Global Trade What’s cooking? - Euler Hermes · Global Trade: What’s cooking? ... the Chemical industry 13 Recipe #2: ... which combines weak trade growth and anemic price pres-sures

Economic Outlook no.1215

Special Report www.eulerhermes.us

Global Trade:What’s cooking?Introducing twelve countries’ recipesfor boosting exports

Economic Research

Economic Outlook no. 1215 | Special Report Euler Hermes

2

Economic ResearchEuler Hermes Group

Economic Outlookno. 1215Special Report

Contents

The Economic Outlook is a monthly publication released by the Economic Research Department of Euler Hermes Group. This publication is for the clients of Euler Hermes Group and available on subscription for other businesses and organizations. Reproduction is authorized, so long as mention of source is made. Contact the Economic Research Department.Publication Director and Chief Eco-nomist: Ludovic Subran Macroeconomic Research and Country Risk: David Semmens (Head), Frédéric Andrès, Andrew Atkinson, Ana Boata, Mahamoud Islam, Dan North, Daniela Ordóñez, Manfred Stamer (Country Econ-omists),Sector and Insolvency Research: Maxime Lemerle (Head), Farah Allouche, Yann Lacroix, Marc Livinec, Didier Moizo (Sector Advisors)Support: Lætitia Giordanella (Office Man-ager), Matthew Anderson, Lukas Boeck-elmann, Irène Herlea, Arthur Stalla-Bour dillon, Sergey Zuev (Research Assistants) Editor: Martine Benhadj Graphic Design: Claire Mabille Photo credit: Allianz, ThinkstockFor further information, contact the Economic Research Department of Euler Hermes Group at 1, place des Saisons 92048 Paris La Défense Cedex– Tel.: +33 (0) 1 84 11 50 46 – e-mail:[email protected] > EulerHermes Group is a limited companywith a Directoire and SupervisoryBoard, with a capital of EUR 14 509 497,RCS Paris B 388 236 853 Photoengraving: Talesca Imprimeur deTalents – Permit February-March 2015;issn 1 162–2 881 ◾ March 03, 2015

3 EDITORIAL

4 OVERVIEW

12 Recipe #1: Harnessing what nature gave you The case of the United States strengtheningthe Chemical industry

13 Recipe #2: Aiming at an all-inclusive service packageThe case of the UK exporting Machinery and Equipment

14 Recipe #3: Specializing on what people will always need The case of France exporting Pharmaceuticalgoods

15 Recipe #4: Banking on quality andreputation The case of Germany’s resourceful Chemical industry

16 Recipe #5: Decelerating wages, accelerating exportsThe case of Spain strengthening the Automotive sector

17 Recipe #6: Creating global desire The case of Italy and its fashion-focused textile genius

18 Recipe #7: Becoming the factorycountry The case of Poland supplying Automotivecomponents to Western Europe

19 Recipe #8: Paving the road to frontiermarkets

The case of Turkey exporting agro-food products to high-risk countries

20 Recipe #9: Investing in infrastructure, hard and soft The case of United Arab Emirates stretchingits plastics exports

21 Recipe #10: Getting support from the highest level The case of China ruling the Household Electronic Equipment arena

22 Recipe #11: Betting on innovation The case of Taiwan enhancing the Semicon-ductors industry

23 Recipe #12: Multiplying Free Trade Agreements The case of Singapore bridging the Electronic Equipment divide

24 OUR PUBLICATIONS

26 SUBSIDIARIES

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Euler Hermes Economic Outlook no. 1215 | Special Report

EDITORIAL

Appetite comes with eating

LUDOVIC SUBRAN

Like a cyclist against the wind, global trade has been fighting an uphill battle. Yes, the outlook does look better overall and trade-gnation sounds like old news, but competition is fierce. Trade is like a marathon; there are front runners and laggards, hungry competitors, those who burn out and those who fade away. Will eager nations catch up? Will outsiders once again change the rules of the game? To answer these questions, we opened the lid and looked at what's cookin’ in the global trade pan. If you want to win the race, you need to train hard, eat well, use good ingredients and avoid saturated fats and fish bones. Like a good life coach, we went around shopping for new restaurants for you; we also selected those with an appetite for tomorrow’s trade pie – so that you could not say you did not know. In addition, we identified twelve recipes for success from countries around the world. It is true that protectionism, financing risks and deflationary trends will continue to be a set menu for those who venture themselves in conquering the world. However, we are confident that you can choose your à la carte strategy- but what’s on offer?For new trade routes, our fifteen delicacies are those coun-tries where you want to increase your exports. Solid reputa-tion makes a big difference once they have unleashed do-mestic demand. As for new export players, the gluttons and

the hungry are stepping up their game. They actively use trade policies and tools. They were a good source of inspira-tion to come up with twelve methods for an export boost. Creating global desire like Italy, multiplying partnerships like Singapore or investing in soft and hard infrastructure like the UAE are as many of the success stories we wanted to tell you over dinner. Exporting is easier said than done: finding new clients, adapting to their needs, fighting red tape and language barriers are important challenges for small and medium enterprises. The risk often seems higher than the reward but preparation does make the difference. For pol-icy-makers, the task is not easy: they can offer their support but they cannot do it for you. Additionally in times of diet, they often focus on reducing imports rather than raising exports value. In the end, if there is one crucial message for those out there who do not know yet if they should try their luck: Exporting goods is importing innovation. By going after new untapped customers out there, you will evolve your products to add quality and service. You just have to take a first bite, and yes you may find it is too spicy once in a while (for us it often means not getting paid!) but once you've finished your plate you may end up eating your competitors'.

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OVERVIEW

Global trade: What’s cooking?Introducing twelve countries’ recipes for boosting exports

Globally, the economy is in trade-gnation an unfortunate statewhich combines weak tradegrowth and anemic price pres-sures. This has been brought aboutas a knock-on-effect from the stag-nation in economic growth seensince the Great Recession. Thismatters greatly for corporate rev-enues, but also as an indicator ofthe remaining excess capacity thatexists globally. 2015 and 2016should bring better news, withsome countries and companiescontinuing to benefit from globaltrade while others looking increas-ingly isolated. Who will win andwho will lose? How will traderoutes evolve? What lies ahead interms of risks and opportunities?Dinner is served!

How fast is the pie growing?

Structurally slower activity and lower or negativetrade price inflation means that in nominalterms we look for trade growth in the mediumterm, 3-5 years, at around half the +12% seenbetween 2001 and 2008. However, the currentsituation is more anemic, with nominal inter-national trade growth dire compared to prior

levels, at a mere +1.9% in 2014 and forecast togrow by +1.8% and +4.5% in 2015 and 2016,respectively. Similarly, in real terms, world trade(goods and services) increased by an annual av-erage of around +6% between 2001 and 2008.It grew by +3.3% in 2014 and is forecast to in-crease by +4.0% in 2015 and 4.5% in 2016. Toput this in context, between 2012 and 2014 neg-ative price pressure resulted in a loss in nominaltrade of USD826 bn or 4% of the USD23,590 bnworth of nominal trade that Euler Hermes esti-mates for 2014. However, greater negative pricepressure seen in 2015, primarily due to limitedgrowth in demand, lower energy prices and ex-cess capacity will result in USD560 bn worth ofdrag on nominal trade. There are three key factors driving this globaltrade-gnation. Firstly, global austerity has de-creased public spending, historically a significantcomponent of growth globally and particularlyduring times of weak demand. Secondly, theamount of exports and imports has declinedwhich, given the inter-related nature of globalexports, has a significant multiplier effect on thesupply-chain and overall activity. These second

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

Value

Deflator

Volume

1615141312

forecasts

World trade growthVolume and value

Sources: CHELEM, Euler Hermes forecasts

Nominal trade to grow by

+1.8% in 2015

and +4.5%

in 2016

5


▶

round effects impact by lowering global growthfurther and subsequently weaken trade, whichweakens growth and so on. Thirdly and finally,private consumption and investment, the mainengines of present growth and future growthpotential, respectively, are seeing tepid growthat best. This lack of private demand is explainedby limited improvement in household’s funda-mentals in advanced economies (high unem-ployment rate in core Eurozone countries; weakwage increases both real and nominal in Japan)and elevated saving rates in key emerging mar-kets such as China; ongoing financing con-straints in large emerging markets such as Braziland Indonesia; and difficult political environ-ment in the Russian sphere. Ultimately, globaltrade is not driving global GDP anymore; it ismerely accompanying it, increasing the needfor countries to focus on boosting their own do-mestic demand with a greater internal focus,while at the same time boosting exports. Themathematical impossibility of everyone increas-ing exports and raising imports, without the col-onization of Mars, unfortunately remains cer-tain.

Nutritious imports: Whereto export in 2015-16?Despite growth at a slower pace, the worldwideappetite for imports continues its trend up-wards. In terms of where demand will be com-ing from, you have the usual suspects and somesurprises. Size does matter. Even if some of thebig importers want to diet, it is still the traditionalbig spenders who will continue to drive importgains. The U.S. will be the hungriest world market in2015-2016 with +USD210 bn cumulated addi-tional imports. The gradual normalization of theFed’s monetary policy will help to maintain astrong USD against main other currencies, sup-porting U.S. importers’ purchasing power. Chinashould follow closely, with +USD200 bn ex-pected additional imports over 2015-2016, de-spite the slight slowdown in real import growthdue to the ongoing economic model transfor-mation. Import gains will be driven by demand-support-ive policies in Germany (i.e. establishment of aminimum wage), and loose monetary policies

Imports generated by the 10biggest importers will

account for over

60% oftotal

cumulated nominal importgains in 2015-2016.

6


in Japan, South Korea and the United Kingdomthat encourage household consumption and in-vestment. British imports will also rise due toGBP’s appreciation against the EUR. In India, therecovery of domestic demand (after two gloomyyears) will be the main supporter of imports,while Hong Kong will continue to benefit fromits position of regional trade hub. As Mexico isconsolidating its leadership as the largest LatinAmerican exporter, its imports will be stimulatedby export-oriented industrial sectors, as the con-tent of exports in imported goods is strong. Fi-nally, France, which is still coping with compet-itiveness issues, will retain their penchant forimported goods in 2015-16.While the behemoths of global imports con-tinue to hold the largest appetites, dynamic andgrowing countries are also ravenous. Indeed,

when looking where the demand will comefrom, it is also necessary to look at the growthpace of imports, and not only the amounts. Themost profitable countries to enter into a longterm business relationship with are not onlythose entering a growth spurt, but ones thatbenefit also from strong fundamentals andsound business environment. The selectionprocess remains critical. We established a ty-pology of countries based on real importsgrowth over 2015-2016 (how hungry they are)and our in-house country risk methodology(how healthy they are). We found nine differentgroups from The Carbs to the Spicy ones to EulerHermes’ Fifteen Delicacies.Among this promising group – real importgrowth above global average and low countryrisk – we find both large and small countries.

The Carbs The Good Calories The 15 Delicacies

CanadaChile

AustriaNorway

SwitzerlandSaudi Arabia

AustraliaNew Zealand

United StatesPeru

BelgiumDenmark

FranceGermany

IrelandNetherlands

PortugalSpain

United KingdomIsrael

MoroccoJapan

Singapore

ColombiaMexico

UruguayEstoniaLatvia

PolandSlovakia

United Arab EmiratesSouth Africa

ChinaHong Kong

IndiaMalaysia

South KoreaTaiwan

With Moderation Set Menu Sweet & Sour

ParaguayCyprusFinland

ItalyCameroon

EcuadorBulgariaHungary

TurkeyTunisia

ThailandTurkey

BrazilCzech Republic

LithuaniaRomania

KenyaIndonesia

PhilippinesVietnam

Junk Food Heartburn Risk Spicy

ArgentinaVenezuela

RussiaUkraine

CroatiaSloveniaGabonNigeriaAlgeria

GreeceIcelandEgypt

BangladeshPakistanSri Lanka

< 3% 3% — 4.5% > 4.5%

Importer cluster by risk and growth in demand

Real imports growth over 2015-2016 (yearly average, %)

Source: Euler Hermes

20162015Hong Kong

South Korea

France

Mexico

United Kingdom

Japan

India

Germany

China

United States

201

210

66

63

60

51

40

37

32

30

Top 10 importersAdditional imports, in USD bn

Source: Euler Hermes forecasts

▶

High

er ri

skLo

wer

risk

Eule

r Her

mes

adap

ted

coun

try r

isk ca

tego

ries

7


China, India, and to a lesser extent Mexico andSouth Korea, not only benefit from their marketsize but will deliver strong import increases over2015-2016. Among smaller importers, Colom-bia, Taiwan, Malaysia, South Africa, the UAE andseveral Eastern European countries promise todemand more space at the table in the comingtwo years.

Exporting à la carte: Movingup the value chain is Asia’snext course

Cutting costs vs. raising quality is the wrong dilemma. When prices decrease, companies usually have used a mix of both options to ensure stable profits. The first one is to decrease production costs. The second one is

to improve product quality, creating a more differentiated product and giving more pricing power. The latter strategy is more expensive, takes time to bear fruit but is more powerful as it allows companies to be less sensitive to external shocks, as it enhances productivity and future profitability. At a country level, mechanisms are more complex as the focus is on economic development (and not about increasing profitability) but the reasoning can be similar. Countries at an early stage of development can afford a low cost strategy for the first phase of their expansion. This is particularly true for those following an export-led growth model. That was the case of China which has benefitted from a strong rise in ex-ports in the 2000’s thanks to the favorable com-bination of limited wage growth and an under-valued exchange rate. Now the baton has been passed to Vietnam, Cambodia and Bangladesh which are seeing strong development in their manufacturing sector. However, when economies catch up, unit labor costs tend to rise due to wage increases, price competitive-ness deteriorates and finding other ways to keep growth on a firm pace becomes important. Up-grading product quality is the most reliable long-term strategy to follow. This can be done through efforts in innovation (the U.S., Taiwan, Japan and Germany), branding and high stan-dards production (France, Italy), but also thanks to an upgrade of the production process (China, Malaysia).

From 2009 to 2012, Chinaincreased its market share ofhigh technology products by

4pps

United StatesBelgium

The NetherlandsIreland

United KingdomGermany

FranceJapan

CanadaHungary

South KoreaSweden

ThailandItaly

PhilippinesMexico

SwitzerlandMalaysia

SingaporeTaiwan

China 4.0%0.5%

0.4%0.2%

0.1%0.1%

0%-0.1%-0.1%

-0.2%-0.3%-0.3%-0.3%-0.3%

-0.4%-0.5%

-0.7%-0.7%-0.7%

-0.9%

-0.6%

Change in market share* of high technologyproductsFrom 2009 to 2012

*share in global exportsSources: CHELEM, Euler Hermes ▶

8


The fierce price competition for lower-value products has pushed emerging markets away from raw (primary) products exports to more sophisticated exports (intermediate, equipment or consumption goods) bringing more value added. In Latin America, Mexico continues to diversify its exports structure relying on inter-mediate goods (vehicle components) and equipment goods (commercial vehicles). In Emerging Europe, Poland and Turkey are be-coming the workshop of Europe. Asia is the re-gion the most involved in this value-added war with strong key players exporting intermediate and equipment goods especially: China, The Tigers (Singapore, Hong Kong, Taiwan, and South Korea) and The Cubs (Malaysia, Philip-pines, Vietnam). Against this background, global trade is set to be more segmented with emerging countries being more involved in global trade and ad-vanced economies implementing new strategies aimed at preserving their market share. Emerg-ing Asia will likely be at the forefront of the elec-tronics industry, combining manufacturing cen-ters (China, Vietnam) and High Tech ones (Taiwan, South Korea, Japan and Singapore). Mexico and Poland are also likely to join the game benefitting from knowledge and capital transfer in the automotive markets, from their core outlets (the U.S. and the EU respectively). This fierce competition requires countries to show strong export-oriented strategies. In the report, we look at twelve export recipes that have worked for countries around the world from Turkey to Singapore to the UAE, as demon-strated in their key industries. Using part or all of them can be a game-changer for companies located in these countries.

Who will be the cooks in theexport kitchen? In 2015, Asia will likely be the main export win-ner totaling USD221 bn exports gains. WesternEurope (+USD134 bn) and North America arecoming just after (+USD78 bn). Eastern Euro-pean countries, Middle East and Africa are thelosers (-USD102 bn) affected by falling com-modity prices and unfavorable currency devel-opment against USD.The majority of goods exports gains will berecorded in China, the United States, Germany,Japan and South Korea as these countries con-tinue to benefit from strong pricing power andfrom their size as major suppliers. Large trade(Hong Kong, Singapore), innovation (Taiwan)and production (Mexico) hubs are also in ourtop 10 countries when it comes to export gains. If we take the top 50, it is important to separatethose with size (export gains in value over 2015and 2016; cut-off at USD20 bn) from those withpace (under- or over-performing in real exportgrowth compared to world average in 2015-16:4.25% per year). We therefore defined an ex-porters’ typology with four groups: The Gluttons(high gains and high growth in exports), theGourmets (high gains due to their size butslower pace of export growth), the Hungry (lowgains but catching up), and the Dieting (lowgains, low growth).In the Gluttons category, on top of the usual sus-pects, we find countries like Vietnam, Canadaand Spain, major players today and tomorrowin world exports.Countries like France, Germany, Italy and theUnited Kingdom are our Gourmets, with risingexports gains in nominal terms due to their size,

but with limited growth in real terms (belowworld average). They are perhaps too limited insectors and destinations (often restricted toneighbors) or too expensive to grow outsidetheir comfort zone.The Hungry are the fast-growing ASEAN countries(Malaysia, Indonesia, and the Philippines), SouthAsian factory countries (Bangladesh) and coun-tries linked to the European value chain - such asRomania (+5.5% and +USD4.7 bn), providingWestern Europe with machinery and equipmentand agrifood products or Morocco. These coun-tries usually do not have gigantic exports marketshares but their exports are catching up fast.South Africa is a good example of a Hungry, with+4.6% of real export growth on average in 2015-16 and +USD3 bn of export gains. The negativeshock in the price of commodities cannot be off-set with a limited manufacturing base and serv-ices that are developing in a limited catchment’sarea (Sub-Saharan Africa). 2016 will be pivotal. Finally, the countries that will underperform (lim-ited exports gains and growth below average)

TWELVE EXPORT RECIPES YOU CANNOTMISS!

Recipe #1: Harnessing what nature gave youRecipe #2: Aiming at an all-inclusive service package Recipe #3: Specializing on what people will always need Recipe #4: Banking on quality and reputationRecipe #5: Decelerating wages, accelerating exportsRecipe #6: Creating global desire Recipe #7: Becoming the factory countryRecipe #8: Paving the road to frontier marketsRecipe #9: Investing in infrastructure, hard and softRecipe #10: Getting support from the highest levelRecipe #11: Betting on innovationRecipe #12: Multiplying Free Trade Agreements

The value of global vehicle exportsto increase by

USD67 bnin 2015

and USD75 bn

in 2016

▶

▶

9


20162015

Electronic

Electric

Vehicles

Machinery

Non-ferrous

Ferrous

Chemical

Wood Paper

Textile

Agrifood

Energy -40029

7889

4653

3843

126142

3439

2831

106120

6775

4450

109124

World trade gainsUSD bn

Source: Euler Hermes forecasts

Singapore

Taiwan

France

Mexico

Hong Kong

South Korea

Japan

Germany

United States

China

2015 2016

251

162

112

75

71

48

42

40

35

34

Top 10 Export winners USD bn



Real exports growth over 2015 and 2016 (average per year)

Nom

inal

exp

ort g

ains

in 2

015

and

2016

(cum

ulat

ive,

USD

bn)

China (5,8%; 251bn)

Hong Kong

South Korea (5,5%; 71bn)

France

Japan (5,3%; 75bn)

Germany (4,1%; 112bn)

Taiwan

Mexico

Singapore

The Netherlands Switzerland (0,2%; 32bn) India Vietnam

(8,5%; 32bn) Spain

United Kingdom

Belgium

Canada

Thailand Czech Republic

Ireland Turkey Brazil

Austria Bangladesh Israel

Hungary Philippines

U.S. (4,6%; 162bn)

Italy

Poland

Indonesia

Colombia

Portugal Romania Pakistan Slovakia Chile

Denmark Malaysia Morocco

South Africa

United Arab Emirates Sweden

Bulgaria Bolivia Peru Sri Lanka Slovenia Cote d'Ivoire Nigeria 0

10

20

30

40

50

1% 2% 3% 4% 5% 6% 7% 8% 0% 8.5%

Gluttons Gourmets

Dieting Hungry

••• •••

•••

Main global exporters: Exports performance over 2015-2016

10


will mainly be large Latin American countriessuch as Brazil and Chile and European countries(Portugal, Hungary) suffering from falling com-modity prices and lack of competitiveness. Wecall them Dieting. Portugal (+4.2% and +USD5bn) is borderline for us as it is catching up fastand could become Hungry, if it manages to revivethe range of goods it exports and fight back thecannibalistic competitiveness of countries aroundsuch as Spain. Sector-wise, the biggest loser of 2015 will be theenergy sector (-USD400 bn in 2015 alone).Among the winners, we find: (i) the chemicalsector (+USD125 bn in 2015 and +USD145 bnin 2016) benefitting from the recovery of themanufacturing sector and the reduced energycosts; (ii) the electronic sector (+USD233 bn over2015-16) supported notably by rising demandin Asia; and (iii) the machinery sector (+USD227bn) driven by robust demand for capital goods

from industrializing countries and outsourcingfrom advanced economies to low-cost areas.

Set risk menu: Price war tostart, politics for the maincourse and payment fordessertExporting is not risk free. There are three hazards to watch out for in 2015: Prices, Protectionism and Non-payment.

No tip includedThere are two reasons to believe that deflation-ary pressures will continue to affect exportsgrowth. First, the declining trend in major com-modity prices worldwide; second the ongoingprice competition to get new outlets when de-mand and purchasing power are sluggish.

Russia

U.S.

Mexico

Brazil

Turkey

Chile

Germany

Spain

Italy

-6%

-4%

-2%

0%

2%

4%

6%

-6% -4% -2% 0% 2% 4%

Capa

city

gap

Inflation gap

NB: The size of the bubble represents exports to GDPSources: National sources, Euler Hermes

Capacity utilization*, inflation rate* and exports***2014 vs 2000-07 average; **2013, % of GDP

Euler Hermes anticipates that oil prices havebottomed out and will rise gradually going for-ward. With no change in sight for structural de-terminants – weaker Chinese demand, highersupply from shale production and a reluctanceof OPEC to cut quotas – it will be the short-termones (geopolitics and financing) which couldsupport a gradual increase by end of 2016 (fore-cast at USD84/barrel). Oil is not the sole com-modity whose prices are on a downward trend:Food prices have been weakening since 2011(FAO index -12%), hampered by the lower thanrecent trend growth of the major agriculture-based economies (Brazil, China and Russia).Services are not spared from rapidly decliningprices, the hardest blow occurring in the trans-port of goods. Maritime transport rates havealso plummeted in a similar fashion. The BalticDry Index (reference index aggregating pricesfor twenty shipping routes) has reached its low-est level in 30 years amid oversupply (numberof active vessels) and lower (Chinese) demand. Though lower raw material prices result in alower value of end-products – and likely rev-enues, businesses should still realize higher op-erating margins. Depending on their pricingpower, companies may have to incorporatesome or none of these savings into the end saleprice to at least save market share. This is thedeflationary vicious circle, threatening long-termglobal trade growth. This phenomenon is notlimited to the Western world: In Asia, this trendcan be seen in producer prices. In the long-run,intensifying deflationary pressures may have

In Asia, producer prices in main tradehubs have been declining

-2% and -4%over the past months

▶

11


prejudicial consequences in industries’ value-chain (financial difficulties), eventually limiting investments and productivity.The top 25 world food retailers are a prime ex-ample of this very issue, with an average revenue growth of +1.6% in 2010-13, compared with+7.8% in 2007-10. Fierce competition for prices has caused operating margin erosion and weak-ened financial strength. The ultimate risk of such a scenario is consumer prices falling so low it is no longer profitable to sell. Oligopolies and dis-ruptive transformation (e-commerce) add a sys-temic risk in the value-chain. In France, the food distribution sector is for half of it with a handful of gigantic players. Limited pricing power means limited negotiating power for suppliers.

The risks of eating aloneSince the early 1990s, accelerated globalizationand Free Trade Agreements (FTAs) have helpedboost trade. Several new super agreements arebeing negotiated such as the Transatlantic Tradeand Investment Partnership (TTIP) between theEU and the U.S., the Trans Pacific Partnership(TPP) between the two sides of the Pacific Ocean,and the Regional Comprehensive Economic Part-nership (RCEP) between ASEAN and severalneighboring countries including China, India andJapan. These three FTAs alone would coveraround 80% of global GDP, hence it is expectedthat they will be game-changers. According tothe Center for Economic Policy and Research es-timates that the TTIP could increase bilateraltrade between the EU and the U.S. by up toUSD270 annually until 2027 depending on thefinal agreement. The devil lies in the detail. However, despite ongoing negotiations, the gen-eral trend of accelerating globalization was dis-rupted by the 2009 global financial crisis, whichexposed the risks related to interdependence forgoods and financing flows. Moreover, many

emerging markets are now facing a period ofless buoyant growth than before the global crisis.An annual survey on potentially trade-restrictivemeasures by the European Commission detected170 new measures in the period from June 2013to June 2014, reflecting an ongoing uptrend since2008. At first sight, the proliferation of tariff bar-riers remains the most striking phenomenon.For example, Turkey raised its customs duties forfootwear products to 50% in August 2014 whileArgentina extended exemptions from the Mer-cosur agreement in January 2014, resulting inimport duties of up to 35% for products such assparkling wines or molds for metal-injection. A closer look, however, shows that non-tariffbarriers are becoming increasingly importantand can be an effective trade-restrictive policyenvironment. In particular, national standardswith regard to product quality, security, foodsafety or environment protection – althoughsometimes reasonable – are often applied toprotect national producers in domestic markets.For example, Russia restricted the import of cer-tain meat and agricultural products from theEU, based on health considerations, back in Jan-uary 2014 (before the conflict with the Westerupted). Also, standards have become an issuein the TTIP negotiations and may lead to a dilu-tion of benefits. Last, politically-motivated sanc-tions constraining trade have regained popu-larity in recent years – Iran and Russia arewell-known examples – although history hasshown that such measures are usually ineffec-tive in reaching the intended political targets.

Who gets the check? Current trade flows are facilitated by ample liq-uidity of US dollars (USD), by far the preferredcurrency for international transactions - 81% ofall trades involve a USD component. However,the additional liquidity flows have seen signifi-cant downward pressure on trade financing

margins, a usual cash cow for financial institu-tions. Low energy prices are also lubricating global trade by providing an income boost to energy importing countries. But there are risks. First, the U.S. Fed is poised to start increasing interest rates while major Central Banks are moving to more accommodative monetary poli-cies. As a result, the USD has gained +12% in the past six months and the expected increase in interest rates will only make the USD more desirable. This could lead to an increase in de-mand for USD, which could tighten liquidity and drive up financing costs. A reduction in USD liq-uidity could promote the use of alternative cur-rencies for trade such as the Chinese Renminbi (RMB); which became the world’s second most used currency for trade finance in 2013 with a 9% global share (the Euro only represents 6%). In the meantime, currency risks and localized credit crunches could hamper trade recovery. The problem is not limited to trade financing in one or another currency. Payment delays as measured by a rise in days sales outstand-ing (DSO), have worsened worldwide in 2014. As a result, global trade is slowed down. More trading on open account com-pared to payment in advance or other methods could be a welcome boost for global trade, especially to and from regions less integrated globally such as Sub-Saharan Africa. In Europe, Italy is a good example where a credit crunch from traditional loans and short-term financing is in part compensated by longer-than-average DSOs, in spite of a liquid Euro and a sound banking system. In China – also plagued with shadow banking, Brazil, India, and Saudi Arabia for instance, not only payment terms are high, they have increased over the past years to offset limited traditional financing: suppliers are financingpart of the regional trade. ◾

Turkey raised its customs dutiesfor footwear products to

50%in 2014

The USD gained

+12%in the second half of 2014

3,000

3,250

3,500

3,750

4,000

DecNovOctSepAugJulJunMayAprMarFebJan

+11+8+37+37

+47+55

+44+45

+65

+60+57

+124

Number of protectionist measures2014

Sources: Global Trade Alert

0 20 40 60 80 100 120

2014

2013

Italy

Spain

China

Turkey

Brazil

Saudi Arabia

Poland

Belgium

Germany

Russia

United Kingdom

U.S.

The Netherlands

Days Sales Outstanding* (DSO)Number of days

* Listed companiesSources: Bloomberg, Euler Hermes

12


Vehicles

Electronic

Agrifood

Machinery

Chemical 15.2

13.8

9.6

8.7

6.6

2015 Export gains -Top 5 sectorsin USD bn


+USD15 bn of export gains of U.S.

Chemical sector in 2015

OTHER COUNTRIES

▶ UNITED STATES

The U.S. is going to achieve autonomy as anenergy producerA cheaper domestic supply of energy has giventhe U.S. industrial base an undeniable advantagethat has led to increased investment flows andhiring. After the shale gas revolution that startedback in 2009, the U.S. is now taking advantageof its tight oil resources. This boon has resultedin U.S. oil imports falling off nearly -30% sinceits 2007 peak. However, the U.S. is very likely toremain a net importer of crude oil in the shortrun despite the fact that the U.S. exports plentyof other energy abroad in the form of coal andrefined products such as diesel, gasoline andkerosene. That is why we expect the U.S. torecord first export losses of USD5 bn in energyin 2015 before more than making them up forreaping exports gains of USD8 bn in 2016.

Chemical sector to be largest beneficiaryThe underlying strategy of sectors that are heavyusers of energy remains unchanged in the U.S.and is based on the advantages of both cheapgas and oil. The chemical industry is a primarybeneficiary of this situation, recording exportsof USD189 bn in 2013 and more than USD190bn in 2014, accounting for around 12 % of totalU.S. exports. The U.S. is now closer to becomingthe most competitive source of chemical pro-duction in the Americas and may achieve this inthe next decade. Whereas (petro) chemical rawmaterials shared the same costs of production

in Europe and in the U.S. in 2005 except for dif-ferences in their tax policies, that is no longerthe case with falling U.S. gas prices from 2010.Indeed, compounded by falling oil prices, thecosts of chemical production are now aroundfour times cheaper in the U.S. than in Europe.

Rapid growth for chemicals and all manu-facturingThe growing autonomy of U.S. energy supplies has gained more importance as it is a foundation spurring a reindustrialization in the economy. In bulk chemical products, the prices of gas (as an energy source) and refined oil (its major feedstock) account for up to 75% of the global cost. Clearly, low oil and gas prices are currently favorable for the U.S. chemical sector. As a re-sult, for two years, U.S. chemical companies have been able to increase hiring, which has not been the case since 1999. Moreover, ap-proximately USD150 bn has been invested in new chemical capacity, including ethylene-pro-duction plants, which are key for the plastics sector. Out of the 58 mn tons of new ethylene supply planned to be commercialized in the current decade, more than 20% of it is for the domestic market, which accounted for only 2%of supply between 2000 and 2010. Cheap en-ergy costs in the U.S. therefore underpin the chemical industry’s forecast of +USD15 bn in 2015 exports, and an annual average growth of+8 % for exports through 2020.

Recipe#1: Harnessingwhat nature gave you The case of the United Statesstrengthening the Chemical industry

MARC LIVINEC, DAN NORTH

SIMILAR EXPORTSTRATEGIES

▶ BRAZIL

▶ FRANCE

Agrifood

Electronic

Vehicles

Machinery

Chemical 1.6

1.3

0.8

0.7

0.6

2015 Export gains -Top 5 sectorsin GBP bn


13


Service 1: A competitive regulatory frame-workThe government has set a formal goal of dou-bling exports by 2020, to GBP1,000 bn and re-balancing the economy towards higher levels ofinvestment. There is a time-critical opportunityto capitalize on the UK’s existing comparativeadvantages of low product market regulation,highly supportive regulatory and institutional en-vironment for businesses compared with therest of the G20. Labor market flexibility, especiallythe “zero hours contract”, and relatively low man-ufacturing labor costs are further key advantages.

Service 2: Public and financial support The government is also encouraging investmentin creative industries (GBP71 bn) and infrastruc-ture (National Infrastructure Plan, GBP55 bn in2015-16) to reduce regional imbalances. Furtherincentives for companies to (re)locate in the UKare being provided and fiscal incentives - cor-porate tax (20% in April 2015 compared with30% in 2006 and 28% in 2010), the lowest withinthe G20 - are expected to boost long-term in-vestment. Moreover, to help UK exporters, thegovernment has significantly increased supportto businesses: (i) the UK Trade and Investment(UKTI) doubled its support in 2014 (to 40,000businesses); (ii) established the UK Export Fi-nance (UKEF) for cheap financing to exportingcompanies (for as much as GBP50 bn, 10% oftotal exports) and (iii) launched the Funding for

Lending Scheme in 2012 and re-focused it onbusiness lending in 2013, particularly to SMEswhich has ensured relatively stable rates allow-ing a more certain environment for demand togrow in.

Strong link with emerging countries boost-ing machinery exportsThe United Kingdom is a well-diversified econ-omy in terms of export destinations, with astrong anchor in Europe (EU), Asia (India, HongKong especially) and Africa (South Africa) dueto historical links. Against this background, thegovernment has set a public strategy to increaseits exposure to emerging countries: total exportsto emerging markets almost doubled between2006 and 2013 with the share reaching 27% oftotal exports. The largest increases among theEM markets were China (+2pp to 3.3% of totalUK exports), UAE (+1.3pp to 2.8%), Hong-Kong(+1.4pp to 2.6%), Russia (+0.7pp to 1.5%), India(+0.4pp to 1.5%), South Korea (+0.7pp to 1.4%)and Saudi Arabia (+0.5pp to 1.2%). This per-

formance has allowed an improvement in ma-chinery exports. Assuming that these countrieswill continue to show a robust demand for cap-ital goods, we expect additional exports in ma-chinery goods to reach +GBP1.3 bn in 2015,representing 20% of total exports gains.

Recipe#2: Aiming at an all-inclusive service package The case of the United Kingdom exportingMachinery and equipment

ANA BOATA

Machinery export gains to reach

+GBP1.3 bn20% of total gains

in 2015


▶ IRELAND

14


The French pharmaceutical industry: dwin-dling momentum at home? Contrary to the overall industrial sector whereemployment has fallen by more than 20% since2000, the French drugs industry has “only” seenemployment fall -3%. It is also very profitable,with profit margins about twice as high as theoverall manufacturing sector. However, it is fac-ing hurdles in the domestic market, as evi-denced by falling drugs consumption from thepublic sector and households over the past twoyears (-1.3% and -2.4% respectively). Even withthe expected slight rebound of private con-sumption to +1%, the overall consumption back-drop will not improve significantly, especiallyfor drug expenditures, as the French govern-

ment is committed to curtailing its health in-surance scheme deficit thanks to bigger health-care savings. As a result, we estimate pharma-ceutical groups’ revenues should go down -3%for 2014 as a whole in France; and this patternmight continue.

Can the export engine pick up pace again …Given the domestic situation, top drug makers are understandably dedicated to spreading their outlets abroad. SANOFI, the largest French drug maker (and the 5th largest in the world), helps play an active role in the process as its market share is increasing quickly in emerging coun-tries. The sector is usually among the best-per-forming exporting sectors, with around EUR29.6 bn in drugs exports in 2013 and EUR28 bn in 2014 and a large EUR4.6 bn surplus in 2014. 2014 figures were a bit disappointing, primarily on the back of higher imports of expensive Hepatitis C vaccines. Moreover, exports fell -5% in 2014, following +2.5% in 2013 and +4% on average over the past 10 years. Too few

fiscal incentives may explain this as French drug makers pharmaceutical firms face an overall taxation 20% higher than that in Italy and 60% compared with the UK. This is problematic because pharmaceutical firms are committed to spending almost 15 % of their revenues on R&D investment for pipeline renewals. … given that competition from abroad isnot twiddling its thumbsAssuming that French pharma firms willstrengthen their competitiveness by makingR&D investments more efficient, we expect +1.2bn additional export for the sector. In 2014, asignificant EUR800 mn was invested in the 220French pharmaceutical plants. Furthermore, outof a hundred new molecules approved in Europeover the last three years, only ten have beenmanufactured in France. It stems from the dis-appointing results of French biotechnologicalentities, despite SANOFI’s global leadership invaccines and more external growth throughbiotech buyouts.

Recipe#3: Specializing onwhat people will always need The case of France exporting Pharmaceuticalgoods

FRÉDÉRIC ANDRES, MARC LIVINEC


▶ BRAZIL

+EUR1.2 bn Export gains of France

Pharmaceutical productsin 2015

70

75

80

85

90

95

100

105

110

115Employment,Pharmaceutical Industry

Employment,Manufacturing

141312111009080706050403020100

Employment in Manufacturing and Pharmaceutical industryBasis 100=2000

Sources: INSEE, Euler Hermes

15


The German export machineWith export gains of +EUR36 bn in 2015 and+EUR62 bn in 2016, Germany will defend itsrank as the third largest global exporter, despiteheadwinds from geopolitical hotspots and slug-gish growth in the Eurozone, the country’s mainexport destination. Key to Germany’s export suc-cess is a focus on the upper segment ofmedium-high tech industries. The leading sec-tors (machinery, chemicals and vehicles) arelikely to see exports rise by +EUR60 bn in 2015and 2016 (cumulative), the lion’s share of Ger-man export growth. The specialization on aninnovative premium segment, combined witha well-developed export network (in the formof chambers of commerce), positions Germanproducts favorably in terms of gaining marketshare in emerging economies. Moreover, Ger-man goods benefit from competitive labor costs,with these stagnating between 2000 and 2011.However, this competitive edge is erodingslowly; from 2010 to 2014 hourly earnings inmanufacturing increased by 5pps faster in Ger-many than in the U.S. and Japan, the country’smain competitors for high value-added goods,and this trend is expected to continue in 2015.

Trade balance in chemicals remains positiveWith a turnover of EUR143 bn last year, the Ger-man chemical industry ranked fourth in chem-ical production worldwide. Companies havebeen coping with foreign competition, which isbenefiting from cheaper access to energy. Whilelower production costs for chemicals in the U.S.and in Asia may have affected Germany’s exportmarket share to some extent, its chemical sectorstill recorded a trade surplus of EUR53 bn last

year. A key reason for this is its high-end posi-tioning resulting from the quality of its R&D andafter-sales services. Moreover, the sector hastaken advantage of the very strong integrationof its production facilities that enables recyclingof by-products to be profitable instead of beinga source of additional costs. Euler Hermes ex-pects the German chemical sector will gainaround +EUR8 bn in additional exports in 2015,and +EUR11 bn in 2016.

The German chemical sector has to copewith the rising cost of electricityOne concern for Germany’s chemical sector,however, is rising energy costs, largely as a resultof the country’s decision in 2012 to phase outnuclear power prematurely. This governmentdecision increased electricity costs for chemicalcompanies, which are now double those acrossthe Atlantic. It would be unfortunate for Europe’slargest economy if this rising cost gap eventuallycompels some German chemical plants to beoutsourced in the U.S. where almost EUR8 bnhave already been invested in new facilities inthe past three years.

Recipe#4: Banking onquality and reputationThe case of Germany’s resourcefulChemical industry

MARC LIVINEC, LUKAS BOECKELMANN


▶ JAPAN▶ SOUTH KOREA

+USD19 bn Cumulative export gains of

German Chemicals sectorin 2015-2016

0 5 10 15

Other

Asia

Africa & Middle East

Latin America

North America

Europe

Vehicles

Chemical

Machinery

68 % of export gains}}7.4

7.8

9.3

2015 Export gains - Top 3 sectorsby destinationin EUR bn


16


A significant decline in labor costs hasincreased Spain’s export competitiveness Along with greater flexibility in the labor market,unit labor costs have dropped by a full -8% belowpre-crisis levels, bringing the manufacturing in-dustry’s hourly labor costs down toEUR22.7/hour (Eurostat data), compared toEUR36.8/h in France and EUR37.9/h in Germany.The country’s exports reached 32% of GDP in2014 (22% in 2007), accounting for 7% of theEurozone’s total exports, an improvement on6% before the crisis. Further supported by theEUR depreciation, Euler Hermes expects totalSpanish exports will continue this upward trend,rising by +EUR10 bn in 2015 and +EUR17 bn in

2016, more than +EUR3 bn of which will origi-nate from the car industry.

Thanks to sector-wide labor competitive-ness agreements, the Spanish car industryis recovering its dynamismSince the sector is inherently deflationary (dueto price-constrained but ever-improving prod-uct), the attractiveness of production sites is adecisive factor in the allocation of new models.Such allocation to Spanish sites increased be-tween 2013 and 2014, a trend we expect tocontinue, as made evident by the actions ofFrench manufacturers, Ford, GM or VW. Spanishcar output, after reaching its lowest level at the

end of 2012 (1.5 mn private vehicles), has con-tinuously increased, falling just short of 1.9 mnunits in 2014, resulting in more than +25%growth and the creation of 31 700 jobs duringthe year. At the same time, production de-creased in several other European countries(Belgium, Italy and France), resulting in a low+2% growth overall European market.

Heading towards a +15% annual growth ofautomobile exports in 2015 and 2016In addition to a reallocation of models designedfor the European market (the Ford Mondéo andKuga were previously produced in Belgium orGermany and the Opel Moka in South Korea),Spain was chosen to assemble new models (in-cluding the Peugeot 301 and Citroën C Elysée)more suited for extra-European markets. Spain’sexport routes are expanding internationally toMaghreb countries, Turkey and even SouthAfrica in an effort to benefit from greater de-mand growth outside Europe and boost exportvolumes further. As more than 80% of Spanishcar production is exported, this is an effectivestrategy to reduce regional cyclical risks. EulerHermes expects cars will represent 12% of totalSpanish exports in 2016, compared with 8.8%in 2012.

Recipe#5: Deceleratingwages, accelerating exports The case of Spain strengthening theAutomotive sector

DANIELA ORDÓÑEZ, YANN LACROIX


▶ MEXICO▶ PORTUGAL

More than80%

of Spanish car productionis exported

Oceania

Asia

Africa & Middle East

Latin America

North America

Europe

Textile

Machinery

Chemical

Agrifood

Vehicles

1.0

2.0

2.5

2.7

3.2

2015 Export gains -Top 5 sectors by destinationin EUR bn


17


Italian exports, one of the main winners inthe region from a lower EURGDP growth is expected to finally turn positivein 2015 (+0.3% after -0.4% in 2014) as a resultof slowly recovering private consumption andpositive net exports. This trend is expected tostrengthen, pushing expectations for GDPgrowth to nearly triple in 2016 (to +0.8%), yetremain very weak, below +1%. Despite Italianexports continuing to lag behind peer groupperformance on the back of slow competitive-ness adjustments, Italy will be one of the mainwinners from a lower EUR (expected to be 1.12in Q4 2015) given its high exposure outside theeurozone and an export structure that is highlysensitive to price variations. Further, Italy willcontinue to take advantage of its ‘Made-In-Italy’

brand created 35 years ago that allowed SMEsto better position themselves internationally rel-ative to peers. Overall, Italy’s total additional ex-port gains are forecast to reach EUR10 bn in2015 (compared with EUR7 bn in 2014) andEUR15 bn in 2016. However, this remains morethan 30% below the 2006-07 average as signif-icant downside pressures on price persist de-spite rising volumes.

Style: ‘Made-in-Italy’ worn everywhereThe textile industry illustrates the gold standardof a nation’s branding. Italy ranks as the world’sthird largest textile exporter behind China andIndia, with EUR48 bn of exports in 2014. Thesuccess of the myriad of SMEs composing thesector (circa 50,000) originates from applyingthe national branding (and R&D) strategy. His-torically organized in clusters, coexistence ofcomplementary activities deterred innovationinvestments. The strong competition – fromboth inside and out – forced them to go intovalue-added activities, with great export poten-tial. EH forecasts textile exports will increase byEUR1.4 bn in 2015 and EUR2 bn in 2016.

Italy’s textile machinery engineering, onthe cutting-edge of fashionThe government is committed to this position-ing upgrade. A tax-incentive program to pro-mote R&D was launched last year and runs until2016. It aims at promoting ‘Made-in-Italy’awareness, especially in the U.S. The total po-tential value of textile exports in that market isestimated at EUR10 bn. Similarly, textile ma-chinery producers have bypassed gloomy do-mestic demand, instead seizing the dynamicforeign market. Investments in the sector havegrown at an average annual growth rate of+4.6% since 2009. Furthermore, 79% of produc-tion is exported, half to Asia, making Italy the2nd largest European exporter behind Germany.As for textiles, Italy already targets new growthdrivers, specifically the U.S. and Turkey, withsales up +46% and +24%, respectively, as the(historic) Asian market becomes saturated(sales -3% in Q2 2014). Orders were up +6% q/qin Q3 2014 suggesting bright prospects for thesector. EH forecasts total exports of textile ma-chinery to exceed EUR2.5 bn in 2015 and reachEUR2.7 bn in 2016.

Recipe#6: Creating globaldesire The case of Italy and its fashion-focusedTextile genius

FARAH ALLOUCHE, ANA BOATA


▶ FRANCE

Vehicles

Agrifood

Textile

Chemical

Machinery 3.0

1.9

1.4

1.0

0.9

2015 Export gains - Top 5 sectorsin EUR bn


+EUR3.4 bn Cumulative export gains

of Italian Textile sector in 2015-2016

18


Outsourcing has turned automotive suppli-ers into an engine of growth for the Polishcar industryThe automotive industry is an important sectorof the Polish economy, accounting for around10% of the country’s exports. Within this indus-try, the cluster of automotive suppliers has beena particular success story, taking advantage ofPoland’s EU accession in 2004. This boosted ex-ports, dramatically increased links with Germanyand allowed Poland to exploit its main compet-itive advantage compared with Western Europe,i.e. wages. The hourly wage in the manufactur-ing industry, estimated at EUR7.50/hour inPoland against an average of EUR32.50/hour inthe Eurozone, illustrates the cost advantage andpotential for outsourcing. Exports of the auto-motive supplier industry increased by an annualaverage +13% during 2004-13, outpacing carmanufacturers’ exports (+6%) and total Polishexports (+11%), a remarkable performanceagainst the background of a weakening Euro-pean automobile market. Meanwhile, exportsof automotive suppliers account for 43 % of allexports of the automotive sector, up from 33%in 2004.

Strong FDI inflows point to continued outperformance of automotive suppliers...The acceleration of FDI inflows (+USD2.2 bn in2012 vs. +USD730mn on average in 2009-2011) indicates a continuation of buoyant out-put and export growth of the automotive sectorin the coming years. On the one hand, large in-

vestments of car manufacturers such as Volk-swagen (a new factory for the assembly of com-mercial vehicles), FIAT (for the production ofthe replacement of the FIAT Punto, currentlyproduced in Italy) and Opel (for the productionof new engines) will increase activity. On theother hand, automotive suppliers and subcon-tractors associated with these developmentswill also benefit. Numerous international sup-pliers such as Delphi, Eaton, Faurecia, Valéo, Learand Hutchinson operate in Poland. The strategyof outsourcing goes beyond the metallurgicalspecificity as the main global tire manufacturers(Michelin, Goodyear, Dunlop and Bridgestone)have also established branches in Poland, a signof sound industrial development.

... with +8% export growth annually fore-cast for 2015-2016With the recovery in the European automobilemarket, combined with the increase in FDI in-flows and ongoing outsourcing to Poland, EulerHermes expects the exports of automotive sup-pliers will grow by about +8% in both 2015 and2016. This performance will be driven by car-makers in Germany, but also in the Czech Re-public, which is the main production site ofSkoda (a market share-gaining subsidiary ofthe Volkswagen Group), and in Slovakia withits factories of Volkswagen, Kia and Peugeot-Citroen.

Recipe#7: Becomingthe factory country The case of Poland supplyingAutomotive components toWestern Europe

YANN LACROIX, MANFRED STAMER


▶ MOROCCO▶ ROMANIA

41%of automobile suppliersexports go towards Germany

France

Czech Republic

United Kingdom

Italy

Germany 0.56

0.21

0.19

0.12

0.10

83 % of total automotiveexport gains

2015 Automotive Export gains - Top 5 destinationsin USD bn


50

100

150

200

250

Saudi Arabia IraqRussiaGermany -Benchmark

141312111009

Total exportsNominal, 100 =2010

Sources: National sources, IMF, Euler Hermes

19


Benefits from increased focus on frontiermarketsTurkish exports have grown at a faster pace thanglobal exports over the past 10 years (+10.5%compared with +8.5% annual average between2005-2014). Part of the success has beenTurkey’s increased focus on frontier markets, inparticular in the Middle East. While the Euro-zone’s export share fell from 44% in 2000 to27% in 2012, the Middle East increased its sharefrom 9% in 2000 to 28% in 2012. Turkey hastaken the role as regional hub between Europeand MENA, with the benefits but also the costs.Geopolitical risks caused a reversal in the chang-ing trade structure in 2013-2014, reducing theMiddle East’s export share to 22%, while the Eu-rozone edged up to 30%. The share of Iraq,Turkey’s second largest export market, fell from8% in 2013 to 7% in 2014. In 2015-2016, EulerHermes expects Turkish exports will rise byUSD10 bn and the Middle East and Eurozonewill each account for around USD3.5 bn.

Aiming to become a major food exporter by2023Turkey was ranked the 25th largest food ex-porter in 2014, with USD17.5 bn, markedly be-hind the leading exporters, the U.S., Netherlands(including re-exports, worth nearly half of totalDutch exports) and Germany. Nonetheless, thecountry has potential to become a major inter-national player. The food industry accounted for11.8% of GDP in 2014 and food exports grew byan annual average +10.9% in 2009-2014. In

2015-2016, the food sector is expected to recordcumulative export gains of +USD1.3 bn. Turkey’sVision 2023 program (a set of economic targetsto be reached by the 100th anniversary of thefounding of the Republic of Turkey) includesreaching USD40 bn in agricultural exports.

Long-run investment in uncertain marketsThe recent surge in Turkish food exports wasfuelled by neighboring countries, despite re-gional instability. In particular, Turkish food ex-ports to Iraq increased at an average annualrate of +27% in 2009-2013, reaching USD3.5bn in 2013. However, recent events in Iraq re-sulted in an estimated loss for Turkish compa-nies of export trade of USD1 bn in 2014. In theshort term, Turkey has also potential to increaseits market share in Russia, against the back-ground of Russian sanctions on some EU agri-food products. Since 2009, Turkish food exportsto Russia have increased by +10% per year. Butthis trend is unlikely to have continued in 2014as total Turkish exports to Russia fell by -15%.Only certain products, such as meat and fish,

accounted for increased exports to Russia in H22014. Going forward, products such as meat,citrus or dairy foods could benefit if Turkishcompanies comply with the strict Russian foodregulations. Overall, investing in higher risk mar-kets is a long-run strategy with an elevated risk-reward pay-off.

Recipe#8: Paving the roadto frontier marketsThe case of Turkey exporting Agrofoodproducts to high-risk countries

FARAH ALLOUCHE, MANFRED STAMER


▶ CHINA▶ JAPAN

+USD1.3 bn Cumulative export gains

of Turkish Food sector in 2015-2016

20


Slowing, but not alarmingUAE GDP growth slowed in 2014 (+4% from+5% in 2013). We expect a further small decel-eration in 2015 (+3.5%) before a rebound in2016 (+4.5%). Exports will be the main detractorwithin this weak performance since oil pricesare falling, lowering exports (-USD15 bn) in 2015before a gradual recovery starting in 2016(+USD18 bn). In the short run, the country’s re-silience will rely on the performance of invest-ment due (i) to the preparations ahead of host-ing the World Expo 2020 and (ii) a long-termstrategy to enhance the position of the UAE as aglobal trade hub (Dubai is already the thirdlargest re-export center after Hong Kong andSingapore).

Upgrading logistics is keyWith a limited share of exports from the non-oil sector, the authorities elected to exploit theUAE’s strategic location and its role as a gatewayboth to advanced economies and fast-growingemerging markets. Given that 90% of globaltrade is carried by sea, the country has adopteda significant infrastructure program but also re-inforced its regulatory framework (including areduction in the procedures needed to export)

to make the country more attractive for trade.This has translated into good global rankingsfrom various institutions such as the World Eco-nomic Forum (ranked 16 out of 138 economiesin the Enabling Trade Index) and the World Bank(ranked 22 out of 189 in the Doing Businesssurvey and 27 out of 160 in the Logistic Per-formance Index). Accordingly, Dubai has rein-forced its position as a leading sea-air multi-modal transport hub: according to the AirportCouncil International ranking, Dubai is the 5thbusiest Aircargo hub in the world. This strategyis reflected in the weight occupied by the con-struction sector in the UAE, which reached 9.4%of GDP compared with a world average of 6.4%.The value added in the construction industry isestimated at USD39.4 bn in 2014 and is fore-casted to increase to USD44 bn in 2015.

Exports: Focusing on downstream petro-chemical products firstUAE intends to diversify its exports base as it istoo concentrated on raw energy products(roughly 70% exports). In the short run the focusis to move up the value chain and increase ex-ports of oil-derived goods. Products such as plas-tics have seen exports increase by 20% per yearin nominal terms over the past ten years andstill continue to expand. We expect them toslow down in 2015 (+10% y/y, equivalent to+USD500 mn exports gains compared to 2014)reflecting limited world demand in the worldand downward price pressures, before a smallacceleration in 2016 (+13% and +USD700 mn)due to further improvement in external de-mand.

Recipe#9: Investing ininfrastructure, hard and soft The case ofUnited Arab Emiratesstretching its Plastics exports

MAHAMOUD ISLAM, DIDIER MOIZO


▶ THE NETHERLANDS▶ HONG KONG Tokyo

Paris

Frankfurt

Louisville

Anchorage

Dubai

Incheon

Shangai

Menphis

Hong Kong 4,162

4,138

2,929

2,464

2,436

2,421

2,216

2,094

2,069

2,020

Top 10 - World’s busiest airports 2013 Total cargo trafficLoaded and unloaded (thousand of metric tons)

Source: Airports council international

+USD1.2 bn Cumulative export gainsof UAE Plastics products

in 2015-2016

21


Exports will remain supportive of growth in2015, despite significant deflationary pres-suresAs we expected, GDP increased by +7.4% in2014 (after +7.7% in 2013). The intended eco-nomic rebalancing remains on track, with pri-vate consumption being a key engine forgrowth. However, the country still faces ongoingfinancing pressures for companies and thebanking system coupled with the prevailing im-balances in the property market. GDP growth isforecast to moderate to +7.1% in 2015. On thedomestic front, the economy is likely to be sup-ported by targeted and conventional monetarypolicy easing and by gradual improvement inprivate consumption resulting from rising realwages. Exports are likely to be resilient in 2015,with a moderate increase in value (+USD120bn after +USD131 bn in 2014) reflecting defla-tionary pressures.

Promoting exports: From “Made in China”to “Created in China”Government policies will remain supportive ofexport volume growth. In particular, it is likelythat the PBoC will continue to maintain the cur-rency at a comfortable level for exporters(6.25RMB/USD on average in 2015) and fiscalpolicy will remain favorable for fragile exporters(in January, China cut tax for coking coal exportsfrom 10% to 3%). In parallel, policies will continueto support companies that move up the value-added chain. These policies include tax advan-tages for companies upgrading their productionprocesses (announced in 2014) and more taxincentives and rewards for companies develop-ing high value-added products. Speeding up thetransition from products “Made in China” toproducts “Created in China” will help - throughan increase in quality - the economy’s exportsto be less sensitive to price pressures resultingfrom rising labor costs. A good example of thisprocess is the electronic segment related to

household equipment, which has undergonestrong growth in the last 10 years.

Equipping world consumers will be keyOver a ten-year period, Chinese exports in-creased at a faster rate (+17% annual averagefor nominal exports) than world exports (+9%),benefiting from membership of the WTO andemergence as a major manufacturing hub. Thistrend was even more pronounced for consumerelectronic goods and household appliances(+18.8% for China vs. +7.4% for the world).While the share in world exports of these prod-ucts remained stable (4%), Chinese global mar-ket share tripled over the decade, reaching 40%.This “dominance” is particularly true for the te-lephony market but also specific products suchas electric water heaters (China accounts for45% of exports of such products). All in all, weexpect the consumer electronics and householdappliances market will expand by +USD15 bn,at least, in 2015.

Recipe#10: Getting supportfrom the highest level The case of China ruling the Householdelectronic arena



▶ SOUTH KOREA ▶ JAPAN

+USD15 bn Export gains of China Consumer

electronics, and householdappliances in 2015

Electric

Chemical

Machinery

Textile

Electronic 38

21

15

13

13

2015 Export gains -Top 5 sectorsin USD bn


22


An innovation hub Taiwan’s GDP growth is expected to increasegradually in 2015 (+3.8%) and 2016 (+3.9%) sup-ported by both improving global demand and avibrant domestic market. Exports in particular(75% of GDP) are set to rise by +USD15 bn and+USD20 bn in 2015 and 2016, respectively, ben-efitting from rising new orders in the electronicssector. Taiwan generates 13% of world electroniccomponents exports (including circuit boards,photosensitive devices, and integrated circuits),which generated about USD80 bn in 2014. Thissuccess is the result of a deliberate strategy toacquire technological skills through the creationof science parks bringing together academia, in-dustry, and research centers and strong invest-ment growth for innovative projects. R&D ex-penditures are equivalent to 3.1 % of GDP, closeto Germany (2.9%). These ecosystems for inno-

vation enabled the emergence of leaders likeTSMC, Media Tek & Mstar, and UMC. There areabout 60 R&D centers in the semiconductors in-dustry in Taiwan.

Price pressures to stabilize in 2015Prices for electronic components are set to sta-bilize, supported by improving global demand.The electronic components market is driven bynew products of the Technologies of Informationand Communication, the development of con-nected objects (+ 6.7% in 2014), but also othermarkets such as the automotive sector (+ 8%market share in 2014) with the development ofhybrid vehicles and driver assistance systems.The market for such goods is an intense com-petitive environment, with regional componentsprices falling (-52%) between 2000 and 2012 andsince then stagnating. Production, which slumpedduring the global financial crisis (-28%) betweenFebruary 2008 and August 2009, recovered rap-idly rising +37% from September 2009 to April2010 and slowing to a more sedate increase of+4% in 2013. The observed stagnation in 2014

hides the dynamism of site installations outsidethe territory, like the Taiwanese foundry, UMCthat implement a factory at Xiamen in China.

Electronic components exports will increaseby +USD4 bn in 2015Exports of electronic components are expectedto grow by +5% in 2015 and will provide ap-proximately +USD4 bn in export gains, benefit-ting from improving demand in the tech sector.The mobile phone segment is usually a majordriver. For example, the launch of an iPhoneusually contributes +0.8pps to total exportsgrowth and +0.5pps to overall GDP growth, onaverage. The main export markets are MainlandChina (25% of electronic exports) and HongKong (28%). After doubling in the past ten years,export shares of these two markets will probablystabilize, with companies in Mainland Chinaemerging as key competitors. In the meantime,other destinations represent growth markets,particularly Singapore, which accounts for 16%of electronic exports, compared with 12% tenyears earlier.

Recipe#11: Betting oninnovationThe case of Taiwan enhancing theSemiconductors industry



▶ SOUTH KOREA▶ CHINA

+USD4 bn Export gains of Taiwan

Electronic componentsin 2015

0

2

4

6

8

10

141312111009080706050403020100

Industrial Production, Electronic Products

Source: Ministry of Economic Affairs, Taïwan

23


2015 outlook: towards a moderate recovery Singapore’s GDP growth is likely to remain belowtrend in 2015. Economic growth is set to improvemoderately to +3.4% (from +2.9% in 2014) ben-efitting from both domestic demand and exter-nal demand. Monetary policy easing is likely tosupport investment and stabilize the exchangerate at a favorable level for exporters. Exportsare likely to recover in 2015 but at slow pace(+USD9 bn) due to falling energy prices (sub-

tracting -USD10 bn from Singapore’s exports),profiting from improving external demand es-pecially from Asian partners. We expect exportswill accelerate further in 2016 (+USD25 bn).

Betting on Hub and Spoke Free Trade Agree-mentsIn addition to its strategic location and excellentinfrastructure (First in “Doing Business 2015”,second in the ranking of the Logistics Perform-ance index), Singapore has built strong partner-ships through 21 bilateral and regional Free TradeAgreements (FTAs) with 32 trading partners.This large network includes the world’s largesteconomies (U.S., China and Japan) and, perhapsmore importantly, fast-growing countries inSouth East Asia through the ASEAN Partnership.With the latter representing one of the economic

Recipe#12: MultiplyingFree Trade AgreementsThe case of Singapore bridging theElectronic equipment divide



▶ MEXICO▶ EUROPEAN UNION

Viet Nam

Indonesia

Thailand

Malaysia

Philippines

Singapore +30

-0.2

-1.7

-4.5

-4.7

-19

Trade balance of electrical and electronicequipment products to ASEAN - 6 partnersin USD bn, 2013

+USD2 bnNet export gains of SingaporeElectrical and Electronic equipmentsector to other ASEAN - 6 partners in 2015

Sources : International Trade Center, Euler Hermes

bright spots in the coming years, strengtheningrelationships within the region will be key. Thisis why the ASEAN economic community projectshave been designed. The goal is to create a singlemarket and a production base by end 2015, witha flow of goods, services, investment capital andskilled labor. It is unlikely that a single market willbe achieved within the year as the developmentgaps remain high, particularly between the coremarkets and the CMLVs (Cambodia, Myanmar,Laos, and Vietnam). However, we think that theprocess will start and will present significant com-mercial opportunities, especially in core markets.

Keeping strong leadership in the electronicequipment sector within the region (ASEAN)Singapore will probably be one of the main win-ners in the short run as it is a gateway to the re-gion with good links to the other majoreconomies and it has most of the qualities (in-cluding a skilled labor market, strong innovationand appropriate business-friendly infrastruc-ture) to benefit from trade development. Forexample, in the electrical and electronic equip-ment sector, which is one of the key industriesof the region, Singapore is already the countrythat takes most advantage of the existing FTAsin the region. Indeed, intra-zone exports of elec-trical and electronic goods increased at an av-erage annual rate of +6.7% over the past 10years and the net balance has always been inSingapore’s favor. In 2014, Singapore’s net ex-ports of electrical and electronic equipment toother ASEAN-6 countries were valued at aroundUSD30 bn and we expect an increase of +USD2bn in 2015.

24


Economic ResearchEuler Hermes Group

Economic Outlookand otherpublications

Already issued:

no. 1195-1196 ◽ Macroeconomic, Risk and Insolvency OutlookThe world at a crossroads

no. 1197 ◽ Global Sector OutlookReconciling economic (dis)illusions and financial risks

no. 1198 ◽ Special ReportThe Mediterranean: Turning the tide

no. 1199 ◽ Macroeconomic and Country Risk OutlookHalf-baked recovery

no. 1200-1201 ◽ Business Insolvency WorldwidePatching things up: Fewer insolvencies, except in Europe

no. 1202-1203 ◽ Macroeconomic and Country Risk OutlookTop Ten Game Changers in 2014: Getting back in the game

no. 1204 ◽ Global Sector OutlookAll things come to those who wait: Green shoots for one out of four sectors

no. 1205-1206 ◽ Macroeconomic and Country Risk OutlookHot, bright and soft spots: Who could make or breakglobal growth?

no. 1207 ◽ Business Insolvency WorldwideInsolvency World Cup 2014: Who will score fewer insolvencies?

no. 1208-1209 ◽ Macroeconomic, Country Risk and Global Sector OutlookGrowth: A giant with feet of clay

no. 1210 ◽ Special ReportThe global automotive market: Back on four wheels

no. 1211-1212 ◽ Business Insolvency WorldwideA rotten apple can spoil the barrel Payment terms, past dues, non-payments and insolvencies: What to expect in 2015?

no. 1213 ◽ Special ReportInternational debt collection:The Good, the Bad and the Ugly

no. 1214 ◽ Macroeconomic and Country Risk OutlookOverview 2015: Not such a Grimm tale but no fabled happy ending

no. 1215 ◽ Special ReportGlobal trade: What’s cooking? Introducing twelve countries’ recipes for boosting exports

To come:

no. 1216 ◽ Special Report

Economic Outlookno.1210 August September 2014

Special Reportwww.eulerhermes.com

The globalautomotive marketBack on four wheels

Economic Research

Economic Outlookno.1213 December 2014

Special Reportwww.eulerhermes.com

Internationaldebt collectionThe Good, the Bad and the Ugly

Economic Research

Business Insolvency Worldwide

Economic Outlookno. 1211-1212October-November 2014

www.eulerhermes.com

A rotten applecan spoil the barrelPayment terms, past dues, non-paymentsand insolvencies: What to expect in 2015?

Economic Research

Macroeconomicand Country Risk Outlook

EconomicOutlook no. 1214January 2015

www.eulerhermes.com

Overview 2015Not such a Grimm talebut no fabled happy ending

Economic Research

https://www.youtube.com/watch?v=GtFdT9A3BCI

25


◽Latin America: Fall in oil prices will cut growth by -0.4pp > 2015-02-26◽Greece and Europe: The sequel Political will, Time and Value-at-Risk,> 2015-01-28◽AFAQ: #QEmania - What does it mean for European companies?> 2015-01-22◽An aditional USD88bn of U.S. exports in 2015 > 2014-12-02◽Chinese growth - What could possibly go wrong? > 2014-12-02◽U.S. businesses’payment behaviors point to slowed GDP and mixedpicture for key industries > 2014-11-18◽Spain: Cautiously taking the bull by the horns > 2014-10-08◽Chinese exports 2014-2015: Another US300bn > 2014-10-07◽Russia and the West: Tough Love? > 2014-09-12 ◽Non-payments in Italy: It’s not over… yet! > 2014-09-04 ◽Don’t cry too much for Argentina > 2018-08-08 ◽ Fertilizer: The seed growing secretly > 2014-08-05◽ Road transport: Labor costs explain the large gap in profitability inEurope > 2014-07-08 ◽The European electricity market under strong pressure > 2014-07-05◽Thailand: Another coup challenges the country’s economic

◽Azerbaijan > 2014-12-17◽Bangladesh > 2014-12-17◽Cambodia > 2014-12-17◽Denmark > 2014-12-17◽El Salvador > 2014-12-17◽Ethiopia > 2014-12-17◽Gabon > 2014-12-17◽Germany > 2014-12-17◽Honduras > 2014-12-17◽Iceland > 2014-12-17◽Israel > 2014-12-17◽Laos >2014-12-17◽Latvia > 2014-12-17◽Lithuania > 2014-12-17

◽Mali > 2014-12-17◽Mozambique > 2014-12-17◽Myanmar > 2014-12-17◽Norway > 2014-12-17◽Paraguay > 2014-12-17◽Rwanda > 2014-12-17◽Sri Lanka > 2014-12-17◽Sweden > 2014-12-17◽Switzerland > 2014-12-17◽Taiwan > 2014-12-17◽Trinidad & Tobago > 2014-12-17◽Turkey > 2014-12-17◽Uganda > 2014-12-17◽Uruguay > 2014-12-17

CountryReport

WeeklyExport RiskOutlook

◽The paper industry in Italy: Time to turn the page > 2014-12-16◽Consumer electronics: Only a timid rebound in 2015 > 2014-12◽Construction in Italy: Only a timid rebound in 2015 > 2014-12-02◽Textile & Clothing in Germany: A two-geared reality > 2014-10-31◽Textile & Clothing in Italy: Bronze medal on the international podium,but facing obstacles > 2014-10-31◽Italian car sector: Time to do an oil change > 2014-10-22 ◽U.S Automotive > 2014-10-03◽U.S. Construction > 2014-10-03◽Italian steel at a crossroads > 2014-09-30◽Der Automobilweltmarkt: Wieder auf allen vier Rädern > 2014-09-19◽Agrifood in the Netherlands The bumpy road continues > 2014-09-18

IndustryReport

http://www.eulerhermes.com/economic-research/economic-publi-cations/Pages/Weekly-Export-Risk-Outlook.aspxN

TheEconomicTalk

N

EconomicInsight

http://www.eulerhermes.com/economic-research/economic-publications/Pages/Weekly-Export-Risk-Outlook.aspx

26

Economic Outlook no. 1215 | February-March 2015 | Special Report Euler Hermes

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Euler Hermes Economic Outlook no. 1215 | February-March 2015 | Special Report

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Department of Euler Hermes Group has no responsibility for the consequences hereof and no

liability. Moreover, these analyses are subject to modification at any time.

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