The expected slowdown in the United States should not lead to a decline in oil prices. On 20 September 2007, the average price per barrel of Brent since 1 January was about 66.8 dollars compared to 65.2 dollars for the same period last year. Despite the OPEC decision to raise production quotas and the prospects for a slowdown in American demand a range of factors — the decline of crude oil stocks in the United States, the hurricane season in the Gulf of Mexico, and growing tensions in the Middle East — strengthened the perception of a shortage prevailing in the markets and pushed prices higher. The average crude price for the full current year will thus likely exceed the $65.2 per bbl average for 2006 and could reach $67 or $68. Prices should continue to rise in 2008 despite slow world demand growth with the dollar's weakness and the rising cost of investments needed to increase production capacity prompting oil producing countries to keep the pressure on prices. A hypothesis based on a $73 to $75 average price per bbl would seem plausible in such conditions.
In the United States: In July 2007, or before the financial crisis, forecasts called for a slowdown in 2007 followed by recovery in 2008. The new scenarios developed in September 2007 after the crisis have at this juncture only reduced the strength of the recovery expected in the United States in 2008 (2.0 per cent in 2007 and 2.4 per cent in 2008 according to the September 2007 "consensus", 1.9 per cent in both 2007 and 2008 for Natixis in September 2007). Forecasters see little likelihood of a recession (GDP declining in two consecutive quarters) at this juncture. We have opted for a hypothesis of an American slowdown continuing in 2008 with 1.9 per cent growth in 2007 and 1.7 per cent in 2008.
Western Europe, after reaching a cyclical peak in 2006, should return to less brilliant growth rates of 2.6 and 2.2 per cent this year and next.
Japan, where the domestic demand dynamic has been disappointing, should post 2.2°per°cent growth in 2007 and 2.0 per cent in 2008.
In emerging countries the American slowdown will only have moderate impact. China, which represents 20 per cent of total emerging-country GDP and has an essentially internal economic dynamic, should hold up well. In total, emerging countries should grow 7.0 per cent in 2007 and 6.9°per cent in 2008.
COFACE | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 |
World production | 2.7 | 4.1 | 3.5 | 4.3 | 3.8 | 3.6 |
| | | | | | |
Industrialised countries | 1.8 | 3.1 | 2.4 | 3.0 | 2.3 | 2.0 |
United States | 2.7 | 4.2 | 3.2 | 3.3 | 1.9 | 1.7 |
Japan | 1.4 | 2.7 | 1.9 | 2.2 | 2.2 | 2.0 |
European Union 15 | 1.1 | 2.0 | 1.6 | 3.1 | 2.6 | 2.2 |
Germany | -0.2 | 0.8 | 1.1 | 3.0 | 2.6 | 2.0 |
United Kingdom | 2.7 | 3.3 | 1.9 | 2.8 | 3 | 2.1 |
France | 1.1 | 2.0 | 1.2 | 2.2 | 1.8 | 1.8 |
Italy | 0.1 | 0.9 | 0.1 | 1.9 | 1.8 | 1.6 |
Emerging countries | 5.6 | 7.1 | 6.5 | 7.1 | 7.0 | 6.8 |
Emerging Asia | 7.1 | 7.9 | 7.9 | 8.5 | 8.5 | 8.3 |
Latin America | 1.9 | 6.0 | 4.5 | 5.4 | 4.9 | 4.3 |
Central Europe | 4.2 | 5.6 | 4.7 | 6.2 | 6.0 | 5.6 |
CIS | 7.8 | 7.9 | 6.7 | 7.4 | 7.5 | 7.2 |
Middle East (plus Turkey) | 5.8 | 7.1 | 6.0 | 5.7 | 5.1 | 5.6 |
Middle East (ex Turkey) | 6.4 | 5.6 | 5.6 | 5.4 | 4.8 | 4.8 |
Sub-Saharan Africa | 4.3 | 5.1 | 6.3 | 5.9 | 7.3 | 6.1 |
World trade | 5.4 | 10.3 | 7.0 | 7.4 | 7.1 | 7.0 |
Will those growth hypotheses be conducive to triggering a credit crunch?
Three factors will mitigate risks of a credit crunch occurring on the scale of the 2001 crisis — which produced a 40 per cent increase in payment incidents.
1/ All payment incident peaks recorded by Coface — 1974, 1982, 1991-93, and 2001 — were associated with world growth below two per cent. All payment incident peaks were moreover linked to at least a 0.8-point decline in world growth. In our relatively pessimistic scenario, world growth suffers a 0.6-point decline between 2006 and 2008 but the growth rate remains above two per cent.
2/ Primarily linked to household overindebtedness, the 2007 crisis is thus unlike the last credit crisis. The payment default peak registered in 2001 is explained moreover by the very nature of the crisis: overinvestment by companies. Companies adjusted for those excesses with drastic spending cutbacks and a consequent upsurge in payment defaults. In 2007, household overindebtedness was responsible for the crisis. Companies have not been at the heart of the crisis even if they could suffer from collateral effects via a possible economic shock and the possibility of more difficult access to financing. Two industrialised countries — the United Kingdom (negative watchlisted in June 2007) and Spain — thus appear vulnerable to a contagion effect resulting from the American property crisis. The percentage ratio of household debt to disposable income is 163 per cent in the United Kingdom and 130 per cent in Spain compared to 138 per cent in the United States.
3/ Companies are generally in better shape to cope with an economic shock. The overall financial health of American companies has been relatively good: debt has stabilised and has not reached the levels registered in 2001. Credit has been expanding since mid-2004. Although in decline, profits have remained at a high level, representing 10 per cent of GDP. Relatively debt-free and more profitable, German and Japanese companies are well armed and less vulnerable.
British and Spanish companies have been a little shakier since they are currently at a cyclical peak in indebtedness terms albeit with their profitability stabilised at a high level. French and Italian companies meanwhile currently seem a bit shakier with low but nonetheless comfortable levels of profitability.
Among emerging countries, a credit crunch could affect those with large current account deficits financed by volatile capital. In Emerging Europe such deficits are often coupled with growing corporate debt denominated in foreign currencies as has been the case in Hungary, the Baltic States, and especially Romania. In the preferred scenario, the American slowdown will only have moderate impact. Slowdowns should develop in Mexico, Argentina, and in very open Asian economies like Singapore and Hong Kong. In most emerging countries, however, domestic demand is often the decisive component of economic performance. Many emerging economies have moreover diversified their foreign trade, particularly toward Europe and Asia.
In that context, the global country risk index has risen 0.7 per cent reflecting mainly the negative watchlisting of the ratings of both Spain (A1), weakened by household overindebtedness and the risk of a property market downturn and Romania (A4) with a current account deficit reaching record levels and making the country very dependent on financial markets. Removal from positive watchlist status of the ratings of Morocco (A4) and Argentina (C) also contributed to the index deterioration.
"A1" rating kept on negative watchlist (March 2007)
A marked slowdown will develop this year with the economy growing only 1.9 per cent, and it will continue in 2008, up 1.7 per cent. The adjustment in the residential construction sector with growing stocks of available housing and declining prices will continue at least until the third quarter next year.
Already deeply in debt, households will suffer from the reversal of the wealth effect that rising property values has produced and will be facing tougher conditions for refinancing mortgage loans. That will prompt them to significantly reduce their consumption (70 per cent of GDP) and increase savings. Several factors could compound that slowdown including a sluggish job market, slower wage growth, and a possible increase in petrol pump prices. The major car manufacturers, already particularly weakened by the competition with their Asian rivals, have begun to feel the effects of the crisis.
The household consumption slowdown and more difficult access to financing will significantly affect corporate performance. Companies may cut back on production and slow the pace of their investments, which will ineluctably undermine their profitability and lead to higher unemployment. Exports will not suffer much from the world economic slowdown, continuing to benefit from the still robust demand from emerging countries and favourable exchange rates. Imports will stall under the effect of the household consumption slowdown thereby contributing to a slight reduction of the current account deficit. Military spending and smaller tax revenues should meanwhile affect the fiscal deficit.
Corporate payment behaviour is still generally good at this juncture with profitability very satisfactory on average. Companies with the largest debt, notably as a result of debt leveraged operations, could nonetheless grow weaker in coming months especially with some sectors already contending with tense financial situations that a credit crunch would exacerbate. That would of course affect residential construction (housing promoters and builders, manufacturers and distributors of building materials, financial intermediaries and institutions, and so on), but also sectors focusing mainly on the domestic market like car manufacturing and housing-related distribution. Services to private individuals, leisure (restaurants, hotels, travel), textile-clothing sectors and hifi6TV-video should also suffer from household budgetary adjustments.
A1 rating
The Japanese economy should grow 2.2 per cent this year and 2.0 per cent in 2008. Exports and corporate productive investment will continue to drive the economy. Regarding exports, strong growth in Asia, particularly China will partly offset the American demand slowdown. Productive investment by companies, despite an upturn expected in the machine tool sector, should increase substantially. The remarkable growth of corporate profits (11 per cent of GDP) will continue although the yen appreciation and rising energy costs may limit the rate of increase, particularly in highly export-oriented sectors like car manufacturing. Industrial production has been accelerating, especially in the information and communication technologies sector after a stock adjustment period. While companies have been reporting record profits and financial assets, the incomes of Japanese households has remained very low leaving little prospect for an improvement in domestic consumption that would allow it to pick up the slack for exports in case of a worsening of the American crisis or prolonged yen appreciation. In that context, household consumption should only manage weak growth in 2007, undermined by an increase in property taxes and the negative effects of the Chuetsu earthquake and this summer's catastrophic weather conditions.
Consumer prices should only rise slightly, or even decline in case of a prolonged yen appreciation with deflationary risk thus continuing to loom over the economy. Despite the regular decline of public spending, the large deficits will persist. The recent political turbulence should moreover delay adoption of essential measures to reduce the public sector deficit, including an increase in VAT on consumption unlikely to be adopted before the next general elections in 2009.
Companies should not suffer from a credit crunch with their reliance on borrowing having declined in recent years concomitantly with their efforts to reduce a still-significant debt burden. The sluggishness of household consumption has, however, weakened certain sectors, like construction, property, wholesale, and hotel/catering, particularly affected by bankruptcies, which rose 14 per cent in the first half this year.
Amid a moderate economic slowdown in Western Europe, growth will only reach 2.2 per cent in 2008 compared to 2.6 per cent this year. Residential construction and the housing sector in general will no longer contribute to growth and will even affect it negatively in many countries. To a lesser degree, the loss of confidence, tightening credit, and a less buoyant job market will affect household consumption and corporate investment. Although the American slowdown and unfavourable exchange rates will similarly affect exports, continued strong demand from emerging regions will mitigate their effect. Certain countries — United Kingdom, Spain, Ireland — will suffer a more severe slowdown due to the weight of residential construction in their economies and the extent of debt borne by their economic actors. Others, like Scandinavia, Benelux, Greece, Portugal, and Switzerland, will post above-average performance.
In that context, the profitability of companies associated with housing (builders, promoters, agents, manufacturers, and distributors of building materials, electric equipment, furniture, and home electronics) should decline. Other sectors like car industry subcontracting, textiles, leather, paper/cardboard processing, and computer assembly will remain vulnerable. Within those sectors, the payment behaviour of small and mid-size companies with relatively large debt burdens will be susceptible of deterioration.
Germany
"A1" rating
Economic growth has slowed in Germany due somewhat to a loss of export dynamism toward the United States. It should nonetheless reach 2.6 per cent again this year.
In view of the world demand slowdown, that trend should continue early next year before stabilising with 2.0 per cent growth expected for the full year. Partially offsetting an export and investment slowdown, household consumption should improve spurred by possible tax reductions in a context of a return to fiscal surpluses and continued improvement in the job picture.
Corporate payment behaviour continues to be good with margins at comfortable levels. Bankruptcies declined another 11 per cent in the first half after easing 17 per cent in 2006. Tightening credit should not have a significant negative effect.
Spain
A1 rating
Negative watchlisted
GDP growth will slow in Spain — up 2.9 per cent expected in 2008 after up 3.8 per cent this year — due notably to the residential investment downturn and subsequent household consumption slowdown (from 3.2 per cent to 2.7 per cent) with residential construction making significant contributions to the economy in 2007: 0.4 per cent to GDP growth, and, in conjunction with non-residential construction, 14 per cent to employment. Between 400,000 and 500,000 housing units should be build next year down from a still-high 600,000 this year and 800,000 in 2006.
Property debt now represents 80 per cent of GDP and 140 per cent of household disposable income with 44 per cent of that income absorbed on average by debt service. The increasing cost of credit — with 95 per cent of loans taken out on a variable rate basis — and the erosion of housing prices, which rose 120 per cent in 10 years, should prompt households to cut down on spending. With companies also deeply in debt, corporate investment should also suffer from the tightening credit conditions. The slowdown should be limited, however, thanks to continued tax reductions facilitated by public sector financial surpluses, demographic pressure linked to immigration, and the exuberant conditions reigning in non-residential construction, particularly in public works.
Payment behaviour, although satisfactory thus far despite a few accidents in textiles, small electric equipment, and computer assembly, could deteriorate. The smaller, often debt-burdened, companies linked to the housing market (light work, real estate agencies, manufacturers and distributors of material and furnishings for the home) that have proliferated in recent years would then be the most exposed.
France
A1 rating
Economic growth should slow to 1.8 per cent in France this year and continue essentially at the same clip in 2008. Household consumption, the main economic engine representing 57 per cent of GDP, should be less dynamic affected by the slowdown in job creation and tightening credit conditions with the residential property market beginning to stall amid the erosion of housing prices and the decline in new housing starts. Recent tax measures should nonetheless cushion the effects of the slowdown in coming quarters. Companies — affected by the summer financial crisis and faced with the spectre of more difficult credit conditions — will moreover be likely to cut back on productive investment. The continuing decline in corporate earnings growth (8.5 per cent in 2000 compared to just 5.2 per cent in 2007) and the cash flow-to-capital expenditures ratio (from 85 per cent in 2000 to 50 per cent in 2007) has made them particularly sensitive to the conditions of the credit on which they have been more dependent since 2004. The domestic demand slowdown will limit import growth paving the way for a substantial reduction in the current account deficit. Exports, already suffering from a lack of specialisation, will feel the effects of both stagnating demand from the country's European trading partners and the euro appreciation in dollar zones. The public sector deficit should increase this year after declining in 2006. The economy should thus continue to grow at the current 1.8 per cent rate in 2008.
Corporate payment behaviour has stabilised at a level near the world average with bankruptcies rising slightly in the first four months this year particularly in construction, retail, and services to private individuals. Rising prices for agricultural raw materials could weaken some major grain-consuming food sectors like meat and dairy products. Shaky conditions have persisted moreover in car and aviation industry subcontracting, paper/cardboard processing, and textiles.
Italy
A2 rating
In Italy growth should slow slightly in 2008, down to 1.6 per cent from 1.8 per cent in 2007, with the slowdown mostly concentrated in the first half of the year. Investment, affected by tightening credit and a less promising growth outlook, will be mainly responsible for the slowdown. Conversely, household consumption, although growing more moderately, will continue to underpin growth thanks to continuing favourable employment and income trends as well as a still limited level of debt. Exports should continue to grow despite unfavourable exchange rates and less buoyant economic conditions in Europe and the United States. The consumption slowdown experienced by Italy's principal trading partners will have little effect on traditional sales (food, clothing, fine leather goods, tourism) mainly intended for high-end households. The effect could be greater, however, on building materials like stone and ceramics or home furnishings like furniture and home appliances.
The slight growth slowdown expected in 2008 should have no particular effect on payment behaviour, which has improved although remaining poorer than the European average. Companies having undergone a highly leveraged buyout will, however, bear particularly close watching. Payments incidents will remain likely to occur in weak sectors like textiles, leather, home electronics, and furniture.
United Kingdom
A1 rating negative watchlisted since June 2007
In the United Kingdom, an economic slowdown should develop toward year end and continue in the first half next year with growth reaching only 2.1 per cent for all of 2008 against 3.0 per cent in 2007. Private consumption will be less dynamic affected by tightening credit conditions and the property market downturn. Personal bankruptcies have already increased, up 11 per cent in the first half this year with debt carried by households, largely in the form of variable-rate loans, now representing 163% of their disposable income. In a property market where average house prices tripled in ten years and currently represent over six years of average income, the number of new mortgage loans has been declining with house prices trending down. A significant drop in home sales and prices will be a real possibility next year and that would have a substantial effect on household prosperity with six per cent of their disposable income deriving on average from mortgage equity withdrawals. The halt in public sector job growth, the immigration slowdown, and higher taxes will also have a negative effect.
The retail trade, particularly in products linked to housing, and related sectors will be the most vulnerable to the effects of the economic downturn, which could result in a marked increase in payment incidents.
In the emerging world, regional economies continue to be among the most vulnerable to a crisis of market confidence even if their currencies and stock markets have partly recovered since the summer financial turmoil. Widening current account deficits have made many countries more dependent on foreign capital. That has been particularly true for the Baltic States, Romania, Bulgaria, and to a lesser extent Turkey and Hungary. That imbalance, sometimes exacerbated by lax fiscal policy, could ultimately result in a sudden exchange rate correction or marked growth slowdown. It would seem all the more prejudicial that private sector debt taken out abroad has increased rapidly in many countries and that a substantial proportion of its domestic debt is denominated in foreign currencies. Certain countries could also suffer from a bursting of their property bubbles.
Despite a slight slowdown, growth should remain strong in Central Europe this year and next up respectively 6.0 and 5.6 per cent after up 6.2 per cent in 2006 (including Turkey). The effect on growth of restrictive policies implemented in Turkey and Hungary has proven somewhat less negative than expected and the entire region should continue to benefit from robust domestic demand. It should also benefit from continued large inflows of foreign investment. New productivity gains and, a slight deterioration of economic conditions in the euro zone notwithstanding, relatively buoyant foreign demand should partly offset pressure from foreign competition and the real appreciation of regional currencies.
PolandA3 rating positive watchlisted since June 2007
Since peaking in the first quarter this year, up 7.4 per cent, growth has remained strong in Poland. Consumption should remain dynamic buoyed by increases in real wages and an improved job market. Good corporate financial performance and financing received from the European Union should continue to support investment. With growth expected to be up about 6.5 per cent this year and 6.0°per°cent in 2008, corporate solvency should remain satisfactory. The central bank has, however, raised its rates to stem inflationary pressures. The current account deficit, although widening, has remained within reasonable limits. Private sector foreign debt has, however, been growing at a high rate. The increase in public sector revenues has thus allowed the government to limit the fiscal deficit and stabilise public sector debt representing 48 per cent of GDP. Admission to the euro zone has nonetheless remained a distant prospect. The liberal opposition party victory in the October 2007 early parliamentary election should help restart the reform process and improve relations with the rest of the European Union.
Hungary
The economy has slumped in Hungary as a result of austerity measures with growth expected to ease to 2.5 per cent this year before beginning to strengthen again in 2008. Household consumption should weaken slightly this year amid declining disposable income and high household debt of which about half is denominated in foreign currencies.
The decline of domestic spending and higher taxes should cause a further contraction of investment while squeezing corporate margins. That should not, however, apply to export sectors. The economic deterioration should continue to undermine corporate solvency as evidenced in recent months by the increase in the Coface payment incident index. Although the fiscal measures have — temporarily — heightened inflationary pressures, they should make it possible to reduce the public sector deficit from 9.2 per cent of GDP in 2006 to 6.4 per cent this year. The current account deficit should decline slightly again in 2007 (five per cent of GDP) before starting to grow again in 2008. Foreign exchange reserves are still relatively low and the forint lost six per cent against the euro this summer bearing out its status as one of the region's most vulnerable currencies.
Romania
A4 rating negative watchlisted
The financial turmoil triggered this summer in the United States has particularly affected Romania with the leu, unlike the other regional currencies, continuing to weaken, down 8 per cent against the euro since early July 2007. A difficult-to-sustain current account deficit — expected to represent 14% of GDP this year — has sharply increased the country's vulnerability to a currency crisis. The inflow of foreign direct investment should moreover decline with the privatisation programme now completed. the rapid growth of private foreign debt and bank credit, with fifty per cent of loans denominated in foreign currencies, could seriously affect companies and households in case of a sharp exchange rate correction or economic downturn. Dissension at the highest government levels has slowed the pace of reforms including those concerning governance. Domestic demand continues to grow strongly meanwhile spurred by loosening fiscal policy, rising incomes, and falling interest rates. GDP growth slowed in the first half this year — up 5.8 per cent against up 7.7 per cent for all of 2006 — amid rising demand for imported goods. GDP should thus grow 5.6 per cent for all of 2007, a marked slowdown from last year.
Ukraine
"C" rating
In Ukraine, a return to strong growth in 2006, up 7.4 per cent, supported by robust domestic demand and the upturn of steel prices, bolstered corporate solvency and benefited the consumer goods sector, construction, and financial services. The economy continued to grow strongly in the first half this year but should slow through year end due to a stronger statistical base, with 6.8°per°cent growth forecast for the full-year. Several factors could hamper growth in 2008 (up 6.0 per cent expected), including a steel price decline, a new price increase for imported gas, and weaker real income growth.
Although the low level of public sector debt will limit sovereign risk, the country has persistent structural weaknesses. The pace of reforms and restructuring the productive apparatus has been slow. With its exports still insufficiently diversified, Ukraine continues to be very dependent on Russia for energy and trade. A widening current account deficit in conjunction with political uncertainties have somewhat increased the risk of an exchange rate correction with the private sector moreover carrying heavy foreign currency debt. The relatively comfortable level of currency reserves will, however, limit that risk. The outcome of the September 2007 early elections should allow the orange revolution parties to form a coalition. Rivalries among the leaders compounded by the constitutional ambiguity on the separation of power should continue to affect political stability.
Turkey
"B" rating
A relatively moderate economic slowdown followed the restrictive monetary policy implemented in Turkey since May 2006. The increase in interest rates last year made it possible to bring annual inflation down to 7.4 per cent in August. Industry, spurred more by exports than by domestic demand, grew 5.2 per cent in the first half with consumption only rising 0.8 per cent. In that context, corporate payment behaviour has been satisfactory and better than the world average.
But the strong growth prevented the necessary correction of external imbalances that will be unsustainable over the long haul. The current account deficit, although declining slightly from 7.5°per°cent in 2006 to a projected 7.0 per cent in 2007, is still too large. Even with foreign direct investment inflows covering a growing proportion of financing needs, the large stocks of volatile capital — short-term debt, portfolio investment — continue to raise the spectre of capital flight triggering a lira collapse.
The prospect of greater stability resulting from last summer's legislative and presidential elections has, however, reduced the risk of domestic factors precipitating a crisis of confidence in the markets. Since the elections and despite a more unstable international financial environment, the lira has continued to strengthen reaching record heights with spreads moreover remaining moderate. Should the subprime crisis worsen, however, a heightened aversion to risk could very well spread to emerging countries that are, like Turkey, highly dependent on capital markets. A new liquidity crisis could undermine the solvency of certain Turkish companies carrying debt denominated in foreign currencies with the private sector, unlike the public sector, having gone much deeper into debt in recent years.
Macroeconomic fundamentals have nonetheless improved since the crises of 1994 and 2001. Sovereign risk has substantially declined thanks to the tight fiscal policy pursued since 2001 and now likely to continue with the AKP Justice and Development Party again holding an absolute parliamentary majority. The banking sector has moreover benefited from profound consolidation.
Russia
"B" rating
The economy should remain buoyant with 7.0 per cent growth expected in 2007 and 6.8°per°cent in 2008, steadily driven by dynamic household consumption and a good investment trend. More expansionary fiscal policy in the run-up to elections should further strengthen economic conditions. The external financial situation has remained robust despite the growth of imports and a slowdown of non-oil exports. That the influx of foreign direct investment has continued to grow despite the Kremlin's reluctance to open energy sector capital to non-residents constitutes a positive factor. Russia continues to amass foreign exchange reserves now ranked third in the world after China and Japan. In the political arena, however, relations with the European Union, United States, and especially neighbouring countries are increasingly tense particularly over energy questions. The domestic situation has, however, been very stable, a result of the increasing centralisation of power. The upcoming legislative elections in December this year and the presidential election next March should take place under the tight control of Vladimir Putin and his United Russia Party. Governance continues to be the country's Achilles heel. The business climate has been deteriorating due to a range of factors: the government's increasing presence as shareholder in many sectors, endemic corruption, the legal system's lack of independence, and the lack of corporate transparency.
Asia continues to post solid economic performance despite the American demand slowdown with the economies of most regional countries mainly driven by robust domestic demand. Even if the United States is still Emerging Asia's main customer, development of intra-regional trade has moreover made Asia less vulnerable to fluctuations in economic conditions in the United States. The regional growth rate should thus reach 8.5 per cent in 2007 and 8.3 per cent in 2008, forecasts strongly influenced by the excellent performance of China and India, which represent 55 per cent of Emerging Asian GDP. American slowdown should ultimately only affect the most open regional economies — Hong Kong, Singapore — and those, like Taiwan, Thailand, and South Korea, already less dynamic. Financially, the large currency reserves accumulated since the Asian crisis now constitute a bulwark against possible external shocks. The large current account surpluses and massive influx of capital will, however, constitute a potential source of risk with the resulting surplus liquidity heating up the property, credit, and stock markets. Those nascent bubbles could increase Emerging Asia's vulnerability should there be a crisis of investor confidence. Momentary collapses — like the stock market crash this past August — could then become more commonplace. Regional economic performance has moreover been very dependent on trends in China's economy, which has been giving troubling signs of overheating and overcapacity. The Chinese government has taken measures intended to gain greater control over growth and especially investment and thereby ensure an ultimate soft landing for the economy. Although a hard landing is no longer the most likely scenario it nonetheless remains a possibility in view of the current booming growth. Such a scenario could have major consequences in the region with a growing proportion of its trade involving China and with the region investing heavily there.
China
A3 rating
The Chinese economy should remain very buoyant with 11.2 per cent growth expected in 2007 and 10.8 per cent in 2008, driven mainly by investment that is still very dynamic and rising exports. Such growth forecasts trouble government officials who fear that the overcapacity in certain sectors like the car industry, steel, and property could result in tighter margins and thus financial difficulties for companies and ultimately lead to a deflationary recession. That risk is already apparent in the lengthening payment delays observed by Coface. To avoid that catastrophic hard-landing scenario, officials have repeatedly increased interest rates and mandatory bank reserves. Whereas the pace of the yuan appreciation is likely to remain moderate, implementation of administrative measures — taxes on certain exports, control of industrial projects in overheating sectors, and quantitative credit controls — could become more frequent. A soft landing thus remains the most likely scenario thanks to the government's efforts. The increasing inflation observed since early this year — with a 4.2 per cent price increase expected for the full current year and 3.8 per cent in 2008 — constitutes another recent significant trend attributable almost exclusively to rising food prices with non-food inflation remaining very low. China's financial situation has been robust exemplified by a growing current account surplus and the world's largest foreign exchange reserves.
Thailand
A3 rating
Adoption of a new constitution by referendum in August 2007 constituted Thailand's first step on the road back to normality since the September coup last year. Although the elections scheduled for December this year should allow a new government to take office early next year, severe political instability continues to mark the country: The opposition between former Prime Minister Thaksin's partisans — assembled in a new party since the Thai Rak Thai Party's dissolution — and their anti-Thaksin adversaries continues to be a central stumbling block. Certain clauses in the new constitution that facilitate no-confidence votes and impeachment procedures could, moreover, be the source of new bouts of instability. In that context of political uncertainty, growth forecasts have been revised downward to about 4.2 per cent in 2007 and 5.0 per cent in 2008. Consumption and investment growth should stagnate this year and next despite expansionary monetary policy. Export sectors, especially high technology and tourism, should, however, drive the economy since the American slowdown has had little effect on Thailand with 15 per cent of its exports flowing to the United States.
The Coface payment experience has thus evidenced no deterioration even though less dynamic domestic demand generally weakened corporate finances in 2006. Thanks to the export dynamism, the country should moreover run a growing current account surplus this year and next with foreign exchange reserves expected to increase to $78 billion in 2007 from $65 billion in 2006. And despite the accelerating pace of capital outflows since 2006 — with $11,500 billion flowing out in 2007 compared to $3,240 last year — linked to measures intended to limit volatile capital and to tighten controls on foreign investment in Thai firms in specific sectors, the baht has continued to appreciate (up 9.1 per cent in 2006 and up 4.3 per cent in the first half this year) and the stock market is up 19 per cent since December 2006. The nine-point decline in the stock market index late July this year was similar to those observed in regional countries after the subprime crisis and bath depreciation in August 2007 (easing from THB 33.4/USD 1.0 to THB 34.3/USD 1.0) should prove to be only transitory.
Indonesia
"B" rating
The Indonesian economy has been in a strong growth phase — up 6.1 per cent in the first half this year — thanks to firm domestic demand and exports, particularly to China. With inflation under control, the government has been able to implement more accommodating monetary policy, favourable to domestic demand. For the full current year and in 2008, growth should also exceed six per cent driven by dynamic private consumption and an investment rebound. Good export performance could moreover allow Indonesia to run a still comfortable current account surplus. The Coface payment incident index continues to reflect payment behaviour better than the world average. The financial situation has continued to improve. With public sector debt declining and external debt ratios also improving, the country was able to repay its entire debt to the IMF.
In that context, the influx of foreign direct investment nearly doubled in the first half this year compared to the same period in 2006. Portfolio investment also increased, which contributed to pushing the stock market index up 47 per cent last year and 30 per cent in the first half this year. Those capital inflows are, however, not without risk: portfolio investment volatility has increased Indonesia's vulnerability to crises of investor confidence, like the subprime crisis this past July and August that triggered a 4.1-per cent rupiah depreciation.
India
A3 rating
For the fiscal year ending 31 March this year, India set a new growth record, up 9.4 per cent. First quarter growth in fiscal year 2007/08 (April to June 2007), up 9.3 per cent on an annual basis, exceeded expectations but nonetheless represents a very slight downturn. In those very good economic conditions, the Coface payment incident index continues to reflect payment behaviour better than the world average although late payments have persisted across all economic sectors.
India has been in a high growth cycle since 2003 thanks to the dynamism in both secondary and tertiary sectors, high savings and investment rates, and the contribution of competitive groups. As much manufacturing industries as services contributed to the continuing very strong growth in the first quarter of the current fiscal year. In that same quarter, domestic demand remained the main growth engine with an investment upturn in the private sector and continued robust consumption. With a more self-contained economy than the other major emerging powers, India remains less dependent on international economic conditions and should thus not suffer much from the American slowdown. Tangible signs of overheating (deterioration of external accounts, property and stock market bubbles) will nonetheless bear watching in a financial context that has become more unstable since summer.
Pakistan and Bangladesh
Ratings: C (Pakistan) and B (Bangladesh)
The political situation in Pakistan and Bangladesh has markedly deteriorated in recent months especially in Pakistan where the run-up to legislative elections has been very turbulent. It remains entirely possible that in the next parliament, normally to be elected before 15th February 2008, no clear majority will be able to emerge between General Pervez Musharraf's partisans, the traditional parities, Islamist movements, which will lead to a period of instability. In Bangladesh, after the honeymoon period that followed the state of emergency instituted in January 2007, government officials now face the challenge of restoring democratic institutions without causing a resumption of violence. In the near term, however, political conditions should nonetheless have a limited impact on growth, which has been obeying a dynamic relatively independent of political upheavals, underpinned by sharply higher expatriate remittances that support consumption and savings and by increased low-end textile exports that leverage labour costs even lower than those in China.
The current international financial turmoil has only moderately affected Latin America with most regional countries benefiting from improved macroeconomic fundamentals. A slight slowdown should nonetheless develop this year and next with 4.9 per cent growth in 2007 and 4.3 per cent in 2008 amid a somewhat less buoyant international environment, especially in the United States while domestic demand will continue to make a decisive contribution. Continued strong world demand, however, particularly in Asia, should make it possible to consolidate external accounts.
The foreign debt reduction process is moreover now well under way while adoption of suitable fiscal and monetary policies has been conducive to reducing inflation and consolidating public sector finances. Persistent structural weaknesses, exemplified especially by inadequate investment rates, have undermined the region's growth potential. Although populist leanings continue to mark the political situation in certain Andean countries — Venezuela, Bolivia, Ecuador — most other regional countries have been pursuing moderate agendas. The institutional and business environment generally leaves room for improvement. In that context, corporate payment behaviour has been relatively satisfactory although some sectors may have to contend with particular difficulties, like the Asian competition affecting textiles or the continuing vulnerability of agriculture to weather conditions.
Mexico
A3 rating
The current international financial turmoil should have a limited impact on Mexico with its relatively diversified economy resting on reasonably sound foundations. The economy should nonetheless grow at a more moderate 2.8 per cent rate in 2007 and 2.9 per cent in 2008 due especially to the slowdown affecting the US economy, which provides a market for 78 per cent of its exports, even with domestic demand remaining Mexico's main economic driver. Already-moderate external debt ratios should ease further and public sector finances, although still dependent on oil revenues, have been improving.
The external account deficit will widen amid declining oil production, less dynamic exports to the United States, and a slowdown in the volume of emigrant worker remittances, but foreign direct investment will cover half the country's financing needs. Structural weaknesses continue to hamper the economy, however, with essential reforms coming up against strong political and social opposition. The new president Felipe Calderon nonetheless succeeded in winning adoption of partial pension reform in March 2007 and tax reform in September 2007, which should improve the growth outlook.
In that context, payment behaviour has remained satisfactory, the few difficulties encountered in the textile and dairy industries resulting from foreign competition or particular problems.
Brazil
A4 rating
With a strengthened economic and financial situation, Brazil has demonstrated greater capacity to withstand the current volatility in international financial markets. After what proved to be a temporary decline in August 2007, the real thus recovered strongly despite the unwinding of currency carry trades. The growth recovery should continue in 2007 and 2008 with domestic demand the main economic engine but not reach the five per cent target set for by the government's January 2007 growth acceleration programme. Because of some inflation pressures, the Central Bank has taken a pause in the monetary easing cycle, in spite of still-high interest rates. The dynamism of some export sectors, despite lower commodity prices and an appreciating real, has helped maintain trade and current account surpluses and has led to a sharp decline in financing needs. Brazil's external vulnerability has moreover declined considerably with record growth expected in foreign exchange reserves. Despite some improvement, public sector debt is still excessive, especially in a period of financial turmoil. And that has hampered investment and infrastructure modernisation. The structural reforms needed to develop stronger growth will be the main challenge for President Lula da Silva's second term in office. But progress on that score could be slow in view of the heterogeneous composition of the government coalition.
Corporate solvency has generally improved in that context, especially in buoyant sectors like oilseeds, the sugar industry, mining, construction, steel, aviation, and, to a lesser degree, automobile. Certain sectors like pharmaceuticals and fertilizer distribution, however, have been contending with particular difficulties or foreign competition exacerbated by the strong real.
Argentina
"C" rating positive watchlisted since June 2007
Removal from positive watchlist
Argentina has been among the Latin American countries most affected by the current international financial turmoil. Amid a growing aversion to risk, the spread on sovereign bonds has doubled since early January this year, even if the problem of unrestructured debt in default and Paris Club non-payment is limiting the country's access to international financing. The peso depreciated forcing monetary authorities to intervene although the currency is considered undervalued, while the stock market index plunged sharply before recovering.
Growth should remain strong in 2007 (about 8.0 per cent) then slow in 2008 while remaining at comfortable levels, about 5.5 per cent. Expansionary economic policy will continue to spur demand albeit to a lesser degree. Although exports should grow at a more moderate pace amid somewhat lower commodity prices, they will nonetheless allow Argentina to run a current account surplus again and increase foreign exchange reserves. As in 2007, a fiscal surplus will be likely in 2008, but the public sector financial situation will be tighter with the government's residual financing needs more difficult to cover due to a liquidity shortage. Foreign debt has declined substantially since 2005 with partial cancellation of the outstanding total and early repayment to the IMF contributing to a reduction in the corresponding debt ratios.
Inflation has been rising despite price controls and recent changes in the index, and the real inflation rate may be at least 15 per cent compared to under 10 per cent for the official rate. That disquieting deterioration reflects economic overheating and bottlenecks.
Argentina has particularly suffered from insufficient investment, particularly in the energy and transport sectors, hampered by an unstable business environment and interventionist economic policy. It appears uncertain at this juncture, however, whether the necessary adjustments will be made after the victory of the incumbent president Nestor Kirchner's wife, Cristina Fernandez, in the late October presidential election.
That context notwithstanding, companies have been improving their financial health and their payment behaviour has been relatively satisfactory.
The regional risk index for North Africa and the Near & Middle East has remained stable.
The outlook for the region's oil-producing countries is still bright with high barrel prices resulting in comfortable revenues and solid financial health. Most have paid off their debts and accumulated extensive foreign exchange reserves or financial assets that will sustain their development programmes over the long haul. Slowing American demand for oil has caused a growth slowdown, especially in Saudi Arabia, which has made the major adjustment effort in fulfilling its swing-producer role. Non-oil sectors have thus been driving growth and should continue to post good performance through 2008.
Although the property sector has been a primary economic engine in the United Arab Emirates, particularly in Dubai, it will bear watching in the future. Iran's positions on the nuclear issue have undermined its prospects.
Petrodollars from the Gulf monarchies have benefited the other regional countries via investment, tourism, and emigrant worker remittances. While Jordan has been successful in gradually consolidating public sector finances, Egypt has continued to run large deficits. Jordan and Lebanon, with current account deficits near 20 per cent of GDP, have been very financially dependent on volatile capital flows.
Violence, political strife, and institutional paralysis in Lebanon continue to undermine the outlook despite donations and credit facilities totalling $7.6 billion promised at the last Paris Conference in January 2007.
And tensions have tended to worsen in recent months in that part of the world and on its borders (Afghanistan) where several geopolitical hotspots pose threats to regional equilibrium. Deterioration of the security situation could particularly affect tourism in the most sensitive countries: Egypt, Morocco, Tunisia, and Jordan.
Saudi Arabia
A4 rating
A marked slowdown of external demand has affected Saudi Arabia's oil sector and could continue to do so in 2008. A still very dynamic non-oil sector with seven to eight per cent growth will continue to drive economic expansion. High oil prices will nonetheless continue to buoy the economy encouraging household consumption and investment in infrastructure, industry, and property. They will also again result in solid external and fiscal surpluses along with a build up of financial assets denominated in foreign currencies. With the country's admission to the WTO the business climate has improved. Corporate performance has been good and the Coface payment incident index has remained at a good level below the world average. The petrochemicals, construction, and financial services sectors should continue to outperform. Regional geopolitical tensions and persistent governance weaknesses still cloud the outlook and deter investment.
Algeria
A4 rating
Algeria boasts a very solid financial situation with foreign debt reduced to the vanishing point and foreign exchange reserves reaching a level equivalent to 3.5 months of imports.
After underperforming in 2006 as a result of maintenance work on oil and gas infrastructure, the economy should resume more dynamic growth — up 4.5 per cent expected in 2007 and 4.1 per cent in 2008 — amid increased gas production, ongoing public sector investment under the Growth Consolidation Plan, and firm household consumption buoyed by civil service wage increases
Growth has been strong in the construction, automobile, pharmaceuticals, and food sectors. With the prospect of continued high oil prices, external and public sector accounts should continue to show large surpluses. Companies should benefit from a still buoyant context overall with their payment behaviour unlikely to deteriorate.
Government officials have undertaken structural reforms, especially in the banking sector, intended to facilitate private sector development. Although the government enjoys unprecedented financial leeway to pursue such reform, institutional and governance shortcomings along with a general resistance to change have impeded progress. Developments in the security situation will moreover continue to bear watching.
Morocco
A4 rating positive watchlisted since September 2006
Removal from positive watchlist
The Moroccan economy's greater-than-expected vulnerability to weather conditions justifies removing the A4 rating from positive watchlist status. Growth should thus slow substantially, declining from 7.9 per cent in 2006 to 2.5 per cent in 2007 due to a poor harvest season early this year. The farm sector thus continues to have a strong influence on economic growth volatility. Pre-election commitments on raising wages and maintaining petrol and food price subsidies could affect public spending in 2008. A trade deficit exacerbated by the cost of energy and capital goods imports could grow larger should the euro zone prove less dynamic than expected.
A dynamic tourism sector, which has contributed to easing the trade balance deficit, will be vulnerable to a sudden downturn in a context of a growing terrorist threat. A difficult business climate has contributed meanwhile to lengthening payment times and reducing collection-procedure transparency.
Iran
"C" rating
Public spending will continue to support growth accompanied by high inflation detrimental to household consumption. Growing tensions with the international community over the nuclear issue in conjunction with sanctions levied by the United Nations will continue to undermine the business climate and deter investment. Those factors will tend to limit economic growth with up 4.0 per cent expected in 2007 and 3.8 per cent in 2008. The increasing skittishness of foreign banks in dealing with Iran could moreover affect corporate payments.
The external financial situation presents no particular problem at this juncture: The current account balance should remain in surplus buoyed by high oil prices. With a high proportion of petrol imported, the rationing in force since June 2007 should have a positive effect on the trade balance. Debt ratios should moreover remain low. Iran's foreign exchange reserves should thus remain at comfortable levels, limiting the risk of a liquidity crisis. Public sector finances have, however, given greater cause for concern. Excellent oil market conditions notwithstanding, the deficits reflect a policy of wide redistribution of oil export earnings. With petrol prices heavily subsidised, the rationing measures should, however, facilitate better resource allocation.
Expansionary fiscal policy has limited the capacity to save oil revenues and increased the economy's vulnerability to a decline in barrel prices. Efforts on the structural reforms needed to consolidate government accounts, diversify the economy, and attract foreign investment have stalled and their future prospects seem bleak at this juncture in view of the political uncertainties.
The government's economic and foreign policy options have been the target of growing criticism. Soaring prices, continuing high unemployment and petrol rationing have spurred growing public unrest, social measures notwithstanding. In that context the ultra conservatives could lose strength in the parliamentary elections next year. But the uncertainties associated with the nuclear programme will continue to be the main risk.
Israel
A4
Israel's confrontations with the Lebanese Hezbollah in summer last year have had relatively little effect on growth underpinned by solid fundamentals: an open and diversified economy that excels in high added value sectors. The economy has remained buoyant despite an export slowdown attributable to the shekel appreciation against the dollar and flagging American demand. Private demand buoyed by easing unemployment and interest rates will be the main growth engine. In that context, the Coface payment incident index has remained at satisfactory levels below the world average.
The external financial situation is still good with foreign currency liquidity crisis risk remaining manageable thanks to relatively stable sources of external financing. Reducing public sector debt, which still constitutes a major fiscal constraint, will depend on the government's capacity to carry on its tight fiscal policy and limit increases in military spending. The United States' guarantee on part of the public borrowing programme will, however, mitigate government default risk.
In the political arena, the ruling coalition has remained weak, but a change of governments would be unlikely to jeopardise current economic policy options. Insecurity and growing regional geopolitical tensions undermine the budget and the country's development potential. 
Economic growth in sub-Saharan Africa should reach 7.3 per cent this year and 6.1=per=cent in 2008, even higher than the exceptional 4.5 per cent average growth registered from 2000 through 2006. That dynamism is mainly attributable to buoyant oil prices — trending up for this year and next — that have particularly benefited exporting countries, like Angola and Equatorial Guinea, capable of increasing their production capacity. In general, the region benefited from firm raw material prices, particularly minerals and metals, underpinned by Chinese and Indian demand. In that context, the slight slowdown of American demand following the subprime crisis will have no significant impact.
Firm raw material prices and debt relief granted to poor highly indebted countries under the HIPC and MDRI programmes resulted in significant improvement in financial ratios. The sustainability of that progress remains uncertain, however, in view of the region's many persistent structural weaknesses including an insufficiently diversified productive fabric making the continent vulnerable to a raw material price downturn, the economic weight of agriculture resulting in a vulnerability to weather conditions, inadequate transport and energy infrastructure undermining efforts to improve productivity, a high poverty rate impeding human capital development, and a difficult business environment deterring foreign direct investment inflows. Political risk has moreover remained high and there are many domestic and sub regional uncertainties that can compromise a brighter outlook as in Côte d'Ivoire for example.
South Africa
A3 rating
In South Africa, sub-Saharan Africa's main economy, economic growth should remain strong in the near term, up 4.5 per cent this year and 4.8 per cent next year, driven by robust domestic demand and increasingly by investment.
A diversified productive fabric characterised by dynamic construction and financial services sectors along with the increased confidence of economic agents has enhanced GDP growth sustainability. Payment behaviour has been very good in South Africa with a very low rate of payment incidents, and limited number of late payments.
The economy has been giving signs of overheating, however, due to inadequate development of energy and transport infrastructure. And a severe shortage of skilled labour has hampered implementation of vast investment programmes undertaken by the government in the past two years to ease bottlenecks.
Deterioration of the current account deficit (5.8 per cent in 2007 and 5.3 per cent in 2008), compounded by rising capital goods imports has increased South Africa's vulnerability to a market crisis of confidence. An increase in foreign direct investment sufficient to cover financing needs thus does not appear very probable at this juncture. The great credibility of the central bank, which has been working to bring inflation within targeted limits (three to six percent), should nonetheless limit exchange rate volatility. There will be limited risks of political instability despite uncertainty over the election of the ANC president. Social risks heightened by the frustrations of large swaths of the population not benefiting from the fruits of economic growth will, however, remain significant.
Nigeria
"D" rating
Nigerian oil production should only operate this year, as in 2006, at 60 per cent of its potential due to persistent tensions in the Niger delta. Economic growth should nonetheless reach 5.5 per cent in 2007, driven by a very dynamic farm sector.
In 2008, it could climb to 7.5 per cent thanks to the start-up of off-shore oil sites and to continued farm-sector dynamism. The central bank's tight monetary policy and a good harvest should moreover make it possible to maintain single-digit inflation next year.
Nigeria continues to run public sector and external account surpluses. Cancellation of $18 billion of debt by the Paris Club in October 2005 and repayment of the residual debt in petrodollars significantly improved the country's financial ratios. Excluding hydrocarbon revenues, however, Nigeria has nonetheless been running disturbingly large public and current account deficits, respectively 45°and°36°per°cent of GDP in 2007, indicative of an insufficiently diversified productive fabric.
Nigeria continues to suffer from profound domestic instability. Brought to power in May 2007 via a disputed election outcome, Umaru Yar'Adua has made efforts to enhance his legitimacy by forming a national unity government. The new government's initial measures would suggest that President Yar'Adua will continue the prudent macroeconomic policy and the reforms — civil service, banking sector, pensions, privatisation, oil revenue reserve fund — initiated by the previous administration. Governance and especially corruption are nonetheless still very nettlesome problems, and the ability of the new president, with his authority disputed, to pacify the Niger delta is still very uncertain.