Recent change in country ratings

	Country	Former classification	Changes
Negatives changes	France	A1	Negative watchA1
	Hong Kong	A1	Negative watchA1
	Iceland	A1	DowngradeA3
	Ireland	A1	DowngradeA2
	United Kingdom	A1	DowngradeA2
	Italy	A2	Negative watchA2

Comments


France
A1
Rating watchlisted with negative implications since october 2008

In the wake of the negative growth — down 0.3 per cent — suffered in the second quarter, economic activity is expected to remain very sluggish for the rest of the year. This will result in positive full year growth of just 0.9 in 2008 followed by 0.4 per cent in 2009 with domestic demand — the traditional economic engine — slowing significantly over the next two years.
Household confidence continued to deteriorate in summer despite the beginnings of a disinflation process. Faced with the continuing decline of their disposable incomes, more difficult access to credit, and signs of weakens in the job market, households have reduced spending on manufactured products and housing. With these negative factors expected to persist in coming months, they will likely continue to hold back on consumption (up one per cent) especially since they could begin to focus on replenishing their savings.
Companies, meanwhile, are expected to slow the pace of their investments. With their profits and cash flow in steady decline — down respectively to 6.2 per cent and 57.6 per cent of GDP this year — they have become particularly sensitive to the currently higher loan rates and stricter conditions for arranging financing. Investment in commercial infrastructure will as a result remain flat. And the gradual adjustment in the residential construction market that began in 2005 will continue. A more substantial decline in housing prices is, however, likely in 2008 and 2009 (down five per cent) due to the increase in stocks coupled with the wait-and-see stance taken by buyers — households and investors — now fewer in number and deterred by tighter credit conditions.
Exports will feel the effects of the economic slowdowns gripping the country's main European trading partners with 65 per cent of sales going to the European Union. Still, thanks to the more favorable real euro exchange rates in dollar zones, French products could benefit from restored price-competitiveness. Despite a slowdown of imports, the foreign trade deficit will widen significantly.
The average mark-up rate applied by companies is expected to remain stable this year at about 31 per cent. But this figure masks significant disparities: Smaller companies will continue to suffer from erosion of their margins attributable to the still high cost of some inputs that they are not always able to pass on to customers, while access to credit will continue to tighten, particularly when credit lines are up for renewal. In this context, companies with high debt will bear close watching especially those having undergone leveraged buyouts. Vigilance will also be in order in several economic sectors including transport (especially road haulage with bankruptcies up 77 per cent in the first eight months this year), automotive parts manufacturers, property, individual construction and associated subcontractors, printing, and metal, rubber, and plastic-related industries.
In the food sector, economic conditions will particularly weaken the hog and poultry industries along with sea fishing. In information technology only video games will continue to perform well. Corporate bankruptcies increased over 12 per cent year-on-year in the six month period ending in March this year, a trend borne out by the rise of payment incidents recorded by Coface thus far this year.


Hong Kong

A1
Rating watchlisted with negative implications since october 2008

After peaking in the first quarter this year with 7.3 per cent growth, up from 6.4 per cent in 2007, the Hong Kong economy slowed substantially in the second quarter easing to 4.2 per cent. That slowdown is mainly attributable to weaker foreign demand — especially from the United States and Europe — which grew only 4.9°per°cent in the second quarter, the slowest growth rate since 2002. Consumption weakened, furthermore, gaining only three per cent in the second quarter down from eight per cent in the first quarter due notably to rising unemployment and declining purchasing power in a context of growing inflationary pressure. And the negative wealth effect resulting from the 35-per°cent cent decline in the Hong Kong Stock Exchange's Hang Seng index between January and September this year could moreover exacerbate the consumption slowdown. In a context of increasing aversion to risk and tightening credit conditions, corporate investment has moreover begun to grow at a slower pace, down from six per cent in the first quarter to four per cent in the second. The economic slowdown is expected to continue in the third and fourth quarters this year with full-year GDP growth down to 4.1 per cent from 6.4 per cent in 2007. According to Coface records, corporate payment behaviour has begun to deteriorate in this context.

Inflation accelerated in the first and second quarters this year (respectively 4.2°per cent and 6.1 per cent) with the special administrative region having to import nearly all its energy and food, notably from mainland China where prices have been soaring. With the Hong Kong dollar pegged to the US dollar, the region has little room for manoeuvre in combating inflation, which is expected to average 4.8 per cent for the full year compared to two per cent in 2007.

In the financial sphere, the slowdown of goods exports in conjunction with an increase in imports in value terms (resulting from the increase in imported food goods mainly from China — compounded by the faster pace of the renminbi appreciation) has contributed to a widening trade deficit. Although the current account surplus will therefore also be likely to shrink in 2008-2009, it will remain at a respectable level thanks to the rapid growth of services exports. The Hong Kong dollar is expected to remain pegged to the US dollar in 2008.

In the political arena, Donald Tsang, re-elected in March 2007 for a third five-year term as chief executive, has remained popular. He will nonetheless have to contend with various actions taken by democrats wishing to institute direct universal suffrage. No reform of the method of voting is, however, expected in the near term with Beijing having announced that direct universal suffrage will not be instituted before 2017 for the chief executive and not before 2020 for Parliament (Legco).



Ireland
Rating A1 downgraded A2 since October 2008

After reaching 5.9 per cent in 2007, GDP growth was negative in the 2008 first half and is expected to be flat for the full year. The decline of residential investment (11 per cent of GDP) will lop about four per cent off total growth. The rise of unemployment, driven by the growing volume of jobs lost in construction, the continued fall of housing prices (down 10 per cent year-on-year), the credit crunch, and the disappearance of fiscal generosity will result in a marked slowdown of household consumption. Although public sector investment in infrastructure (roads, railway, and so on) and building will likely remain strong under the National Development Program, less buoyant demand is expected to considerably undermine corporate investment, particularly by subsidiaries of American companies. Only foreign trade will make a positive contribution. Amid a marked import slowdown, exports of services (45 per cent of sales abroad), especially in information technology will remain dynamic while the economic slowdown gripping the United States (a fifth of the export market) and the United Kingdom will result in a slowdown of exports of manufactured and farm products mitigated by the strength of pharmaceutical sales.
Accustomed to operating in an environment of strong growth, companies have suffered from the slowdown as the upsurge of bankruptcies in the first half this year attests. Although it is no surprise that the sectors bearing the brunt of the deterioration include residential property (construction and services) and road transport (affected by rising petrol costs), conditions have also been difficult in retail: furniture, automotives, and consumer electronics. The tourist sector has been contending with a decline in American tourists.


United Kingdom
Rating A1 downgraded A2 since October 2008

Economic growth is expected to decline slightly by the start of 2009 and could remain sluggish far into the coming year amid the slowdown of household and corporate spending caused by the financial and property crisis.
In this context, households have been contending with the rapid decline of housing prices, which could reach 30 per cent, and the tightening of credit conditions with their outstanding debt representing 170 per cent of their disposable income. A less buoyant job market in financial services, among others, will also have a dampening effect. In view of the severe deterioration of public sector finances, the government is not in a position to offer them any significant aid.
Despite a 16 per cent decline of the sterling effective exchange rate, exports have shown hardly any dynamism, which reflects the slump of foreign demand and the tendency of British companies to raise pound-sterling prices rather than attempt to win market share. Confronted with sluggish demand companies have lacked motivation to invest.
In a deteriorating environment corporate health has suffered particularly in construction, property-related services, distribution (home furnishings, automotive, consumer electronics, and clothing) and outbound tourism, all sectors affected by the reticence of consumers. Bankruptcies thus increased 14 per cent in the second quarter.

Italy
A2
Rating watchlisted with negative implications since october 2008

The Italian economy remains sluggish managing only negative growth in the second quarter. And GDP growth will remain flat until early 2009 with a timid upturn possible later in the year.
In the midst of the crisis, households will keep the lid on consumption. They can expect no support from the government, which has made a commitment to Brussels to put public sector finances back into balance by 2010. Their financial position remains nonetheless satisfactory as a result of their relatively limited debt. They have moreover had time to adjust to a property market downturn dating back to 2004.
Companies have suffered from the rise of credit and wage costs, which their meagre productivity gains have been far from enough to offset. Export margins are squeezed by a lack of competitiveness and a marked slowdown in world demand. However, not only are companies accustomed to living in a weak growth environment but they also benefit from relatively high cash flow and moderate debt. After deteriorating from late 2007 through spring this year corporate payment behaviour stabilised thereafter at a poor level.
The sectors with the highest numbers of payment incidents include leather, weaving, breeding, and meat, prone to recurrent difficulties. Milling (flour, pasta), biscuit making, and the dairy industry have struggled with the rising cost of agricultural raw materials. And papermaking and metallurgy have been facing high input costs and sluggish demand. Sales of construction materials (ceramics, stone, tile) and home furnishings (woodwork, sanitary plumbing, home electronics) have been poor due to the slump in residential construction in many markets.


Iceland
Rating A1 downgraded A3 since October 2008

The economy fell into a severe slowdown in the second quarter this year, which is developing into a recession as 2008 fades into 2009. Restoration of the trade balance has only had a mitigating effect on the domestic demand slump. Although that renewed equilibrium paves the way for gradually eliminating imbalances resulting from the overheating in recent years, its immediate impact has been harmful to some actors.
Despite still-substantial wage increases linked to the ongoing labour shortage and new tax reductions, household spending, whether on housing or consumption, have declined under the effect of the credit crunch, 12 per cent inflation (or even higher in the wake of the krona collapse), the re-emergence of unemployment, and the bursting of the speculative property bubble. And households carry debt, largely contracted at variable rates, that represents 220 per cent of their disposable income and the corresponding debt service represents 20 per cent. Corporate investment will weaken further despite the ongoing work on the aluminium industrial complexes. The construction of office and sales premises will decline as a result of the difficulties in the financial sector and in property (25 per cent of GDP) compounded by the decline of consumption. Conversely, public sector investment will remain strong but give rise to a large fiscal deficit and an increase in public sector debt.
The strong export growth will continue as the metallurgical factories get up to speed. Sales of fish products will remain at a good level with rising world prices largely offsetting the decline in volumes resulting from the reduction of quotas for cod. Meanwhile, the decline of domestic demand, the upsurge of prices for imported products and the difficulty to obtain foreign currencies will result in a reduction of imports.
The failure of the financial system triggered by the loss of international investor confidence in the Icelandic economy and particularly its bloated banking system has exacerbated the island's economic difficulties. Local financial institutions, with 70 per cent of their business done abroad, proved so incapable of consolidating their positions in the wake of the warning signs last spring that the government had to take control. Although public sector finances have been healthy, Iceland's net external debtor position represents 120 per cent of GDP and foreign debt — mainly contracted by private banks — 550 per cent. The concomitant revenue account deficit constitutes nearly the entire current account deficit (13 per cent of GDP this year). Even with IMF aid, special drawing rights at other Scandinavian central banks, a loan from Russia, and the sell-off of foreign assets Iceland may still be unable to meet its commitments abroad.
With the recession, the credit crunch, and sharply higher cost of many, largely imported, household products, corporate financial health will deteriorate. A ripple-effect from the new aluminium factories has, however, doubtless strengthened companies located in the north-east and rising prices can similarly enable the fish industry to cope with quota reductions by substituting other species and increasing the proportion processed locally. Tourism may benefit from an increase in foreign visitors attracted by a decline in prices for hospitality services. Conversely, smaller companies in the construction and retail sectors located in the south-west, particularly in the capital region, will suffer. Investment companies have moreover grown weaker due to their considerable debt (representing half the total debt of all Icelandic companies) with 70 per cent denominated in foreign currency. Although the British and Scandinavian assets acquired in exchange are certainly worth ten times the GDP, the crisis tends to complicate matters in evaluating them and to reduce their yield.

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