situation is deteriorat-ing because of the persistence of lowoil prices. As a result of lower oilincome, government announced further cuts to fiscal expenditures.

• Ecuador is the second most affectedcountry in the region by the decreasein oil price after Venezuela. The eco-nomy is poorly diversified and depen-dent on oil income (40% of the fiscalincome, more than 50% of exports).

• Public spending and investments (themain keys of growth) are expected togo down given the current decreasein oil prices. Country requires an oilprice of around 120 US dollar/barrel tomaintain fiscal stability.

• The dollarization of the economymakes difficult a devaluation to adjustpublic accounts and non-oil exportsare less competitive notably towardsEurope.

• Outlook for local private businessesseems to be gloomy after disagree-ments over safeguards againstColombia and Peru (two of Ecuador’slargest trading partners).

• High dependence on Chinese funds.

Armenia : C

• Economic downturn and worsening ofpublic finances expected for 2015.Armenia, highly dependent economi-cally and financially from Russia, suf-fers from the decrease in transfersfrom expatriate workers and exports.

• The political situation is unstable.Armenians have expressed their dis-content several times and recently inJune 2015 during a demonstration toprotest against the rise in electricitytariffs. Expectations vis-à-vis the gov-ernment are high while the economicsituation slows the reform process.

Brazil : B

• Brazil’s economy falls into recessionand outlook for the following quartersisn’t encouraging.

• All leading indicators are deteriorating(retail sales, industrial production,business confidence; high householddebt).

• Household consumption (the maingrowth engine) is decreasing due tothe increasing inflation and unemploy-ment rates.

• Investments are declining given therepercussions of Petrobras scandal.

• Weak activity compromises govern-ment tax revenues, increasing the riskof downgrade by rating agencies

• Fiscal additional adjustment is threat-ened by low support in Congress.

• Budget balance is expected toachieve a deficit of 10% of GDP in2015 and public debt to reach 70% ofGDP in 2016.

• High exchange rate volatility

• Political fragility.

Country risk assessments

• 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).

BRAZIL8

B

A4

Country risk

Business climate

Medium termFAIRLY

LOW RISK

Brazil’s economy enters recession

The Brazilian economy enters recession. The countryrecorded a contraction in activity in the first twoquarter of this year; the outlook for the followingquarters is hardly encouraging as the domestic andexternal economic environment is unfavourable togrowth. Domestically, household consumption, the maingrowth engine, is likely to slow down under the effectof high interest rates on loans and the fall in the realwage caused by the upswing in inflation. Investmentwill probably decline further because of the close to40% reduction in the 2015-2019 investment pro-gramme for the oil & gas giant Petrobras and therepercussions on companies in related sectors suchas military and civil shipbuilding. This comes on topof a steep social cost in terms of employment. Indus-try should continue to suffer from the shortfall ininfrastructure and skilled labour, resulting in a fasterrise in costs to the detriment of productivity. Exter-nally, foreign trade remains negatively affected bythe long-lasting fall in commodity prices, especiallyiron ore, and by the fall in Chinese demand. Agricul-tural exports, conversely, will probably grow, at leastin volume terms, due to the increase in oilseed, grainand legume crops (including soybeans). The depre-ciation of the real against the dollar should improvethe competitiveness of exports, but the simultaneousdepreciation of several other currencies in the regionis reducing the competitive advantage of similarBrazilian export products. Lastly, the rise in inflationsince the start of 2015, due to the realignment of sub-sidised electricity, petrol and transport prices andrates, should continue under the effect of importedinflation linked to the depreciation of the Braziliancurrency, despite a significant monetary tighteningthat has not yet borne fruit.

An austerity policy whose results are rather mixed

Rebalancing public finances in order to restore investorconfidence and prevent a possible downgrade of thecountry’s sovereign seems inconclusive: Brazil’s sover-eign rating was cut of investment grade that it enjoyedfor 7 years by one of the rating agencies. One the onehand, initial tax revenue figures seem disappointing dueto the slowdown in activity and the additional adjust-ment measures (increases in certain taxes, asset salesand budget cuts) are struggling to be approved byCongress. On the other hand, the president can’t any-more rely on its former political allies to pass thesereforms and the business community becomes morereluctant with regard to the government.

Slight improvement in the current-accountbalance thanks to the fall in imports

The current-account deficit is expected to post aslight improvement in 2015 thanks to the expectedreturn of the trade surplus, caused by the fall inimports. The weakening of the Brazilian currencycombined with the slowdown in investment andconsumption is indeed reducing demand forimported goods, which have become more expen-sive. Despite the improved competitiveness ofexports thanks to the exchange-rate adjustment,exports remain negatively affected by the long-lasting fall in commodity prices (agricultural andmining). The services and income balance (tourism,dividends, interest) remains in the red. The current-account deficit should be partly financed by foreigndirect investment (around 2.6% of GDP, excludingreinvestment) and by public debt.

The search for a new economic boostdespite the political tensions surroundingthe Petrobras affair

Dilma Rousseff’s administration has been weakenedpolitically and is struggling to meet its objective tobreak with four years of lacklustre growth. The govern-ment is seeking to revive the economy, in particular viaa plan for concessions (roads, airports, railway lines),estimated at close to $64 billion, in order to offset partof the shortfall in infrastructure that is hamperingBrazilian productivity. The Petrobras affair may never-theless have negative repercussions on domesticinvestment (the company has already reduced its five-year investment plan by nearly 50%) and on FDI flowsbecause of the lack of investor confidence in the coun-try. Despite a certain upswing in confidence in the gov-ernment after the removal of the company’s seniorexecutives, the imprisonment of leaders of building andpublic works companies accused of price collusion andthe publication of Petrobras’ quarterly results, DilmaRousseff’s image could deteriorate further if the accu-sations about the financing of her 2014 electoral cam-paign by the companies involved in this scandal wereto be proved. Meanwhile, protests are held in manyBrazilian states calling for the departure of President.

RISKASSESSMENT

Strengths Weaknesses

� 6th-largest economy worldwide � Growing active population � Varied and abundant mineral and agriculturalresources

� Advanced manufacturing industry: aerospace,chemicals, pharmaceuticals and oil engineering

� Resistance to external shocks: creditor externalposition, considerable reserves

� Major macroeconomic balances maintained

� Lack of qualified labour/incomplete educationalsystem

� Shortcomings in infrastructure (transport,energy)

� Insufficient investment � High production costs (wages, energy, logisticsand credit)

� Public expenditure high and inefficient � Corruption flourishing due to inequalities

Imports of goods, as a % of total

China Euro-zone

Argentina NetherlandsUnitedStates

E

19%

17%

10%

8%7%

Euro-zone

China Argentina NigeriaUnitedStates

1

17%16%

15%

4%

7%

Exports of goods, as a % of total

(f): forecast

COFACE ASSESSMENTS

TRADEEXCHANGES

2012 2013 2014 2015 (f)

GDP growth (%)

Inflation (yearly average) (%)

Budget balance (% GDP)

Current account balance (% GDP)

Public debt (% GDP)

1.8 2.7 0.1 -2.5

5.4 6.2 6.4 9.5

-2.6 -3.1 -6.2 -10.0

-2.4 -3.4 -4.4 -3.8

54.8 53.3 58.9 67.6

MAIN ECONOMICINDICATORS

9

A4

B

Country risk

Business climate

Medium termLOW RISK

Continued economic slowdown in 2015

The slowdown of the Chinese economy continues in2015. The authorities have implemented the neces-sary reforms to ensure a more even balance ingrowth towards consumer-driven expansion. How-ever, corporate profits are being affected in the shortterm in sectors hit by heavy overcapacity, particularlyinfrastructure and construction. Nevertheless a collapse in the property market is unlikely however,as the authorities have the capacity to intervene inthe event of a major crisis. Beijing has tended tofocus its interventions on easing the regulationsimplemented in 2010 and 2011, when property pricessurged as cut in interest rate. Thus property pricesbegan to recover in April 2015 in major cities. Besides, household spending should remain firm dueto the healthy jobs market. However, a slowdown indisposable income is perceivable, as retail salesgrowth slowed in the first half of 2015. Finally, growth in Chinese exports should stabilisedue to the strength of the US economy and the slighteconomic improvement in Europe. Chinese exportsare also expected benefit somewhat from the depre-ciation of the yuan during the summer 2015.

Private sector and local authority debt jeopardising the financial system

Although the level of public debt is sustainable, localauthorities have a high level of debt which remainsopaque. At the end of 2013, a national audit revealedlocal authority debt to be RMB17.9bn, i.e. one third ofGDP.Given the development of a shadow banking industryas an alternative source of financing (estimated at 30%of total funding), it is difficult to accurately assess thelevel of debt in the private sector. However, the IMF esti-mated debt at 207% of GDP at the beginning of 2014compared to 130% in 2008. Whereas most privatecompanies have deleveraged, debt ratios have contin-ued to progress among public companies and propertyand construction groups. Furthermore, SMEs fre-quently have to rely on shadow banking at exorbitantrates, given their difficulty in securing financing.Moreover, the quality of banking assets is deterioratingalthough the shadow banking industry remains under-estimated. The non-performing loans ratio reached1.25% at the end of 2014, its highest level in severalyears. In April 2015, China experienced its first SOEdefault in the domestic bond market with the solarenergy group Baoding Tianwei which failed to pay aUSD14m coupon and debt holders requested reim-bursement from the parent company. Although thiscredit event did not cause panic, the market isnonetheless awaiting the reaction of the parent com-

pany. The introduction of real bankruptcy risk isinevitable and will reduce moral hazard generated bygovernment interventions. The solvency of more fragileborrowers will have to be scrutinised in the context ofan economic slowdown. Besides, Chinese stock markets, which had risen bymore than 110% from November 2014 to a peak in June2015, have tumbled more than 37% since then. Admit-tedly this market correction can be seen as a healthydevelopment after such a sharp rally disconnectedfrom corporates’ fundamentals, but volatility andequity price deflation pose risks: the heavy use of mar-gin finance (investors borrow money to buy shares)could lead to a downward spiral, real activity could beaffected by this downturn and there could be animpact on domestic and international confidence in thecabinet’s reform agenda if the market doesn’t stabilize.

Persistent shortcomings in terms of governance

Whilst reaffirming the supremacy of the ChineseCommunist Party (CCP), the annual central com-mittee session in October 2014 concluded withdecisions relating to an improvement in the stateof law. However, the national security reform proj-ect has caused concern among some NGOs andforeign investors. Despite a seamless transitionfrom the previous administration, President Xi Jin-ping wields unprecedented authority over the CCP,particularly following the anti-corruption campaignwhich targeted the highest-ranking party digni-taries. However, the Xi Jinping – Li Keqiang admin-istration is facing both social and ethnic unrest. Thecountry has seen an increasing level of workeractivism which caused the authorities to publish aguide on the development of “harmonious workrelations”. Furthermore, pro-democracy demon-strations in Hong Kong last year were a challengefor the Chinese government. Finally, major short-comings in term of governance persist, particularlyconcerning access to company balance-sheets andlegal protection for creditors.

RISKASSESSMENT


� External accounts benefitting from industrialcompetitiveness and diversification

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

� Gradual move up-market � 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 a challenge 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

� Chinese banks weak, considering the creditdynamism and uncertainties over the level of non-performing loans

� Environmental problems


Hong Kong UnitedStates

Japan SouthKorea

Euro-zone

S

17% 17%

11%

7%

4%

SouthKorea

Euro-zone

UnitedStates

AustraliaJapan

1

9% 9%

8%

5%

8%


COFACE ASSESSMENTS

TRADEEXCHANGES

2012 2013 2014 2015 (f)

GDP growth (%)




Public debt (% GDP)*

7.7 7.7 7.3 6.7

2.6 2.6 2.0 1.2

0.2 -1.1 -1.1 -1.9

2.6 1.9 2.0 3.2

37.3 39.4 41.1 43.5


(f): forecast* Comprising central and local debt (excl. financing vehicles)

CHINA

10

B

A2

Country risk

Business climate

Medium termMODERATE

RISK

Economic activity sustained by domesticand European demand

After accelerating strongly in 2014, growth isexpected to slow slightly in 2015 and be closer to itspotential. In 2015, the major growth contributor willbe household consumption. Employment will con-tinue to grow, thanks in particular to the dynamismof public works. Wages will keep increasing morerapidly than prices which will be moderated byhydrocarbons price fall, boosting purchasing power.Investment is temporarily favoured by the acceler-ated use of European structural funds under the2007-2013 programme, as the final date for its useapproaches (30 June 2015), as well as by the grant-ing by the Central Bank of subsidised loans to SMEs.Because of Hungarian industry's integration in theproduction chain and the recovery of Europeandemand, exports will still be dynamic, but as importswill be sustained by domestic demand and the highimport-intensity of exports, trade's contribution togrowth will be positive but limited.

Slow improvement in the public accountsbut debt remains huge

The public accounts deficit is expected to remain sim-ilar to the 2014 deficit, slightly below 3%. But the accu-mulation of previous budget deficits has led tosignificant debt (77% of GDP in 2014). The slowimprovement is expected to continue in 2015, thanksin particular to the control of spending now that theelections are over.

Trade surplus, weak FDIs and sizeable external debt

The current account surplus is expected to grow in2015, thanks to the euro zone recovery (represent-ing 57% of Hungarian exports) and weak oil prices.Thanks to machinery, automotives, consumer elec-tronics, domestic appliances, foodstuffs and ser-vices to business and tourism, trade in goods andservices has been in surplus since 2009. Togetherwith European funding these surpluses make itpossible to deal with the weakness of FDIs anddeleveraging by the banks. Government interven-tionism is discouraging foreign investment. Certainsectors such as telecommunications, energy, bank-ing and the media are particularly under pressure.The public authorities are taking measures (fiscalor others) to reduce profitability and encourageforeign investors to withdraw to the advantage ofHungarian public and private players. Foreigngroups are not encouraged to increase their pres-ence, even though their preferred sectors (cars andelectronics) are to a large extent spared. Meanwhile, the burden of external debt has dimin-ished (116% at the end of 2014 against 144% of GDPin 2010), chiefly because of deleveraging by banksand businesses. The State’s share (44% of the total)is stable. This movement is facilitated by thestrength of the forint, which is depreciating slowlyand steadily in the context of a fixed exchange sys-

tem with wide fluctuation bands, against the euro.In view of the still large foreign exchange commit-ments of the banks and also of households, thecentral bank would not hesitate to increase interestrates rapidly to prevent a significant depreciation.

A weak banking sector

As a result of the financial crisis and governmentpressure, the share of foreign interests in the bank-ing sector, previously largely dominant, has consid-erably reduced. Sector activity, which shranksharply in 2009, is still shrinking because ofdeleveraging by the private sector. The quality ofits assets deteriorated sharply with the forint’sdepreciation in 2009, which affected householdsheavily indebted in Swiss francs. Weak activity,poor asset quality, punitive taxation and the burdenof restructuring foreign currency loans to house-holds are leading to zero profitability. Althoughgreatly reduced, exchange rate risk exposureremains considerable.

Prime Minister Viktor Orban’s governmentlost his two thirds majority

Sporadic tensions are arising with Slovakia andRumania concerning the large Hungarian minoritiesthere. These tensions exist also with the county’sEuropean partners on Hungary’s sympathetic atti-tude towards Russia regarding the Ukrainian affair.European leaders have also expressed their con-cern about the drift towards authoritarianism sincethe conservative Fidesz party came to power in2010 and, recently, about the attitude of theauthorities about immigrants. Backed a two thirdsmajority confirmed in the April 2014 poll, PrimeMinister Viktor Orban’s government had no hesita-tion in making changes to the legal texts in a waythat was unfavourable to the balance of powersand to democratic and cultural freedoms. However,he lost this two thirds majority (holding with oneseat only) during the February 2015 by-election, infavour of the liberal opposition. This shows con-cerns of a certain part of the Hungarian electorate(internet tax plan, link between V. Orban andMoscow, corruption). Thus, the Prime Minister willno longer be able to amend the Constitution at will,although he can govern without great difficulty. Bylaunching infringement proceedings for violatingEuropean values, Brussels has occasionally suc-ceeded in pressing the authorities to back downregarding the most extreme amendments. Never-theless, the business climate is still satisfactory,very similar to that of the neighbouring countriesdespite the State’s unbridled interventionism incertain sectors of the economy.

RISKASSESSMENT

Strengths

Weaknesses

� Trade surplus� Good infrastructures� Diversified economy� Skilled workforce� Inclusion in the European production chain

� Aging population� Little room for manoeuvre on budget� High public and external debt� High exposure to exchange rate risk� Weak banking sector� Energy dependency: 70% of needs imported� Drift towards authoritarianism and interventionism

� Large poorly integrated Roma minority


Euro-zone

Romania Russia UnitedStates

RUnitedKingdom

57%

6%5% 3% 2%

Euro-zone

Russia Poland CzechRepublic

China

56%

9%7%

4%5%


(f): forecast

COFACE ASSESSMENTS

TRADEEXCHANGES

2012 2013 2014 2015 (f)

GDP growth (%)




Public debt (% GDP)

-1.5 1.5 3.6 3.0

5.7 1.7 -0.3 0.0

-2.3 -2.4 -2.6 -2.7

1.9 4.1 4.2 4.8

78.5 77.3 76.9 75.5


HUNGARY

11

D

C

Country risk

Business climate

Medium termVERY

HIGH RISK

An agreement that marks a turning point in 2015

The Vienna agreement signed on 14 July 2015 ratifiedthe negotiation process between the Islamic Repu-blic and the P5+1 members (the five permanentmembers of the Security Council plus Germany) con-cerning the Iranian nuclear programme. It states thatthe international sanctions imposed on Iran by theinternational community will gradually be lifted fromspring 2016. While it appears that the American pres-ident Barack Obama has managed to secure enoughSenate votes, the definitive implementation of theagreement remains subject to the ratification of the terms of the agreement by the Iranian Majlis (Par-liament). A successful conclusion of these negotia-tions and the lifting of sanctions should be one of thedecisive factors for the outcome of the next Iranianparliamentary elections, which will be held on 26February 2016. If the sanctions are not lifted in 2016,the risk is that the most radical parties whom areopposed to this agreement may get a boost.

A decline in growth because of the oil countershock

The impact of the fall in oil price ended the slight eco-nomic recovery that started in 2014. Thus, the Iranianactivity has severely slowed down in 2015. Hydrocar-bon production did not exceed 0,4 mb/d in the firstthree month of 2015 and the value added of this sectorhas declined by 5,2% over the same period. Hydrocar-bon exports, which account for 75% of Iranian exports,declined by 15% year-on-year. Although non-oil exportshave risen by 10%, they still stem from related sectors(petrochemicals, plastic industry) and could thereforebe affected by the downturn in the oil sector. Theexpected pick-up in consumption, following lower infla-tionnary pressures, did not materialize in the first threemonths of 2015. On the contrary, private consumptionseems to have declined over the same period (-0,1%).Investment, which had displayed some signs ofrebound in the end of 2014, declined significantly in thebeginning of the year, reflecting the investors’ wait-and-see stance. Increasing governement consumption andpublic investment should remain the main tools to sup-port growth. The completion of the agreementbetween the P5+1 could also foster renewed confi-dence. Activity could therefore pick up in the last twoquarters of 2015, nevertheless without making up forthe slowdown at the beginning of the year.

Public account in deficit and current accountson the edge

The weak imbalance in the public finances isexpected to last and could widen in 2015. The con-traction in fiscal revenues could continue becauseof lower hydrocarbon prices, which are the State'smain source of finance. Effectively, the price ofcrude could stabilise below that which allows theIranian budget to balance. The Horani governmenthas already taken steps to limit the impact of thisprice fall by incorporating it into the 2015 budget,at the risk of introducing a policy of austerityagainst a background of social tensions and highunemployment. The current account balance willstill post a small surplus in 2015, but this surplus is weak. Despite the sanctions, lran's businessesbenefited thanks to the depreciation of the Iranianrial, a drop in their export prices which opened upmore of the Asian markets. However, the weakincrease in export of hydrocarbons could adverselyaffect movements in the current account.

Critical business climate

The country, which for a long time has been closedto exports, is starting a gradual opening to interna-tional actors. The authorities are preparing a num-ber of measures with a view to increasing thecountry’s attractiveness, in particular by creating a“one-stop-shop” that is meant to simplify adminis-trative formalities. However, institutional shortcom-ings remain and the contractual framework,especially on legal issues, still hampers an improve-ment in the business climate.

RISKASSESSMENT


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

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

� High inflation� Social tensions� Unfavourable business climate


China Turkey Japan SouthKorea

India

27%

11% 11%

7% 6%

UAE China India SouthKorea

Euro-zone

36%

19%

8%6%6%


(f): forecast* fiscal year starting on 21 March

COFACE ASSESSMENTS

TRADEEXCHANGES

2012 2013 2014 2015 (f)

GDP growth (%)


Budget balance (% GDP)*


Public debt (% GDP)

-6.6 -1.9 3.0 0.8

30.5 34.7 15.5 16.5

-0.3 -0.9 -1.4 -2.5

6.3 7.4 3.8 0.8

11.2 11.1 12.2 11.9


IRAN

C

C

Country risk

Business climate

Medium termVERY

HIGH RISK

Growth driven by the implementation of structural investment projects and thedynamism of agriculture and services

Growth remains vigorous, sustained by thedynamism of the building, public works and energysectors and by the good performance of agricultureand services. Construction and energy are benefit-ting from public and private investments made underthe National Development Plan while cash crops, first among them cocoa of which the country is theworld's leading producer, are taking advantage ofthe measures aimed at increasing productivity. The cocoa industry also benefits from the currenthigh level of world prices. Nevertheless, the sector isconcerned about the risks of the Ebola epidemicspreading to the main cocoa production area fromneighbouring Guinea and Liberia. The mining sector,especially gold, is expected to expand, thanks to thediscovery of new deposits and the adoption of a newmining code. The exhaustion of certain oil wells iscurrently affecting production but the sector’s regu-latory framework has also been amended andprospecting for oil is expected to intensify. Growth isalso expected to benefit from the improvement ofthe business climate and the implementation of thegovernment strategy of developing SMEs/SMIs.Growth, however, is still very exposed to fluctuationsin raw material prices and is still hampered by aginginfrastructures. Much remains to be done to make upfor the loss resulting from a long period of economicstagnation and political crisis (with the averagegrowth being 1.2% per year between 2005 and 2011,with a contraction in activity of 4.1% in 2011). How-ever, the recovery in economic activity since the endof the post-electoral crisis has helped to raise thepopulation's standard of living (+22% of GDP percapita, in purchasing power parity terms between2011 and 2015), thus enabling household consump-tion to grow. Under the reform of the cocoa/coffeenetwork, planters benefit from the increase of pro-duction prices. Wages have been raised in the publicsector, access to public services has improved anduniversal health insurance should be introduced by the end of 2015.

A widening of the current account deficitand sound management of public finances

Strong domestic demand should continue to beaccompanied by a rise in goods imports (particularlyequipment) and services (freight, insurance), resultingin a widening of the current account deficit in 2015. Thisdeficit should be mainly financed by direct foreigninvestment, up sharply since 2011.

Budget implementation is satisfactory and the per-formance criteria used in the agreement under theExtended Credit Facility concluded with the IMF havebeen complied with. The very successful issue ofeurobonds for $750 million in July 2014 and $1 billionin February 2015, that took place scarcely three yearsafter the country defaulted on some coupons of its2010 eurobond, has contributed to financing thebudget and the increase in the average maturity of thepublic debt. The effect of the latter has been greatlyreduced since the major relief that the country bene-fited from in 2012 under HIPC/MDRI initiatives (publicdebt was halved between 2011 and 2015 following thepartial cancellations of 2011). The risk of over-indebt-edness is now considered moderate but the authoritieswill have to see that the funds, which could again beraised on the capital markets, continue to be investedin growth promoting projects.

The Head of State well placed to win the 2015presidential election

The political situation has gradually returned tonormal since the 2010-2011 post-electoral crisis,thanks to the holding of legislative and local elec-tions, and the insecurity has noticeably reduced,encouraging the return of investors. However,progress on national reconciliation is still slow andthe main opposition party, which is divided on itsparticipation in the electoral process and sees itselfas subject to legal persecution, has not yet reg-ained its place on the political stage. AlassaneOuattara intends to stand again in the October2015 presidential election and has a good chanceof being re-elected, benefitting from his good man-agement of the economy, the restoration of secu-rity and the support for his candidacy in September2014 of the leader of the other major party of theruling coalition. However, renewed violence duringthis election and the legislative elections which areto follow in 2016 cannot be wholly ruled out.

RISKASSESSMENT


� Agricultural wealth (world's leading cocoa producer) and diversification into hydrocarbonsand ores

� Port, road and energy infrastructures undergoingmodernisation

� Further debt cancellation obtained in 2012 under the HIPC and MDRI initiatives

� Economy dependent on meteorological conditions and movements in the prices of cocoaand oil, the country’s main export products

� Gaps to be filled in the management of publicfinances, infrastructures and governance, despiteprogress recorded in recent years

� Renewed violence still possible around next elections


Euro-zone

Ghana UnitedStates

GabonNigeria

30%

9%8%

7%6%

Nigeria Euro-zone

Bahamas IndiaChina

23% 23%

9%

3%

6%


(f): forecast

COFACE ASSESSMENTS

TRADEEXCHANGES

2012 2013 2014 2015 (f)

GDP growth (%)




Public debt (% GDP)

10.7 8.7 7.9 7.7

1.3 2.6 0.6 1.2

-3.1 -2.3 -2.3 -3.7

-1.8 -2.7 -2.5 -2.8

44.5 43.7 46.6 45.6


12

IVORY COAST

KAZAKHSTAN13

B

B

Country risk

Business climate

Medium termFAIRLY

HIGH RISK

Growth slowed by the slump in oil price

Growth is slowing significantly in 2015. Industrial output, dominated by the oil sector, makes littleprogress. The start of operations at the offshoreKashagan oilfield is still suffering major delays and isunlikely to happen before 2016. Major investment projects, in particular work on theinternational exhibition EXPO-2017, will sustain acti-vity in construction and services. In contrast, con-sumption, the main growth driver, will be dampenedby credit constraints, a more restrictive fiscal policyand also the acceleration of inflation. Exports will be hit by the downturn in growth inChina, the recession in Russia and above all by thelow price of oil. Inflation, fuelled by the impact of the tenge devalu-ation on the cost of imports, could reach the upperlimit of target range of 6-8% fixed by the central bank(NBK).After a devaluation of almost 20% in February 2014,the tenge exchange rate decreased further (by morethan 20%) in August 2015, after the decision of theNBK to introduce a free floating exchange rate sys-tem. A slight increase in the oil price may allow a sta-bilisation of the currency at the end of the year.However, the exchange rate of the Kazakhstan cur-rency, closely linked to the Russian rubble (firstexport market, excluding hydrocarbon) is expectedto remain volatile.The situation of the banking sector, already weak,may deteriorate further due to the consequences ofthe depreciation on the foreign currency debt of thebanking sector, and also to the worsening of thequality of the portfolio in a deteriorating economicenvironment.

Erosion of the budget surplus and worsening current account balance

Fiscal revenues, over half of which derive from the oilsector, will be hit by the weak gains in hydrocarbonoutput, which cannot be fully offset by the increasedexport taxes decided in April 2014. Non-oil tax rev-enues are also expected to be hit by the weakness ofgrowth. The government has announced some meas-ures to cut spending, especially the postponement inwage increase, initially planned for 2015 and the freezeof some non-priority investments projects. Neverthe-less, infrastructure projects will certainly be maintainedand the government will keep on sustaining publicindebted companies (especially the energy companyKazMunaiGaz). Oil funds will be used to cover theseexpenses, thus limiting their fiscal impact and allowingto deliver a surplus which is, though, on a falling trend.

The current account balance will continue to contractin 2015, because of the weak oil exports (75% of total),associated with production difficulties combined withan adverse evolution of the price. Demand, too, isunlikely to be buoyant on Kazakhstan's main exportmarkets: the EU, China and Russia.Imports will remain high due to the need for equipmentas well as food and energy (fuel, given the weak localrefining capacity). Profit repatriation by the oil compa-nies will accentuate the scale of the deficit. The countryremains exposed to external shocks, but its foreignexchange reserves (4 months of imports, excludinggold) and the NFRK ensure it has enough leeway in liquidity terms. Moreover, the country continues to benefit from international funding (EBRD, ADB, WorldBank) and its underground riches remain attractive to foreign investors.

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

The country has been led since 1991 by NursulatanNazarbayev and his party (Nur Otan), which holds abig majority of parliamentary seats. N. Nazarbayevwas re-elected for a fifth term with 98% of thevotes in the early election in April 2015 (formerlyscheduled for 2016). Considering his age (74 years),the country's political stability remains a source ofuncertainty due to the risk of conflicts which couldbreak out between the different government fac-tions, if his succession had to be suddenly broughtforward. Popular discontent is growing in the face of wagelevels, rising prices and corruption. Organised massmovements are, however, still unlikely given theweakness of the opposition. Meanwhile, the secu-rity measures, tightened in response to fears of ter-rorism and religious extremism in the context of thewithdrawal of UN forces from Afghanistan, are lim-iting the opportunities for large-scale protests. The business climate remains strongly hamperedby State interference in the economy, inefficientinstitutions and corruption.

RISKASSESSMENT


� Expected increase in oil exports thanks to exploitation of Kashagan oil field

� Plentiful foreign direct investments� Strategic position between Asia and Europe

� Economic dependence on raw materials (oil, gas, uranium, iron)

� High external debt� Weak banking system� Persistent shortcomings in legal and institutionalframework

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


Euro-zone

China Canada RomaniaRussia

37%

23%

9%

4%3%

Russia China Ukraine UnitedStates

Euro-zone

36%

25%

12%

2%4%


COFACE ASSESSMENTS

TRADEEXCHANGES

2012 2013 2014 2015 (f)

GDP growth (%)




Public debt (% GDP)

5.0 6.0 4.6 1.0

5.1 5.8 6.9 8.0

4.5 5.2 4.3 3.0

0.4 -0.3 0.6 -1.0

12.4 12.9 13.7 14.5


(f): forecast* including Oil Fund transfers (NFRK)

A2

A3

Country risk

Business climate

Medium termLOW RISK

Slower growth in 2015

After having picked up in 2014, growth shoulddecrease in 2015. The low price of commoditiesshould continue to penalise exports of crude oil,petroleum products and liquefied natural gas. Never-theless, the country also exports high value addedmanufactured products but electronic exports areimpacted by the economic slowdown in China, oneof Malaysia’s largest partner. However, demand fromthe US should remain dynamic. Furthermore, domestic demand should remain vig-orous despite high household debt (87% of GDP,which is the highest level in Asia). The government'sbudget consolidation efforts will affect householdpurchasing power. Oil subsidies were reduced onseveral occasions in 2014, the price of petrol has risento close to 10% and the government introduced VATat a rate of 6% in April 2015. However, in order toreduce the effect of these measures on the pooresthouseholds, the government has also decided tostrengthen the social security system and inflationshould remain contained due to the moderation offood prices and the deceleration in lending, particu-larly for properties.Moreover, the effects of the impetus of the economictransformation programme will continue to be posi-tive for public and private investment due notably tothe construction of a rapid public transport networkin Kuala Lumpur for a total of USD 11 billion (4% ofGDP). Furthermore, the Malaysian and Singaporeanauthorities have decided to build a high-speed raillink connecting Singapore to Kuala Lumpur. Thework is estimated at USD 12 bn and should start during 2015. Lastly, the sectors linked to tourism have sufferedfrom the effects of the two Malaysian Airlines air disasters that occurred in 2014 as well as the deteri-oration in security in Borneo.

The budget balance is recovering, while theexternal position remains sound

In 2014, the budget deficit narrowed and this trend isexpected to continue in 2015, as the authorities havebegun a fiscal consolidation process aimed at balanc-ing the budget by 2020. Therefore, the governmentintroduced VAT at a rate of 6%, extended the propertytax and reduced subsidies for electricity, sugar andpetrol. Whereas it represented 20% of GDP in 2012, theweighting of the subsidies was reduced to 17% of GDPin the first half of 2014 and the trend should continuein 2015. The improved budget balance should enablethe public debt to be reduced, which, however, willremain at a high level, above that of the Asian average. Furthermore, the current account surplus is projectedto deteriorate in a context of downward commodityprices cycle and economic slowdown in China. Even if,the high level of foreign exchange reserves (close to 7months of imports) ensures Malaysia has a goodcapacity to resist sudden flights of capital, the ringgit

is under pressure because of the drop in oil prices andthe political scandal linked to the sovereign fund 1MDBand affecting the Prime Minister. Even though the currency had been little affected in comparison to theother Asian currencies by the announcements of theAmerican Federal Reserve during the summer of 2013,the expected tightening of US monetary policy couldimpact the currency in a context of global financial turmoil. Finally the banking sector remains adequatelycapitalised and liquid, with little foreign debt and witha low rate of non-performing loans. Nevertheless, thehigh level of household debt and the banks' exposureto foreign assets is a risk.

The prime minister weakened by suspectedcorruption

Despite the victory of the Prime Minister's party,Barisan Nasional (BN), the general elections of May2013 confirmed a redistribution of political forcesand the rise in power of the opposition initiatedduring the 2008 elections. The legitimacy of thePrime Minister, Najib Razak, was confirmed by hisvictory during the party's internal elections in Octo-ber 2013 and the opposition has been weakened byan internal crisis relating to the appointment of theHead Minister of the State of Selangor and the sen-tencing to five years in prison of its leader, AnwarIbrahim, for a sex scandal. Nevertheless, suspectedcorruption and the embezzlement of funds linkedto the 1MDB public investment fund have weakenedthe Prime Minister since July 2015. Members of hisparty have called for his resignation and he has dismissed his deputy as well as the country's publicprosecutor, both involved in the enquiry. Lastly, the NB is keen to use its One Malaysia programme to end the New Economic Policy intro-duced in 1969 - positive discrimination measuresfavouring the Bumiputra (indigenous Malays) and seen, in particular, as a disincentive to foreigninvestment. However, community tensions remainbelow the surface due to religious and ethnic diver-sity.

RISKASSESSMENT

Strengths Weaknesses� Diversified exports� Dynamic services sector� Excellent education system, 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 performance of gas and oil sector

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

� Persistent regional disparities


Singapore China UnitedStates

Euro-zone

Japan

18%13%

10%

7%6%

China Singapore Euro-zone

UnitedStates

Japan

16%

12%

9%8%

9%


COFACE ASSESSMENTS

TRADEEXCHANGES

2012 2013 2014 2015 (f)

GDP growth (%)




Public debt (% GDP)

5.6 4.7 6.0 4.8

1.7 2.1 3.1 2.7

-3.9 -4.4 -3.7 -3.5

5.8 4.0 4.6 2.1

56.2 57.7 57.0 56.7


(f): forecast* Fiscal year 1 July to 30 June

MALAYSIA14

A1

A1

Country risk

Business climate

Medium termRATHER HIGH RISK

Activity is likely to slow down in 2015

Economic growth is likely to fall in 2015: low oil priceshave led to a fall in tax revenue (exports) and a fall ininvestment (-0.3% annualised for the first quarter2015) in all sectors of the economy. The energy sec-tor plays a crucial role in the economy, with its outputaccounting for over 20% of GDP and over 25% of taxrevenue. The industrial sector is also in difficulty:industrial output had fallen by an annualised 3.4% inApril 2015, largely because of deterioration in theextractive industries but also in the manufacturingsector. Incidentally, the production capacity utilisa-tion rate has crossed the 80% threshold (a sign offalling demand). Moreover, household debt is stillhigh because of an increase linked to mortgagecredit, which itself has led to a sharp increase inproperty prices. At the same time, the authorities aretrying to control this increase in property prices (thehighest in the OECD) so as to avoid the risks associ-ated with a burst bubble. A gradual recovery is expected in 2016, however,thanks to an increase in external demand but also toa recovery in household consumption and invest-ment. Monetary policy may have to remain accom-modating so as to continue stimulating growth.Incidentally, Norway’s central bank cut its key policyrate to 1% on 18 June 2015 (at a time of limited defla-tionary pressure) because of low oil prices and pricesin the eurozone; 2015’s rate of inflation is thereforelikely to be below the 2% target fixed by the author-ities. In budgetary terms, public spending plans arelikely to continue supporting activity - the construc-tion of hospitals in particular. With regard to thelabour market, unemployment should remain under4%. From a sector point of view, the non-oil sector islikely to take over from the oil sector.Lastly, the expected end of QE in the USA is a bear-ish risk which could generate some volatility anddepreciate the Norwegian krone, which would allowAmerican investors to have a greater presence inNorway as it would cost less to invest. Should therebe an adverse external economic shock (a fall in oilprices or a further fall in European activity), the gov-ernment has sufficient resources to support growth,thanks mainly to revenue from energy productionwhich is used to finance the oil fund (the Govern-ment Pension Fund Global), 4% of which can be usedin the budget. In this context, the budgetary surpluswould remain very high, and public debt lower thanthe average level for advanced countries.

Exports will continue to suffer from low oilprices in 2015-2016

An increase in energy exports volume would not offsetthe fall in the price of oil. Energy exports have fallen by3.8% since the beginning of the year (Norway is theworld’s 7th largest oil exporter), but an economicupturn is expected in the USA and Europe which wouldfavour energy exports (oil and gas account for 50% ofNorway’s exports). This would not offset the low priceof oil, however, as it is only likely to increase graduallyover the next few years. Other positive factors are likely to favour exports andease the bearish pressure on the current account sur-plus in 2016. The fact that the markets are anticipatingan end to QE in the USA during the second half of 2015is likely to help limit the deterioration in the currentaccount balance thanks to the depreciation of thekrone; this would make the country’s extractive indus-tries competitive again.

The populist parties are making majoritydecisions a tense affair

The conservatives won the September 2013 elec-tions and replaced the outgoing left-wing coalitionled by Labour’s Jens Stoltenberg; the left had beenin power since 2005. The new Prime Minister, ErnaSolberg, presented her coalition government inwhich the populist and anti-immigration ProgressParty (Fremskrittpartiet, FrP) acquired two keyministries – petroleum and energy (Tord Lien), andfinance (Siv Jensen). This is an historic governmentfor Norway and there is a major risk of the author-ities being challenged. Despite these risks, thelegitimacy of the new government has not yet beenquestioned.

RISKASSESSMENT

Strengths Weaknesses� Discovery of new oil deposits � Support from the sovereign oil fund (Europe’slargest fund in terms of assets)

� Norway’s currency is attractive to investors � Wide political consensus� Solid banking system� Tension on the employment market eased byimmigration

� Dependence on the oil sector� Slowdown in investment in various sectors

� Very high level of household debt� Competitiveness eroded by high wages� Shortage of labour in the high-value-added sectors


Euro-zone

UnitedKingdom

UnitedStates

DenmarkSweden

49%

24%

6% 5% 4%

Euro-zone

Sweden UnitedKingdom

DenmarkChina

30%

13%

9%

6%6%


COFACE ASSESSMENTS

TRADEEXCHANGES

2012 2013 2014 2015 (f)

GDP growth (%)




Public debt (% GDP)

2.5 0.8 2.2 0.5

0.7 2.1 2.0 1.6

14.4 11.1 9.7 5.5

12.5 9.8 8.2 7.1

28.9 29.0 28.5 28.2


(f): forecast

NORWAY15

A4

A1

Country risk

Business climate

Medium termRATHER HIGH RISK

Dynamic recovery, now mainly driven by domestic demand

The recovery which started in the second half of 2013is strengthening in 2015 (+1.0% in Q2 2015 qoq after0.9% in Q1 2015). The return of confidence, linked toimproved financing conditions on the markets andgood export performance, as well as adjustmentpolicies implemented by the government, created abasis for a more vigorous rebound than initiallyexpected. The contribution to growth of domestic demand hasoutstripped the contribution of external demand. Sit-uation on the labour market is improving, the unem-ployment rate has been declining steadily since May2013, although it is still at a very high level (22.5% inJune 2015). The recovery is expected to continue in2015 thanks to an expected resumption of credit,continuous improvement of the labour market and aslight rise in household purchasing power thanks tolow inflation. The improved economic outlook, thehealthy state of exports and the need to renew exist-ing equipment will continue to drive productiveinvestment. Moreover, residential investment isbeginning to recover (+5.0/5.1% in Q1 and Q2 2015yoy after +2.4% in Q4 2014) and housing prices, hav-ing reached a low in the beginning of 2014, havebegun to rise slightly.The external accounts have posted a surplus since2013 thanks to lower labour costs and falling importstriggered by the contraction in domestic demand.This surplus decreased in 2014 because of the recov-ery in imports but should rise again in 2015. Salesabroad are expected to continue to benefit fromcompetitiveness gains and slightly stronger demandfrom the country's main export markets. Spainshould also benefit from the euro’s depreciation. Thespecialisation in production segments with low ormedium technological content has not been detri-mental to the country, which has benefited fromdiversifying its exports to the emerging economies.The euro zone is still Spain's top market, but its shareof exports has fallen (50% in 2014 compared with60% in 2004). Export momentum was sustained insectors such as capital goods, automotive, agrifoodand chemicals.Overall, there is a gradual reduction of imbalances,although the private sector remains highly indebted(163% of GDP in 2014), which limits the scale of therecovery.

Businesses in better health, a restructuredbanking sector but public debt continues to rise

Exporting companies, in particular the large industrialgroups which have benefited most from productivitygains, have been able to hold their own during the cri-sis, but those oriented towards the domestic marketare just emerging from the crisis. Gross margins startedto recover as of 2008 and companies have beendeleveraging since end 2010, although the current spell

of deflation is tending to slow the process. Finally thenumber of bankruptcies has been falling since late 2013(the highest number of insolvencies is still recorded inthe construction and retail sectors).The steps foreseen under the bank restructuring pro-gramme implemented from mid-2012 in exchange forEuropean financial assistance have been successfullycompleted. The financial assistance programmeexpired, as planned, at the end of 2013. It was instru-mental in getting an improvement of the situation ofthe financial sector badly hit by the explosion of theproperty bubble in summer 2007 and then by therecession back on its feet. The banking sector is nowbetter capitalised, with greater liquidity and better pro-visions for losses. Its financing conditions on the mar-kets have improved considerably, The ECB's stress testscarried out in autumn 2014 revealed no weaknessesregarding the sector's capital adequacy. However, theproportion of non-performing loans, although declin-ing, remains high.Sovereign risk improved, thanks to the sharp fall in thecost of borrowing on the bond markets (the 10 yearbond interest rate is 2% in July 2015) and the fiscaladjustment undertaken (the cyclically adjusted budgetbalance rose by 6.8 point between 2009 et 2014 toreach -2.3% of potential GDP in 2014). Nonetheless, thepublic debt is still rising (expected to reach almost100% of GDP in 2015), making the country still vulner-able to a change of mood on the markets.

Difficulties piling up on the political scene

The disclosure, in October 2014, of another corrup-tion scandal is yet again undermining the credibilityof the traditional political class. This scandal shouldpenalize the ruling centre-right party (PP), as wellas the socialist opposition (PSOE). With legislativeelections coming up (December 2015), the radicalleft-wing party, Podemos, born from the indigna-dos movement, is capitalising on social discontentand this pernicious situation. In May 2015, Podemoswon Barcelona municipal elections. However, theparty, which ranked first in the polls until March2015, is seeing his popularity sliding and doesn’tcompete on an equal footing with traditional par-ties (PSOE and Popular Party) anymore. The cen-trist party Ciudadanos appears to be close behind.This is reinforcing the country political fragmenta-tion and could lead to more political instability inthe future, complicating the process of forming asolid majority. Meanwhile, the government needs todeal with the growing pressure from Catalan sepa-ratists, who are feeling stronger after their symbolicvictory in the referendum on 9 November 2014.

RISKASSESSMENT

Strengths Weaknesses� Renewed competitiveness and stronger exporting sectors

� Improved financial situation of businesses� Reform efforts� High-quality infrastructures� Significant tourism potential

� Convalescing construction and banking sectors

� High private debt� Increasing public debt� Very high unemployment, particularly amongyoung people


Euro-zone

UnitedKingdom

Morocco TurkeyUnitedStates

50%

7%

3% 2% 2%

Euro-zone

China Algeria RussiaUnitedKingdom

45%

6%4% 3%4%


COFACE ASSESSMENTS

TRADEEXCHANGES

2012 2013 2014 2015 (f)

GDP growth (%)




Public debt (% GDP)

-2.1 -1.2 1.4 3.1

2.4 1.5 -0.2 -0.7

-10.3 -6.8 -5.8 -4.3

-0.4 1.5 0.6 1.2

84.4 92.1 97.7 99.4


(f): forecast

SPAIN16

B

A4

Country risk

Business climate

Medium termMODERATE

RISK

Growth subject to political uncertainty andtensions, as well as continuing depreciationof the lira

In 2014, household consumption, the main engine ofactivity (70% of GDP) suffered from high inflation,driven by the depreciation of the Turkish lira, andhigh interest rates. In this context, unemploymentreached a high level, close to 10% of the active popu-lation. The Turkish lira, alike other emerging marketcurrencies, depreciated by more than 28% againstthe dollar between May 2013 and the end of 2014.Admittedly, this depreciation pushed up inflation, butit also benefitted the exporting sectors. In 2015, growth will remain moderated. Indeed,investors and consumers are facing several concerns.First, parliamentary elections in June and the run-upto the early ones in November have not dispelledpolitical uncertainty. Second, internal (armed conflictwith Kurdish fighters from the PKK in the south-east)and external geopolitical tensions (in the South withSyria and Iraq, in the North with Russia and Ukraine)will persist, affecting exports to these important mar-kets for Turkey. Then, the activity could be penalizedby the continuing depreciation of the lira (26% fromJanuary 1st to August 24th), fed by this uncertaintyand tensions, but also by the general distrust ofemerging markets in the slowing China context. Con-sumers and investors’ confidence is highly sensitiveto currency fluctuation.

Soundness of public finances but vulnerableexternal accounts

Management of the public finances remains conserva-tive, with a primary balance (excluding interest pay-ments on debt) in surplus. The low public deficit isexpected to rise slightly in 2015 even though theprospect of elections did not cause a significant fiscaleasing. The weight of public debt is not a cause forconcern. It continues to fall and should not be compro-mised by the budget deficit, which is lower than anti-cipated by the government.Despite a recent improvement, the current accountdeficit remains high. The trade deficit has decreaseddue to lower prices of energy and raw materialsimports, a large part of the deficit, even though the liradepreciation reduces the benefit. Moreover, the finan-cing of the economy heavily depends on foreign capi-tal. The currency’s volatility imposes a big risk onTurkish businesses, which are heavily indebted in for-eign currencies and import large amounts of interme-diate products and components. Their results andcapacity to roll over their debt could suffer. Finally, foreign exchange reserves, despite their comfortablelevel (slightly above 5 months of imports), may not besufficient to face a sudden capital withdrawal andshort-term commitments.

A tense local and regional political context

The former Prime Minister, Mr Erdogan, was electedPresident by direct universal suffrage in August2014. However, his Islamist-conservative party(AKP - Justice and Development Party) lost theabsolute majority at the June 2015 parliamentaryelections, despite remaining the first political party.This new political configuration gives evidence ofcertain lassitude and concern of the electorate fac-ing authoritarian governing, economic slowdownand blurred policy with ISIS. In early July 2015,President Erdogan asked his Prime Minister AhmetDavutoglu to form a government with a parliamen-tary majority within the next 45 days. Following thefailure of the negotiations the president called for snap elections on November 1st. Uncertaintyrelated to the outcome of these elections will main-tain anxiety.In the months prior to the June elections, Mr Erdoganhad multiplied his goodwill gestures towards theKurdish electorate, sketching reconciliation with thePKK, in order to gain the support of the BDP, theKurdish party, in the future parliament. In July talksceased and the government resumed its strikesagainst PKK bases in the Iraqi Kurdistan andarrested hundreds of people. The resumption ofhostilities, with many casualties on both sides, willresult in a vote either sanctioning the about-face of the AKP or favouring of the AKP out of fear.Turkish politics are complicated by the Kurdish sup-port to Western powers in their fight against ISIS,in which Turkey is also committed. However, Ankarafears that its alliance with the Kurdistan RegionalGovernment (KRG) in the northern third of Iraq willfuel the demands for independence from a part ofthe local Kurdish population and eventually helpswith the building of a Kurdish territory in Syriasouth of its border. Moreover, Turkey fears that the fight against ISIS extremists could benefit theSyrian regime it wants to expel. The country alsohas to find solutions for 1.4 million refugees fromSyria and Iraq, whose presence contributes to theinstability of the Turkish-Syrian border.

RISKASSESSMENT

Strengths Weaknesses� Public finances under control� Resilient banking sector� Demographic vitality and skilled labour force� Pivotal regional position which increases the attractiveness of the Turkish market

� Insufficient domestic savings, substantial currentaccount deficit and heavy dependence onforeign capital

� Rising corporate foreign debt increases exposure to exchange rate risk

� The Kurdish question remains a source of socialand political instability

� Geographic stability tested by the Syrian andIraqi conflicts

Euro-zone

Iraq Russia UnitedStates

UnitedKingdom

28%

8%6%

5%4%

Euro-zone

Russia UnitedStates

IranChina

27%

10% 10%

4%5%


COFACE ASSESSMENTS

TRADEEXCHANGES

2012 2013 2014 2015 (f)

GDP growth (%)




Public debt (% GDP)

2.1 4.2 2.9 3.1

8.9 7.5 9.0 7.5

-2.1 -1.2 -1.3 -1.6

-6.2 -7.9 -5.8 -5.0

36.2 36.3 34.9 33.5


(f): forecast

TURKEY17


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