China and the United States, two giants with feet of clay · ing power. Against this backdrop, the ... Global Financial Stability Report, FMI, April 2016 ... 2000 2002 2004 2006 2008

ood growth figures inEurope, rebound in manyemerging currencies and oilprices: there was an increas-ing number of signs of a lullin spring before the British

referendum. But this calm is in appearanceonly, as many "micro" risks appear as soonas we scratch this "macro" surface. Andthe two largest economies in the world,the United States and China, whose coun-try ratings have been downgraded respec-tively to A2 and B, perfectly illustrate thistendency. In China, the most widely fol-lowed economic indicators, such as GDPgrowth, retail sales and industrial produc-tion, show that growth is stabilising. Butcompany insolvencies are growing sharply.In the United States, hidden behind thecontinuous fall in the unemployment rate,there are companies whose profitability isbeing eroded and which are investing less.

By Coface Group Economists

But the parallels between China and theUnited States stop there, as these "micro"vulnerabilities are different on the twosides of the Pacific. In China, companies aresuffering from overcapacity and excessivedebt, which will take time to reduce, whilein the United States, companies' problemsare more cyclical than structural: six yearsafter the beginning of the recovery processthey derived the full benefits from, theturnaround point has been reached andresulted in a rise in insolvencies in early2016, for the first time since 2010.

If we add Japan (downgraded to A2 inMarch), it is therefore the three largesteconomies that are seeing their compa-nies' credit risk increase in this first half ofthe year. Unsurprisingly, Asian countriesare negatively affected by the Chineseslowdown (downgrading of South Korea,Hong Kong, Singapore and Taiwan).

Before the British referendum, Europe was- for a change - the herald of good news:the country assessments of France andItaly have actually been revised upwards(respectively to A2 and A3), under theeffect of falling insolvencies, earnings thathave stopped declining and ever morefavourable lending conditions. Central andEastern Europe is benefiting from theeurozone recovery: Romania, Slovenia,Lithuania and Latvia have been reclas-sified. In Europe, companies shouldtherefore keep their positive growthmomentum over the next few months,unless the consequences of the Britishreferendum and other numerous polit-ical uncertainties spoil the party.

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CHINA AND THE UNITED STATES, TWO GIANTS WITH FEET OF CLAY

The global economy remains stuck in a "Japanese-style" trap of sluggish growth, despite ever more expansionary monetary policies

Unsurprisingly, global growth prospects have notimproved since our latest update in March. Theyhave even deteriorated slightly (global growthforecast revised downwards by 0.2 pp to 2.5%),particularly because of the United States (seebelow). Few improvements are expected for 2017,since we expect global growth to remain lowerthan 3% for the sixth year running, and thereforestuck in a "Japanese-style" trap of sluggish growth.Like in Japan since the middle of the 1990s, thislacklustre growth goes hand in hand with a lowlevel of inflation: consumer prices are expected torise only 2.9% worldwide on average this yearaccording to the IMF, i.e. the lowest growth rate

since 1980 (1). For advanced economies only, infla-tion will probably be even lower than 1%, which isonce again unprecedented.

This sluggishness is obviously not encouragingcentral banks to tighten their monetary policy: norate hike is on the horizon for the ECB (see inset 1)or the Bank of Japan. The current slowdown in USgrowth is jeopardising the Federal Reserve's planto raise its key interest rate. In the United Kingdom,the predictions of monetary tightening have beenshelved and could even give way to expectationsof rate cuts following the outcome of the Britishreferendum (see box n°3 page 7).

June 2016

Companies are negatively affected by this envi-ronment: because of the listless growth they lackoutlets, while the low inflation rate limits their pric-ing power. Against this backdrop, the companyrisk is increasing according to our country ratings,which measure their average credit risk in 160

countries. The global average of these ratingsshows a marked increase in the risk level for com-panies worldwide. What is worse is that the cur-rent level is at a peak not seen since the early2000s, the period when these country ratingswere created (see chart n°2 page 3).

Sources: IMF, national statistics and Coface forecast

(1) The IMF does not provide this data for the years prior to 1980.

Chart n°1Contributions to globalgrowth

Forecasts

2009 2010 2011 2012 2013 2014 2015 2016 2017

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GROUP

China: a short-lived respiteChina partly explains this trend, as its countryrating has been downgraded from A4 to B. Yetthe first quarter briefly showed signs of a stabil-isation of growth, thanks to vigorous creditgrowth encouraged by the central bank. Theauthorities continue to stimulate activity viaaccommodative monetary and fiscal policies,reflected by the stimulus measures that willincrease the fiscal deficit to 3% of GDP in 2016(versus 2.3% in 2015). Nevertheless, the effi-ciency of such stimulus is increasingly limited

and worsens the credit risk. The reason is theovercapacity in many sectors (steel, cement,etc.). Moreover, Chinese companies' high debtlevel explains why an increasingly significantpart of new financing is not allocated to invest-ment, but is only used to refinance existingcredit lines (2). The IMF (3) estimates that 14% ofthe loans taken out by Chinese companies canbe considered as risky (4), the most vulnerablesectors being steel (39%), sales (5) (35%) and themining sector (35%). And non-performing loanscontinue to grow: they were up 42% in the firstquarter in year-on-year terms. When including"special mention loans", bad debt now accountsfor 5.8% of total loans (see chart n°3).

The Chinese authorities are therefore graduallyrealising that this expansionary monetary policy isnot sustainable. Besides, the most recent activityindicators show a slowdown in growth in thespring linked to a reduction in allocated loans (seecountry file page 12) and microeconomic signalssuch as the rapid rise in the number of defaults inthe local corporate bond market are negative (seechart n° 4).

The rest of Asia also continues to feel this Chineseshock wave. The latest payment survey undertakenby Coface highlights growing problems for com-panies, as more than 80% of the entities ques-tioned recorded late payments in 2015(6). Actors inthe construction sector are by far the most affectedby this lengthening of payment periods. The mostseverely affected economies are Singapore, Hong Kong, Taiwan, South Korea and Malaysia.

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(2) In 2015, 44% of the bond issues were used to refinance existing programmes according to Wind Informations(3) Global Financial Stability Report, FMI, April 2016(4) When a borrower's coverage ratio is lower than 1, the debt is considered "risky". The coverage ratio is measured by the EBITDA /interest expenditure ratio(5) Wholesale and retail sales(6) "Asia Corporate Payment Survey", Coface Overview, May 2016. www.coface.com/News-Publications/Publications

Chart n°2Average country index risk worldwide (1 = country rating A1, low risk; 8 = country rating E, extremely high risk)

Source: Coface

2000 2002 2004 2006 2008 2010 2012 2014 2016

Q1 2014 Q3 2014 Q1 2015 Q3 2015 Q1 2016

Chart n°3Non performing loan ratios (% of total)

Source: PBoC

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Chart n°4Number of corporate bond defaults in China

Source: Bloomberg

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3COUNTRY RISKPANORAMA

GROUP


Growth is slowing down in the United States,where it is unlikely to exceed 1.8% this year and1.5% next year. Companies are already feeling theeffects of this contraction: the number of insol-vencies increased slightly in the first quarter(+0.3%), for the first time in six years! The declinein their earnings is another tangible signal of thegrowing fragility of US companies: -6% year-on-year in the first quarter of 2016, after an 11.5% fallin the fourth quarter of 2015. The fall in corporateearnings in the energy sector is, admittedly, nota surprise, but it does not explain everything:excluding the energy sector, earnings keep falling(-7.9% year-on-year in the fourth quarter).

Companies are not the only ones to tread water:job creation hit the lowest level in six years inMay (at 38,000). And the decline in the unem-ployment rate (to 4.7% of the labour force) ismisleading, insofar as it went hand-in-hand witha fall in the employment rate. In other words, theunemployment rate has fallen despite the smallnumber of jobs created, as more discouragedjob seekers who have stopped looking for a job

As they are very open and highly exposed toChina (7), they are facing a slowdown in theirgrowth and a rise in companies' credit risk. Thehigh level of household debt (particularly inSouth Korea, Malaysia, Thailand and Singapore)could also weigh on activity. Their country ratingshave therefore been downgraded (see page 9).Conversely, the Philippines and Vietnam con-tinue to post solid growth.

United States: rise in insolvenciesin the first quarter for the firsttime since 2010

Europe: investment is pickingup, but political uncertainties are having a negative impact

are therefore no longer included in the officialfigures. Other bad news: this employment reportconfirms that the energy and manufacturingsectors are no longer the only ones to destroyjobs. Sectors that until now have been in goodshape, such as construction, seem to be runningout of steam. Only job creation in the healthcaresector prevented the US economy from destroy-ing jobs in May. Household consumption growthwill be slightly less vigorous than usual over thecoming quarters, especially as the recentrebound in inflation (particularly in services suchas leisure, rents and healthcare) is limitinggrowth in American consumers' purchasingpower.

While growth slowed down in the United States,it accelerated in the eurozone in the first quarter(+0.6% quarter-on-quarter), fuelled both byhousehold consumption and private investment.This good start should enable it to reach 1.7% forthe full year. The budgetary easing (especially inSpain) and, above all, the positive effects of thefall in the oil price on companies' margins as wellas on household purchasing power are still atwork. The ECB's low interest rate policy (seeInset n°1) is also positive for companies. TheECB's latest semi-annual survey on SME's financ-ing conditions in the eurozone published in Junealso highlights this trend: European small andmedium-sized enterprises are less worried thanin the past about bank lending conditions. Forthe third half year in a row, they confirm thatthey are seeing an improvement in the supply ofbank loans as well as a fall in the interest ratesoffered. And for the first time, this improvementis also benefiting very small businesses. Themost marked progress was in Spain, Ireland andSlovakia, whereas only Finnish and AustrianSMEs did not benefit from this improvement,according to the survey(8).

Growth is expected to stabilise in 2017, amid aresurgence of inflation that is not offset by equiv-alent nominal wage growth, with unemploymentlevels that remain high in most eurozone coun-tries, despite the slight decline in their levelrecently. And the risks linked to political uncertain-ties will also have to be monitored in the secondhalf of 2016 and in 2017. They are likely to weighon growth, as they will lead households and com-panies to postpone certain consumption andinvestment decisions. Various studies confirm this.In 2011, Aisen and Vaiga concluded that a higherdegree of political uncertainty (measured by thenumber of changes of government) is associatedwith a lower per capita GDP growth, after study-ing the statistical relationship between these two

(7) Asia suffering from the ordeal of the Chinese slowdown, Coface, September 2015 www.coface.com/News-Publications/Publications(8) https://www.ecb.europa.eu/pub/pdf/other/accesstofinancesmallmediumsizedenterprises201606.en.pdf?c96d449e601cbe6c87d2e67d54e68c70

Chart n°5GDP of Singapore, Taiwan and Hong Kong (100 = first quarter of 2013)

Source: National statistics

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GROUP

news:this


https://www.ecb.europa.eu/pub/pdf/other/accesstofinancesmallmediumsizedenterprises201606.en.pdf?c96d449e601cbe6c87d2e67d54e68c70

Box n°1New ECB measures to boost inflation and investment

in the eurozone

variables in 169 countries between 1960 and2004 (9). These results confirm those of Alesina(1996) (10), according to which GDP growth in 113 countries between 1950 and 1982 was signif-icantly lower when the probability of the col-lapse of a government was high.

However, the EPU (Economic Policy Uncertainty)indicator (11), which aims to measure the degree ofuncertainty in terms of economic policy, confirmsthat this uncertainty is at a high level. While it didnot exceed 100 on average between 2001 and2007, it has fluctuated between 150 and 200 since2008 (see chart n°6). It even exceeded 400 in theUnited Kingdom in April and May, in the contextof the campaign for the referendum on whetheror not the country should remain in the EuropeanUnion. Because of the outcome of the referendumin UK (see box n°3 page 7), it is unlikely that thedegree of uncertainty will fall significantly inEurope in the coming quarters all the more sincethe political agenda is busy: political conse-quences of the Spanish general elections in June,continuation of the Greek programme (see inset2 page 6), regional elections in Germany in Sep-tember 2016 and then May 2017, constitutional referendum in Italy (autumn of 2016), generalelections in the Netherlands in the first quarter of2017, presidential elections and general electionsin France in the spring of 2017 and, lastly, parlia-mentary election in Germany in September 2017.Not to mention the fact that the migrant crisis hasnot been solved, despite the agreement signedwith Turkey at the start of the year, and this willprobably continue to have an influence on the

On 8 June 2016, the European CentralBank (ECB) launched its corporatebond purchase programme (CSPP).This measure comes on top of fiveother measures that Mario Draghiannounced on 10 March 2016: (i) 0.05percentage point cut in the refi rate to0% and (ii) cut in the marginal lendingfacility rate to 0.25%; (iii) 0.1 percent-age point cut in the deposit rate to -0.4%; (iv) ¤20 billion increase in themonthly purchases to ¤80 billion; (v)introduction of a new TLTRO (4-yearloans to banks at very low interestrates).

The implementation of these newmeasures was justified by the lack ofgrowth dynamism and the low level ofinflation. The inflation rate, currently innegative territory (-0.1% year-on-yearin May 2016), is expected to reboundto above 1% towards the end of 2016

thanks to favourable base effects aswell as the recent slight rise in oilprices. Coface expects the oil price tobe close to $50 per barrel on averageduring the second half of 2016 (i.e.around $45 per barrel for the fullyear). Core inflation (excluding foodand energy prices) remains at a lowlevel (0.8% year-on-year in May 2016).

The purpose of the CSPP is to buyinvestment grade quality bondsissued by non-financial corporationsheadquartered in the eurozone. Themaximum stock of bonds eligiblefor this programme is estimated atbetween ¤400 and 800 billion. Untilnow, the ECB has not announced themonthly amount of private-sectorassets it intends to buy, but the con-sensus estimates it at ¤5 billion (i.e.6.3% of the monthly purchase flows of¤80 billion). French companies are

likely to be the main beneficiaries ofthe CSPP, ahead of Dutch, German,Italian and Spanish companies. TheECB will operate in the secondarymarket, and even in the primary mar-ket, and its objective is to reducecompanies' funding costs so they canfinance new investment projects. Bypushing down bond yields, the ECBhopes to drive investors to riskiermarket segments and to SMEs, whichtraditionally raise financing in thebanking market. This measure could,however, become less efficient ifinvestors, discouraged by the lowyields that safe companies provide,switch to companies outside the euro-zone. And companies could betempted to launch M&A transactionsor to buy back their own shares ratherthan investing.

Chart n°6Political uncertainty index in Europe

Source: www.policyuncertainty.com

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(9) Aisen A. and Vaiga F. (2011): "How Does Political Instability Affect Economic Growth?" , Working Paper no. WP/11/12 of the International Monetary Fund.(10) Alesina, A. and Perotti, R. (1996). "Income distribution, political instability, and investment." European Economic Review 40, 1203-1228.(11) The EPU indicator is based on the occurrence of articles dealing with economic uncertainties in the press, budgetary provisions and discrepancies of GDP

growth forecasts between economists. See www.policyuncertainty.com

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http://www.policyuncertainty.com

http://www.policyuncertainty.com

Box n°2

The viability of the Greek debt depends on significant relief

Despite the debt cancellationgranted in 2012 by private creditors(exchange transaction for publicdebt securities at a discounted price)and the fact that the eurozone andIMF creditors have granted newgrace periods and repayment sched-ules as well as a reduction in theinterest rates on their loans (stand-by arrangement for the IMF, the firstlending facility to Greece and loansfrom the European Financial StabilityFacility - EFSF - for European credi-tors), the Greek public debt remainsvery high. As of end-2015 it stood at¤311.5 bn, i.e. 176.7% of GDP, of whichtwo-thirds are due to the Europeanpartners (excluding ECB). On aver-age, the European loans have graceperiods and repayment schedules ofrespectively 15 and 40 years. Theaverage variable interest rate isaround 1.2%.

During the discussions on the firstreview of the ESM programme(European Stability Mechanism, afund that has succeeded the EFSF),which were completed on 16 June2016, the eurozone ministers offinance undertook to reduce theGreek debt if certain conditions aremet. The IMF has for a long timedefended this promise of debt relief.

However, we are not talking about animmediate restructuring (which cantake place to only in 2018), which theIMF would have wanted. Also, it isnot a question of reducing theamount of nominal debt, but reliefmeasures such as a partial earlyrepayment of the first lending facilityand a reprofiling of the EFSF loans.The Europeans will agree to thisrestructuring only if the commit-ments made under the bailout planare kept. In the short term, however,i.e. before the end of the third bailoutplan (2018), measures will be imple-mented to smooth the profile of therepayments to the EFSF and toreduce interest rates.

According to the viability analysis ofthe Greek public debt carried out bythe IMF (23 May 2016), withoutrestructuring, the debt ratio, after ini-tially decreasing (160% of GDP in2030), will start growing again andreach around 250% in 2060. TheIMF’s forecasts in the budgetary fieldare nonetheless less optimistic thanthose of the European Commission(primary surplus of 1.5% of GDP inthe long term, versus 3.5% for theCommission, a point that remains tobe clarified). The IMF has revised thelong-term growth assumptions

downwards to 1.25% due to the lowlevel of potential growth. The IMF'sanalysis suggests that to perma-nently lower the debt ratio, the gov-ernment financing needs will have tobe maintained below the thresholdof 10% of GDP until 2040 andincrease to only 20 % in 2060, whichwill require a substantial reprofilingof the European loans. The IMFtherefore proposes a combination ofthree measures:

• An extension of the repaymentschedule of 30 years for the lend-ing facility to Greece, of 14 years forthe EFSF loans and of 10 years forthe ESM loans;

• An extension of the grace period,ranging from 6 years for the ESM to17 and 20 years for the EFSF andthe lending facility to Greece, aswell as an extension of the interestpayment deferral on these loans;

• A reduction in the interest rates(replacement of variable rates withfixed rates not exceeding 1.5% until2040).

These measures as a whole wouldreduce the debt ratio to 100% ofGDP in 2060.

The fact remains, however, that evenafter restructuring, the debt dynam-ics will remain very sensitive toshocks. So if growth stabilised at 1%in the long term (-0.25 percentagepoints compared with the core sce-nario), accompanied by a lower pri-mary surplus (1% of GDP i.e. -0.5percentage points), the debt wouldno longer be viable.

The IMF must ensure by end-2016that the measures suggested by theEuropeans, many of which are notquantified, will actually make it pos-sible to bring the debt back to aviable long-term trajectory. TheEuropeans have, however, acceptedthe methodology is has proposed(based on fixing the governmentborrowing requirement) to adjustthe debt relief.

Chart n°7Greek public debt (sustainability scenarios)

Source: IMF (DSA of May 2016)

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With restructuring

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Growth and primary surplus reduced respect. By 0.5 an 0.5 percentage point

Box n°3

United Kingdom: What’s next after the vote?

On Thursday 23rd of June, the UK hasvoted to leave the European Union.52% has voted to leave and 48% toremain. In this context, Prime MinisterDavid Cameron announced he willstep down. Shockwaves have spreadacross financial markets on June 24, asboth short-term and long-term uncer-tainties are high. The GBP plunged toits lowest since 1985. Global equitymarkets have fell too. Oil, gold and theeuro also reflect this surge in volatilityand global risk aversion.

In the short-term, uncertainty andvolatility is likely to prevail on financialmarkets. Its impact on business andconsumer confidence in both the UKand in the rest of the world will dependon the magnitude of the correction onfinancial markets and on politicaldevelopments in the coming weeks.

In the UK, if business and consumerconfidence is affected by financialmarket volatility and political uncer-tainties, private consumption relatedsectors will be affected by theincreased household precautionarysavings and higher inflation. Businessinvestment will take a hit as well. And the construction sector could beimpacted by higher prices of importedinputs. Hence, the paradox is exportingsectors are not the most at risk ones inthe short-term, as they could benefitfrom the lower level of the GBP. All inall, this could push the BoE to cut ratesby the end of the year. And this leadsus to revise down our GDP growthforecast (to 1.2% this year instead of1.8%, and 1.1% next year).

Domestic political uncertainties add tothis risk, as a conservative leadershipelection could take several months.The UK's vote to leave may lead tocalls for another Scottish referendum,as Scotland voted to remain in the EU.Northern Ireland’s case could be anissue too, all the more since the regionhas borders with an EU country, theRepublic of Ireland.

In the rest of the world and morespecifically in the EU, the magnitude ofspill-over effects in the short-term willmostly depend on coming politicaldevelopments and central bankactions. The main ones have alreadyannounce they are ready to providebanks with ample liquidity.

As a reminder, the political situation inSpain could bring further uncertaintyon to the future of the European proj-ect. Later this year, a referendum inItaly on the constitution reform isexpected and the resignation of PMRenzi is at play. Then elections arescheduled in the Netherlands, inFrance and in Germany in Q1, Q2 andQ3 2017 respectively.

Higher volatility and uncertainty in theshort-term will be driven by long-termchallenges and unknowns resultingfrom the outcome of the referendum.In this regard, the key issue is of coursethe negotiation of a trade agreementbetween the UK and the EU. The trick-iest point is the access to the singlemarket that ensures free movementsof goods, services, capital and people(and makes it possible for firms of thefinancial sector based in the UK tooperate easily in the whole EU withouthaving to comply with local regula-tions). According to Article 50 of theTreaty on EU, the UK has to formallyannounce its intention to leave the EUduring the European Council (the nextone is on the 28th of June). The UK willthen have two years to negotiate anew agreement with the EU, whichseems nonetheless unlikely due to thevery long period usually required tonegotiate trade agreements: it tookseven years for Canada and the EU tosettle one (and it is still not ratified).The two-year countdown could there-fore be prolonged. Three types ofagreements are conceivable: (i) EEAmembership, like Norway, whichimplies full access to the single marketbut loosing voting rights on regulatoryframework and EU decisions; (ii) a

“customized” bilateral agreement, likeSwitzerland, which establishes accessto the single market for specific sec-tors and (iii) WTO rules, with existingcustom tariffs and no access to the sin-gle market.

The agreement will largely depend on political choices of the future PM, as there is a trade-off to be donebetween economic benefits resultingfrom the access to the single marketand political/regulatory constraints. Asone of the leaders of the ‘Leave’ campis very likely to be the next PM, a Nor-way-style agreement is less likely andthe negotiation process with the EUwill be tricky. And defaulting to WTOrules means higher custom tariffs andno access to the single market. In thisworst case scenario, the long-termeconomic cost of the Brexit would behigher:

1) In the UK, usual competitive export-ing sectors being linked to the EUthrough supply chains (pharmaceu-tical and automotive are notableexamples) will suffer from highercustom tariffs on their exports to theEU in the long-term. But on theother hand, the government couldalso decide to impose higher importtariffs, especially to help sectors currently suffering from foreigncompetition (metal industry). Thelong-term effect on the financialsector (8% of GDP, i.e. twice higherthan the OECD average) is anunknown at this stage (see above).

2) In the EU, countries having thestrongest links (in terms of tradeand investment) with the UK andcomparatively small domestic mar-kets are most exposed: Ireland is byfar the most at risk in this regard,followed by the Netherlands, Belgium, Denmark and Sweden,where the impact will be smaller.


GROUP

France: A2• Higher corporate margins in 2016 hel-ped by the growth of the activity andby a government support reform(CICE).

• Highest non-financial private invest-ment since 2012 during the first quarter(+2,3%).

• Recovering of the construction sector(5% of the French GDP).

• Decreasing business insolvencies (-3,2%expected in 2016)

Italy: A3• Economic growth has recovered sinceQ1 2015. Activity is expected to streng-then in 2016 and 2017, driven mainly byprivate consumption, itself supportedby rising real household income. Thefirmness of consumption, waning sparecapacity and the expected increase incorporate margins should lead to astrengthening of investment. However,imports are expected to continue togrow faster than exports.

• Employment continued to rise, unem-ployment has been declining since theend of 2014.

• Bankruptcies started to decrease in2015. This trend continued in Q1 2016.

Ivory Coast: B• Economic growth remains one of themost dynamic of the continent. Theimplementation of new major buildingprojects, the marked improvement inthe business climate, private sectorsupport measures, subdued inflationand improving living standards shouldcontinue to boost economic activity in2016 and in the medium term.

• Macroeconomic imbalances havebeen curtailed.

• After two record years, cocoa produc-tion could decrease slightly this year.However, exports should continue tobenefit from the high price of thiscommodity.

• Political stability emerged strongerfrom the smooth re-election of Alas-sane Ouattara in October 2015.

• Security has overall been restoreddespite the jihadist attack in Grand-Bassam in January 2016.

BAROMETER

COUNTRY RISK ASSESSMENTS CHANGES

UPGRADES

Country risk assessments

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

These countries are:Afghanistan, Armenia, Central African Republic, Cuba, Eritrea,Iran, Iraq, Libya, Sudan, Syria,Timor-Leste, Venezuela, Yemenand Zimbabwe.

June 2016

Country Country risk new

France A2

Italy A3

Lithuania A3

Slovenia A3

Latvia A4

Roumania A4

Ivory Coast B


GROUP

Mozambique : D• Outlook for growth worsened follo-wing the disclosure that the govern-ment had concealed USD1.4bn debt.IMF and WB have temporary suspen-ded their facilities waiting for clarifica-tion.

Public debt may reach 90% of GDP in2016. Probability of default on sovereigndebt increases. Investment deterred bylack of confidence in government's relia-bility and on its ability to fix debt issues.

• Worsening political situation with revival of opposition of RENAMOagainst the ruling FRELIMO.

Zambia: D• Collapse of the kwacha in 2015 (lostnear 50% of its value against the dol-lar), mainly due to slowdown in Chinaand impact of slump the copperprices. The currency may by weakenfuther by dollar strength.

• Mining companies have announcedplans to downscale their operation.The country will continue to sufferfrom low prices and also decrease inproduction. Fiscal deficit (about 8 % in2015) will not improve in 2016. Publicdebt more than doubled between2012 and 2015, reaching 53 % of GDPin 2015 (58 % forecasted for 2016).

• The sizeable fiscal deficit will remainhigh and falling foreign reserves haveled to the issuance of Saudi Arabia’sfirst sovereign bonds since 2007.

• The Program Saudi Vision 2030 relea-sed in April 2016 presents a program toreduce Saudi dependency to oil. Theimplementation may allow Saudi eco-nomy to move beyond oil in the longterm but may not have an effect on theeconomic slump in the short term.

Algeria: C• Algerian economy is deeply reliant onoil and gas sector. The impact of the oilshock on economic activity has beenlimited so far, with fiscal policy remai-ning expansionary through 2015, butgrowth is expected to slow because ofthe needed fiscal consolidation. Thecountry experienced in 2016 a secondyear record high public deficit that willreach 15 % after a deficit closed to 16 %in 2015 according to the IMf. The Fondsde Régulation des Recettes (FRR),Algeria’s oil saving fund, tends todecline.

• The current account deficit widens ashydrocarbon exports fell almost byhalf. Inflows of foreign direct invest-ment remain weak at 1 percent of GDP.Foreign exchange reserves decline butremain substantial.

Singapore: A3• Singapore, which is trade-reliant, isexposed to China’s structural slow-down.

• Weaker than expected externaldemand from the US, Japan andEurope also affects the manufacturingsector dominated by export-orientedindustries.

• The shock on commodities (includingoil) is also impacting Singapore’s acti-vity (fall in exploration, activities of trading).

Saudi Arabia: B• Saudi Arabia’s economy has begun tofeel the negative effects of the declinein oil prices: non-oil activity moderates,the fiscal deficit increases and thedecrease in deposits of the bankingsystem, especially government ones,weigh on the banking system and theeconomic activity.

• Leading indicators point to a slow-down of the non-oil economy: ATMtransactions, business confidence andprivate sector credit growth, have allbeen slipping since the beginning ofthe year. Saudi Purchasing Managers’Index (PMI) remains well below itslong-run average.

Country risk assessments

DOWNGRADES

Country Country risk new

United States A2

Canada A3

South Korea A3

Finland A3

Hong Kong A3

Koweït A3

Qatar A3

Singapore A3

Taiwan A3

United Arab Emirates A4

Malaysia A4

Namibia A4

Saudi Arabia B

China B

Algeria C

Angola D

Mozambique D


GROUP

1010

AZERBAIJAN

Strengths Weaknesses

l Abundant oil and gas resources l Development of new energy transit routes to the EU

l Skilled labour force

l Inadequate economic diversification l Risk of armed conflict with Armenia l Governance problems and high level of corruption

Euro-zone

Indonesia Thailand IndiaIsrael

47%

9% 8%

4% 4%

Euro-zone

Russia UnitedKingdom

ChinaTurkey

18%

14% 14%

8%

11%

Exports of goods, as a % of total

Azerbaijan's growth might experience in2016 its first recession in twenty years

Growth, hit by lower oil prices, is expected to benegative in 2016. The hydrocarbon sector (40% ofGDP), especially the gas sector, will continue todominate the economy. Gas production shouldincrease strongly, thanks to the launch of the sec-ond stage of the Shah Deniz project, although gasdeliveries are not expected before 2018-2019.Activity in services (30% of GDP) and construction,sustained by public investment in recent years, maydecline due to a more restrictive fiscal policy. Consumption is not likely to be much moredynamic in 2016 than in 2015, given a fiscal policywhich is set to be only modestly expansionary anda high inflation rate. Furthermore, persistence of low hydrocarbonprices and high interest rates (raised from 5% to 7% in March 2016) would weigh on investments(except in infrastructure projects already launchedand supported by the State, like pipelines construc-tion). Finally, export contribution may be limited byslow production increase and hydrocarbon pricelower in 2016 than in 2015.Consumer price rises are set to continue, fuelled bythe ongoing impact of the depreciation of themanat against the dollar observed in 2015.

Worsening public deficit but stabilisation of the current account

Despite the fiscal consolidation effort announced in2015, the government would not be able to forgo anincrease in social spending, even moderate, in order tolimit the decline in real incomes. However, the prioritis-ing of public investment projects could be revised. Thecut in spending may be not sufficient to offset thehigher than expected drop in oil and gas income (50%of State revenues). Moreover, non-hydrocarbon rev-enues might be severely hit by the decrease in activity.In this context, the government amended its budgetproject in February 2016, now based on an oil price of25 $/bl (conservative assumption).The amount of assets accumulated in the sovereignfund SOFAZ, estimated at nearly USD 34 billion (over50% of GDP) as the end of 2015, gives the State com-fortable room for manoeuvre.

After the sharp worsening observed in 2015, the exter-nal accounts are expected to stabilise in 2016. Thedevaluations in 2015 allowed Azerbaijan to recover adegree of competitiveness against Russian productswhose prices have fallen steeply following the collapseof the rouble. However, exports, highly reliant on hydro-carbons (95% of the total), are unlikely to grow muchdue to low oil and gas prices and with productionunlikely to increase strongly in the short term. Imports

are expected to increase weakly, due to the moderationin demand and in public investment. FDI flows willremain considerable, especially for projects in thehydrocarbons sector (Trans-Anatolian and Trans-Adri-atic pipelines –TANAP and TAP). The central bank (BCA) abandoned the peg of themanat to the dollar at the end of 2015 after the cur-rency loss about 50% against USD. The managed float-ing exchange arrangement introduced since then isdevised to mitigate the impact of persistent low oilprices on budget revenues and preserve foreign cur-rency reserves. The manat exchange rate strengthenedin early 2016 and may stabilise with the assumption oilprice would not slump again strongly.The banking sector, highly dollarised, has been hit bythe depreciation, which has weakened balance sheets.

Political stability, which does not excludesocial tensions

President Ilham Aliyev, in power since 2003, was re-elected for a third term in October 2013. His party(New Azerbaijan Party - NAP) won the November2015 parliamentary elections, boycotted by most ofthe opposition parties. While the government has managed to maintain adegree of social and political stability to date, thanksto significant oil resources, growing inequalities andthe strong economic slowdown are heightening pop-ular discontent. The risks of repression and the weak-ness of the opposition are, however, limiting anyprotests. Meanwhile, despite some progress, performance ongovernance remains less good overall than that ofthe other CIS countries, especially regarding the fightagainst corruption (ranked 172nd in 2014 while Russiais in 168th place and Kazakhstan 155th).Finally, the risk of regional political instability remainshigh due to tensions with Armenia over the status ofNagorno-Karabakh, as evidenced by the resumptionof fighting early April 2016. No scenario for resolvingthe conflict seems to be in sight, in the short term.

RISKASSESSMENT

COFACE ASSESSMENTS

TRADEEXCHANGES

C

C

Country risk

Business climate

Medium termMODERATE

RISK

2013 2014 2015 (f) 2016 (f)

GDP growth (%)

Inflation (yearly average) (%)

Budget balance (% GDP)

Current account balance (% GDP)

Public debt (% GDP)

MAIN ECONOMIC INDICATORS

Population (millions of persons-2014) 9.3(f): forecast * Transfers from oil Fund SOFAZ included

GDP per capita (US dollars-2014) 7,936

5.8 2.8 1.1 -3.2

2.4 1.4 5.0 8.0

1.4 -0.4 -2.0 -3.5

22.1 14.1 -0.5 0.0

13.8 15.9 20.6 25.6

Imports of goods, as a % of total

11


l 6th-largest economy worldwidel Growing active population l Varied and abundant mineral and agriculturalresources

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

l Resistance to external shocks: creditor externalposition, considerable reserves

l Lack of qualified labour/incomplete educationalsystem

l Shortcomings in infrastructure (transport,energy)

l Insufficient investmentl High production costs (wages, energy, logisticsand credit)

l Public expenditure high and inefficient l Importance of corruption and inequalities

China Euro-zone

Argentina JapanUnitedStates

E

18%

16%

12%

6%

3%

Euro-zone

China Argentina NigeriaUnitedStates

1

17%16%

15%

4%

6%


Recession is expected to continue in 2016

Despite a moderation of GDP contraction in the firstquarter 2016 compared to the previous quarters, theoutlook for the Brazilian economy seems grim. Inter-nally, household consumption, the main growthdriver, should still suffer from the high cost of credit,lower real wages due to the still high inflation and therise in unemployment rate (around 11% in April 2016). The rise in unemployment also affects the bankcredit supply: the banking sector, exposed to house-hold debt, is expected to face an increase in non-per-forming loans which contributes to reduce thesupply of credit. Private and public investmentshould continue to contract due to the weakness ofdomestic demand and the pursuit of a fiscal austeritypolicy. Foreign trade would be affected by the slow-down in Chinese demand and its impact on prices ofminerals. Export competitiveness should still beaffected by weak transport infrastructure and rigidlabor regulations, despite the gains related to thecontinued depreciation of the real against the dollar.Finally, inflation should decline in line with the weak-ness of domestic demand. It should neverthelessremain above the target set by the central bank(4.5%) due to the depreciation of the Brazilian cur-rency. Rising unemployment and slowing consumerprices should lead to the easing of monetary policytowards the end of 2016.

A primary deficit higher than expected in 2016

The adjustments to fiscal policy begun in 2015, shortlyafter the re-election of President Dilma Rousseff, arehaving trouble achieving their aims: inflation and publicdeficit have continued to rise. The lack of a majority inCongress and the recession have impacted the adjust-ment in public finances, which in turn led to the deci-sion by three rating agencies to downgrade thecountry to speculative grade. The new interim government that took office in May2016 has already announced a higher than expectedprimary deficit estimated at nearly 72 billion BRL, or2.8% of GDP. This increase is explained mainly by thelower tax revenues expected during this year, but alsoby the release of deferred payments under various pro-grams funded by the federal state. The new govern-ment is now working on a fiscal adjustment plan thatshould be subject to the approval of Congress beforenext summer. Proposals such as the reform of the socialsecurity system or the tax increases are considered. Awidening budget deficit should result in worrying pub-lic debt dynamic which could reach 73.4% of GDP in2016 from 66.5% of GDP in 2015 according to the gov-ernment.

Improvement in the current account deficitdriven by lower imports

In 2016, the current account deficit is expected toimprove thanks to weaker imports on the back ofslower private consumption and investment, as wellas the depreciation of the Brazilian real which madeimports more costly. On the other hand, depreciationof the local currency would also help to boost exportcompetitiveness but exports will continue to be hitby low commodity prices. Trade in services andincome balance (tourism. dividends. interest) willalso remain in deficit.

The challenges of the Michel Temer’s newadministration

In May 2016, Brazilian Senate voted in favour of theopening of the impeachment’s proceedings againstthe President Dilma Roussef with 55 votes in favour,14 more votes than the majority required. This is herVice President Michel Temer, which now assumes therole of interim president, while waiting the final deci-sion of the Senate that should be held in August2016. Barring unforeseen circumstances, two thirdsof the votes in the Senate necessary for revoking def-initely the President should be achieved. MichelTemer is expected to remain in power until the nextelections in 2018, but he will face to several chal-lenges, including ensuring political stability due to hislack of legitimacy (he was not elected democrati-cally). The success of his government will mainlydepend on its ability to pass economic reforms tobring the country out of the crisis and to restorecredibility.

RISKASSESSMENT

COFACE ASSESSMENTS

TRADEEXCHANGES

C

A4

Country risk

Business climate

Medium term

2013 2014 2015 (f) 2016 (f)

GDP growth (%)




Public debt (% GDP)


Population (millions of persons-2014) 203.0(f): forecast


3.0 0.1 -3.8 -3.4

5.9 6.4 10.7 7.0

-3.1 -6.0 -10.3 -8.8

-3.0 -4.3 -3.3 -1.9

51.7 57.2 66.5 73.2


MODERATERISK

BRAZIL

12

CHINA


l External accounts benefitting from industrialcompetitiveness and diversification

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

l Gradual move up-market l Development of servicesl Infrastructure development

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

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

l Overcapacities in certain industries and highdebt level of corporates

l Fragile Chinese banks (sharp increase in creditgrowth and deterioration of asset quality)

l Government’s strategy is ambiguous on arbitrating between reform and growth

l Environmental problems

UnitedStates

Hong-Kong Japan SouthKorea

Euro-zone

E

17%16%

11%

6%

4%

Euro-zone

SouthKorea

UnitedStates

AustraliaJapon

1

10% 10%

8%

5%

8%



Further slowdown in 2016

The Chinese economy is expected to continue slow-ing in 2016. The authorities are implementing reformsneeded to rebalance growth in favour of consump-tion and services. This is however hitting the profitsof weak companies. Despite the ongoing monetaryeasing since November 2014 and the expansionarybudget measures, investment is likely to remain lim-ited in 2016. As companies are heavily indebted andseveral sectors are facing large overcapacities, themonetary relaxation is proving ineffective and thevolatility of the financial markets could undermineconfidence levels of among investors and consumers.In this context, disposable income should rise slowlyand household consumption is likely to slackensomewhat. Despite the very rapid expansion in onlinesales, retail sales are losing momentum. Although there was a rise in property prices in themain cities in 2015, the construction related sectorsare likely to remain flat because of high inventory lev-els. A collapse in the housing market is however notvery likely, as the authorities have the capacity tointervene in the event of a severe shock. The growthof the services sector, in particular financial, is alsocontinuing. Exports are however expected to continue sufferingthe weakness of global demand. Nevertheless down-ward pressures on the yuan could improve the com-petitiveness.

The credit risk of companies is increasing

Although the level of public debt is sustainable, that oflocal municipalities is high (at around a third of GDP)and remains opaque. In addition, corporates are highly indebted and theexpansion of shadow banking makes it very difficult toevaluate. In September 2015, the debt of the privatesector accounted for 205% of GDP. On top of this anddespite the monetary policy easing, SMEs frequentlyhave to rely on shadow banking at exorbitant rates,given their difficulty in securing financing.In this context there has been a gradual decline in thequality of banking assets which are also under-esti-mated because of the scale of shadow banking. Theofficial ratio of non-performing loans reached 1.75%during the first quarter 2016, its highest level since2009. Together with “Special mention loans”, this ratioreached 5.76%. The credit risk has increase significantly,highlighted by the growing number of defaults on theChinese bond market. While China experienced its firstdefault in 2014, 24 companies (a third of State ownedenterprise’s) defaulted on the bond market during thefirst quarter 2016. The introduction of real bankruptcyrisk is inevitable and will reduce moral hazard gener-ated by government interventions. In the context of theeconomic slowdown, the solvency of more fragile bor-rowers will still need to be monitored in 2016.

Following a rise of more than 110% between November2014 and June 2015, the Chinese stock marketsrecorded a significant correction during summer 2015.Stock exchanges lost more than 43% in less than 3months. In the beginning of 2016, the benchmark indexlost 17% before stabilizing. Volatility is also high on theforeign exchange market. Admittedly this market cor-rection can be seen as a healthy development aftersuch a sharp rally disconnected from corporates’ fun-damentals, volatility have generated additional risks.The heavy use of margin finance (investors borrowmoney to buy shares) has increased the credit risk andcould worsen the downwards spiral.

Business climate continues to suffer shortcomings

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

RISKASSESSMENT

COFACE ASSESSMENTS

TRADEEXCHANGES

B

B

Country risk

Business climate

Medium termLOW RISK

2013 2014 2015 (f) 2016 (f)

GDP growth (%)




Public debt (% GDP)*


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


7.7 7.3 6.9 6.5

2.6 2.0 1.5 1.8

-1.1 -2.1 -2.3 -3.0

2.5 1.7 2.4 3.3

39.4 41.1 43.2 46.0

13

ECUADOR


l Significant mineral, oil and gas potentiall Almost energy self-sufficient thanks to hydro-electricity

l Tourism potential (flora, fauna, cultural heritage)l Climatic diversity, enabling numerous types of crop lMarine wealth: world's biggest exporter of prawns

UnitedStates

Euro-zone

Peru ColombiaChile

44%

10% 9%6%

5%

UnitedStates

China Colombia PanamaEuro-zone

4

32%

13%

10%

5%

8%


l Poorly diversified economy, dependent on oil l Inadequate infrastructures (roads, dams) andpoorly qualified work force

l History of sovereign default lWeak private, domestic and foreign investment l State interventionism l Credit expensive and still underdeveloped l Opposition of indigenous populations and ecologists to the development of primaryresources


Activity will be strongly affected by low oilprices and the earthquake in early April The Ecuadorian economy, largely dependent on pub-lic spending from oil revenues, felt the negativeimpact of falling oil and gas prices and moved intorecession in the second semester of 2015. AfterVenezuela, Ecuador was the country in Latin Americathe most severely impacted by the fall in crude oilprices. In 2016, activity is expected to suffer againwith the persistence of low oil prices and the loss ofcompetitiveness of its non-oil exports, as a result ofthe strengthening on the US dollar against theColombian peso and Peruvian sol (main trading part-ners in the area). The earthquake in early April shoulddeepen further economic recession and would cost3.3 billion dollars (0.3 % of GDP). The epicenter waslocated near Pedemales, Ecuador’s center for shrimpfarming (world’s biggest exporter), which shouldcurtail aquaculture production. The government’slack of resources is also likely to lead to a reductionin public investment whilst private investment willalso suffer from the decline in the availability of creditas the banks provide funding in priority to the publicsector. Household consumption is likely to remainweak, under the effect of rising unemployment,freezing wages and the increasing of some taxes andimport restrictions. The slowdown in domesticdemand should however lead to a reduction of infla-tionary pressures in 2016.

Further budget cuts after earthquake Low oil price, responsible for over one-third of budgetreceipts, forced the government to instigate measuresto limit the rise in the public deficit (freeze on publicsector wages, higher taxes and duties on imports, cutsubsidies). The April earthquake has increased furtherthe State financing needs. The country intends to coverthese requirements through additional loans fromChina, as well as from multilateral institutions (IMF,World Bank). A series of new measures was alsoannounced to finance a part of the rebuilding effort(new receipts estimated at one billion dollars): VAT ratewill be increased by 2 percentage points for one year(at 14 %), corporate tax will rise by 3 percentage points(at 25 %), some employees will temporarily pay anaddition tax of their income and an additional excep-tional contribution on wealth tax. President Correaannounced his intention to privatize new assets by end2016 in order to meets its financing needs. The countrycould also tap international markets, but only at ahigher cost. The public debt is therefore set to reach38 % of GDP, just below the legal threshold of 40 %provided by the Constitution. The majority is held byChina, with loans guaranteed by the granting of miningconcessions, oil revenues and future electricity produc-tion.

Current account continues to suffer fromfalling oil and gas exports The current account deficit should continue to growin 2016, as a result of the worsening balance of tradedue to lower oil prices and the appreciation of thedollar (Ecuador is a dollarized economy). The tradein petroleum and related products represents almost50% of the country’s exports and 20% of its imports.Despite the appreciation of the dollar which is mak-ing imports cheaper, these should also fall, given theincrease in import taxes and duties applied as ofMarch 2015, as well as because of the slowdown indomestic demand. The balance of services willremain in deficit, the costs of freight and servicespaid to foreign companies will exceed tourist income.The income balance is feeling the impact of the sig-nificant capital withdrawals and FDI, which aredeclining, will not be enough to finance the currentaccount deficit.

The President Rafael Correa renounces to bea candidate in the next presidential elections The next presidential and parliamentary elections inEcuador are scheduled for February 2017. The Pres-ident, Rafael Correa, of the Alianza Pais (PA) partyexpressed his wish to not be a candidate. Althoughthe Constitutional amendment allowing him to standas many times as he wants has been voted, thereform will not go into effect until 2021. The likelycandidate expected to succeed him seems to be hisformer vice president, Lenin Moreno. Maintaining thepower of the PA is however uncertain because gov-ernment has to deal with divisions that haveemerged within his ruling majority and the decline inthe government popularity. The business climate is likely to remain mediocredespite the adoption of the reforms, tax incentives,aimed at attracting private investment. The lack ofrecourse to international arbitration courts, Stateinterventionism, as well as the ongoing fall in com-modity prices are all reducing the attractiveness ofthe country.

RISKASSESSMENT

COFACE ASSESSMENTS

TRADEEXCHANGES

C

B

Country risk

Business climate

Medium termHIGH RISK

2013 2014 2015 (f) 2016 (f)

GDP growth (%)




Public debt (% GDP)




4.6 3.7 0.3 -3.0

2.7 3.6 3.9 2.1

-4.6 -5.3 -5.3 -3.9

-1.0 -0.6 -2.5 -2.8

25.9 31.2 34.5 38.3

14

EGYPT


l Tourism potentiall Manageable external debtl Political and financial support from the Gulfmonarchies and western countries

l Poverty (40% of the population) and high unemployment

l Twin deficitsl Low level of foreign exchange reserves l Banking system subject to sovereign risk


Euro-zone

SaudiArabia

Turkey UnitedStates

India

24%

7% 7%

5%4%

Euro-zone

China Kuwait UkraineUnitedStates

2

24%

11%

7%

4%5%


A vigour that is running out of steam in 2016

In 2016, Egypt's economy shows signs of slowdown.The tourism sector already weakened by the attackon the Russian aircraft in October 2015 would con-tinue to contract following the latest incident of civil-ian plane from the national company on May 2016.The number of tourists decreased by 25% over thefirst 9 months of the fiscal year 2015/2016 and isexpected to weaken in the second half 2016. Touristsnights felt also by 38.5% during the same period. Thegrowth drivers are expected to be the public sector,the distribution and agriculture.Inflation will remain high and will continue to putpressure on production costs. Moreover persistenceof input supply issues, power cuts and lack of foreigncurrency would continue to plague the sector'sprospects. However, Egyptian authorities shouldcontinue to support the economy throughout severalprojects as the Canal of Suez economic zone as out-lined in the first speech of Prime Minister IsmailSherif.A total of 12 projects have been identified and arescheduled to be implemented in 2016 in differentsectors (electricity. desalination. and mining). In themedium term, the repercussions of the Sharm el-Sheikh conference on investment and the develop-ment of the gas field discovered by ENI should helpincrease the potential growth.

Consolidation of government spending

In 2016, the public deficit will remain high as currentspending as well as investment spending are expectedto grow in order to boost activity. The welfare pro-grammes targeting education and healthcare pre-sented as part of the 2014/2019 five-year developmentstrategy are scheduled to be launched in 2016. Theauthorities are planning to finance this spendingincrease through an increase in mandatory contribu-tions associated with a broadening of the tax base. Areform completing the introduction of VAT should beratified by the new Parliament in 2016. The accumula-tion of public deficit will keep the debt at a record highlevel. The return to political stability and the positivesignals the authorities have sent to the financial mar-kets have made it easier to obtain external borrowing.A euro-denominated bond issue of $1.5 billion waslaunched in April 2015.

The external accounts remain in the red

The current account deficit is likely to persist in 2016because of a fall in tourism revenue that will erodeservice balance surplus. Net transfers have alsodecreased. However, trade balance deficit shouldcontract slightly due to a decrease of imports. Thegreatest improvement should come from higher FDIinflows that increased by 78% from July to December2015.

Facing a shortage of foreign reserves, Egypt allowsits currency to fall. In order to limit the expansion ofblack market, The Egyptian central bank decided inMarch 2016 to devalue the pound by 14%. Despitethis devaluation, difference between the officialexchange rate (8.83 pounds for a dollar) remainsabove the exchange rate on the black market. InJune, Egypt's government approved prison sen-tences for traders selling foreign currency outsidethe official exchange rate. However the central bankrecently observed a slight improvement in its foreigncurrency reserves which have exceeded 17 billion.

General elections marked by consensus

Despite a more peaceful climate overall, the upcom-ing period promises to be challenging for the coun-try. The protests repressed by the police and thearmy but also the trial against several journalists rein-force latent climate of tension. Egypt, which hasbased its foreign policy on the fight against terror-ism, must cope with the growing threat of jihadistson its own territory in the Sinai in particular, wherethe Islamic State claimed responsibility for the attackon the Russian civil aircraft, but also on the Libyanborder where jihadists movements are gatheringstrength as a result of the political vacuum in Libya.

RISKASSESSMENT

COFACE ASSESSMENTS

TRADEEXCHANGES

C

B

Country risk

Business climate

Medium termHIGH RISK

2013 2014 2015 (f) 2016 (f)

GDP growth (%)




Public debt (% GDP)


Population (millions of persons-2014) 86.7(f): forecast Fiscal year from July to July


2.1 2.2 4.1 3.2

6.9 10.0 10.9 9.6

-13.3 -12.9 -11.6 -11.4

-2.2 -0.7 -3.6 -5.3

84.6 85.9 87.6 89.3

15


l Support from the international financial commu-nity, possibility of a debt relief at the end of 2018

lWorld’s leading shipownerl Tourist attractiveness

l Very high public debtl Quality of banks' portfolios very degradedlWeak public institutions. high tax evasionl Limited industrial base, low technologicalcontent of exports (foodstuffs. chemical products. metals. refined oil)

l Social tensions fostered by fiscal austerity and massive unemployment


Turkey Italy Bulgaria CyprusGermany

12%

9%

7%

5% 5%

Germany Russia Italy ChinaIraq

10% 10%

8% 8%

5%


Economic activity is expected to recover inthe second half of 2016

After having been hit again by the recession in 2015,due to uncertainties generated by Syriza's rise topower and the introduction of capital controls, in themiddle of the year, the country should graduallyreturn to growth in the second half of 2016 thanks toincreased confidence generated by the easing oftensions with the international financial community.The expected completion of the first review of theEuropean Stability Mechanism program following theagreement reached in May 25, 2016 by the euro areaand the implementation, in early June, of additionalmeasures, should lead to the resumption of Euro-pean disbursements and pave the way for debt reliefat the end of 2018. Renewed confidence linked tothese latest developments should help lift capitalcontrols and encourage investment recovery. Draw-ings on European loans should, inter alia, allow thegovernment to pay its arrears and thereby re-injectmoney into the economy.The unemployment rate should continue to declineslightly in 2016 due to the reforms of recent yearsand the recovery in economic activity. However, itremains very high (24.4% of the workforce in Q42015).

Major reforms have been passed in May 2016

The third bailout package, following those in 2010 and2012, approved by the Eurogroup in August 2015,involves the provision of 86 billion euros in exchangefor the implementation of significant reforms. TheGreek parliament has approved a number of thesereforms between the summer and the end of 2015,including regulations governing property seizure. InMay 2016, it adopted the controversial pension and taxreforms, as well as new austerity measures (indirect taxincreases and the creation of a new state privatisationfund, an independent public revenue authority and acontingency mechanism designed to cut spending ifthe country fails to meet fiscal targets). This was alsothe case, at the beginning of June 2016, after muchprocrastination, for the additional measures (phasingout of a benefit for pensioners, privatisation of an elec-tric operator, lifting of restrictions on selling nonper-forming loans guaranteed by the state).

Progress have been achieved on budget butpublic debt can be brought down to a sus-tainable path only if it benefit from a substan-tial relief

The more limited than expected decline in activity,the fiscal adjustment effort made in the second halfof 2015 and one-off factors have enabled the countryto achieve a slight primary surplus (excluding interest

payments and the support to the banking sector)last year, exceeding what had been agreed. HoweverBank recapitalisation, completed by year's end, tem-porarily increased the total public deficit to over 7%of GDP. Reforms and measures taken in 2016 shouldgenerate new savings and ensure that the deficit willremain limited to around 3.6% of GDP this year. Withthe resumption of financial assistance, paymentdefault by the government should once again beavoided. Moreover, if commitments under the rescueplan are met, Greece should benefit at the end of2018 from a major debt relief thanks to a reprofilingof the European loans. However, even after restruc-turing, debt dynamics will remain highly sensitive toeconomic and fiscal shocks.

Banking sector is convalescing

Banks experienced a severe crisis marked by a lackof access to international capital markets, depositflights, a long-lasting recession and losses caused bythe forced restructuring of Greek sovereign debt in2012. Banks have been recapitalised and consoli-dated in 2014 and recapitalised again late 2015. How-ever, their profitability and the quality of their assetshave strongly deteriorated (nonperforming loansaccount for nearly 35% of total loans). Moreover, ifthe introduction of capital controls helped stemdeposit withdrawals, these have not replenished. Thesituation in the sector should remain weak in 2016although efforts are undertaken to address the prob-lem of bad loans.

Country's politics continue to be impacted bythe financial and economic crisis

Greece has experienced in recent years a strongpolitical instability (five elections and a referendumin seven years), all governments having been tornbetween donor requirements and the need to pre-vent a social explosion. The current government, ledby the party of the radical left "Syriza", that emergedvictorious from new early legislative elections (Sep-tember 2015), now only has a two-seat majority inParliament and thus remains fragile. Moreover, thecountry has found itself in the front line of themigrant crisis.

RISKASSESSMENT

COFACE ASSESSMENTS

TRADEEXCHANGES

C

A3

Country risk

Business climate

Medium termVERY

HIGH RISK

2013 2014 2015 (f) 2016 (f)

GDP growth (%)




Public debt (% GDP)




-3.2 0.7 -0.2 -0.2

-0.9 -1.4 -1.1 0.0

-13.0 -3.6 -7.2 -3.6

-2.0 -2.1 0.0 -0.2

177.7 180.1 176.9 183.0

GREECE

16

Strengths

Weaknesses

l Trade surplusl Good infrastructures thanks to efficient use of EUfunds

l Diversified economyl Skilled workforcel Inclusion in the European production chainl Good payment behaviour

l Aging population and low participation rate toactive population

l Education and training gapsl Little room for manoeuvre on budget l High external debt and exposure to exchange rate risklWeak banking sectorl Energy dependency: 50% of needs imported, 40%from Russia alone

l Insufficient innovation and R&Dl Drift towards authoritarianism and interventionisml Poor targeting of social policy


Germany Austria Slovakia ItalyRomania

29%

6% 6%5% 5%

Germany Austria China SlovakiaRussia

26%

7% 7%6% 6%


Activity sustained by private consumption

Growth is expected to significantly decrease in 2016.This fall is linked to the expected decline in publicinvestment due to the fact that we are between twocampaigns of European funding. This temporarydecline in EU structural funding will also weigh onprivate investment, although SMEs (a vital compo-nent of the economy) will benefit, for the last year,from the Funding for Growth Scheme, which consistsin making loans worth up to about 2% of GDP avail-able at a maximum interest rate of 2.5%. At the sametime, a new funding for growth scheme (FGS+) willtake over to encourage the banks to lend to SMEs atmarket based rates by offering them various advan-tages, in particular a cut in the tax on their assetsfrom 0.53 to 0.31% and partial management of inter-est rate risk. Household consumption should be themajor contributor to growth. Employment shouldcontinue to grow, thanks, in particular, to increasedhiring under the public employment scheme towhich all the unemployed are required to belong inorder to receive welfare benefits. Agriculture andpublic services are the major employers of this cheapworkforce. Households will benefit from the cut inthe flat income tax rate from 16% to 15%, higher wel-fare benefits and the lowering of VAT on certainproducts (new housing, pork products). Moreover,average wages should continue to increase morerapidly than prices, which should rise moderately.Because of Hungarian industry’s close involvementin the European production chain and of a recoveryin demand, exports should remain dynamic. Sales ofvehicles and automotive parts (5% of GDP) could, inaddition, continue their progression.

Stabilization of public deficit at a moderatelevel, but still high debt

Despite the cost of converting household loans fromthe Swiss franc to the forint (less than 1% of GDP) andincome tax cuts, the public accounts are expected toreport a stable deficit of 2% in 2016. The State is relyingon an increase in VAT income thanks to remote moni-toring of cash registers and intends to privatise a largeportion of the agricultural land it owns. The accumula-tion of previous budget deficits left a significant debtburden (75% of GDP at the end of 2015), but whoseweight should start to ease. A third of the debt (against50% end-2011) is denominated in euros and the shareheld by non-residents fell to 50%, because of incentivesfrom the central bank to commercial banks and house-holds to invest in forint-denominated Treasuries.

Comfortable trade surplus, but foreigninvestors are cautious

The current account surplus is expected to increase in2016, helped by the recovery in Europe and still mod-erate energy bill. Thanks to vehicles and automotiveparts, household electronics, household appliances,agrifood, medicines, medical devices, services to busi-nesses and households (medical services, tourism),trade in goods and services has been reportingincreased surpluses since 2009. Together with Euro-pean funding and expatriate remittances, these sur-pluses make it possible to deal with the repatriationof income by foreign investors and investments byHungarian households abroad. New foreign directinvestments are no longer expected to decline andwill post modest growth. The favourite sectors forFDIs, such as automotive, electronics and pharmaceu-ticals have mostly been spared from State interven-tionism. By contrast, telecommunications, energy,banking and media remain under pressure from theState, which has taken steps (taxes, price imposi-tions....) in respect of large companies, generally for-eign, which reduce their profitability and encouragethem to disinvest in favour of public, as well as privateHungarian actors. Meanwhile, the external debt bur-den (excluding debt linked to FDIs) is declining (75%at end 2015 compared with 115% of GDP end 2011),mainly as a result of deleveraging by banks and busi-nesses. The percentage held by the State and the cen-tral bank (58% of the total) is stable.

Prime Minister Viktor Orban maintains hisnationalist and interventionist positioning

Viktor Orban and the Fidesz, a nationalist, centreright party, in partnership with the Christian Demo-cratic People's Party were re-elected to govern inApril 2014. Faced with electoral competition fromJobbik, an extreme right-wing party, which causedhim to lose his two-thirds majority (needed to amendthe constitution) during a by-election, Viktor Orbanstressed his nationalist discourse, in particulartowards refugees. This has maintained tensions withhis European partners, already sharpened by Hun-gary's understanding attitude towards Russia overUkraine and the institutional reforms which havehemmed in the mechanisms of checks and balancesand freedoms. Despite State interventionism and anumber of corruption scandals, the business climateremains satisfactory, worse than in Poland and Slo-vakia, but much better than in Romania and Bulgaria.The overall payment behavior is good.

RISKASSESSMENT

COFACE ASSESSMENTS

TRADEEXCHANGES

A3

A2

Country risk

Business climate

Medium termMODERATE

RISK

2013 2014 2015 (f) 2016 (f)

GDP growth (%)




Public debt (% GDP)




1.9 3.7 3.0 2.0

1.7 0.0 0.0 0.3

-2.5 -2.5 -2.0 -2.0

4.1 4.0 4.4 5.0

77.3 76.9 75.0 74.0

HUNGARY

17


l Advantageous geographic situation in a dynamicregion

l Very high national savings level (around 23% ofGDP)

l 90% of public debt held by local investors

l Difficulties to consolidate public finances andgoes out of deflation

l Reduction of the active population and growingproportion of workers without job security

l Governmental instabilityl Low productivity of small and medium-sizedenterprises


UnitedStates

China SouthKorea

Hong KongEuro-zone

C

19%18%

8%7%

6%

China UnitedStates

Australia SaudiArabia

Euro-zone

1

22%

9%8%

6%6%


Growth would not be able to take off in 2016

Growth remained subdued in 2015, driven by foreigntrade and public consumption.In the first quarter of2016, growth in the economy has been resilient, butthe Abenomics have not given the expected results:the deflation risk persists and the public debt is stillvery high. All in all, growth prospects remain limitedthis year.Although private consumption should sustain activ-ity thanks to a slight upturn in wages (+2.2% after thenegotiations in the spring of 2015, the largestincrease in 17 years) and the emergency planannounced in November which provides minimumwage increase of 3% and stimulus measures (exten-sion of access to unemployment insurance, aid topensioners). Nevertheless, the dynamics shouldremain subdued, as evidenced the Prime Minister’sdecision to postpone, for the second time, the hikein VAT rate from 8% to 10%, to October 2019 (initiallyscheduled for October 2015 then April 2017). Theunemployment rate should stay low around 3%,wage growth could still be held back by companies’tendency to not redistribute their profits to a suffi-cient extent, as well as the rigid structure of theJapanese labour market (low mobility and pro-nounced duality). Private investment is not expectedto pick up significantly in 2016, dampened by com-panies’ wait-and-see behaviour given the uncertain-ties weighing on the global recovery as well as thepressure on the yen’s appreciation. However it islikely to be stimulated by the tax cuts, the goodfinancial conditions and the progress in terms of gov-ernance. Inflation would struggle to remain positive in 2016,despite oil price is no longer falling (the drop in theprice curbed the rise in inflation in 2015, but inflationexcluding food and energy is struggling to stay inpositive territory) It will in all likelihood stay far belowthe central bank’s 2% target. A Chinese hard landing and a failure of wages torebound are the main downward risks to growth.Beyond the current asset purchase programme (JPY80,000 billion per year), the central bank introduceda negative interest rate at 0.1%, in January 2016.Nonetheless, even if a new drop cannot be ruled outthis year, the positive impact of this monetary easingwould be moderate given the massive liquidity thathas already been provided.

Consolidating public finances remains a crucial challenge

The fiscal deficit will probably stabilise at a high level in2016. The increase in welfare spending (healthcare)weighs heavily on the State budget while revenues areinsufficient. However the government has decided topostpone the new rise of the VAT rate to 2019 and tocontinue the corporate tax reform (tax cut and broad-

ening of the tax base). Following the earthquake inKyushu, in April 2016, 780 billion of yen would beadded to the budget to help with the rebuilding(though the government reports a neutral budgetarycost with compensation via debt service reduction)Furthermore, a stimulus plan is scheduled and couldamount between JPY 5,000 billion to JPY 10,000 bil-lion. Fiscal consolidation remains a key challenge forthe country, and although the government reassertedits determination to reach a primary surplus by 2020,greater efforts will be required to reach this objective. The current-account surplus should be maintained in2016 owing to a trade deficit, still limited, by thereduced energy bill. Nevertheless the exports could beaffected by the appreciation of the yen against the dol-lar at the beginning of the year. Related in particularwith this appreciation, Toyota anticipates a 35% netprofit fall, for the fiscal year 2016/2017. The services bal-ance should improve under the effect of an increase intourism (because of the easing of rules on grantingvisas in Asia), with FDI remaining stable on the whole.

Shinzo Abe was re-elected, but his popularityis declining

In September 2015, Shinzo Abe was re-appointed ashead of the LDP (the Liberal Democratic Party cur-rently in power). The opposition’ role remains weak.Senate elections are scheduled for July 2016. In theevent of a victory, Shinzo Abe could remain in poweruntil 2018. Nevertheless, the lack of results of Abe-nomics and the earthquake in Kyushu could onceagain reduce his popularity rating. In July 2016, halfthe seats in the House of Councillors will be renewed.This vote will therefore represent a test for the rulingparty.Concerning the business environment, the authori-ties announced a simplification of procedures toencourage SMEs to invest in the emergency plan inNovember. Moreover, an agreement in principle wasconcluded in October 2015, concerning the Trans-Pacific Partnership for free trade (12 countriesinvolved). The challenge is to harmonise standardsby reducing customs tariffs and to counterbalanceChina’s growing influence.

RISKASSESSMENT

COFACE ASSESSMENTS

TRADEEXCHANGES

A2

A1

Country risk

Business climate

Medium termVERY

HIGH RISK

2013 2014 2015 (f) 2016 (f)

GDP growth (%)




Public debt (% GDP)




1.4 -0.1 0.6 0.5

0.4 2.7 0.8 0.2

-8.5 -6.2 -5.2 -5.2

0.8 0.5 3.3 3.0

244.5 249.1 248.1 249.3

JAPAN

18


l Favourable geographic location: long coastline,closeness to South African market

l Considerable mineral (coal), agricultural andhydroelectric potential

l Major gas reserves discovered off-shore (2010)

l Limited diversification; dependence on rawmaterial prices (aluminium, coal)

l Poor transport and port infrastructure seriouslylimiting its ability to export its raw materials

l High dependence on international aid and theSouth African economy

l Poor governance


China Euro-zone

India UnitedKingdom

SouthAfrica

29%27%

20%

6%

2%

SouthAfrica

China Euro-zone

UnitedStates

India

27%

17% 17%

3%

9%


Significant decline in growth expected in 2016

Growth is expected to lower in 2016. The agriculturalsector would suffer particularly from dry weathertriggered by the climatic phenomenon El Niño.Industrial activity, most notably coal production, mayfeel the benefits of the new rail line linking the minesin the centre of the country with the port of Nacala,commissioned in mid-2015. But the recent disclosureof a huge amount of debt concealed by the govern-ment to multilateral institutions, will severely impactdirect investments and financial flows. Expectedreduction in public capital spending would weigh onthe construction sector, traditionally a strong one inthe Mozambican economy. Furthermore, the weakexternal demand and low price of the leading com-modities exported by Mozambique (aluminium andcoal) would limit export contribution to growth.Finally, consumer demand may be held back by surg-ing inflation, fuelled by the impact of drought onfood prices, hike in some public tariffs (specificallyelectricity) and the effects of the depreciation of themetical.

A worsening of public finances and currentaccount deficit difficult to avoid

Since the major deterioration in the budget balancerecorded in 2014, the government has implementedbudget consolidation measures, especially in theframework of the agreement reached with the IMF inOctober 2015. The outcome of the scandal linked to anundisclosed debt may undermine these efforts as maindonors (IMF, World Bank among others) have sus-pended their financial support, whereas grants accountfor about 10 % of budget revenues. Nevertheless, thedeterioration of the fiscal balance may be limited bymeasures aimed at extending the tax base and improv-ing tax collection. The level of public debt (mainly external debt) hasincreased drastically and conditions of loans, less andless concessional, make the debt repayment burdenheavier. The depreciation of the metical against dollaris increasing State debt, more than 80% denominatedin foreign currencies. Finally, the government has todeal with its obligations arising from sovereign guaran-tees granted on the debts of major public companies.

Then, the debt relating to the USD 850 MN bond issuedby EMATUM, a state-owned fishing company, has beenexchanged against state bonds and the additional USD1.4 bn guaranteed obligations is now included in officialdebt statistics. Risk on public debt distress is now high.The structural current account deficit, linked with thecountry’s huge need for imports of capital goods andservices for the construction of its infrastructures (gas,transport) will not be eliminated in 2016. Exports ofmining product are not going to increase given theweak growth in external demand and the still low com-modity prices. Capital inflows will dwindle due to theloss of investor’s confidence in the ability of the countryto deal with its substantial indebtedness.Then, the downward pressures on the metical are likelyto continue and the depreciation against the dollar in2016 may be as high as in 2015 (30 %) while foreignexchange reserves have declined to barely USD 2 bn(around 2 months of import).

A continuing fragile political situation and weaknesses in governance

Frelimo has led the country since independence(1975). Its representative, Filipe Nyussi, has beenPresident since January 2015, after he won the elec-tions in October 2014. Tensions with Renamo, theleading opposition party which fought against Fre-limo during the civil war, are mounting. The social sit-uation is also unsettled as a result of growingdiscontent among the population with the slow paceof progress in terms of the fight against poverty andreducing unemployment, alongside continuing polit-ical uncertainties that are off-putting for foreigninvestors.The business climate in Mozambique remains diffi-cult. Its performances as measured by the WorldBank’s governance indicators are generally belowthose of its neighbours (with the exception of Zim-babwe). The country has dropped down the classifi-cations, most notably for its control of corruption(151st out of 215 countries in 2014 compared with 124th

in 2010), rule of law (164th compared with 129th) andabove all political stability (down 49 places since2010 to 141st place in 2014).

RISKASSESSMENT

COFACE ASSESSMENTS

TRADEEXCHANGES

D

C

Country risk

Business climate

Medium termVERY

HIGH RISK

2013 2014 2015 (f) 2016 (f)

GDP growth (%)




Public debt (% GDP)



GDP per capita (US dollars-2014) 630

7.4 7.4 6.3 3.0

4.2 2.3 3.5 15.0

-8.1 -15.4 -11.0 -13.8

-40.0 -34.7 -41.0 -45.3

52.2 57.5 75.0 90.0

MOZAMBIQUE

19

PHILIPPINES


l Economy reputed for its electronic industry(more than 40% of exports).

l The proportion of the country’s exports to otheremerging Asian economies is constantly growing.

l Household consumption and external accountsare benefiting from expatriate’s workers remit-tances.

l Thriving business process outsourcing (BPO) sector

l Low level of investment, particularly in infra-structure.

l Governance shortcomings l Inequalities and strong demographic growth are impacting economic performances


Japan UnitedStates

Euro-zone

Honk KongChina

23%

14%13%

9% 9%

China Euro-zone

Japan SouthKorea

UnitedStates

15%

10%9%

8%8%


Growth should remain strong

The economy, in 2016, should remain vigorous withhousehold consumption still the main driving force(70% of GDP). This will continue to benefit from sub-stantial remittances from abroad, the rapid expan-sion of credit. Besides, the low level of energy priceshelps to sustain purchasing power. Inflation, despitea slight upturn, should remain reasonable and withinthe central bank target range (2%-4%). Although China is the 3rd largest buyer of Philippineexports, the country is likely to be relatively unaf-fected by the slowing Chinese economy. Exports ofelectronic goods should remain strong, benefitingfrom booming smartphone sales. The businessprocess outsourcing (BPO) sector, which represents25% of exports, should also remain dynamic. In addition, despite the government experiencingproblems in budgetary execution and with publicspending below the forecasts for 2015, these are setto pick-up this year. Indeed, public spending hasbeen strong during the first quarter because of the Presidential election in May. The Public PrivatePartnership programme initiated by PresidentAquino is also starting to bear fruit and should helpboost infrastructure improvements. Investors never-theless remain cautious as Rodrigo Duterte, who waselected in May and is due to take office on June 30,is very controversial. However he should continue thepolicy implemented by his predecessor and maywork with members of his team. Finally, the countrywill still be suffering from infrastructure inadequacies,in particular for electricity. The construction sectorshould therefore see rapid growth.

The financial situation of the countryremains very sound

The macroeconomic fundamentals of the Philippineeconomy have improved significantly over recentyears. Although the budget balance is likely to deteri-orate in 2016, following increased spending for thereconstruction and development of infrastructures aswell as tax exemptions allocated to certain sectors.However, the public debt should continue to shrink ifthe measures decided by the elected President are inline with those from his predecessor.In terms of its external accounts, the Philippines shouldmaintain its current account surplus in 2016. Remit-tances from its expatriates (accounting for more than7% of GDP in 2015) have proven particularly resilientduring the crisis and this trend should continue. Nevertheless, the trade balance should worsen due tothe rapid rise in imports stimulated both by householdconsumption and the input needs for industry. Exportsof services (particularly the outsourcing of companyservices) have experienced an upward trend over thepast few years. In this context, its currency reservesshould remain at a very comfortable level (more than10 months of imports in 2016).

A new controversial president will lead the country

The Constitution from the Philippines does not allowa second term of office thus B. Aquino, elected in2010, couldn’t stand for reelection during the May2016’s presidential campaign. As expected accordingto surveys, Rodrigo Duterte won and will take officeon June 30. He has been a very controversial candi-date because of his violent declarations during thecampaign and because of the explosion of extraju-dicial killings during his terms as the mayor of Davao.He has promised to tackle criminality. Despite strongeconomic performance during Aquino’s term, Fil-ipinos have chosen an anti-establishment candidate.Indeed growth has not been inclusive enough andpoverty is still high in the country. He knows littleabout foreign policy and has no economic policy.Thus he should follow advises from skilled counsel-lors. He will push to rewrite Constitution and changefor a federal system of government. He also declaredthat policies in force in Davao will be implementednationwide (including a late-night drinking ban anda curfew for unescorted minors).Besides, tensions remain high in the territorial dis-pute between the Philippines and China. This dis-agreement is scheduled for consideration by aninternational Tribunal. Furthermore, a peace agree-ment was negotiated, in October 2012, with thearmed rebel group which has claimed the creation ofan independent Islamic State on the Island of Min-danao for the last 40 years. This was subsequentlyconfirmed in August 2014 with an agreement on theframework law about autonomy for this region. How-ever, this agreement has not been confirmed by theCongress so far. Finally, in spite of ambitious targets to improve gov-ernance set by President Aquino, the country stillsuffers from major shortcomings concerning corrup-tion (the country is ranked at 126th out of 215 by theWorld Bank). Shortcomings also persist concerningrespect for the rule of law and the quality of regula-tions.

RISKASSESSMENT

COFACE ASSESSMENTS

TRADEEXCHANGES

A4

B

Country risk

Business climate

Medium termMODERATE

RISK

2013 2014 2015 (f) 2016 (f)

GDP growth (%)




Public debt (% GDP)




7.1 6.1 5.8 6.0

2.9 4.2 1.4 2.0

0.2 0.9 0.0 -0.6

4.2 3.8 2.9 2.5

39.2 36.4 37.1 35.7

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