June 2015 - Global Country Risk Outlook

n this panorama, we firstset out a study examiningthe economic situationand outlook for Sub-Saharan Africa. After along period of gloominess,

the economic weather became morefavorable despite the Lehmann Broth-ers bankruptcy in 2008 and the euro-zone sovereign debt crisis. This part of the world has managed to benefitfrom structural reforms, public financesconsolidation, significant foreign invest-ments, abundant global liquidity and

By Coface Group Economists

more stable political environments. Thefall in global raw materials prices reshuf-fles the deck and the sky could turn grey.However, situations differ from one coun-try to another. Some are suffering and willcontinue to suffer from the deterioratingweather while others, which alreadystarted to diversify their economies,should be protected from the storm.

With this issue we are also publishing our quarterly barometer of worldwidetrends in country risk. We explain why wehave upgraded our risk assessments

for Portugal, the Czech Republic and Vietnam. We also explain why we give a negative assessment for the prospectsfor Algeria, Bahrain, Canada, Gabon,Madagascar, South Africa and Tanzaniaand why we have downgraded ourassessment for China.

Readers will find updated reports forsome of these countries setting out theireconomic situation in more detail at theend of the panorama. Readers will alsofind updated country analysis for Angola,Argentina and Egypt.

I

JUNE 2015PANORAMA

COFACE ECONOMIC PUBLICATIONS

Global Country Risk Outlook

2Research paperSub-Saharan Africa:sunny in the east, cloudyin the centre

3Part 1The region is still highlydependent on raw materials

8Part 2The drive to diversify the economy is underway in several countries

17BarometerCountry risk assessment changes

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

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

(1) 45 countries in all: South Africa, Angola, Benin, Botswana, Burkina Faso, Burundi, Cameroon, Cape-Verde, Central African Republic, the Comoros, DemocraticRepublic of Congo, Ivory Coast, Eritrea, Ethiopia, Gambia, Ghana, Guinea, Guinea Bisau, Equatorial Guinea, Kenya, Lesotho, Liberia, Madagascar, Malawi,Mali, Mauritius, Mozambique, Namibia, Niger, Nigeria, Rwanda, Sao Tome and Principe, Senegal, Seychelles, Sierra Leone, South Sudan, Swaziland, Tanzania,Chad, Togo, Uganda, Zambia, Zimbabwe.

2

SUB-SAHARAN AFRICA: SUNNY IN THE EAST, CLOUDY IN THE CENTRE

BY OUR ECONOMISTS

COUNTRY RISK

also the high prices of raw materials, onwhich the region is very dependent: oil,metals, minerals and foodstuffs accountfor 80% of exports. The sharp fall inglobal raw materials prices over the lastyear therefore means economic cloudsare looming on the region’s horizon.But has the weather worsened uni-formly in all the countries? Which coun-tries are coming out best in thisunfavourable environment? Are thereother sources of growth to protectthese countries from the coming head-winds? To answer these questions, thisstudy first identifies the countries forwhich the risk of darker economicclouds is particularly great, i.e. thosewhich have been hardest hit by the

recent fall in raw materials prices. To dothis, we distinguish particularly thecountries which export non-renewableraw materials (oil, metals and minerals)from those that export renewables(food and agricultural products), theprices of the first having fallen morethan those of the second during thepast year (part 1). But, among the coun-tries where the risk of bad economicweather is highest, some will stay 'dry'because they have an umbrella to pro-tect them: these countries have begunto diversify their exports and, moregenerally, their economy allowing themto shelter from the adverse conditions(part 2).

Most of the sub-Saharan (1) economieshave been enjoying fine weather since2008: growth in the region has reachednearly 5% p.a. on average since thatdate, despite the storms (LehmanBrothers collapse and sovereign debtcrisis in the eurozone) or at best verycloudy weather (declining growth trendfor the large emerging countries) in therest of the world. The reasons for thisfair weather are many: structural read-justment linked to a relatively low initialper capita wage level, high foreigninvestments in a context of abundantworld liquidity, more stable politicalenvironments, as well as public financesin better order thanks to numerousdebt cancellations. Among them were

PANORAMA

GROUP

Pierre BOSSUETJunior economist

Jean-Louis DAUDIEREconomist

Anne-Sophie FÈVREEconomist

Julien MARCILLYChief Economist

INTRODUCTION

June 2015

RESEARCH PAPER

3COUNTRY RISKPANORAMA

GROUP

A large part of added value still comes from the extractiveindustries and agriculture

The importance of the agricultural sector and ofthat of the extractive industries and utilities(respectively 20% and 21% of total added value in2012(2)) underlines the dependence of Sub-SaharanAfrican economies on commodities.This general statement, however, masks some dis-parities. In Central Africa, which includes almost allthe Sub-Saharan oil exporting countries (Angola,Cameroon, Gabon, Equatorial Guinea, Chad,Congo, with the exception of Nigeria), the impor-tance of the extractive industries and utilities,which greatly increased in the 2000-2009 decade,stands at a much higher level than the African

THE REGION IS STILL HIGHLY DEPENDENT ON RAW MATERIALS

1

Chart n° 4Western Africa: share of sectors in total added value (%)

Source: UNCTAD

(2) Source: UNCTAD(3) The UNCTAD figures do not take into account the recent change in the reference year used for calculating Nigerian GDP, which has resulted in an upward

revision of the importance of services in GDP.

average (46% in 2012, see chart n° 1). At the sametime, the proportion of agriculture has fallen tolow levels. In southern Africa (essentially SouthAfrica) where the importance of the extractiveindustries and agriculture is very slight, despite theabundance of natural resources, growth is, how-ever, much less dependent on raw materials (seechart n°2). Eastern Africa (Kenya, Ethiopia, Tanza-nia…) shares some similarities with southern Africa.However, the agricultural sector still has an importantplace there (see chart n° 3). Western Africa (Nigeria,Ghana, Ivory Coast…), with some reservations concerning Nigerian statistics (3), occupies a middleposition, the extractive industries, agriculture andservices having about equal weight (see chart n° 4).

Source: UNCTAD

Chart n° 2Southern Africa: share of sectors in total added value (%)

Source: UNCTAD

Chart n° 1Central Africa: share of sectors in total added value (%)

Source: UNCTAD

Chart n° 3Eastern Africa: share of sectors in total added value (%)

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1970 1975 1980 1985 1990 1995 2000 2005 2010

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1970 1975 1980 1985 1990 1995 2000 2005 2010

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1970 1975 1980 1985 1990 1995 2000 2005 2010

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1970 1975 1980 1985 1990 1995 2000 2005 2010

ServicesExtractive industries and utilitiesAgricultureManufacturingConstruction




Among the natural resourcesexploited, oil occupies a centralposition

On which natural resources are the sub-Saharaneconomies most dependent? There are some indi-cators which allow a more detailed answer. TheWorld Bank provides statistics on the contributionsof oil, gas, coal, minerals and forests to GDP (4) bycountry. These show that sub-Saharan Africaremains strongly reliant on the rents(5) derived fromoil, far ahead of those from mining or forestry (seecharts n° 5 and 6). After having peaked in 2008, thecontribution of oil has slowly diminished, with pro-duction concentrated on a small number of coun-tries, either on a stagnating (Angola) or falling

trend (Gabon, Equatorial Guinea, Chad). Produc-tion remains, moreover, very erratic in Nigeria. Oil,thus alone accounts for nearly two thirds of the total contribution of natural resources to sub-Saharan GDP, oil rents representing 11% of theregion’s GDP in 2013.

The degree of dependence, however, varies widelybetween countries. Thus, considering only the caseof oil, the situation of Gabon and Angola cannot becompared with that of Cameroon or Nigeria, whoseeconomies are more diversified (see chart n° 5).Nonetheless, in almost all the net exporters of oil inthe region, fuels represent the lion's share of exportrevenues.

(4) World Bank data base - World Development Indicators

(5) Defined as the difference between the total cost of production and the value of production at world prices.

4 COUNTRY RISKPANORAMA

GROUP

Chart n° 5Total natural ressources rents, 17 main economies (% of GDP in 2013)

Source: World Bank

Chart n° 6Total natural ressources rents, most resource-dependent countries (% of GDP in 2013)

Source: World Bank

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10

0

Gabon

Congo

Equatorial

Guinea

Mauritania

Gabon

Angola

DR Congo

Liberia

South Sudan

Burundi

Chad

Guinea

Eritrea

Burkina Faso

Sub-saharan

Africa

Sub-saharan

Africa

Angola

DR Congo

Zambia

Ghana

Ethiopia

Nigeria

Mozambique

Uganda

Cameroon

Ivory Coast

Tanzania

South Africa

Senegal

Kenya

Botswana

Oil rents (% of GDP)Natural gas rents (% of GDP)Coal rents (% of GDP)Mineral rents (% of GDP)Forestl rents (% of GDP)

Oil rents (% of GDP)Natural gas rents (% of GDP)Coal rents (% of GDP)Mineral rents (% of GDP)Forestl rents (% of GDP)

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Commodities represent 80% of theregion’s exports of goods

An analysis of the share of commodities in exportsof goods shows a more pronounced dependenceof the region on raw materials than does that of theshare of the different sectors in the economy. Fuels(essentially oil) account for more than half of sub-Saharan Africa’s sales abroad 53% in 2013 (6)), farahead of minerals, metals and precious stones(17%), on the one hand, and food items and agri-cultural raw materials (11%) on the other. Revenuesfrom the sale of commodities, dependent on move-ments in world prices, but also on the vagaries ofclimate, where agricultural products are concerned,thus represent in total 82% of the region’s exportsof goods.

If we list the countries most dependent on rawmaterials with regard to exports, then fuels repre-sent between 60% and 100% of exports of Angola,Equatorial Guinea, Chad, Nigeria, Congo, Gabonand Sudan (see chart n°7). As far as mining prod-ucts are concerned, sub-Saharan Africa mainlyexports, in order of importance, iron (ore, metal,cast iron), gold, copper (ore and metal), preciousstones, silver (and platinum), base metal ores andaluminium. Between 60% and 90% of exports ofBotswana (primarily diamonds), the DemocraticRepublic of Congo (copper), Zambia (copper),Mauritania (iron ore) and of Eritrea (gold) comprisethis type of product (see chart n° 8). As to food andagricultural products, the region exports chieflycocoa, fruits, cotton, fish and coffee. These prod-ucts represent between 60% and 100% of theexports of Guinea Bissau (fruits), Somalia (animals),the Seychelles (fish), Ethiopia (coffee, vegetables,oleaginous grains and fruits, animals), Sao Tomeand Principe (cocoa), Cape Verde (fish) and Gambia (wood, fruits) (see chart n° 9).

On the other hand, raw materials represent lessthan half of exports in South Africa, the Comoros,Lesotho, Malawi, Mauritius and Swaziland. Finally,countries such as Djibouti, Kenya, Madagascar,Niger, Uganda, Senegal, Togo and Zimbabweoccupy a middle position with percentages ofbetween 50% and 65%.

(6) Source : UNCTAD


GROUP

Source: UNCTAD

Chart n° 7Share of fuels in exports of goods (% 2013)

Source: UNCTAD

Chart n° 8Share of ores, metals and precious stones in exports of goods (% 2013)

Source: UNCTAD

Chart n° 9Share of food items and agricultural raw materials in export of goods (% 2013)

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Angola

Chad

Nigeria

Congo

Gabon

Sudan

Cameroon

Mozambique

Guinea

Equatorial

Guinea

Sub-saharan

Africa

100

80

60

40

20

0

Botswana

Zambia

Mauritania

Eritrea

Guinea M

ali

Namibia

Rwanda

Central African

Republic

DR Congo

Sub-saharan

Africa

100

80

60

40

20

0

Guinea-Bissau

Seychelles

Ethiopia

Sao Tome &

Principe

Cabo Verde

Gambia

Burundi

Uganda

Benin

Somalia

Sub-saharan

Africa

The current drop in raw materialprices affects the countries of theregion unequally

After the record highs reached in 2011, the pricesof raw materials began to fall. The slide acceler-ated in the second half of 2014 but was uneven,depending on the raw materials concerned.

This means we can make a distinction betweennon-renewable products (crude oil and basemetals) and renewable products (foodstuffs andagricultural raw materials). Prices for the firsthave fallen sharply (-35% for base metals and -40% for oil between January 2013 and May 2015)while there has been more limited decline for thesecond (-5% for agricultural raw materials and -20% for foodstuffs) (see chart n° 10).

As we can see and given the structure of theexports from sub-Saharan Africa, the way the fallin raw material prices affects the region is veryuneven (see chart n° 11).

the region according to their vulnerability to therecent movements in raw materials prices. Thisclassification allowed us to distinguish three categories of countries:

• Countries that are very vulnerable to this differ-entiated fall in raw materials prices (on the rightside of the chart n° 11): these are net exportersof non-renewable raw materials, and netimporters of renewable raw materials. Theirterms of trade are worsening sharply, as theprice of their export products is falling by more


GROUP

Source: IMF

Source: UNCTAD

Chart n° 10Index of commodity prices (January 2013=100)

Chart n° 11Share of net exports of non-renewable or renewable products in exports of goods (% 2013)

To measure this differentiated effect of therecent drop in raw material prices on theeconomies of sub-Saharan Africa, we first calcu-lated for each country the difference betweenexports and imports of non-renewable rawmaterials (as a percentage of total exports) andthat between the exports and imports of renew-able raw materials. A positive (or negative) scoreindicates that the country in question is a netexporter (or importer) of these products. Wethen calculated the difference between thesetwo scores, in order to classify the countries of

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2013 M1 2013 M7 2014 M1 2014 M7 2015 M1

Agricultural raw materials index (includes timber, cotton,wool and hides price indices)Metals price index (includes copper, aluminium, iron ore,tin, nickel, zinc, lead and uranium price indices)Crude oil (simple average of three spot prices; datedbrent, west texas intermediate and Dubaï Fateh)Food and beverage price index

Ethiopia

Sao Tome & Principe

Uganda

Malawi

Cabo Verde

Kenya

Burundi

Seychelles

Central African Republic

Mauritius

Tanzania

Swaziland

Togo

Ivory Coast

Sierra Leone

Gambia

Senegal

Burkina Faso

Benin

Comores

Zimbabwe

Madagascar

South Africa

Liberia

Mali

Namibia

Rwanda

Cameroon

Ghana

Mozambique

Lesotho

Zambie

Eritrea

Botswana

Niger

Guinea

Gabon

Nigeria

Chad

DR Congo

Congo

Equatorial Guinea

Angola

Sudan

Renewable ressources (agricultural raw materials and foods items (A)Non-renewable ressources (fuel, ores, metals and precious stones (B)

(A) - (B)


GROUP

than that of the products they import. This shockis likely to affect both their external accounts(deterioration of the current account balance)and their public accounts, the more so since thelatter have also deteriorated in recent years (seebox 1).

• Moderately affected countries (in the middle of the chart n° 11 page 6): these are net exportersof both renewable and non-renewable rawmaterials. They are therefore affected by thecorrection in world prices but to a lesser degreebecause the weight of exports of the second is less important than for the countries in theprevious category.

• Countries relatively unaffected (on the left handside of the chart n° 11 page 6): these are netexporters of renewable raw materials, and alsonet importers of non-renewable raw materials.The price of their exported products has fallenless than that of the products they import.

A fourth category could have been added: thatof countries which are net importers of rawmaterials (both renewable and non-renewable),which would be the big winners from this exter-nal environment. But this analysis shows thatsub-Saharan Africa has no such country.

(7) Informal group of public creditors essentially bringing together advanced countries, whose role is to find co-ordinated and lasting solutions to the paymentdifficulties of debtor countries (debt rescheduling or reduction in debt service obligations).

(8) Ivory Coast, Ghana, Uganda, Democratic Republic of Congo, Rwanda, Senegal, Tanzania, Zambia. The countries accessing the capital markets which havenot benefitted from debt cancellation are South Africa, Angola, Gabon, Kenya, Mauritius, Namibia and Nigeria.

Sub-Saharan African debt is expanding againBox 1

The borrowers benefit from greater free-dom in their borrowing policy, in a con-text where their infrastructure needsrequire the mobilisation of a significantamount of capital. Facilitated by themonetary easing applied in westerncountries and abundant liquidity, thisrenewal of debt has proceeded at a fastpace in certain countries and the cost ofthese new debts is higher than that ofthe loans obtained from the multilateralinstitutions or the Paris Club countries.This could again increase the region’svulnerability. So, the recovery in theUnited States and Europe and the fall inoil prices are already beginning to lead

to a tightening of borrowing conditions,noticeable especially for oil-producingcountries, Ghana and Zambia. Somecountries will therefore be forced toscale down their bond issuance pro-gramme, which could delay their invest-ment programmes and will not make iteasy to refinance their existing debts.The depreciation of certain African cur-rencies against the dollar (the currencyin which eurobonds are denominated) is further complicating the task of thegovernments of the countries con-cerned, since it increases the value inlocal currency of repayments in foreigncurrencies.

The cancellation of the debt of nearlythirty African countries under the heavilyindebted poor countries (HIPC) initiativesince 2000 and the acceleration ingrowth have made it possible to bringthe overall burden of sub-SaharanAfrican debt within reasonable limits.Thus the region's public debt/GDP ratiodropped from 66.7% in 2000 to 23.6% in2008, its lowest point for three decades.This cancellation took the form of reliefinitially granted by the official creditorsof the Paris Club(7) (cancellation of a flowof maturities over a certain period), towhich was added, at a second stage,after the HIPC completion point wasreached, a reduction granted by the mul-tilateral creditors (multilateral debt reliefinitiative or MDRI) and cancellation ofthe debt stock still owed to the ParisClub creditors.

Since 2009, there has been a process ofre-indebtedness (see chart n° 12), alongwith the reappearance of a budgetdeficit. Indeed, after five years of sur-pluses, the region’s public accountsrecorded a deficit of nearly 3% of GDPon average over the 2009-2014 period.Turning away from concessionary loansfrom multilateral institutions, numerousAfrican countries, including some ofthose which benefitted from the HIPCinitiative,(8) successfully tapped the inter-national financial markets from 2007(Ghana and Gabon opened the way).These eurobond issues were over sub-scribed at interest rates generally lyingbetween 6 and 7%. Moreover, certaincountries took out significant bilateralloans outside the Paris Club countries,from countries such as China.

Chart n° 12Countries with access to capital markets and rapidly expanding debt(public debt in % of GDP - source: IMF)

Source: IMF

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02000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

AngolaGhana (HIPC)Senegal (HIPC)South AfricaTanzania (HIPC)

Some of the sub-Saharan African countries cur-rently have assets, which means they are lessexposed to the consequences of falling world rawmaterials prices. Greater economic diversificationreduces their vulnerability to external shocks onthe raw materials markets. We have identified twopossible diversification strategies:

1 - expanding the manufacturing sector, in parti-cular thanks to the upgrading of the agriculturalsector favouring the agrifood industry;

2 - developing the relatively high value-addedservices sectors.

Expansion of the manufacturingsector and increased integrationinto the global value chains

When we study the share of the manufacturingsector in the GDP of sub-Saharan African coun-tries, it seems that the contribution of manu-facturing industry is generally fairly weak. Themedian value is in the order of 7.8%, with signif-icant gaps between countries.

Among the economies where the production ofmanufactured goods contributes most (so whichare situated above this median value, see chartn° 13), not all have increased the share of manu-facturing industry in their GDP since 2000. Thisstability tends to suggest that the manufacturingsector could have difficulty in driving the econ-omy in the long term, if production stagnates.

Admittedly some have seen this sector's share inthe economy increase in the past ten years(Swaziland, Tanzania, Namibia, or Uganda forexample). But this indicator of the manufactur-ing sector's contribution to the economy doesnot reflect the increased diversification of themanufacturing industry and therefore does notseem to be the most relevant for identifying thecountries which could capitalise on this sector.

The success of the economic development of cer-tain Southeast Asian countries has been based,at least partly, on the expansion of the manufac-turing sector linked to successful integration intothe global value chains. Analysis of the globalvalue chains (GVC) is based on the study of thevalue added at each stage in the manufacture ofa product, from its conception to its end use bythe consumer. The integration of a country into aglobal value chain enables its businesses, by ben-efitting from their competitive advantages in astage of the production process, to create addedvalue by transforming goods imported fromanother country, thus also creating employmentand wealth. Two main indicators can serve toassess a country’s integration into GVCs:

• upstream integration which is used to measurethe share of foreign added value in a country'sexports and

• downstream integration which is used to mea-sure the share of added value contributed by acountry in the exports of other countries.


GROUP

THE DRIVE TO DIVERSIFY THE ECONOMY IS UNDERWAY IN SEVERAL COUNTRIES

2

Sources: BMI/World Bank

Graphique n° 13Share of manufacturing industry in GDP (%)

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Uganda

Tanzania

Burundi

Malawi

Lesotho

Mali

Guinea

Mozambique

South Africa

Senegal

Namibia

Madagascar

Cameroon

Ivory Coast

Mauritius

Central African Republic

Swaziland

20002013

Specialisation, initially, in products with highlabour intensity (because of low wage costs),followed by an increase in the added value con-tent, is a development model which has enableda number of countries, particularly in East Asia,to create bases for sustainable growth. Increa-sed integration into GVCs seems to be a priorcondition for initiating a virtuous circle of growthand structural transformation and for generatingrepercussions in terms of job creation and inclu-sive growth leading to genuine development.

The various existing studies (9) show that the inte-gration of sub-Saharan Africa into GVCs is gen-erally weak, because of the structure of exports,dominated by primary products and the poordiversification of the products exported. Thereis, however, potential for strengthening this inte-gration through increased diversification ofexports. Identifying the countries, whose exportdiversification is relatively high or increasing,could help pinpoint the sub-Saharan Africaneconomies likely to benefit from more sustain-able growth, leading to higher rates of employ-ment and greater wealth for the population.

The extent of this diversification can be mea-sured thanks to the UNCTAD indicator regardingthe number of products (10) “of which the addedvalue of exports is above USD 100,000 or repre-sents more than 0.3% of the country’s totalexports”. The more different products that acountry exports, the more diversified its produc-tion structure and the better will be its integra-tion into international trade. Thus the number ofproducts exported by the oil-producing coun-tries is generally much lower than that of non-hydrocarbon exporting countries. The diver-sification indicator is 36 for Equatorial Guinea,70 for Chad and 82 for Angola, while it is above250 for South Africa. Nigeria is, however, anexception with an index of 229.

Not surprisingly, South Africa has the biggestnumber of products exported from the region. Itis also one of the Sub-Saharan African countriesmost integrated into the GVC, in particular,thanks to is automotive production sector. Sev-eral major vehicle manufacturers have indeed setup assembly plants there following the govern-ment’s decision in the mid-1990s to reduce cus-toms duties on the import of vehicles and spareparts. The vehicles are mainly sold on the Africancontinent but also in Asia.

In Kenya, the diversification of the economy isnot new either. It concerns, in particular, the agri-cultural processing sector, floriculture, textilesand the leather industry, as well as tourism andservices.

Other countries, whose diversification efforts aremore recent, have seen the number of theirproducts exported grow very rapidly over thelast ten to fifteen years.

By using a criterion for the increase in exportdiversification, measured by the multiplier factorof the number of products exported between2000 and 2013 (higher than 3), together with acriterion of the level of diversification in 2013 (at least a hundred exported products), threecountries stand out: Uganda, Ethiopia andRwanda (see chart n° 14). For these economies,diversification can be a key factor for long-termgrowth.

• In Uganda, the increase in the number of pro-ducts exported since 1995 is explained in partby the manufacture and export of agrifoodproducts and beverages (beers produced par-ticularly by the brewer, SabMiller, from locallyproduced sorghum), as well as horticulturalproducts.

• Rwanda, a third of whose GDP comes from theagricultural sector, has also begun the localproduction of liquors from coffee and lemonsproduced locally, converted into syrup towhich imported alcohol is added. The drink, ofwhich the production began at the beginningof 2015, is at present distributed only locally,but the producer is aiming at the East Africanmarket. This experiment is supported by thegovernment in the framework of the specialeconomic zones (SEZ) created to offer favour-able conditions to companies which set upthere, particularly regarding energy supply(electricity, water).


GROUP

Chart n° 14Export diversification

(9) In particular the report on "global value chains and Africa's industrialisation " published in 2014 by the AfDB, the OECD and the UNEP and the IMF’s”Regional Economic Development Prospects” for sub-Saharan Africa of April 2014 (chapter III)

(10) According to the SITC classification

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Rwanda Ethiopia

SeychellesChad

Uganda

Tanzania

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EquatorialGuinea

Source: UNCTAD

7

6

5

4

3

2

1

0

Number of exported products (2013)

Multiplier of number of exprted products between

2000 and 2013

0 50 100 150 200 250 300

Angola

Nigeria Kenya

The textile sector has also benefitted from meas-ures to promote its expansion and is contributingto the country’s gradual integration into the GVC.C&H Garment Company, a Chinese clothing man-ufacturer has, for example, recently chosen to setup in Rwanda, in view of a rather favourable busi-ness environment and low labour costs. Thecompany is located in one of the SEZs and itsproduction is intended for export.

• The case of Ethiopia is also emblematic, beingto do with the expansion of the clothing/footwear sector. In 2012, the Chinese HuajianShoes company set up a factory there for themanufactures of shoes and, in 2013, the Swedishready-to-wear clothing chain H&M decided to get its supplies from Ethiopian suppliers inorder to benefit from lower labour costs. TheEthiopian government has announced an annualinvestment of USD 1 billion over the next tenyears for setting up a specialised industrial park,aimed specifically at textile production, leather-work, agrifood industry and other sectorsrequiring a large labour force. The programmeis half financed by the Ethiopian state. Major for-eign companies have confirmed their interest inestablishing production in Ethiopia in this spe-cial zone (Phillips-Van Heusen Corp, owner ofTommy Hilfiger and Calvin Klein and the Euro-pean distributor, Hennes & Mauritz AB).

In Uganda, Rwanda and Ethiopia, two sectorsstand out as having contributed to the diversifica-tion of the economy: agricultural product process-ing and textiles. Agribusiness makes it possible to exploit the agricultural resources of the coun-tries in which the primary sector is highly devel-oped. This strategy makes it possible not only toincrease local production of agricultural produceand thus support employment in the primary sec-tor, on which a large part of the populationdepends for a living, but also to create jobs inactivities with higher added value. Initially, the aimis to distribute the processed products locally,before targeting the regional market. The agri-industry is in fact the one which seems best inte-grated at the regional level in Sub-Saharan Africa.

Meanwhile, the textile, leather and shoe sectors areoften privileged by the governments of emergingcountries, which, through special economic zones,as in Ethiopia, encourage foreign investors toestablish production in their countries. Apart fromaccess to plentiful and relatively cheap labour, foreign businesses can benefit from advantages interms of access to the export markets offered bythe preferential treatment agreements concludedby numerous African countries with the EuropeanUnion and/or the United States (African GrowthOpportunity Act - AGOA).

African investors are also active in these sectorsaccording to the United Nations report on world

investments. With the products traded at theregional level being mainly manufactured pro-ducts (and not primary products as with indus-trialised partners), the strengthening of regionalintegration, particularly through intra-regionalinvestment, is of real interest. For the smallercountries and especially Rwanda (but also Benin,Burkina Faso, Guinea-Bissau, Lesotho and Togo),investments from other African countries repre-sent at least 30% of total foreign direct invest-ment. Uganda also receives significant FDIs fromAfrican countries, in particular South Africa.

The agrifood and textile sectors, as is generally the case with the production of labour-intensive,low added value products, can be only a firststep towards the diversification of the economicstructure and of exports. If improved integrationof Sub-Saharan African countries is achieved via the manufacturing sector, this means thathighly labour intensive manufactured productsmust be gradually replaced by products withgreater added value. For the country this meanseither moving more up-market in the labourintensive sectors (like Kenya in the textile sec-tor), or succeeding in manufacturing more high-tech articles.

In Uganda, where exports are increasingly diversified, higher value-added manufacturingindustry is beginning to grow and the country isexporting more high-tech goods, such as metal-lurgical products and those from the chemicalssector (plastics). While “products manufacturedwith intermediate skill and technology inten-sity”(11) represented only 1% of its exports in2000, they accounted for 7% in 2013. As forproducts manufactured with high skill and tech-nology intensity, their share in total exports rosefrom less than 1% in 2000 to 10% in 2013.

Similarly, the share of labour-intensive manu-factured products in Ethiopian exports, whichaccounted for 9% of total exports in 2000, fell to7% in 2013 in favour of products manufactured withintermediate skill and technology intensity (3% in2013, while this type of product was not exportedin 2000.)

Finally the East African countries (Uganda, Kenya,Ethiopia) seem to be moving towards diversifica-tion and more up-market in their industrial produc-tion and exports. This is true of Rwanda too, but thischange of direction is more recent and is not yetvisible in the data.

On the other hand, some African countries haveplaced their bets on their services sector to drivetheir economies, following the growth modelpursued by several countries in East Asia and bydeveloped countries, which have relied on thetertiary sector to increase their higher value-added trade and thus progress up the GVCs.


GROUP

(11) According to the UNCTAD classification

Focusing on services: a specific development model or destined to fail?

The services sector is dominant in Africa's eco-nomy and has been for many years. It grew 5.2%on average for the whole of sub-Saharan Africaover the 2000-2013 period (5.1% for agricultureand 3.5% for industry) and therefore contributedstrongly to the region's annual GDP growth.

Moreover, a certain number of African countrieshave revised the calculation of their GDP in orderto take better account of their services activity.This is the case particularly for Nigeria, Ethiopia,Ghana, Mozambique and Kenya.

In more than half of the sub-Saharan countriesservices account for more than 50% of GDP (seechart n° 15). Among the countries in which theweight of the tertiary sector is below the average,are, on the one hand, countries that are very richin natural resources (Angola, Mauritania, DRC andGuinea) for which the extractive sector remainsdominant, and, on the other hand, those whereagriculture remains fundamental (Burundi, Liberiaand Central Africa). Nigeria, Africa's largest oilproducer, is an exception with a services sectorwhich reached 57% in 2013.

A development model based on services is fairlyunusual insofar as, as a general rule, this sectordoes not act as a driver in the early phases ofdevelopment. However, certain countries havebeen able to increase their level of developmentthanks to the tertiary sector, by focussing their

efforts on high value-added services. This is par-ticularly the case of India, thanks, in particular tothe expansion of activities in the information tech-nology sector (software) and business services(call centres in particular). The lasting quality ofeconomic growth and the positive impact in termsof development can thus be achieved by a modelbased on services, provided, however, that theservices provide high added value.

Now the dominant sub-sectors in the sub-Saharaneconomies remain trade and public services. Trad-ing activities are particularly developed andunderestimated in the statistics, as a significantpart carried out by the informal sector eludesnational accounting. For nearly two thirds of sub-Saharan African countries, the contribution oftrade services to GDP is above 10%. There is widevariation in the growth of formal trade in the poor-est countries. The contribution to the country’seconomy is particularly high in Cameroon (oil pro-ducing country) and in Sao Tome (a countryclassed as weak by the IMF, despite a relativelyhigh per capita GCP).

On the other hand, it seems that the share of tradein GDP is on a stagnating or even falling trend inthe richest countries. With the exception of Angola,trade's contribution to the national economy waslower overall in 2013 in the countries with the high-est per capita GDP. Conversely the share of tradegrew in the poorest economies, the cases ofBurundi and Malawi being particularly illustrative.The trade sector, essentially retail, is, however, anactivity with low productivity and low added value.


GROUP

Source: BMI

Chart n° 15Countries for which theshare of services in GDP is above 50% (2013)

Swaziland

Burundi

Mozambique

Benin

Nigeria

Rwanda

Madagascar

Malawi

Sao Tome & Principe

Kenya

Tanzania

Ghana

Gambia

Namibia

Senegal

Uganda

Botswana

Zambia

South Africa

Lesotho

Mauritius

Eritrea

Cabo Verde

Seychelles

Djibouti

0 10 20 30 40 50 60 70 80 90 100

50.1

50.4

53.2

55.3

57.0

57.3

58.6

60.2

60.3

60.8

61.0

62.8

66.1

66.2

66.6

67.1

68.3

69.2

72.0

73.0

79.4

80.2

84.9

88.2

88.6

The weight of public services (health, education,administration) is high, in particular in countrieswhere the tertiary sector dominates the country’seconomy (see chart n° 16). The four countries inwhich public services account for more than 15%of GDP are also those for which the weight ofservices in the economy is among the highest. InLesotho, Namibia, South Africa and Mauritius,services account for more than 2/3 of GDP. Publicservices are not very productive but are sourcesof employment and thus of steady income for the population. Moreover, good performances interms of education and health are contributors todevelopment.

The services sub-sectors which predominate inAfrican countries, in particular retail trade andpublic services (services to individuals) are there-fore essentially non-commercial, in part informaland of low productivity.

The contribution of transport and communi-cations activities, considered as having higheradded value, is above 10% of GDP (in 2013) in onlyabout 15 sub-Saharan African countries (see chartn° 17). This contribution has, moreover, been growing very slow since 2000, except for Nigeria(+13 percentage points) and Uganda (+10). It is,however, interesting to try to make a distinctionbetween the two sub-sectors: transport, on theone hand, and communications on the other.

In the majority of sub-Saharan African countriestransport is relatively underdeveloped, reflectinga lack of infrastructures. According to the WorldEconomic Forum’s Global CompetitivenessReport, the leading sub-Saharan African country(South Africa) is ranked 32nd in the world out ofthe 151 countries on the indicator for the quality of transport infrastructure. Fewer than ten sub-Saharan African countries figure in the top half ofthe list.

The transport sector is often driven by activitieslinked to tourism. This is the case, for example, in Cabo Verde and Madagascar, for which the highshare of the “transport and communications”sector’s contribution (nearly 20% of GDP) isexplained by the development of its airlines, aswell as by the efforts made to support maritimetransport. At the same time, internal means oftransport remain underdeveloped.

Despite the fairly limited availability of data, it ispossible to identify some countries in which activities related to communications seem to bemaking an increasingly important contribution tothe economy. According to the United Nations’classification registry, the “communications” sub-sector comprises relatively diversified activities:publishing, film and television production, telecom-munications and information technology, etc.


GROUP

Source: BMI

Chart n° 16Share of public services (excl. defence) in GDP (% 2013)

Source: INCTAD

Chart n° 17Share of transport and communications in GDP (% 2013)

0 5 10 15 20 25 0 5 10 15 20 25

Lesotho

Namibia

South Africa

Mauritius

Tanzania

Niger

Senegal

Seychelles

Kenya

Malawi

Cabo Verde

Nigeria

Botswana

Ghana

Nigeria

Madagascar

Cabo Verde

Ghana

Sao Tomé

Gambia

Uganda

Mauritius

Erythrea

Kenya

Mozambique

Ivory Coast

Tanzania

200520102013

Sao Tome& Principe

The weight of this subsector has been particularlysignificant in Nigeria since the change in the refer-ence year (2010 and no longer 1990) for the calcu-lation of its GDP, decided in April 2014. Thisstatistical modification has resulted in Nigeria robbing South Africa of its position as the leadingsub-Saharan economic power in GDP terms, but ithas, above all, enabled the country to identify thediversification of the Nigerian economy, whichseems to be dominated by services. Telecommuni-cations and also film production (“Nollywood”)contribute to the weight of these activities, whichexceeds 10% of GDP.

With the exception of Nigeria, the weight of com-munications activities remains low in sub-SaharanAfrica, below 5% of GDP in most of the countriesfor which statistics are available. However, thedynamics are positive in certain economies,which are, once again, mostly located in the eastof the continent, like Uganda and Kenya.

The expansion of mobile telephone networks hasbeen very rapid in Africa, whereas fixed line teleph-ony is underdeveloped. Mobile phone access isexpected to continue to grow. According to theassociation of mobile phone operators, GSMA,nearly 40% of the population of sub-Saharan Africahad access to mobile telephony in 2014 and the penetration rate could reach 50% by 2020.However, progress is uneven across countries.

Six countries, which, themselves alone account forhalf of subscribers, dominate the market: Nigeria,South Africa, Tanzania, Ethiopia, Kenya and theDRC.

The expansion of telecommunications, more pre-cisely of the use of mobile telephone networks isin tandem with the growth of financial services.Sub-Saharan Africa is the leader in the transfer ofmoney via mobile phones. “Mobile banking” wasborn in Kenya and allows those who do not haveaccess to the formal banking sector to carry outfinancial operations using their mobile.

Financial services remain the privilege of a smallnumber of countries. Only eight have a weight-ing of these activities in their GDP of more than5% (see chart n° 18). With the exception ofMalawi (a fragile country), they are among thecountries with the highest levels of GDP percapita and are classed as middle-income coun-tries by the IMF. Botswana, Mauritius and SouthAfrica perform particularly well and have a finan-cial system which contributes to a share of GDPconsiderably higher than that observed in theother countries. But this share is growing insome less developed economies where thefinancial sector is still underdeveloped, such asKenya.

The growth of the financial sector is driven by for-eign investment flows, particularly from otherAfrican countries. While the majority of the invest-ment inflows come from industrialised countriesand are directed on the African continent towardsthe extractive sector (hydrocarbons, mines), bigforeign companies are also beginning to invest ininnovative sectors. The United Nations WorldInvestment Report 2014 mentions particularly thecreation by in late 2013 of IBM Research's firstAfrican research facility in the vicinity of Nairobi.This interest of the American firm reflects thepotential of the Kenyan market, the world leaderin mobile phone payments. Microsoft has alsoannounced partnerships and Google has investedin start-ups in Nigeria, Kenya and South Africa.The largest African investors on the continentremain South Africa (especially telecommunica-tions), Angola and Nigeria (especially active infinancial services).

Services to businesses are also an importantsub-sector to the extent that they are tradable.Even though this development concerns a rela-tively limited number of countries, the develop-ment of high-value-added services can enablecertain countries to construct an endogenousmodel of growth capable of also driving othereconomic sectors. Improving transport andtelecommunications infrastructures, supportingthe development of the financial system willhave a positive impact on the industrial sectorand even on the agricultural sector.


GROUP

Source: BMI

Chart n° 18Share of financial services in GDP (%)

0 5 10 15 20

Botswana

Mauritius

South Africa

Lesotho

Malawi

Namibia

Kenya

Ghana

200520102013

India’s experience thus clearly serves as a model forcertain countries because of the positive effect ontheir economy of activities related to informationtechnology and communications, as well as infor-mation management. Several countries, such asSouth Africa, Kenya, Mauritius and also Uganda,seek to support these sectors related to the outsourcing of business services. Kenya thus hosts an IT data capture centre, launched by the com-pany, Digital Divide Data, which benefits from acheap labour force. In return the training ofemployees enables the country to increase itsrange of services.

The development of certain services is a trumpcard favouring integration into global valuechains and thus more generally supporting theeconomy. With regard to this, the level oftelecommunications services is, according to thestudy by the BafD, closely linked to increasedintegration within global value chains. So,according to the WTO, the share of services inexports is over 40% and is growing strongly in Uganda and Kenya, countries in which com-munication activities are particularly dynamic(see chart n° 19).


GROUP

Chart n° 19Share of exports of services (total % of exports)

Source: WTO

0 20 40 60 80 100

Cabo Verde

Djibouti

Ethiopia

Madagascar

Seychelles

Uganda

Kenya

Rwanda

Tanzania

Mozambique

Ghana

South Africa

Namibia

Zimbawe

Lesotho

Botswana

Zambia

DR Congo

Nigeria

Angola

2000200520102013


GROUP

Interview with Jean-Christophe Batlle,Box 2

Are there other risks currently limiting the expansion of businesses?

Several risks remain. First of all, West-ern Africa has been affected by theEbola epidemic, which, although ithas now been brought under control,has reduced the region’s level of for-eign trade with the rest of the world.The second risk, even though it ismuch reduced, remains political insta-bility. 2015 is an election year in seve-ral countries (Ivory coast, BurkinaFaso, Togo, Tanzania…), which stillremains a source of concern, even ifthe recent elections in Nigeria haveshown that a political changeover canproceed peacefully. Finally, the busi-ness environment is still far from per-fect. Some countries, however, aretaking this matter very seriously. As of2014, there are five African countriesamong the ten countries whichachieved most reforms in this area:Benin, Ivory Coast, the DRC, Senegaland Togo. Even if these countries arestill at the bottom of the ranking,these results are encouraging.

Which are the most promisingsectors in the medium term in the region?

Let us first remember that Africa hasgrowth prospects of 4.4% in 2015 and4.7% in 2016. The region will benefitfrom a slight acceleration in worldgrowth, leading to a strengthening ofAfrican domestic demand. This isbecause the continent is now moreresilient to external shocks as its eco-nomic activity is driven more bydomestic demand (private consump-tion and public investment in infra-structure). Let us also remember thatAfrica has become an attractive areafor foreign direct investment. The sec-tors which will remain buoyant in thecoming months are still construction,agriculture, services and, to a lesserextent, manufacturing industry.

Has the recent fall in raw materialprices, particularly that of oil,affected the activity of businessesin the region?

The fall has affected the raw materialexporting and importing countriesdifferently. Gabon and Angola, forexample, have suffered directly withregard both to their budget balancesand to their foreign exchange reser-ves. Investment programmes maytherefore be frozen or delayed andproviders of services and materialsmay find themselves faced with pay-ment delays. On the other hand, forimporting countries, especially oilimporters, this can have a beneficialeffect on public spending as well ason inflation and allow them to reallo-cate the sums saved to productiveinvestment.

Africa manager, Coface

CONCLUSION

This study aims to identify the countries with bothlow exposure to the recent fall in world raw mate-rials prices and which have already begun aprocess of economic diversification. In otherwords, the countries for which the risk of bad eco-nomic weather is low (effects of the fall in worldprices), and, even if it should occur, those whichhave an umbrella to protect them (relative diver-sification of the economy).

13 countries are today little affected by the fluc-tuations of world prices. They are in effect bothnet exporters of renewable raw materials andnet importers of non-renewable raw materials.The drop in the price of their exported productsis therefore less than that of their importedproducts (see part 1).

To measure the diversification of the economythrough the manufacturing sector, we have selected

the countries the number of whose exported prod-ucts more than tripled between 2000 and 2013.These are Uganda, Rwanda and Ethiopia. And, to identify the countries having advantages in thefield of services, we have considered those

1 - where the share of transport and communi-cations services in GDP is above 10% and hasincreased since 2005;

2 - where the share of financial services in GDP isabove 5% and has increased since 2005;

3 - where the share of exports of services is over40% of total sales abroad and has increasedsince 2000. Only one country benefits bothfrom the increase in the weight in exports of these services sectors with relatively high added value and from that of services ingeneral: Kenya (part 2).

Finally, several countries meet none of these criteria:they are very exposed to the fall in the price of oil,which is their main export. And this gift of oil hashardly encouraged them to undertake reforms witha view to diversifying their economy. Angola, Gabonand the Congo, for example, are among them. Notall the countries which are net exporters of non-renewable raw materials are among them. Rwandaand, to a lesser degree, Nigeria are benefitting fromthe current process of economic diversification,which lessens the effects of their worsening tradeterms. Other economies are, however, not very vul-nerable to these recent fluctuations in raw materialsprices, but are poorly diversified. Among them areTogo, the Central African Republic and Malawi.These are particularly economies with low percapita income.

Finally, three countries are emerging as the big win-ners because they meet all these criteria: Kenya,Ethiopia and Uganda. They therefore have all theadvantages necessary for achieving long-termgrowth without being penalised in the short termby the fall in raw materials prices. The recent figuresconfirm this: GDP growth there reached nearly 7%on average in 2014. However, these favourableprospects with regard to short-term growth do notmean the total absence of risk and vulnerability. Therecent terrorist attacks in Kenya demonstrate, forexample, risks to political stability in the region. Thelack of infrastructure is also a well-known vulnera-bility as is a high current account deficit (more than7% on average expected in 2015). And as in theregion as a whole, the level of public debt is mod-erate (33% of GDP on average) but is on a risingtrend. Despite all these risks, perspectives forgrowth are particularly favourable in both the shortand medium term in these three countries. That isalready a lot.


GROUP

Winners: Diversified economies with limited exposure to non-renewable resources price change

Losers: Poorly diversified economies with high exposure tonon-renewable resources price change

Guinea

NigerChad

DRC

CongoGabon

EquatorialGuinea

Angola

Kenya

Uganda

Ethiopia

tion infrastructures. Moreover, mili-tary expenses will grow temporarilyin 2015.

• Exports will benefit from the eco-nomic recovery in Western Europewhich absorbs 80% of exports and,particularly, from the European auto-motive market recovery given astrong presence of the Czech indus-try in the European manufacturingchain. Moreover, the Koruna anchor-age to the euro is solid, and thedepreciation of euro will keepexports competitive.

• Despite partial defection from Russ-ian tourists tourism remains strong,contributing to the surplus of theservices balance.

• Local banks, which for the most partare subsidiaries of foreign groups,are solid, with low non-performingloans, and largely financed by localdeposits.

Portugal: A4

• The exit from the bailout plan is asuccess: no recourse to a precau-tionary credit line in June 2014, earlyrepurchase of one quarter of the IMFcredit in March 2015.

• The fiscal stance is improving andexternal accounts are rebalancing.

• The economy is recovering: growthis likely to reach 1.5 % this year andnext year.

• The recovery is confirmed by corpo-rate indicators: higher corporatemargins, decline in bankruptcies in2014 and satisfactory Coface pay-ment experience.

Vietnam: B

• The economic performance hasimproved with 6% GDP growth in2014 and inflation is now under con-trol.

• The country enjoys large FDI inflows,especially related to high valueproducts such as smartphones.

• Private consumption is now accele-rating thanks to low inflation andimproved consumer confidence.

• The external risk has declined: thereis a current account surplus and inter-national reserves have increased.

BAROMETER

COUNTRY RISK ASSESSMENT CHANGES

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

Country risk assessmentss

Country Country risk Country risk previous new

Czech Republic A4Ï A3

Portugal BÏ A4

Vietnam CÏ B

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

Czech Republic: A3

• We expect the Czech economy toregister fair and accelerating growthboth for this year and 2016 (respec-tively 2.5 and 2.8%). Order books areexpanding.

• Internal demand should be buoyant,in particular household consump-tion, which will be sustained by ris-ing employment and salaries, as wellas moderate and temporary fiscalloosening which the decent fiscalsituation makes feasible.

• Public consumption and investmentgrowth are robust. Authorities havehastened the use of European fundsbefore they expire, leading to a risein public investment in transporta-

June 2015


GROUP


GROUP

Bahrain: A4

• Bahrain's growth outlook has deterio-rated since the end of last year, due inparticular to falling oil price.

• The fall of global oil prices is puttingsignificant pressure on the countrypublic finances. Reduced publicresources will negatively impact pub-lic investment that traditionally sup-ports the non-oil sectors. Moreover,the public debt that already repre-sents more than 43 % of the GDPshould increase at 54 % of GDP in2015.

• The external risk is strengthening. Thecurrent account surplus should turn toa deficit of 2 % and external debtshould rise significantly.

• Moreover, private sector activity willsuffer from further erosion in con-sumer and business confidence,already weakened by the persistentuncertainty of Bahrain's political envi-ronment.

• However, the impact of the oil priceslump may be cushioned by macro-economic and financial assistancefrom the rest of the Gulf.

ASSESSMENT EITHER DOWNGRADED, OR REMOVED FROM POSITIVE WATCH LIST OR PLACED UNDER NEGATIVEWATCH LIST

Algeria: A4

• The country is facing a drop in oil andgas prices: considering the highdependency on oil and gas pricesdevelopments, the country shouldrecord an economic slowdown in2015. The fall of oil and gas pricessince June 2014 is going to hit growth,and a strong rebound in activity isunlikely if the oil and gas prices don’trecover.

• It will have an adverse effect on publicaccounts, while the country experi-enced a significant public deficit in2014 that reached 6.2% of GDP (oilrevenue accounts for more than 70%of total public revenues and 33.2% ofGDP in 2014). Besides, the decision ofthe authorities to support the privatesector thanks to tax relief and to main-tain social expenses may increase thepublic deficit in 2015.

• Current account will also register asignificant deficit due to a combinedfall in export receipts and an increasein imported goods.

Country Country risk Country risk previous new

Algeria A4 A4

Bahrain A4 A4

Canada A1 A1

China A3 A4

Gabon B B

Madagascar C C

South Africa A4 A4

Tanzania B B

Country risk assessments

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


GROUP

South Africa: A4

• The growth slowdown should con-tinue. It is due, among others, to shortages in electricity productionand distribution which may worsenduring the winter season. Unem-ployment is increasing and inflationremains high, despite lower price ofimported energy.

• Twin deficits and public debt areincreasing and the more restrictive fiscal policy will weigh further ondemand.

• The rand exchange rate remainsvolatile.

• Political and social situation remainsfragile in the context of ongoing wagenegotiations in the mining sector.

Tanzania: B

• Activity is slowing, and public deficitis increasing.

• The depreciation of the shillingagainst the US is a source of concern(17 % between January and May2015 following 8 % in 2014), on theback of increasing current deficitand reduced inflows of aid, after thedecision of main donors to suspendgrants following corruption scandal.A stronger US dollar and nervous-ness ahead of the October 2015election may increase pressure onthe shilling. Moreover, low supply offoreign currencies and recurringpublic payment arrears have impacton public and private companies.

Canada: A1

• Oil price drop hampers Canada’sgrowth. For the first time since Q22011, GDP contracted by -0,1 % QoQ inthe first quarter of 2015. DespiteCanadian dollar depreciation, currentaccount deficit widened due to the USeconomic slowdown and oil priceweakness.

• The oil and gas industry, as well assupport activities, are facing difficul-ties. Investment in energy will there-fore be postponed.

• Canada's housing bubble remains amajor issue. Speculative pressureremains high in the real estate sector.But given the current growth slow-down and its impact on householdincome, the construction sector out-look could deteriorate in the quartersto come, all the more since householddebt is comparatively high (as a % ofdisposable income).

• Canada’s manufacturing exportrecovery will allow a rebalancing ofthe economy. Despite oil and gasindustries’ difficulties, Canada’s diver-sified economy should provide newavenues of growth in the coming year.Exports should benefit from the Cana-dian dollar depreciation and will favora gradual rebalancing of the economytoward the manufacturing sector.However, Canada’s economic recov-ery will depend on the US economyrebound.

China: A4

• The high level of private sector debt isa source of concern. Given the expan-sion of shadow banking, it is difficultto assess precisely the level of privatesector debt, but the IMF estimates itstood at around 207 % of GDP in early2014 (compared to 130% of GDP in2008). This level is substantiallybeyond the levels observed in emerg-ing economies and particularly in theother BRICS. Moreover, non-perform-ing loans are rising.

• Consequently, bearing in mind theeconomic slowdown, the solvency of

the more exposed players needs to bewatched. Sectors most affected willbe those experiencing sizeable over-capacities and low profitability, suchas cement or steel sectors linked tothe construction sector. Indeed theproperty market situation remainsdeteriorated: real estate investment isslowing and property prices aredeclining.

Gabon: B

• The country is affected by the sharpin oil price:

• The country still relies on oil, whichaccounts for around 35% of GDP, 52%of fiscal revenues and 77% of goodexports, although the non-oil sectorhas driven growth in recent years, dueto the implementation of a majorpublic investment programme,

• The decline in oil prices, in addition toa steady downward trend in produc-tion, will thus affect current accountand fiscal balances which will turn todeficits in 2015. Moreover, the countrydoes not have a large fiscal buffer andpublic debt has already been risingfor some years,

• In the end, falling prices should leadto an economic slowdown, withgrowth declining to around 4% in2015 (after 5.4% in average in the past3 years).

Madagascar: C

• The political crisis lead to a vote bythe National Assembly end of May toimpeach the President elected inDecember 2013. The recurring poli-tical instability weighs on investment,and delays reforms needed in orderto reduce deficits. In this context,there is a risk that international aidflows will be suspended again (theInternational community suspendedgrants after the coup in 2009 butresumed flows after the presidentialelection end of 2013).

ALGERIA20

A4

B

Country risk

Business climate

Medium termFAIRLY LOW RISK

A slowdown in growth due to weak oil & gas prices

Growth in Algeria should see a net slowdown in 2015.Lower oil & gas prices during the second half of 2014directly affect the domestic economy, as the energysector represents over 36 % of GDP and 97 % ofexports. After having returned to positive growth in2014, the oil & gas sector is expected to contract in2015. Hydrocarbons exports fell sharply, by 23.7 %during Q4 2014. Despite a slight rally in the oil pricesince February 2015, exports should continue to con-tract over 2015. The non-oil sectors are also expectedto be weighed down by the decline in public invest-ment. Household spending should nonethelessremain firm, partly on account of the consumercredit reform for domestic products, and will remainone of the main growth levers. Faced with the risk ofa prolonged slowdown, the Algerian authoritiesintend to introduce a number of measures aiming tolimit the impact of falling oil & gas prices, includingsocial public spending and a corporate tax reform inthe private sector.

A challenging budgetary situation and a deteriorating current account

The public deficit is expected to deepen in 2015 due tothe combined effect of continued budgetary spendingduring the first half of the year and an estimated 10 %drop in annual revenues. In response to the decline inoil revenues, the authorities plan to rationalise publicspending whilst continuing to support the private sec-tor by reducing corporate tax. Although public debtincreased in 2015, it remains at a sustainably low level. The trade balance should also be impacted by thedecline in export revenues, aggravated by the fall in oil& gas prices and the contraction in export volumes. Inparallel, goods imports continued to increase in 2014,particularly industrial capital goods and food products.However, to offset the decline in export revenues, theauthorities plan to introduce import licences on prod-ucts which weigh the most heavily on the trade balance(cement, vehicles). The country can nevertheless relyon its abundant currency reserves (equal to almostthree years of imports).

Cabinet reshuffle in May 2015

After fifteen years as Head of state, PresidentAbdelaziz Bouteflika, aged 77, was re-elected inmid-April 2014 for a fourth five-year term. Follow-ing the election, a first government was formedunder Prime Minister Abdelmalek Sellal. However,in a challenging economic context, President Abde-laziz Bouteflika largely reshuffled the cabinet inMay 2015, nominating a dozen new ministersincluding some key posts, such as Finance, Energyand Higher education. The president also madechanges at the head of major companies and publicinstitutions including Sonatrach and in the manage-ment of the Customs & Border Services, Air Algérieand Banque Nationale Algérienne. Furthermore,restrictions on imports and foreign investmentswere reintroduced in order to support and promotenational industries. Bye-laws for limited companieswere also streamlined however, in order to promotenew businesses. National security seems to have improved rela-tively, although radical Islamic activism and insta-bility have intensified at the Eastern and Southerndesert borders due to the resurgence of the Libyanconflict.

RISKASSESSMENT

Strengths Weaknesses

� Abundant oil and gas reserves.� Strong potential from renewable energies andtourism.

� Robust external balance sheet (very low foreigndebt, strong currency reserves).

� Heavy dependence on oil & gas and problemswith exploiting revenues.

� High youth unemployment. � Excessive public sector weighting.� Heavy bureaucracy, weak financial sector andgovernance issues.

Imports of goods, as a % of total

Euro-zone

United Kingdom

Canada BrazilUnitedStates

E

54%

11%8%

5% 4%

Euro-zone

China Turkey ArgentinaUnitedStates

5

44%

12%

4% 3%4%

Exports of goods, as a % of total

(e): estimate (f): forecast

COFACE ASSESSMENTS

TRADEEXCHANGES

2012 2013 2014 (e) 2015 (f)

GDP growth (%)

Inflation (yearly average) (%)

Budget balance (% GDP)

Current account balance (% GDP)

Public debt (% GDP)

3.3 2.7 4.1 2.6

8.9 3.3 2.9 4.0

-4.1 -0.8 -6.2 -12.5

5.9 0.4 -4.3 -15.7

10.0 8.3 8.8 13.6

MAIN ECONOMICINDICATORS

ANGOLA21

C

D

Country risk

Business climate

Medium termRATHER HIGH RISK

Slower growth in 2015 due to the fall in the oil price

Despite several new wells coming on line and thelaunch of new oil fields, oil production (45% of GDP)will progress only marginally in 2015 and the fall inthe price of crude will limit the contribution of oil &gas exports to GDP. Furthermore, the sharp downward revision in publicspending will affect domestic demand and economicactivity. The postponement of a number of publicinvestment programmes will have a negative impacton the construction sector, which usually drives theeconomy. Private investments will be handicappedby high interest rates. Household spending will alsobe curbed by budgetary spending cuts and higherprices.Inflation will accelerate in 2015 and should reach theceiling limit set by the central bank (9%) driven byfuel prices following a reduction in petrol subsidies.Inflationary pressure will also be exacerbated by thedepreciation of the kwanza. After hiking base ratesby 25bps in March 2015 (to 9.25%), the central banknow enjoys only limited leeway given the slowdownin growth.

Worsening budget deficit and deterioratingcurrent account balance

The budget deficit recorded in 2014, the first since2009, will deepen in 2015. Given the weight of oil rev-enues (three quarters of total), the moderate increasein production and lower crude prices will significantlyreduce state revenues. Tax revenues excluding oil & gaswill also be limited by the slowdown in economic activ-ity. In order to attempt to stem the deterioration in pub-lic finances, the parliament adopted a revised budgetproposed by the government in February 2015, basedon an oil price of $40/barrel (compared to $81 previ-ously). The progressive withdrawal of petrol subsidies,decided at the end of 2014 and which should be effec-tive by September 2015, will also contribute to adecrease in expenditure, but will not prevent the deficitfrom worsening. The current account balance is also expected to post adeficit in 2015 under the combined effect of lower oilexport revenues (more than 90% of total) and higherimport costs, due the depreciation of the national cur-rency. Despite the expected decline in imports (capitalgoods and consumer goods) due to weaker domesticdemand, the country effectively remains highlydependent on imports for its food products, whichmeans that a proportion of its imports cannot bereduced.

The depreciation of the kwanza observed in 2014 con-tinued into 2015. The national currency lost almost 6%of its value between January and the end of April. Inorder to preserve the country’s reserves, the Angolanauthorities decided to allocate currencies primarilytowards the payment of certain transactions (particu-larly oil and food products). These measures havemeant longer payment delays for companies which arenot involved in these priority industries.The lack of currency liquidity and the economic slow-down could weigh on the banking system. which ishighly dependent on the oil sector. An increase indoubtful loans already triggered intervention by theAngolan state in 2014 to support Banco Espírito SantoAngola (BESA), the subsidiary of the Portuguese bankBES. Although this incident does not jeopardise thestability of the banking system, it highlights its fragility.

Social tensions and shortcoming in the business environment

The country has been governed since indepen-dence by President José Eduardo dos Santos andhis party (MPLA), with its supremacy again reaf-firmed in the 2012 parliamentary elections. Theopposition, despite gaining in strength, neverthe-less remains too weak to be an alternative. Thebiggest area of uncertainty is the successor for thecurrent president. The constitution was amendedto allow him to remain in office until 2022. His ageand rumours of his state of health mean that therecould well be a change before that date. Given theextent of the political, and economic grip of thepresident and his party, a disorderly successioncould prove destabilising for the country. Further-more, popular discontent regarding inequalitiesand poverty has been fuelled by the economicslowdown and the increase in the rate of inflation.The Angolan market contains significant invest-ment opportunities but also considerable risksgiven the ubiquity of corruption (Angola ranks 153out of 175 in the Transparency International classi-fication) and the poor business environment.

RISKASSESSMENT


� Major oil producer� Start of liquefied naturel gas production� Significant economic potential: diamonds. copper. iron. gold. agriculture. hydraulicresources

� International backing

� Vulnerability to oil price volatility� High unemployment (26%). extreme social inequality and regional disparities

� Lack of infrastructure� Fragile banking sector � Political and economic control held by small elite


China Euro-zone

India SouthAfrica

UnitedStates

E

46%

16%13%

9%

3%

Euro-zone

China Brazil SouthAfrica

UnitedStates

4

34%

20%

7%6%6%



COFACE ASSESSMENTS

TRADEEXCHANGES

2012 2013 2014 (e) 2015 (f)

GDP growth (%)




Public debt (% GDP)

5.2 6.8 4.0 3.2

10.3 8.8 7.3 9.0

4.6 0.3 -4.1 -6.8

12.0 6.7 1.0 -7.0

29.6 34.6 38.4 47.0


ARGENTINA22

C

C

Country risk

Business climate

Medium termVERY

HIGH RISK

Towards a recession in 2015

According to official data, the country recordedgrowth of 0.5% in 2014. In 2015, economic activityshould contract due to a drop in household spendingpower, impacted by a decline in real salaries as infla-tion rises, and due to a fall in exports towards Brazil(the main trade partner). Industrial goods exportsare likely to be weighed down by a contraction in theBrazilian economy, particularly lower sales in theautomotive sector. Agricultural exports on the otherhand should progress, at least in terms of volume, assoya and corn harvests are expected to be better thisyear, but should nonetheless be weighed down byrelatively weak commodities prices and possibleexport restrictions in favour of the domestic market.Investment remains depressed by import controlsand the difficulty of securing currencies. Inflationshould remain at a high level.

Deeper public deficit

Although the country’s budgetary revenues are amongthe highest in the region, the public deficit shoulddeepen further due to higher government spending.The state budget includes a significant rise in subsidiesfor industry, energy and public transport and also anincrease in investment into nuclear power plants, satel-lites (Arsat) and telecommunications. Furthermore,pressure from the powerful union lobby has forced thegovernment to concede salary hike of almost 27% formetallurgy and construction sector employees. Aheadof the presidential elections in October 2015, the stateeffectively fears a revival of social unrest among thepopulation triggered by a loss of spending power dueto rising real inflation. In order to stem the public deficit,the government is obliged to rely on the domestic mar-ket for funding and also borrow from the social securityretirement pension funds and the central bank. Thecountry is still unable to secure external financingdespite recent efforts to regain access to the interna-tional financial markets (agreement with the Paris Clubpublic creditors and compensation for the Spanish oilcompany Repsol following its nationalisation).

Fragile exterior balance

The current account deficit continues to worsenunder the increasing weight of energy costs and aweaker trade surplus. Argentina effectively har-bours great potential from shale oil and gas, par-ticularly from the Vaca Muerta field in theSouthwest of the country, but cannot become self-reliant on account of the low level of energy invest-ment. Agricultural exports remained weighed downby weaker commodities prices, whereas manufac-tured goods sales (primarily the automotive sector)have been slowed down by weaker demand fromBrazil. Despite strict import controls in order tostem capital outflow, the trade surplus is diminish-ing constantly (-17% in 2014) and can no longer off-

set the services deficit. The risk of a crisis followingcurrency depreciation seems limited in the shortterm and devaluation is now less likely, since a cur-rency swap agreement with China has stabilisedthe erosion of reserves, supported by strict controlof capital outflow (imports, repatriation of foreigncorporate profits).

Holdout funds: no agreement expectedbefore the October 2015 elections

Following the breakdown in negotiations with hold-out funds, Argentina has been in selective paymentdefault since July 30th 2014 (solely for debt issuedin foreign currencies). The draft law enabling theexchange of part of the foreign-denominated debtinto new domestic-currency bonds is doomed tofail due to the legal constraints involved. Theexpected agreement between the government andholdout funds in early 2015, upon the expiry of theRUFO clause, did not occur and the chances of afresh agreement before the October 2015 presiden-tial elections now seem less likely. The countrytherefore remains excluded from external financingwhich increases the pressure on its reserves.

Uncertain elections amid social tensions

Although the ruling party won the recent provincialelections, the outcome of the presidential elections,which should be held in October 2015, remainuncertain. Corruption scandals have seriously tar-nished the government’s image and the Nismanaffair, following the suspicious death of a federalprosecutor involved in the enquiry into the presi-dency, continues to shake the country. Economicdifficulties, particularly the drop in spending power,have fuelled popular discontent to the benefit ofthe Peronist opposition. Faced with galloping infla-tion, the country’s leading unionists have steppedup their salary demands and announced furtherstrikes in June, despite some progress in negotia-tions. Finally, the International Centre for Settle-ment of Investment Disputes ruled in April thatArgentina should repay 405 million dollars to Suezhaving unilaterally reneged upon its contracts withthe company in 2006.

RISKASSESSMENT


� Natural, agricultural, energy and mineralresources

� Education level greater than the regional average

� Qualified labour� Democratic political system

� Dependency on the prices of agricultural commodities

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


Brazil Euro-zone

UnitedStates

ChileChina

21%

10%

7%

5% 5%

Brazil Euro-zone

UnitedStates

MexicoChina

26%

16%15%

3%

11%



COFACE ASSESSMENTS

TRADEEXCHANGES

2012 2013 2014 (e) 2015 (f)

GDP growth (%)




Public debt (% GDP)

0.9 2.9 0.5 -1.0

23.0 26.0 23.9 30.0

-2.4 -2.0 -2.7 -4.1

-0.2 -0.8 -0.9 -1.7

37.3 40.2 48.6 49.5


A1

A1

Country risk

Business climate

Medium termVERY

HIGH RISK

Weaker oil prices are weighing on Canadiangrowth

During the first quarter of 2015, and for the first timesince 2011, the Canadian economy contracted (GDP0.1%). Consumer spending, which traditionally drivesthe economy, increased only marginally (+0.1%),whereas investments in non-residential constructionand equipment dropped by 2%. Unemploymentremained stable at 6.8% in April. Despite Canadiandollar depreciation, current account deficit wideneddue to the US economic slowdown and oil priceweakness, as oil represent 27% of total exports. Oilprice weakness is also affecting oil and gas compa-nies as well as support activities for oil and gasextraction. Investment in energy will therefore bepostponed. Besides, the economic situation of West-ern provinces, which are particularly dependent onthe oil rent, could deteriorate. On the other hand,federal public finances, which are less dependent onoil sales, should continue to improve towards equi-librium by 2016, in line with government objectives.Falling oil prices should boost disposable incomeamong Canadian households, although part of therevenues generated are likely to be used to pay downhousehold debt, which represented almost 165% ofdisposable income in 2013. Furthermore, the fall in oiland gas share prices should also feed through tohousehold wealth, as retail financial assets representalmost 25% of the country’s financial assets. Inflation,which stood at 1.9% in 2014, fell to 0.8% during thefirst quarter of 2015. To counter deflationary trends,the Central Bank of Canada cut its base rate by 25basis points in January 2015 to 0.75%. The Canadianproperty market appears heavily overpriced andremains dynamic. Canadian economic difficulties,more specifically the fall in consumer spending, aretherefore jeopardising the dynamism of the propertysector.

The recovery in manufacturing exports willrestore growth balance

Despite the preponderance of the energy sector, theCanadian economy remains broadly diversified and candraw on its dynamic manufacturing sector. Despite oiland gas industries’ difficulties, Canada’s diversifiedeconomy should therefore provide new avenues ofgrowth in the coming year. Exports should benefit fromthe depreciation of the Canadian dollar and restoremore balanced growth in favour of the manufacturingindustry. However, Canada’s exports recovery willdepend on the US economy rebound.

The Canadian banking system will remainstrong

The capital adequacy ratios of Canada's banks areabove the regulatory requirements. Moreover, theyremain profitable despite the low interest rates. Atthe time of the 2008 world financial crisis, theCanadian banks remained strong and had no needof a bailout. Despite the burden of private debt andthe risks related to property, the banks have suffi-cient equity to absorb any losses resulting from asharp property market correction.

Uncertain elections

According to the opinion polls conducted at theend of 2014, the governing conservative coalitioncould lose the October 2015 elections to the moremoderate liberals. Domestically, the western part ofCanada benefitted most from the election of theconservatives. A change of majority could swingthe balance back to the east.

RISKASSESSMENT


� Abundant and diversified energy resources� Prudent management of the public finances� Low level of external debt � Dynamic demography (migratory flows)� Strong, well-capitalised and strictly supervisedbanking sector

� High degree of openness and heavy depen-dence of the economy of the United States

� Weakening energy exports due to falling pricesand U.S. natural gas reserves

� Insufficient R&D spending� Manufacturing industry’s loss of competitivenesslinked to rising power of emerging competitors

� High household debt� Weakening of energy exports (natural gasresources in the United States)

� Inadequate gas distribution infrastructures


UnitedStates

China UnitedKingdom

JapanEuro-zone

U

76%

4% 4% 3% 2%

UnitedStates

China Mexico JapanEuro-zone

7

52%

11%8%

3%6%



COFACE ASSESSMENTS

TRADEEXCHANGES

2012 2013 2014 (e) 2015 (f)

GDP growth (%)




Public debt (% GDP)

1.9 2.0 2.5 1.4

1.5 1.0 1.9 0.9

-3.1 -2.8 -1.8 -1.7

-3.3 -3.0 -2.2 -2.6

87.9 87.7 86.5 87.0


CANADA23

CHINA24

A4

B

Country risk

Business climate

Medium termLOW RISK

Continued economic slowdown in 2015

After a slowdown in 2014, the Chinese economyshould decelerate further in 2015. The authoritieshave implemented the necessary reforms to ensurea more even balance in growth and now seem to beinclined to let the economy slowdown in order toenable a further shift towards consumer-drivenexpansion. This process is continuing in 2015. Dispos-able incomes are rising almost at the same rate asGDP growth and the service sector portion of theGDP is now greater than that of industry. However,corporate profits are being affected in the short termin sectors hit by heavy overcapacity, particularlyinfrastructure and construction. The property marketis showing signs of weakness, with a drop in prices,while stocks are at all-time highs and investments aredeclining. A prolonged fall in prices could impact theconstruction sector, which represents 15% of GDP,and banks due to their property exposure. A collapsein the property market is unlikely however, as theauthorities have the capacity to intervene in theevent of a major crisis. Beijing has tended to focusits interventions on easing the regulations imple-mented in 2010 and 2011, when property pricessurged as cut in interest rate. However, the centralbank maintains tight control over credit growth. Household spending should remain firm due to thehealthy jobs market. However, a slowdown in dispos-able income is perceivable, as retail sales growthslowed during the first quarter of 2015. Furthermore, growth in Chinese exports should sta-bilise due to the strength of the US economy and theslight economic improvement in Europe. However,the renminbi should continue to be driven higher byits internationalisation which will weigh on the com-petitiveness of exports as well as salary increases.

Private sector and local authority debt jeopardising the financial system

Although the level of public debt is sustainable, localauthorities have a high level of debt which remainsopaque. At the end of 2013, a national audit revealedlocal authority debt to be RMB17.9bn, i.e. one third ofGDP.Given the development of a shadow banking industryas an alternative source of financing (estimated at 30%of total funding), it is difficult to accurately assess thelevel of debt in the private sector. However, the IMF esti-mated debt at 207% of GDP at the beginning of 2014compared to 130% in 2008. Whereas most privatecompanies have deleveraged, debt ratios have contin-ued to progress among public companies and propertyand construction groups. Furthermore, SMEs fre-quently have to rely on shadow banking at exorbitantrates, given their difficulty in securing financing.

Moreover, the quality of banking assets is deterioratingalthough the shadow banking industry remains under-estimated. The non-performing loans ratio reached1.25% at the end of 2014, its highest level in severalyears. In April 2015, China experienced its first SOEdefault in the domestic bond market with the solarenergy group Baoding Tianwei which failed to pay aUSD14m coupon and debt holders requested reim-bursement from the parent company. Although thiscredit event did not cause panic, the market isnonetheless awaiting the reaction of the parent com-pany. The introduction of real bankruptcy risk isinevitable and will reduce moral hazard generated bygovernment interventions. The solvency of more fragileborrowers will have to be scrutinised in the context ofan economic slowdown.

Persistent shortcomings in terms of governance

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

RISKASSESSMENT


� External accounts benefitting from industrialcompetitiveness and diversification

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

� Gradual move up-market � Infrastructure development

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

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

� Overcapacities in certain industries� Chinese banks weak, considering the creditdynamism and uncertainties over the level ofnon-performing loans

� Environmental problems


Hong Kong UnitedStates

Japan SouthKorea

Euro-zone

S

17% 17%

11%

7%

4%

SouthKorea

Euro-zone

UnitedStates

AustraliaJapan

1

9% 9%

8%

5%

8%


COFACE ASSESSMENTS

TRADEEXCHANGES

2012 2013 2014 (e) 2015 (f)

GDP growth (%)




Public debt (% GDP)*

7.7 7.7 7.4 7.0

2.6 2.6 2.0 1.2

0.2 -1.1 -1.1 -1.9

2.6 1.9 2.0 3.2

37.3 39.4 41.1 43.5


(e): estimate (f): forecast* Comprising central and local debt (excl. financingvehicles)

CZECH REPUBLIC 25

A3

A2

Country risk

Business climate

Medium termLOW RISK

The country has returned to growth

The country came out of recession in 2014 thanks toa recovery in exports and public investment. Growthshould steadily accelerate in 2015 and 2016, drivenby internal and external demand. Household consumption will be boosted both by increasingemployment and wages, as well as the supportmeasures in the budget, equal to 0.5% of GDP. Withthe Central bank policy interest rate at close to zero,the cost of credit is low and favourable for the prop-erty market in the major cities such as Prague andBrno. Investment will primarily be focused on a fasteruse of the European funds allocated for the period2007-2013 (the end date for their use is June 2015)for the construction of roads and rail lines, militaryexpenses, and, then, the increase in capacities in theexporting industries. Exports of motor vehicles, andto a lesser extent, of machines and electronic devices(the three represent over half of all sales) will feel thebenefits of the acceleration in western Europeandemand (80% of exports) and the low level of thekoruna for which the central bank (CNB) set a flooragainst the euro in November 2013 (CZK 27 to 1euro). This CNB target has proven its credibility asthe bank has not had to intervene to achieve it. How-ever, given that at the same time imports have beensustained by internal demand, the contribution oftrade to growth will be moderate.

Sound budget situation despite a temporary loosening

The previous government was punished in the October2013 elections for its austerity policies. A new centre-left coalition consisting of Social-Democrats, Christian-Democrats and a new party, ANO, founded in 2011 bythe businessman, Andrej Babis, as a response to ongo-ing corruption scandals, took over the reins of govern-ment under the lead of the social-democrat, BohuslavSobotka, from the right-wing coalition. Whilst euro-scepticism is not a prerequisite, membership of theeuro is still not on the agenda, at least for the shortterm. As the new government decided to loosen the budg-etary constraints, the budget deficit has slightlyincreased. Allowances for families with more than onechild are going to be increased, alongside wages in thepublic sector. A reduced rate of VAT will be brought infor healthcare purchases, books and products forinfants. The State’s contribution to sickness insurancefor the elderly, students and the unemployed willincrease. Finally, the indexing of pensions will be rein-troduced. The level of the deficit, even given thesemeasures, will still remain below the 3% of GDP markand the public debt close to 40%. This is a mediumterm debt, 80% denominated in the national currency.Moreover, the authorities have adopted a modest

medium-term fiscal program designed to reduce thestructural deficit to 1% in 2018 (against 1.6 % at present),notably by improving tax collection, which should beenough to put the debt a downward trend.

Large trade surplus

The previous low account deficit will turn into aslight surplus. The country’s trade runs a large sur-plus. Its exports are fully benefiting from the upturnin automobile demand in Europe. Despite the par-tial defection of Russian visitors, tourist revenuesalso make a large contribution to the services sur-plus. These two surpluses cover the dividend repa-triations from foreign owned companies, withSkoda, the local Volkswagen subsidiary, in firstplace. An increasing proportion of these sums(almost a third in 2015) are now reinvested in place,which helps to consolidate the position of Czechindustry in the European, and in particular, German,production chain, and ensures the managerialautonomy and technological contribution of thelocal subsidiaries. Its external debt is limited (67%of GDP) and 80% of it is owed by the private sector.The external debt held by the local banks repre-sents 27% of the total, which is a reflection of thedomination of European banking groups. The localsubsidiaries, however, have a base of local depositsthat easily cover their loans, and have not sufferedin the crisis.

RISKASSESSMENT


� Central geographic location, at the heart ofindustrial Europe

� Highly integrated into the German productionchain

� Significant industrial potential (38% of GDP)� Significant local added-value (55% of the valueof its exports)

� Cultural links with Western European economies

� Aging population � Small, very open economy, with exports accounting for 84% of GDP

� High degree of geographic and sector specialisation of its exports

� Insufficient R&D and transport infrastructure� Lack of competition and skilled personnel / slow productivity gains


Euro-zone

Poland Russia HungaryUnitedKingdom

E

63%

6% 5% 3% 3%

Euro-zone

Poland Russia HungaryChina

60%

8%6%

3%5%


COFACE ASSESSMENTS

TRADEEXCHANGES

2012 2013 2014 (e) 2015 (f)

GDP growth (%)




Public debt (% GDP)

-0.8 -0.7 2.0 2.5

3.5 1.4 0.4 0.2

-3.9 -1.3 -2.0 -2.0

-2.2 -2.2 -1.0 0.4

45.0 45.0 43.0 42.0



C

B

Country risk

Business climate

Medium termHIGH RISK

Economic recovery in 2015

After several years of stagnation, the Egyptian econ-omy seems to have resumed growth. The nationalgrowth rate increased during the second half of 2014driven by the manufacturing sector and a recoveryin the tourist industry. The energy mining industrywill remain depressed due to the fall in oil & gasprices and should record a negative growth rate. Thiswill be largely offset however by strong perform-ances in the construction sector and higher revenuesfrom the Suez Canal. Investments increased, com-pared to 2013/2014, due to a recovery in privateinvestment. Consumer spending should continue tosupport economic activity particularly given the highlevel of public expenditure and increased householdconsumption. This improvement has been confirmedby a stronger consumer confidence index. The PMIindex which gauges corporate confidence alsoreflects an improvement in the economic climate.

No sign of improvement in the publicfinances

Despite signs of an economic recovery, Egyptian publicfinances should remain strongly in deficit in 2015. Inspite of increased revenues stemming from financial aidprovided by the Gulf States and new corporate taxes,the budget deficit should remain above 10 % on theyear. Spending will continue to increase under plannedstimulus policies. This increase should be offset by areduction in energy subsidies which began in July 2014.Despite these measures, spending on subsidies willcontinue to weigh on the budget as it representsalmost 5.1% of GDP. The significant deficits recorded2011 have resulted in a substantial increase in publicdebt. Mainly domestic, it is held by the banks. Thereforms aimed at cutting subsidies and attracting jointfunding for future major investment projects will helpgradually bring down the debt.

External accounts and Egyptian pound still under pressure

The 2011 Egyptian crisis had major repercussionson the external balance sheet. Since 2013, Egypthas been a net importer of oil & gas and remainshighly dependent on grain and energy imports. Thetrade balance deficit is likely to exceed 9 % of GDPin 2015, although it will be offset by a slight tradesurplus in services thanks to a stabilisation of trans-fers from expatriates and an increase in the numberof tourists. The current account excluding grantsshould also remain negative and worsen in 2015.The deficit will be only partially covered by directforeign investments and financial aid from the GCC.External debt should remain at a manageable level(around 20% of GDP).In this context, it will be difficult to keep the Egypt-ian pound informally pegged to the dollar. Thedevaluation of the pound in January 2015 from 7.14 to 7.53 per dollar and restrictions introduced

aiming to combat a shadow forex market shouldlimit downside pressure. Following fresh aid from the Gulf States, Egyptianreserves should reach 20 billion dollars in 2015,which is the highest level in four years.

Completion of political transition

Egypt has regained a degree of political stabilityfollowing the election of President Abdel Fatah ElSissi in June 2014. The Egyptian president presentshimself as the country's new strong man. His poli-cies are based on two areas: reviving the Egyptianeconomy and an unrelenting war on terrorism.Despite a generally calmer atmosphere, the nearfuture is likely to be difficult for the country. TheEgyptian authorities have not succeeded in bring-ing about a consensual transition and Egyptiansociety remains deeply divided between the differ-ent revolutionary movements (Islamists and left-wing secular parties). Moreover, the regime'srepression of the Muslim Brotherhood, an organi-zation declared a terrorist group by the govern-ment, increases the risk of a violent response by itsmembers. These tensions have been exacerbatedsince the former president Mohamed Morsi wascondemned to death in April 2015.With regard to the economy, the international mar-keting campaign led by the President since hiselection (visit to the countries of the Gulf Cooper-ation Council, presence at Davos) seems to bebearing fruit. The International Egypt EconomicDevelopment Conference held on 13 March 2015 inSharma El Sheik resulted in the signing of $36 bil-lion in contracts, which could, in future, help revivethe Egyptian economy.

Vulnerable banking sector

Egypt's banking system remains inefficient andhighly exposed to sovereign risk. Holding almost95% of the public debt, it hardly involves the pri-vate sector, which suffers from a crowding outeffect. Moreover; the bank account penetration rate(10 %) is very low compared to other MENA coun-tries. However, though weakly capitalised, Egypt'sbanks are still fairly profitable and the ratio of non-performing loans is declining. A new reform has been introduced to facilitate andtherefore encourage investment in Egypt. Thisreform has reduced a number of constraints includ-ing the abolition of manager criminal liability anddecreased customs levies on capital goods.

RISKASSESSMENT

StrengthsWeaknesses

� Tourism potential� Manageable external debt� Political and financial support from the Gulfmonarchies and western countries

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

� Twin deficits� Low level of foreign exchange reserves � Banking system subject to sovereign risk


Euro-zone

India Turkey LibyaSaudiArabia

23%

7% 7%6%

4%

Euro-zone

China Ukraine SaudiArabia

UnitedStates

2

25%

10%

8%

5%5%


COFACE ASSESSMENTS

TRADEEXCHANGES

2012 2013 2014 (e) 2015 (f)

GDP growth (%)


Budget balance (% GDP)*


Public debt (% GDP)

2.2 2.1 2.2 4.0

7.1 9.5 10.1 9.8

-10.6 -13.7 -13.8 -11.8

-3.9 -2.4 -0.8 -3.3

78.9 89.0 90.5 90.5


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

EGYPT26

B

C

Country risk

Business climate


Growth prospects have deteriorated due tothe fall in oil prices

Economic activity slowed slightly in 2014 as publicspending was reduced, after several years of rapidgrowth in capital expenditures, in response to the fallin oil revenues. Growth should decelerate moresharply in 2015 due the further fall in oil prices andthe refurbishing of several oil wells. Economic activityshould nonetheless pick up gradually from 2016onwards, driven by public investment, the naturalresources sector (food, gold and manganese mines,and wood processing) and services. The countryremains highly vulnerable to instability in oil prices,and is also faced with a decline in oil production dueto the gradual depletion of its reserves. The authori-ties have nonetheless made a major effort to diver-sify and modernise infrastructures under the PlanStratégique Gabon emergent (PSGE). The project isbeginning to bear fruit and should limit the impactof the collapse in oil prices. The success of the gov-ernment’s strategy will depend on improved invest-ment efficiency however and many obstacles remainin place for the long-term development of the econ-omy (insufficient electricity supply, lack of skilledlabour, doubtful contract security and poor gover-nance).

Public and external accounts should dip into red territory in 2015

The country’s financial situation remains heavilydependent on oil, which represents almost 80% ofexports and more than half of fiscal revenues.The drop in production and the fall in crude prices dur-ing the second half of the year drove oil exports downin 2014, which an increase in wood and manganeseexports failed to offset. Meanwhile, imports excludingthe oil sector increased slightly. The trade surplusdecreased, while the invisible deficit remained at a highlevel (reflecting the cost of freight and insurance, thepurchase of technical services abroad and profit repa-triation). This caused further contraction of the currentaccount surplus, which should tip into deficit in 2015given the steeper decline in oil sales, despite the factthat imports should decrease due to the global declinein commodity prices and weaker public demand. Cur-rent accounts will only move towards balance in 2016if oil prices recover slightly, while non-oil exports areexpected to continue to increase.The public account surplus has dwindled over the pastfew years due to a huge increase in public investmentsunder the PSGE. The fall in oil prices which began in2014 has led to the authorities adopting a budgetamendment. Capital goods expenditure has beenrevised sharply lower compared to the initial budget,which has increased the budgetary surplus andenabled the government to purge part of its arrears.The 2015 budget includes a much lower level of oil

revenues and forecasts a fall in spending on goods andservices, a further decline in fuel subsidies and a stabil-isation of public investments. Despite this, the publicdeficit should be approximately 3% of GDP in 2015.Public debt remains relatively low but the country hasrapidly built up new debt since an early repayment ofdebt in 2008 to the Paris Club. Furthermore, the costof borrowing on the bond markets has risen since theend of 2014 for oil producing countries.

The presidential and legislative electionsshould be more closely contested than in thepast in 2016

The presidential party continues to dominate thepolitical scene. However, social discontent is grow-ing and the legitimacy of the Head of state AliBongo is persistently being challenged. Further-more, the opposition has regained some of itsstrength in 2014 with the emergence of a newalliance, although there is no guarantee that it willbe able to agree on a single candidate for the pres-idential election. Following the senatorial electionsin December 2014, which the ruling party won out-right, like the municipal elections in December 2013and the legislatives in December 2011 (boycottedby the opposition), the presidential and legislativeelections promise to be more closely contestedthan in the past in 2016.

RISKASSESSMENT

Strengths Weaknesses� 5th largest oil producer in Sub-Saharan Africa; 2nd largest African timber producer; aiming to bethe world's leading manganese producer

� Economic diversification efforts undertakenunder the “Plan Gabon Emergent”

� Public debt reduced in 2008 thanks to earlyrepayment to the Paris Club

� Economy highly dependent on the oil sector

� High cost of production factors linked to infra-structure inadequacy (transport and electricity)

� High unemployment and widespread poverty


Japan Euro-zone

Australia IndiaUnitedStates

21%

17%

10% 10%9%

Euro-zone

IvoryCoast

UnitedStates

CameroonChina

39%

16%

9%

5%7%


COFACE ASSESSMENTS

TRADEEXCHANGES

2012 2013 2014 (e) 2015 (f)

GDP growth (%)




Public debt (% GDP)

5.5 5.6 5.1 4.4

2.7 0.5 4.5 2.5

2.6 1.8 2.9 -3.1

21.3 14.8 11.1 -4.0

21.1 26.9 27.7 34.4



GABON27

A4

A2

Country risk

Business climate


Resurgent growth

After three years of recession, Portugal recordedfresh growth in 2014. The recovery has been drivenby domestic demand. Consumer spending hasincreased, investment in the construction industryhas continued to decline but the increase in invest-ments in equipment, which began to recover in 2013,has accelerated. However, as goods and servicesimports have increased more rapidly than exports,foreign trade has contributed negatively to growth.The recovery continued in the first quarter of 2015 asimports fell, because of lower energy prices, andexports accelerated. The contribution from domesticdemand has remained positive although decreasingslightly. Despite a restrictive fiscal policy, the currentdecline in credit and political uncertainty ahead oflegislative elections this year, growth should reachabout 1.5% in 2015 and maintain approximately thesame rate next year. After increasing slightlybetween the end of 2014 and early 2015, the unem-ployment rate (13.7% in Q1 2015) should fall back overthe next few quarters which, combined with a slightrise in disposable household income (lower energycosts, income tax deductions), should continue tosupport consumer spending. The increase in the pro-duction capacity utilisation rate, accommodatingmonetary policy and a lower corporate tax rateshould stimulate corporate investment (in April 2015,the industrial confidence indicator reached its high-est level since February 2008). Exports should accel-erate in 2015 and 2016, benefitting from firm demandfrom major trade partners such as Spain, Germanyand the UK, and from a gain in competitiveness dueto the depreciation of the euro. However, the contri-bution of external trade to growth should be weak,given the expected rise in imports.

Corporate debt remains high and anincrease in doubtful loans is weighing onbank profitability

Company margins started to recover from summer2009 onwards driven by wage moderation andemployment restructuring. Moreover, the number ofbankruptcies, which had mainly hit SMEs as they aregeared primarily towards the domestic market,declined in 2014, after having almost quadrupledbetween 2007 and 2013. Furthermore, payment inci-dents recorded by Coface, which had peaked in early2012, declined sharply. However, despite decreasingslightly, corporate debt remains too high (128% of GDPat the end of 2014), which is weighing on investment.The banking sector has improved its solvency and benefits from better financing conditions. However, the increase in non-performing loans is impacting itsprofitability and restricts its capacity to grant loans to

creditworthy companies. The second half of 2014 sawthe bailout of Banco Espirito Santo while Banco Com-ercial Português failed the ECB stress tests.

A successful exit from the bailout planalthough many challenges lie ahead

The international ¤78bn bailout plan (by the EUand the IMF) implemented in May 2011 has reacheda positive conclusion. Portugal’s access to bondmarkets was fully restored before the expiry of theplan (June 2014) without having to rely on a pre-cautionary credit line. Economic activity recovered,public finances have improved and the imbalancein external accounts has been reabsorbed.A growth shock and improved competitivenesshave helped to correct the country’s externaldeficits but unemployment and underemploymenthave risen sharply. A recovery in growth withoutultimately deteriorating the current account balance remains an important challenge. The per-sistence of significant handicaps (low investment,high level of debt and structural bottlenecks)means that further reforms are necessary. AlthoughPortugal has made progress in this area, it is lag-ging behind its peers in terms of job flexibility anddomestic competition. Effectiveness of central andlocal administrations and public sector paymentdiscipline need to be improved, along with thefunctioning of insolvency and corporate debtrestructuring procedures. Finally, although theauthorities were able to pay back part of the loansfrom the IMF ahead of schedule, in March 2015, thegovernment’s sizable debt burden(130% of GDP)and financing needs continue to pose significantrisks to debt sustainability. Debt dynamics remainhighly sensitive to macroeconomic shocks.

RISKASSESSMENT

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

� Declining labour unit costs and reforms

� Limited scale of the manufacturing industry, specialisation in sectors with low added value(textile-clothing. mineral products and metalores. metals. food products)

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

� Deteriorating bank asset quality and profitability


Euro-zone

Angola UnitedStates

BrazilUnitedKingdom

59%

6% 6%4%

1%

Euro-zone

Angola China RussiaUnitedKingdom

65%

5% 3% 2%2%


COFACE ASSESSMENTS

TRADEEXCHANGES

2012 2013 2014 (e) 2015 (f)

GDP growth (%)




Public debt (% GDP)

-4.0 -1.6 0.9 1.5

2.8 0.4 -0.2 0.6

-5.6 -4.8 -4.5 -3.2

-2.1 1.4 0.6 1.4

125.8 129.7 130.2 126.3



PORTUGAL28

B

C

Country risk

Business climate

Medium termFAIRLY HIGH RISK

Economic activity will remain firm in 2015

Economic growth accelerated in 2014, buoyed by anincrease in foreign direct investments (FDI) andexports, particularly mobile phones. In 2015, eco-nomic growth should remain dynamic and exportswill continue to benefit from the strength of theeconomy in the US, which is Vietnam’s main tradepartner. The country’s exports have moved upmarketthanks to DFI. Electronic exports are progressing andthe country has become a hub for tablet and smart-phone production by Korean companies. FDI inflowremains at a high level due to delocalisation as Asiancompanies set up production units in Vietnam. Inflowshould continue to progress in 2015, provided thatpublic companies continue opening their capital.In the agricultural sector, the country benefitted fromfavourable weather conditions in 2014 and growth inexports of fish and prawns. Rice exports should alsocontinue to progress.However, domestic investment remains weigheddown by the weakness of the banking system, whichhas a particularly high level of non-performing loans.Despite regular easing of monetary policy since 2012,which continued in 2014 with a 50-point cut in thebase rate in March, and liquidity injections, creditgrowth struggled to take off (14% in 2014). However,consumer spending recovered in 2014 which is a signof improved consumer confidence encouraged bymoderate inflation. This trend should continue in2015. Tourism will remain weighed down by the anti-Chinese rioting in May 2014.The inflation rate slowed in 2014 and should remainmodest in 2015 due to moderate credit growth andflat commodities prices. However, if monetary policyis relaxed significantly, a steep increase in inflationcannot be ruled out.

Persistent financial weaknesses

After heavy capital outflow forced the authorities todevalue the dong six times between 2008 and 2011, thecountry’s exterior balance has since stabilised. Exportsproved resilient despite the unfavourable internationaleconomic climate. However, the current account sur-plus will be reduced in 2015 due to stronger importsrequired to meet domestic demand and lower rev-enues from tourism. Although the central bank deval-ued the dong by 1% in January and also in May inresponse to pressure on the trade balance, the cur-rency stabilised and foreign exchange reserves haveprogressed and now represent 3 months of imports.The dong will remain exposed to currency fluctuationsand global risk aversion, particularly as the marketsanticipate a tightening of US monetary policy. In 2015, the budget deficit and public debt will continueto increase and sovereign risk will remain high. In addi-

tion to a lack of transparency in public accounts, publicdebt remains highly vulnerable to currency risk asalmost 50% is denominated in foreign currencies. Fur-thermore, contingent commitments could jeopardisethe sustainability of public debt in the medium term inthe event of public company defaults. Moreover, the banking system remains fragile as it isundercapitalised and heavily exposed to the dollar.Despite the creation of a defeasance vehicle, credit riskremains high and underestimated. Furthermore, thepublic banks’ heavy exposure to opaque public com-panies is a further cause of weakness. However, meas-ures have been taken, with ten pilot banks selected toimplement supervision along the same lines as Basel II.They have until the end of 2015 to put in place anindicative approach, prior to the implementation of astandardised approach by 2018.

Increasing geopolitical tensions and persistent shortcomings in the business climate

The sovereignty dispute in the South China Seabetween Vietnam and China was reawakened inMay 2014 following the installation of a Chinese oilrig in waters claimed by Vietnam. This generatedserious anti-Chinese feelings in Vietnam, resultingin demonstrations and acts of violence against Chi-nese interests in the country. China in the end dis-mantled the rig in July under pressure from theUnited States, and ASEAN countries decided todraw up a code of conduct with China covering thisquestion. Vietnam is likely to further strengthen itslinks with the United States and Japan in 2015,whilst the underlying frictions with China willremain. The quality of governance remains an issue inattracting foreign investors. The key shortcomingsare in terms of the rule of law and control of cor-ruption, which remains, despite the reforms carriedout, very widespread within the political and eco-nomic milieus. Finally, the Communist Party stillcontrols the country’s entire political, economicand social life.

RISKASSESSMENT

Strengths Weaknesses� Skilled and low cost labour� Solid agricultural potential and natural resources� Development strategy based on economic openness and diversification

� Shortcomings in the business climate. � Lack of infrastructures � Incomplete public sector reforms � Widening inequalities � Weak banking system

UnitedStates

Euro-zone

China SouthKorea

Japan

19%

15%

11%10%

5%

China SouthKorea

Euro-zone

ThailandJapan

29%

16%

9%

5%6%


COFACE ASSESSMENTS

TRADEEXCHANGES

2012 2013 2014 (e) 2015 (f)

GDP growth (%)




Public debt (% GDP)

5.2 5.4 6.0 6.0

9.1 6.6 4.1 2.5

-6.8 -5.9 -5.9 -6.5

6.0 5.6 4.1 3.4

48.5 52.1 52.1 54.0



VIETNAM29


COFACE SA1, place Costes et Bellonte92270 Bois-ColombesFrance

www.coface.com

RESERVATION

This document is a summary reflecting the opinions and views of participants as interpreted and noted by Coface on the date it was written and based on available information. It may be modified at any time. The information, analyses and opinions contained

in the document have been compiled on the basis of our understanding and interpretation of the discussions. However Coface does not, under any circumstances, guarantee the accuracy, completeness or reality of the data contained in it. The information,

analyses and opinions are provided for information purposes and are only a supplement to information the reader may find elsewhere. Coface has no results-based obligation, but an obligation of means and assumes no responsibility for any losses incurred by

the reader arising from use of the information, analyses and opinions contained in the document. This document and the analyses and opinions expressed in it are the sole property of Coface. The reader is permitted to view or reproduce them for internal use only,

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June 2015 - Global Country Risk Outlook