Highlights
2009 & 2010 scenario adjustments


The trend observed late 2008 continued in the first quarter this year with production falling in the United States, the euro zone, and Japan, down respectively 2.5 per cent, 4.6 per cent, and 9.1°per°cent year on year. The severity of the recessions in industrialised countries is unprecedented since WWII. And coinciding in time their combined effect has moreover resulted in a record contraction of world trade (down 11 per cent for the full current year according to the latest IMF forecasts). And the recessions gripping the major capital goods exporting countries, Germany and Japan, have been more severe.

The situation has been more varied for emerging countries with severe recessions in emerging European and open Asian economies, relatively mild recessions in Latin America, and just modest slowdowns in China and India.
The deepening of the global recession in the first quarter has prompted us to adjust our growth forecast for 2009: the global economy is now expected to suffer a 2.5 per cent recession with a 3.9°per°cent contraction of growth for industrialised countries partly offset by positive growth of 0.7°per°cent for emerging countries. According to the forecasts put forward in March 2009, global growth was expected to be down 1.6 per cent with industrialised countries down 3.1 per cent and emerging countries up1.7 per cent.

For the euro zone the downward adjustment is substantial with a 4.3 per cent recession now expected. For Germany, reeling from the export shock, the strength of the recession has been adjusted to a negative 5.9 per cent. The year-end export crunch recorded in 2008 intensifies the growth shock suffered by both Germany and Japan with economic conditions in both countries heavily dependent on the world trade dynamic. But throughout Europe exports and corporate investment have tended to drag production down with these two demand components expected to decline respectively 14 per cent and 10 per cent in the euro zone. Undergoing a decline of "just" one per cent, household consumption has seemed strong even achieving positive growth in Germany and France in the 2009 first quarter. In both the United Kingdom and Spain, severely affected by a property crisis compounded by high private debt, the GDP contraction will exceed three per cent.

The adjustment to growth forecasts for emerging Europe is considerable with a more severe 3.7 per cent recession now expected for 2009. The impact of the sudden stop triggered by precipitous capital flight has been large in one of the rare emerging regions dependent on international financial flows. The recession in Europe, the main market for Eastern European exports, and an excessive private debt burden (often denominated in foreign exchange) have weighed on economic activity. The Community of Independent States has also suffered greatly with a 4.9 per cent recession now expected including an adjusted six per cent contraction for Russia.

Latin America has fared reasonably well but with significant disparities across the region with Central America suffering considerably more than South America: Negative two-per cent growth is expected for the continent with the two major regional economies expected to suffer recessions, a one-per cent contraction for Brazil and 5.5 per cent for Mexico. And forecasts have been revised upwards for just two emerging countries with positive 7.0 growth now expected for China and 5.5°per°cent for India. China's economic stimulus policy has proven very effective, to such an extent that it has rekindled debate over the allocation of capital: Although the rate of expansion of bank credit reached 30 per cent early this year, it has mainly benefited state-run companies. With the Indian economy relatively closed, the outcome of the general elections held in May — with the Congress Party winning a resounding victory — paves the way for a period of more dynamic reform, which bolsters the confidence of economic actors.


COFACE
2001
2002
2003
2004
2005
2006
2007
2008
2009 f
2010 f
World production
1.6
2.0
2.8
4.1
3.6
4.3
4.1
2.3
-2.5
1.7
Industrialised countries
1.1
1.3
1.8
3.1
2.4
2.9
2.4
0.7
-3.9
0.5
United States
0.8
1.6
2.7
4.2
3.2
2.9
2.0
1.1
-2.9
0.9
Japan
0.2
0.1
1.4
2.7
1.9
2.2
2.1
-0.7
-7.0
-0.1
Euro Zone
1.8
1.1
0.8
1.7
1.5
3.0
2.6
0.8
-4.3
0.1
Germany
1.1
0.0
-0.2
0.6
1.1
3.0
2.5
1.3
-5.9
0.7
United Kingdom
2.3
2.1
2.7
3.3
1.9
2.8
3.0
0.7
-3.7
0.7
France
2.1
1.1
1.1
2.0
1.2
2.0
2.1
0.7
-2.7
0.3
Italy
1.7
0.3
0.1
1.2
0.1
1.9
1.4
-0.6
-4.7
0.4
Spain
0.0
0.0
0.0
3.3
3.6
3.9
3.7
1.2
-3.8
-1.2
Emerging countries
3.0
4.4
5.7
7.3
6.6
7.3
7.6
5.4
0.7
4.1
Emerging Asia
4.8
6.5
7.1
8.0
8.0
8.8
9.5
6.4
3.6
6.1
Latin America
0.2
0.5
2.0
5.9
4.5
5.6
5.6
4.3
-2.0
2.1
Emerging Europe
0.5
4.0
4.6
6.9
6.0
6.6
5.7
3.2
-3.7
0.9
CIS
6.1
5.3
7.8
7.9
6.7
8.2
8.5
5.5
-4.9
1.5
Middle East
2.3
2.6
6.5
6.2
5.7
5.4
4.8
5.6
2.2
4.2
Africa
3.4
6.3
6.4
6.2
5.9
6.5
6.7
5.3
1.7
3.9
China
8.3
9.1
10.0
10.1
10.4
11.6
13.0
9.0
7.0
8.5
India
5.8
3.8
8.5
8.3
9.3
9.7
9.1
6.0
5.5
7.0
Brazil
1.3
2.7
1.2
5.7
2.9
4.0
5.7
5.2
-1.0
3.0
Russia
5.1
4.8
7.3
7.2
6.4
7.4
8.1
5.6
-6.0
1.3
World trade
0.1
3.4
5.4
10.3
7.0
7.4
7.2
3.3
-11.0
-0.6


Based on the extent of the slowdowns, the adjusted forecasts tend to cast CIS, emerging Europe, Japan, and Latin America as the geographic regions suffering the largest declines in growth from 2007 through 2009:


2010 and the recovery shaping up

Our growth forecast for 2010 has undergone little change from the previous exercise. The scenario remains based on a very weak recovery in industrialised countries encumbered by the debt repayment burden, especially in the United States, United Kingdom, and Spain. A stronger recovery could develop in emerging countries free of excessive debt. In Asia or Latin America a glimmer of improvement in world trade in conjunction with price stability for raw materials will rapidly generate positive effects on economic activity. World GDP growth — at market rates — will likely be up1.7 per cent (compared to 1.8 per cent previously) with industrialised countries up 0.4 per cent and emerging countries up 4.1 per cent. In Spain but also in Ireland, Belgium, and Portugal, growth will likely remain negative in 2010. The severity of the crisis in the Baltic States (where double-digit declines in GDP are expected this year) and Hungary will continue to weigh on their economic activity.

According to our main scenario, the global recession is expected to end in the 2009 third quarter. Global production will then stop falling. Economic growth is nonetheless expected to remain weak through end 2010: The quarterly rate for three major economies — the United States, Japan, and Germany — will remain below one per cent according to available consensus forecasts. As regards the shape of the recovery there have been few perceptible differences in economist expectations for these countries with growth slightly stronger in the United States, levelling off at 0.8 per cent late this year, and much weaker in Japan.

A "tilted L" scenario remains the most likely. The possibility of the recession drawing to a close in third quarter rests on several indicators currently flashing green: in the United States, retail sales were up slightly in May. And above all the property market has given a few signs of impending stability albeit with the stock of homes for sale nonetheless remaining a very high 10.2 months and prices continuing to fall, down 19 per cent year on year in March 2009. But in May new housing starts for single family homes were up 7.5 per cent and building permits 7.9 per cent month on month. The job market has moreover shown some signs of life: although jobs continue to be lost, the rate of loss has eased from 741,000 in January to 345,000 in May.

And it is particularly significant that economic actor expectations have been trending up for several months with indicators of business and consumer confidence turning around since early in the second quarter: In the United States the ISM Manufacturing Index rose again in May, its fifth consecutive monthly increase. According to the ZEW Index in Germany investors expect an economic upturn by the third quarter this year. Disinflation has also provided very strong support for demand with price inflation in the United States expected to be down 0.8 per cent in 2009 and up just 1.1 per cent in 2010 and in the euro zone up 0.3 and 1.0 respectively this year and next. The recoveries in China and India have also bolstered confidence.

Other indicators also attest to renewed optimism. But caution is called for in interpreting them since they partly reflect the euphoria of financial investors "betting" on a resumption of growth and reinvesting idle cash in riskier assets. Stock market indices in industrialised countries have achieved remarkable index growth since they hit bottom early March 2009 with the New York, London, and Paris stock exchanges then surging respectively 34 per cent, 28 per cent, and 36°per cent by early June. And raw material prices have moreover been trending up: the CBRT composite index of all raw materials, after falling 54 per cent from June 2008 through February 2009, was then up 20 per cent by end May. The Energy-Only Index has begun to rise again since February. The Metals Index began to trend up in December 2008 with prices rising 40 per cent since then. The renewed appetite for risk is also reflected in the rise of the stock markets and exchange rates of emerging countries since February 2009. But the significance of this upswing seems heavily dependent on news reports bearing out (or not) concomitant positive developments in the real economy. And bad news could result in a new crisis of confidence. These movements are thus not to be taken at face value: They do not constitute tangible and decisive proof that a recession has come to an end.

A "double-dip," or "W," scenario cannot be ruled out. Economic growth in the second half of the year could benefit from a restocking process symmetrical to the destocking that prevailed in the 2008 last quarter and 2009 first quarter. And the impact of the increases in public spending will likely become palpable from the 2009 third quarter. But these beneficial effects could fade, however, if the debt repayment process continues to undermine demand. Household consumption — 75 per cent of the United State's GDP, 65 per cent of the United Kingdom's GDP, and 58 per cent of Spain's GDP — has been under siege on two fronts:

· new spending effectively prohibited by excessive household debt with the continued rise of the household savings rate thus inevitable in the three countries

· consumer confidence undermined by the continuing rapid growth of unemployment in industrialised countries, rising in the United States from 5.8 per cent in 2008 to nearly 9.0°per°cent this year and in the euro zone from 7.6 per cent to 9.6 per cent.

The savings rate in the United States has increased as a percentage of disposable income at a very rapid clip, up from virtually nil in 2007 to 4.4 per cent early this year. According to historical records, the long-term trend on private savings stabilised at around eight per cent of disposable income between1985 and 1992 and then began a gradual decline ultimately dropping to a virtually nil savings rate by 2007. JP Morgan foresees the savings rate possibly falling again as household access to credit gradually improves and automotive sales rise spurred by the trade-in incentive implemented in September. But the savings rate ultimately depends on expectations on trends in the job market with unemployment prompting increases in emergency savings. A pivotal factor in breaking out of the recession will be the response of the job market to the recovery process. And there will be some risk in the second half of the year of the recession playing out as a jobless recovery, which would contribute to preventing private demand from driving economic activity in 2010.
More fundamentally, if the USA economy were to follow the dynamic of a structural change in consumer behaviour that could result in a return to savings rates averaging about eight per cent. Under this hypothesis there would have to be yet another year with spending remaining virtually flat or in decline. And that would mean the end of the recession would be delayed until 2010.

That is the main reason why forecaster s have been particularly cautious in interpreting signs of recovery with, at the very least, economic activity likely to remain short-winded throughout 2010 — largely due to the private savings adjustment in the United States.

The euro's rise will undermine recovery in Europe. The strengthening of the European single currency these past three months has come at the wrong time for Europe's recovery with one euro now worth $1.38. And Natixis foresees $1.42 in six months and $1.52 in the coming twelve months. With the renewed appetite of investors for riskier assets — equity, emerging, and raw material assets — a relative disaffection with the dollar will emerge. The fundamentals dictating the decline of the dollar have been regaining the upper hand: The current account deficit of the United States is expected to climb to about four per cent of GDP in 2009 while the balance for the euro zone will be near equilibrium. The European Central Bank's commitment to controlling inflation — notably materialised by its refusal, supported by the German government, to monetise public sector debt — also constitutes strong support for the euro. A ten per cent appreciation of the European single currency against the dollar will thus be likely in the coming 12 months.

A moderate upswing of oil prices is expected in 2009and 2010. Averaging $50 since 1°January 2009 the price per barrel of Brent remains far below its June 2008 price of $107. But oil prices have nonetheless achieved a remarkable rebound — up 34 per cent — in the first half of the year, rising from $36 early January to $70 by 12 June. And the price rise accelerated sharply in May, up 27 per cent. The market has been volatile, meanwhile, appearing unresponsive to supply and demand fundamentals. With demand remaining weak and compliance with OPEC discipline uneven, speculative buyers have been sensitive to the slightest sign of recovery in China or the United States. Speculators have consequently built up stocks that will tend to undermine prices when they go on the market. The dollar exchange rate will moreover continue to affect barrel prices. In view of the price upswing we have adjusted our price hypotheses for 2009 and 2010 respectively to $60 and $70 a barrel. It is noteworthy that the political troubles in Iran after the 12 June presidential election have had no perceptible impact on oil prices. It is nonetheless true that the country's unused crude production capacity, some 4.7 million barrels a day, represent twice the volume of its oil exports: 2.2°million barrels a day.


Country risk trends and @rating changes
June 2009


Europe
Western Europe: slowing pace of economic decline, auguring of stability albeit at a low level
Emerging Europe: real economy battered and currencies still weak.


Western Europe

After the sharp drop in economic activity recorded in the 2008 fourth quarter and 2009 first quarter, a glimmer of hope emerged in the second quarter this year.

Although industrial production and exports continue to contract, the rate of contraction has eased, down respectively 1.9 per cent and 1.3 per cent in April in the euro zone, a trend borne out by the May PMI survey. The difficulties are concentrated more than ever in automotives, capital goods, and property. Household consumption has remained strong and could improve further as confidence grows and government support measures take full effect. A smaller drop in activity in the second quarter with the economy then stabilising — albeit at a low level — in the third quarter thus appears likely.

Caution is nonetheless still called for. Several factors continue to undermine household spending, notably the rise of energy prices, the continued fall of property values, and the pressure on wages associated with the worsening job picture, a trend expected to intensify. The corporate situation will continue to deteriorate as evidenced by the drop in earnings and cash flow with access to financing on reasonable terms remaining difficult particularly for smaller companies. Destocking and disinvestment have persisted while corporate bankruptcies have continued at a high or accelerating rate depending on the country. Improved prospects for exports will depend on the pace of the recovery of world trade even with the real effective exchange rates for the euro and the other European currencies more favourable to them at this juncture. And the position of banks remains far from completely consolidated amid lingering uncertainties over their solidity especially in case of exacerbation of the situation in Central and Eastern Europe. And most regional countries moreover lack room for manoeuvre to increase the support they provide to their economies.

Economic conditions in coming months will depend to a large extent on the situation prevailing in Germany (A2 since March this year) with the results of several surveys focused on economic actors (ZEW, IFO, PMI) effectively auguring a slight improvement.
Consumption has been firm and domestic orders for consumer goods have begun to trend up. Social transfers, particularly generous compensation for part-time work, have been playing their intended role. With automotives and capital goods still experiencing severe difficulties, however, and in view of their large share in the economy, caution is in order. Industrial production (down 2.1 per cent), exports (down 4.8 per cent), and new orders from abroad thus continued to trend down in April. A proliferation of payment incidents can thus not be excluded out of hand.

A few positive signs have also emerged in the United Kingdom (A3 since March this year). Industrial production was up 0.3 per cent in April with all categories of goods — durable, non-durable, consumer, and capital goods — benefiting. The results of PMI and CBI surveys done in May reflect the markedly slower pace of the economic decline.

The signs of improvement in the property market, where prices have already fallen over 20 per cent, include the increased frequency of visits to agencies, a slight increase in the granting of loans, and the slower pace of the fall of prices. The firmness of consumption — up in March and April, down in May, but expected to be up again in June — has benefited mass distribution. Moreover, although exports continue to trend down, the past depreciation of the pound sterling will ultimately have a net favourable impact. Payment incidents have nonetheless continued to increase at a high rate.
In France and Belgium, rated A2, and Italy, A3 since March 2009, industrial production, exports, investment, and construction have remained depressed even if the results of surveys of corporate CEOs conducted in May (INSEE, BNB, and PMI) augur a return to stability. While household consumption in Belgium and Italy has suffered a marked contraction, in France it has posted weak growth bolstered by the effect of cushioning mechanisms that protect household purchasing power and the extent of the public sector.

In the other regional economies there has hardly been any improvement amid continuing massive increases in payment incidents. That has notably been the case for Spain (A3 since March 2009) where despite extensive government support, private consumption and investment are still in decline, affected by soaring unemployment and ongoing debt repayment. The deflation of the speculative property bubble is far from over with prices down only seven per cent year on year and sector actors still hampered by financial difficulties. The positive foreign trade contribution is attributable essentially to the fall of imports with exports still limited by the lack of competitiveness of Spanish companies.
The situation is even worse in Ireland (A3 since March 2009) with the persistence of past excesses, even more flagrant in construction, and the substantial influence on the economy of severely troubled banks. And the effects of soaring unemployment and necessary debt repayment have been compounded by several negative factors: ebbing immigration, positive real interest rates caused by deflation, a negative wealth effect associated with the fall of property values, the skittishness of foreign multinationals with a heavy presence in the country, and the deteriorated state of public sector finances after the bailout of the banks. A major recession has developed in consequence.

Among the smaller economies, Norway (A2 since March 2009) and Switzerland (A1 since March 2009) continue to hold up relatively well. Thanks to its hydrocarbon resources Norway has enjoyed substantial room for manoeuvre and could benefit from a modest recovery in the second half of the year. Switzerland meanwhile has benefited from its specialisation in sectors — like pharmaceuticals, food, and precision mechanicals — relatively unaffected by the global economic sluggishness and moreover capable of responding promptly and significantly to any signs of improvement in world trade. The outlook is not as bright for Finland, Sweden, the Netherlands, Austria (all rated A1 since March 2009), Portugal (A3 since March 2009), or Luxembourg (also rated A1 since March 2009). These six countries have suffered from the repercussions of the severe difficulties affecting either neighbouring countries that constitute major markets for their exports (Russia, the Baltic states, Hungary, Germany, Spain) or major sectors of their economies (wood, paper, telephony, automotives, steel, re-export & logistics, textiles, financial services). Fortunately, however, most of these countries enjoy substantial fiscal room for manoeuvre that enables them to cushion the impact.


Downgrade to A2 three countries rated A1 since March 2009 — Austria, the Netherlands, and Finland — due to the drop in foreign demand

Payment defaults have increased significantly in Austria thus far this year. The outlook is poor with a recession in excess of three per cent expected this year followed by stagnation in 2010. Through its exports, the Austrian economy is exposed to the poor economic conditions prevailing in surrounding countries. It notably supplies many inputs for the manufacture of German exports and is directly affected by the sub-par performance of Eastern European economies. Its extensive presence in the automotive industry has moreover hobbled industrial activity. Companies have cut back sharply on capital and property investments.

Consumption has been flat despite the growth of disposable income associated with tax breaks. Banks have been very involved in the economies of Central European countries, particularly Hungary, Slovakia, the Czech Republic, Romania, and Slovenia with their receivables in the region representing 70 per cent of its GDP.

In the Netherlands, production and exports continued to deteriorate in the 2009 first quarter with full year growth thus expected to contract 4.7 per cent. With an open economy, the country is very dependent on demand from its four traditional trading partners (Germany, Belgium, France and the United Kingdom). Exports and investment will continue to decline, down respectively16.2 per cent and 14.7 per cent. With wage growth remaining very moderate and unemployment rising, the contraction of the disposable incomes of private individuals compounded by the erosion of their financial and property asset values will prompt households strained by very heavy debt (170 per cent of disposable income) to cut back considerably on spending. The plans for rescuing the banking sector and stimulating the economy in conjunction with a slowdown in revenues from gas will wipe out the fiscal surplus the country has run since 2005 and increase the debt nonetheless expected to remain relatively low (nearly 60 per cent of GDP). Bankruptcies accelerated these past months, surging 96.4 per cent in the first quarter.

Economic activity contracted sharply in the fourth quarter in Finland down by nearly two per cent year on year. Exports took the brunt of the decline of German, Swedish, British, Dutch, and Russian demand. They also suffered from the erosion of corporate competitiveness undermined by high payroll costs and from the euro appreciation against the currencies of some trading partners. The shock was particularly devastating in the key industrial sectors: wood and telecommunications equipment. Households, deeply in debt (110 per cent of disposable income), will reduce spending despite easing inflation, wage growth, tax breaks, and interest rate cuts (with 90 per cent of property loans taken out on a variable rate basis). The drop in tax revenues and the increase in spending associated with the economic support plan will get the best of the fiscal surplus Finland has run for several years. Although public sector debt will increase considerably it will nonetheless remain limited at 50 per cent of GDP. Bankruptcies increased over 38 per cent year on year from February through April 2009.

Portugal's A3 rating negative watchlisted due to the sharp contraction of household consumption, decline of exports and investment, and surge of payment incidents

The 2009 outlook darkened for Portugal after industrial production contracted sharply in the first quarter in phase with the drop in orders from the main trading partner, Spain, the market for over 30 per cent of Portuguese exports, and from European Union member states in general, which absorb 72 per cent of the country's sales abroad. Amid tighter credit conditions, the deterioration of corporate profitability will prompt companies to reduce their investments and staff even more. Rising unemployment and eroding purchasing power will similarly prompt households burdened by heavy debt — representing129 per cent of their disposable income — to cut back on spending especially to replenish emergency savings (from 6.5 per cent to 10.6 per cent), a process facilitated by easing inflation and falling interest rates. The contribution of public sector investment to GDP growth will remain modest. Bankruptcies surged nearly 68 per cent, particularly in manufacturing (subcontractors to automotive parts manufacturers and to the construction, textile, and leather industries), wholesaling, and construction.


Emerging Europe

Suffering from the combined effects of the recession gripping Western Europe, the credit crunch, and the contraction of capital inflows, the region has taken the brunt of the international crisis. The countries with the most severe financial difficulties have no alternative other than to implement painful adjustment programmes with IMF and European Union backing. The Baltic economies above all but also Hungary (A4 since March 2009), Bulgaria, and Romania (both rated B since March 2009) have to deal with the consequences of their high current account deficits and heavy foreign currency debt. Taking pains to maintain their rigid exchange rate regimes, the Baltic States are faced with an unprecedented recession.

Turkey (B since March 2009) has also suffered from the effects of declining exports, tightening credit conditions, and slowing capital inflows. With a strong banking system, however, it is better equipped today to cope with a crisis than it was in 2001.

Poland (A3 since March 2009), the Czech Republic (A2 since March 2009) and Slovakia (A3 since January 2004) boast better than average fundamentals for the region and less vulnerability to the increasing scarcity of financing from abroad. This negative trend notwithstanding Poland succeeded last May in obtaining, as a precautionary measure, a Contingent Credit Line from the IMF. With export-oriented economies, the Czech Republic and Slovakia have suffered considerably from the contraction of world trade, particularly in the automotive sector. Except for Poland, which leverages its large domestic market, the entire region was gripped by recession in the first quarter. And the contraction of regional GDP could reach 3.7 per cent for the full year, which would only spur bankruptcies and further undermine corporate payment behaviour. The recovery expected in 2010 is expected to be of modest proportions (up 0.9 per cent) for a number of reasons including still relatively lacklustre foreign demand, the rise of unemployment, a limited credit expansion, and a lack of fiscal room for manoeuvre with public sector finances expected to deteriorate this year. There has nonetheless been a noteworthy easing of tensions in financial markets (foreign exchange and securities) since March 2009 associated with the reduced aversion to risk of foreign investors and the increase in IMF support for countries in difficulty, as well as a tentative increase in the confidence of economic agents in some countries, especially Turkey.

Four country @ratings negative-watchlisted
- Slovakia's A3 rating, due to the sharp economic decline
- Estonia's and Lithuania's A4 and Latvia's B rating, due to the scale of the recession and the risk of a currency crisis

Slovakia suffered a more severe GDP contraction than expected early this year due mainly to the sharp drop in exports. Rising unemployment and tightening credit will also contribute to the recession, which could reach 4.7per cent this year. A tentative recovery could develop in 2010 (up 1.9 per cent) in the wake of slowly improving economic conditions in the rest of the euro zone. In the run-up to legislative elections in 2010 government officials will take pains to support the economy even at the cost of a marked increase in the public sector deficit. With sales abroad dropping faster than the volume of imports, the current account deficit could grow in relation to GDP notwithstanding the mitigating effect of the decline in profits paid out to foreign investors and the increase in European financing granted to the country. Foreign direct investment is moreover expected to slump in 2009.

The Baltic States have suffered greatly from the drying up of financing and the drop in exports. GDP is expected to contract about 17 per cent in Latvia and 13-15 per cent in Estonia and Lithuania. The financial position of the three countries has become precarious as evidenced by the fall of their foreign exchange reserves. The difficulties have especially piled up in Latvia with the second tranche of the IMF loan postponed in March 2009 due to the inadequacy of the cuts made in public spending and the failure of the attempt to float treasury bills in June amid rumours of devaluation. The dropping of the fixed exchange rate regimes in these countries — fixed peg in Latvia and currency board in Estonia and Lithuania, all in relation to the euro — would dangerously exacerbate default risks: Besides its foreign debt, the private sector is burdened by heavy foreign currency debt owed to the local banking system (foreign currency loans represent between 64 per cent of total outstanding loans in Lithuania and 89 per cent in Latvia). The exchange value in local currency of private sector commitments would increase in proportion to the devaluation with the difficulty of meeting debt service payments increasing accordingly. In view of the similitude between the economic models of the three Baltic States, a decision by Latvia to drop its currency peg would probably force Lithuania and Estonia to follow suit and devalue their currencies as well.

The Latvian government has just agreed, however, to make drastic cuts in public spending and to raise taxes, which is expected to lead to resumption of payouts by the IMF and reduce the likelihood, at least for now, of devaluation. But gaining acceptance for such draconian measures by an already overwrought public will not be easy.

Moreover, if the peg is maintained, the adjustment will continue to exclusively undermine growth and the country will be unable to benefit fully from a global recovery due to the resulting loss of competitiveness.


CIS and Russia
Private companies hit hard by the credit crunch

Severely weakened by the global liquidity crisis, the downturn of raw material prices that lasted until February this year, and the drop in foreign demand, the Community of Independent States seems to be one of the most affected regions behind Emerging Europe. After the figures on the economic slowdown recorded in the 2008 fourth quarter, the initial indicators of economic activity in 2009, including industrial production, largely bear out that overall trend: the Community suffered the most severe recessions in ten years in the first quarter with GDP contracting 9.5 per in Russia, 21 per cent in Ukraine, and 2.2 per cent in Kazakhstan. And it will likely be gripped by a 5.2 per cent recession for the full current year before managing a slight rebound of 1.4 per cent in 2010 thanks to the upswing of oil prices.

The growth of private external debt in conjunction with the difficulties experienced by regional banking systems as a result of the negative impact of the liquidity crisis and the recession on corporate balance sheets has prompted governments — generally solvent — to support their banking systems via recapitalisations and cash injections and to refinance corporate debt.

The Russian economy, rated C since March 2009, will slip into a severe recession in 2009 with a six per cent contraction attributable to the crisis-driven waning of global demand and the weakening of the household consumption dynamic. Servicing private debt continues to pose problems amid the growing global scarcity of liquidity and the risk aversion of investors. With low debt, the government has naturally provided support to banks and companies albeit very selectively. But it has recently announced that private companies will no longer receive systematic support. The rouble appeared to stabilise in the early months this year and even to appreciate again since end May, which has facilitated maintaining stable levels of foreign exchange reserves totalling about $368 billion

Ukraine (D since March 2009) slipped into a severe recession (with a 10 per cent economic contraction expected in 2009) under the combined effect of a marked deterioration of the terms of trade, the slowdown of both domestic and foreign demand, the collapse of the hryvnia, and the crisis gripping the banking sector. Despite the fiscal discipline imposed by the IMF programme signed in October 2008, government debt could increase considerably as a result of the economic downturn and the massive support granted to the banking sector. And the country's financial position remains notably shaky in view of the sovereign, exchange-rate, and private-external-overindebtedness risks exposed, IMF aid notwithstanding. Considering the uncertainties bearing on the exchange rate and the high levels of private debt denominated in foreign-currencies, the failure of a significant number of Ukrainian banks and companies will be unavoidable. The severe political instability and the outlook for the presidential election postponed until January 2010 could jeopardise the chances of meeting the conditions underlying an IMF agreement nonetheless crucial to the Ukrainian economy.


North America
A few encouraging signs but with major uncertainties surrounding efforts to stimulate domestic demand

In the United States (A2 since March 2009), the collapse of exports, investment, construction, and production continued in the 2009 first quarter with the economy thus contracting by 1.4 per cent (or an annualised 5.5 per cent) compared to the previous quarter and by 2.5 per cent compared to the first quarter last year.

A few indicators tuned green in April and May albeit weakly: increases in building permits and new housing starts for single family homes, increased confidence of companies and households, slight increase in retail sales, marked easing in the pace of the labour market deterioration, and improvement in financial asset values. But other indicators continue to flash red: acceleration of defaults on subprime and prime property loans and concomitantly of property repossession orders (albeit mitigated by various moratoriums) driving housing prices down, acceleration also of defaults on car loans and credit cards; increase in interest rates on mortgage loans, and rebound of petrol prices.
And the negative trends continue to largely overwhelm encouraging signs. Our scenario thus remains based on a 2.9 per cent economic contraction in 2009 followed by improvement in 2010 with resumption of positive (0.9 per cent) growth. Although household disposable income has registered a substantial increase thus far in 2009 (particularly in April and May) thanks to various government support measures, it will likely undergo an equally substantial contraction for the rest of the year. In view of the time lag apparent last year between receipt of fiscal incentives by households and the actual spending, the benefit of the recent fiscal stimulatory measures will likely be more visible in the third quarter. Amid the continuing growth of unemployment and fall of asset values, notably property, and with petrol prices moreover trending up, households will continue to exercise caution on spending. The old-car scrapping incentive that goes into effect in September could, however, spur car sales. The spectacular rise of the savings rate since spring 2008 (5.7 per cent in April) attests to the current cautious attitude of consumers and the priority they continue to give to paying off debt that remains nonetheless high at 128 per cent of disposable income despite a six-point decline since mid-2007.

Pending improvement in the trend for new orders, companies will continue to adjust their stocks accordingly and postpone their investments in capital equipment and software, already down 30 per cent in the six-month period through March 2009. The drastic reductions made by large companies in their costs — production, dividend distribution, stock repurchase, for example — are expected to limit the decline in profits (down 13.4 per cent in the first quarter year on year) and, by improving internal resources, reduce their external financing needs. While the marked increase in corporate bond issues since the third quarter last year may have increased the proportion of medium-term debt, it has facilitated reducing short-term debt to banks. Smaller companies will continue to suffer, meanwhile, from the severe credit crunch with bankruptcies expected to continue — up 64.3 per cent in the first quarter — with the sectors hit hardest including automotives (dealers and partsmakers), construction, and consumer staples including not only clothing, furniture, and leisure but even food products.

Some sectors, like mechanicals and public works, are nonetheless expected to begin to benefit late this year from the vast infrastructure modernisation programme launched by the new administration and local communities. The federal government's fiscal deficit and debt will grow, reaching respectively 13.2 per cent and 77.7 per cent of GDP.

Economic activity in Canada (A2 since March 2009) tends to more or less track conditions prevailing in the huge neighbouring economy to the south but in a toned-down manner. The economic decline has thus been easing in the second quarter this year auguring a slight recovery toward year end. While companies continue to reduce their investments and stocks, particularly in industry, retail sales have been trending up. Property investment continues to decline but mainly in the western provinces where the market excesses were greatest. Local banks have remained healthy and government officials enjoy substantial fiscal room for manoeuvre. The current strengthening of the Canadian dollar, at a faster pace than raw material prices, will constitute a handicap for traditional exports when the recovery gets under way.


Latin America
A certain capacity to withstand the global crisis but with Central America suffering from the North American recession

Amid the global economic crisis, Latin America will not escape recession in 2009 (about two per cent) that will give way to a tentative recovery in 2010 (about 1.5 per cent). Nonetheless, very few regional countries seem exposed to either a monetary or financial crisis.

The foreign-trade trade pattern of the region is characterised by a relative dichotomy. Highly dependent on North American demand, Mexico, Central America, and the Caribbean area have been severely affected by the recession in the United States. Conversely, South America benefits from more geographically diversified trading partners with its natural wealth making it particularly attractive to Asian countries, especially China. The sub-continent is thus in a position to cushion the impact of the global crisis. With its external accounts deteriorating, Latin America has large financing needs while the crisis has increased the difficulty of gaining access to international capital markets and obtaining increasingly scarce credit. This situation is expected to prove manageable for most large economies, Brazil (A4 since January 2007), Chile (A2 since January 2009), Colombia and Mexico (both rated A4 since March 2009), and Peru (B), which benefit from relatively healthy economic and financial fundamentals. Colombia and Mexico have moreover strengthened their external positions thanks to Contingent Credit Lines extended by the IMF in April-May 2009, a facility available to countries with good performance but that have been affected by the crisis. Since early this year, meanwhile, Brazil and Colombia have successfully floated sovereign bond issues on international capital markets despite competition from massive issues by developed countries. Confidence in the financial stability of Latin American countries nonetheless does not run deep enough to shield the region from the risk of capital flight. Many private companies in the region have moreover been contending with cashflow problems attributable to the credit crunch while currency depreciations increase the cost of foreign currency debt. And that could cause a surge in corporate bankruptcies like those wracking developed economies.

Four country@ratings negative-watchlisted:


The economies of Costa Rica, El Salvador, and Guatemala have suffered greatly from the recession in the United States, their main trading partner. GDP will contract two per cent on average this year in the three countries with stimulus measures limited by the shakiness of their public sector finances notably undermined by tax evasion and large informal economies. Their external accounts have also suffered from the repercussions of the US recession with exports, expatriate remittances, and tourism revenues in decline in consequence. External imbalances are also attributable to oil imports and purchases abroad associated with investments growing out of DR-CAFTA the Central American Free Trade Agreement with the United States. Foreign direct investment inflows will cover only a fraction of the three countries' external financing needs and covering the balance in international financial markets will not be easy. In this context local companies have been contending with cashflow problems attributable to the credit crunch. Their payment behaviour has deteriorated in consequence.

Economic activity in Venezuela is headed for collapse in 2009 with GDP contracting by about two°per cent amid weakening oil prices and production. Future growth has also been jeopardised by the priority given to redistribution of the oil wealth and the recourse to extra-budgetary commitments — via the FONDEN development fund and the state-run oil company PDVSA — to the detriment of productive investment. Ill-adapted economic policies have moreover given rise to very strong inflation. Although the enormous inflation differential with the country's main trading partners necessitate devaluation, government officials have continually sought to postpone such drastic action. Capital flight will thus continue despite the exchange controls imposed by the CADIVI. The current account surplus will doubtless volatilise amid the deterioration of the international situation, and foreign exchange reserves will likely continue to be tapped to some extent for the benefit of FONDEN and PDVSA, even if the external financial position will in all likelihood remain relatively comfortable with moderate debt ratios.
The "21st century socialism" advocated by President Hugo Chavez has resulted in increasing economic interventionism by the government and additional nationalisations in an unpredictable business environment. In this context, settlement times for recurring late payments have lengthened and transfer problems have emerged in connection with the foreign exchange mechanism managed by CADIVI.


Asia-Pacific
Emerging Asia: rebounds in China and India
Japan: stimulus plans attenuate a deep recession
Australia: holding up well but exposed to continuing risks associated with raw material exports


Emerging Asia

Emerging Asian growth will slow, easing from 6.4 per cent in 2008 to 3.6 per cent en 2009 before rebounding to 6.1 per cent in 2010 thanks to the expansionary policy mix widely adopted in the region. Reductions in interest rates and legal reserves have been implemented while fiscal stimulus plans have been rolled out with South Korea's plan (4.7 per cent of GDP) the most far-reaching in Asia, followed by Singapore's plan (3.4 per cent of GDP), and then the Chinese and Malaysian plans (both 3.0 per cent of GDP). Special credit stimulus plans were moreover often put into effect to spur domestic demand. The resulting strong credit expansion has raised fears, however, of asset-quality deterioration in many banking systems.

While the effects of the 1997 Asian crisis were mainly financial, the 2008 economic and financial crisis has mainly affected Emerging Asia via the trade channel. Emerging Asia's specialisation in medium and high technology products (automotives, electronics, and capital goods) particularly vulnerable to global investment cycles partly explains the significant crisis impact on very open Asian economies. In the 2008 last quarter and the 2009 first quarter, Emerging Asian exports plunged 70 per cent, a fall twice that suffered in 2001 in the crisis triggered by the bursting of the speculative Internet bubble and three times the fall during the 1997 Asian crisis. Intraregional Asian exports flowing to China (assembly platform) fell a precipitous 80 per cent. Economic growth in Malaysia (A2 since March 2009), Thailand (A3 since March 2009), Hong Kong (A2 since March 2009), Taiwan (A2 since March 2009), and Singapore (A2 since March 2009) was thus negative in the 2009 first quarter. And for the full current year these open economies will be mired in recession with GDP contracting 3.5 per cent in Malaysia, 3.0 per cent in Thailand, 4.5 per cent in Hong Kong, 7.5 per cent in Taiwan, and 10 per cent in Singapore as a result of the economic downturns in industrialised countries. All these economies were negative watchlisted in March, except for Singapore whose rating was downgraded.

The South Korean economy (A2 since March 2009) also slowed in the 2009 first quarter (down 4.4 per cent year on year). A severe recession will grip the economy for the full current year with GDP contracting by four per cent due to the drop in both exports and domestic demand. Private consumption will suffer from the growth of unemployment and very high level of household debt with financial debt representing just over 1.5 times average annual disposable income, a situation likely to spur savings in a context of increasing risk aversion. According to an IMF survey in 2008 (Stress Testing Household Debt in Korea) South Korean households devote a higher proportion of their income to paying interest on debt than do households in either the United States or Japan. And the current destocking process will likely persist with stocks in March 2009 remaining 25 per cent higher than normal. The financial sphere will moreover bear watching. Despite support from the government (liquidity injections, loan guarantee extensions, and export insurance) and from abroad (swap lines concluded with the United States, Japan, and China), the debt service burden borne by companies jeopardises in a crisis context their capacity to meet their commitments. The increase in the default ratio since end 2008 attests to the difficulties experienced by smaller companies in meeting commitments to the banking sector, which could be affected in turn by deterioration of the debt-repayment capacity of both companies and households.

The Philippines (rated B since March 2005), Indonesia (B since March 2004), and Vietnam (B since June 2008) will achieve positive growth this year, respectively 0.5 per cent, 2.5 per cent, and 3.3 per cent, thanks notably to an effective expansionary policy mix and the steadiness of domestic demand. After continuing to grow in 2008 and the first quarter this year (up five per cent), household consumption is moreover expected to benefit throughout the current year from fiscal stimulus plans (wage increases in the public sector in Indonesia, subsidies to needy households in the Philippines, tax cuts, and so on). With the high technology manufacturing sector making a relatively smaller contribution to the value added by these economies, they have accordingly tended to fare better than open Asian economies specialised in upmarket manufactured products.

Signs of recovery are now perceptible in the region's two largest economies.

India (A3 since January 2005) has withstood the crisis relatively well thanks to an economy open to a relatively limited degree and to the dynamism of domestic demand. The subcontinent achieved 5.8 per cent growth in the 2009 first quarter after 5.1 per cent in the 2008 fourth quarter (year on year). Full-year growth is expected to reach 5.5 per cent. And the significant election victory won by the Congress Party will likely enable it to undertake a programme of reforms needed to relieve economic choke points particularly in terms of infrastructure. With companies relying increasingly on external financing, however, they could be affected by a prolonged credit crunch in international markets. If a new crisis of confidence should develop payment delays could increase.

Signs of recovery in China (A3 since January 2009) were also perceptible in the 2009 first quarter thanks to counter-cyclical economic policies (reductions in interest rates and legal reserves, fiscal stimulus plans that swelled the central government deficit to three per cent of GDP, and suspension of the loan quota system). On a year-on-year basis growth reached 6.1 per cent in the 2009 first quarter compared to 6.8 per cent in the 2008 fourth quarter. But on a quarter-on-quarter basis corrected for seasonal variations, the consensus estimate is that growth reached six per cent in the 2009 first quarter up from two per cent in the 2008 fourth quarter. The credit expansion has moreover accelerated this year, up 21 per cent in January, 24 per cent in February, and 30 per cent in both March and April compared to up 15 per cent in 2008. Investment, meanwhile, grew 30 per cent mainly in the public sector. Despite growing unemployment, sales rebounded in the 2009 first quarter in the retail, automotive, and property sectors up respectively 16 per cent, 3 per cent, and 9 per cent; spurred by the fall of consumer prices, special stimulus measures (tax incentives on new car purchases, subsidies to farmers), and the positive wealth-effect associated with the strengthening of the stock market with the Shanghai Stock Exchange up 36 per cent in the first four months of the year. China's economic growth has thus bottomed out. But weaknesses nonetheless persist.

The current recovery rests almost exclusively on public sector investment and liquidity injected into the economy. Payment default risks are still mainly concentrated in the private sector, particularly low value-added branches and branches with excess capacity suffering from economic policy focused on high value-added sectors with the country striving to move its economy upmarket. A soaring expansion of bank credit — with the new loans granted by banks in the 2009 first quarter representing 94 per cent of the new loans granted all last year — associated with an easing of the own funds-to-debt ratios of municipal investment companies is expected to cause a deterioration of asset quality that already troubles Chinese financial regulators.

Ii is noteworthy that such concerns are not specific to China. Albeit largely spared from contamination by toxic assets, especially subprime (a fact borne out by the results of a survey by the Asian Development Bank covering 44 Asian countries whereby toxic assets represent less than one per cent of total assets), Asian banking systems are currently being put to the test for the first time since the Asian Crisis. They could suffer from an increase in the proportion of non-performing loans. Fitch has thus undertaken to revise the outlook for several Asian banks: seven in Taiwan, one in Hong Kong, and one in South Korea. And banks in Vietnam, Mongolia, and Cambodia have solicited government support.

Japan (A2 since March 2009)0

The spectacular fall of economic growth in the 2009 first quarter (down an annualised 14.2 per cent quarter-on-quarter and down 9.1 per cent year-on-year) resulting from the decline in both exports and investment bears out that of all industrialised countries Japan will likely suffer the most severe recession this year with GDP contracting by 7 per cent. The lack of reactivity demonstrated by companies in failing to reduce their stocks and costs in the 2008 fourth quarter paved the way for the fall of corporate profits to their lowest level since 1983. They will thus have to revise their investment projects downward and adjust production. But production could, however, benefit temporarily from a technical recovery: The vast economic support plan implemented by China and focused chiefly on investment will likely enable Japanese mechanicals and metal processing sectors to limit the deterioration of their business activity. That temporary relief from the overall trend will, however, remain marginal since Japanese exports to China correlate with Chinese exports to the United States and the European Union.

The improvement in consumer confidence recorded in May was largely attributable to various stimulus measures implemented by the government in the second quarter, particularly for purchases of vehicles and home furnishings. Despite these measures, household consumption — already relatively flat before the crisis — will decline in 2009 (down 2 per cent), undermined by the rise of unemployment (5.9 per cent) and the decline in disposable income (with financial assets constituting 70 per cent of net wealth), and savings are expected to increase to 7.6 per cent of disposable income. The measures taken by the government will widen the fiscal deficit —a negative 6.7 per cent of GDP for 2009— and increase already colossal public sector debt representing over 185 per cent of GDP.


Australia (A2 since January 2009)

The economy improved slightly in the 2009 first quarter (up 0.4 per cent year on year) thanks to a range of government support measures intended for households (tax rebates, aid to first-time property owners) and companies. Other factors have contributed to Australia's economic strength, including: steady iron ore and coal exports buoyed by the high prices prevailing in recent years and reductions since September 2008 in the Central Bank's key rates, which have spurred consumption by households by reducing their debt service burden. But the recent downward renegotiation (over 30 per cent) of prices associated with raw material shipments and the tendency cultivated by China these past weeks to operate in commodity futures markets to meet its supply needs is expected to undermine mining-company exports and investment. Saddled with heavy debt averaging 156 per cent of disposable income households will continue to exercise extreme caution on spending (deterioration of the labour market and priority given to replenishing emergency savings) and to repay debt. Economic growth is expected to contract nearly 1 per cent this year.



Near & Middle East, North Africa
Crisis effects mitigated by rebounding oil prices

The Near & Middle East (except Turkey) and North Africa have not been spared by the crisis and could lose 3.5 points in 2009 compared to 2008. The growth of non-performing loans held by banks will bear watching. The recovery expected in 2010 will be relatively soft.

Oil producing countries seem to have been hit hardest by the collapse of oil prices, the decline in foreign demand, and the credit crunch, which will undermine the financial performance of companies and banks. But some of them — Saudi Arabia rated A4, Abu Dhabi A2 since January 2009, Kuwait A2, Algeria A4, and Libya C — enjoy an excellent capacity to cope with crisis effects thanks to currency reserves and financial assets accumulated these past years enabling them to support growth in non-oil economic sectors.

The upswing of oil prices since the year began, especially the rebound in May, has brightened the outlook and augurs smaller-than-expected twin deficits. Oil revenues will in any case be far below the record levels reached last year.

The United Arab Emirates (A2 since January 2009) will slip into recession (down 1.6 per cent). Of all regional countries the three emirates have suffered most with the crisis affecting not only Abu Dhabi's oil industry but especially Dubai's property and banking sectors. Saudi Arabia will also slip into a mild (one-per cent) recession despite robust counter-cyclical policy, since as "swing producer" it leverages its own vast resources and plays the pivotal role in adjusting hydrocarbon production to falling global demand. The banking sectors in the Gulf monarchies have in general received government support to keep the market liquid. But the quality of their assets could suffer a marked deterioration as a result of the worsening economic conditions, their exposure to the property sector, and a general lack of corporate transparency.

Iran (rated D) seems vulnerable meanwhile, weakened by four years of the populist policies pursued by President Ahmadinejad. Foreign exchange reserves have been relatively low, representing only ten months of imports, and inflation — although currently low virtually everywhere else — exceeds 25 per cent. And the political crisis triggered by the 12 June elections could make things even worse.

Except for Israel, directly affected via the trade channel and expected to slide into a 1.4-per cent recession this year, the crisis has relatively little effect on the other regional countries. But compared to oil countries they nonetheless remain more vulnerable in view of their severe fiscal imbalances (Lebanon rated C, Jordan B since June 2006, and Egypt B), high debt (particularly Lebanon), and great dependence on foreign capital (particularly Jordan). Their governments thus enjoy little room for manoeuvre to support their economies, which will nonetheless benefit from easing inflation, down from the particularly high levels reached in 2008. Goods and services exports have declined amid the fall of demand from client countries and the slowdown of tourism and Suez Canal traffic (Egypt). Remittances from emigrant workers have also been in decline but apparently to a lesser degree than expected. The drop in imports compared to 2008, considering the fall of staple commodity prices and slowdown of domestic demand, will likely make it possible, however, to keep current account deficits from deteriorating. The downturn of foreign capital flows, already perceptible in 2008 has accelerated, spurred by the credit crunch, the economic downturn in neighbouring oil countries, and the risk aversion of investors. With its current account deficit still very high and its great dependence on foreign capital, Jordan seems the most vulnerable.

With Pakistan (D since March 2009) already mired in a severe economic crisis, the troubles in the North-West Province have weakened its position even more. But the IMF released funds to enable it to avert a liquidity crisis and, considering the extent of the difficulties faced, softened the conditions on the loan granted. In addition to the $5.3 billion in aid promised in April by Pakistan's friends, international aid has been mobilised to assist persons displaced from the strife-ridden province. The political instability and the president's weak backing in parliament severely undermine the outlook.


Sub-Saharan Africa
Affected by the second crisis wave — but not swamped

After maintaining near six-per cent growth for the past five years, sub-Saharan Africa will likely suffer this year to a greater extent than expected from the effects of the global contraction of economic activity. Between 2008 and 2009, the continent could lose nearly four points of growth with forecasts for 2009 accordingly reduced below two per cent compared to the five per cent forecast last October. And growth is expected to rebound to 4 per cent in 2010 but remain below its pre-crisis level. But the continent is nonetheless expected to increase the positive growth differential over developed economies to 7.6 points in 2009 up from 4.8 points in 2008.

The oil producers have been among the hardest-hit countries. They will likely suffer a precipitous 5.5-point drop in growth, down from 6.9 per cent in 2008 to a still-positive 1.4 per cent this year. Most oil countries will be unable to offset the decline in prices by increasing production, whether for technical reasons (Nigeria, rated D, contending with the Niger Delta insurrection) or due to OPEP constraints. Angola (C) will thus likely experience an economic contraction of about 3.5 per cent, after maintaining near 20 per cent annual growth over the past five years.

While a large majority of continental countries have benefited from the fall of oil and foodstuff prices, all have suffered from the decline in their exports in both volume and value terms and from the decline in financing flows, particularly foreign direct investment and private transfers. Lacking diversification, African economies suffer directly from the decline in prices and demand for their main export production (like diamonds in Botswana and Namibia, coltan in DRC). A few exceptions are noteworthy, like the rise of cocoa prices (Ghana rated C) and cotton (Mali C, Burkina Faso C) associated with a drop in production, and the steady prices for gold with its safe haven appeal (Ghana, South Africa, Mali). The drop in foreign direct investment amid the increasing global scarcity of liquidity, and increased risk aversion will likely primarily affect the mine prospecting and production sector with these activities having become less profitable (DRC rated D, Zambia & Uganda both rated C). And energy and transport infrastructure projects will likely also be subject to many delays. Foreign direct investment is, however, expected to remain dynamic in telecommunications (Niger, Ethiopia rated C) and agriculture (Mozambique B, Mali). Even if estimates of a 20-per cent decline in private transfers are very approximate, this unfavourable trend will affect household consumption in Africa with the transfers representing as much as 30 per cent of goods and services exports (Senegal B, Togo C). Covering financing needs is thus made all the more difficult especially since — despite the measures taken by the IMF to help African countries cope with the crisis (doubling the amount of donations, increasing concessional loans) — uncertainties weigh on the capacity of developed countries to meet their bilateral commitments on public development aid.

South Africa's A3 rating kept on negative watchlist with the country's economy (33 per cent of sub-Saharan African GDP) still affected by sluggish household consumption despite the 450-basis point reduction in its key rate decreed by the Central Bank and made effective since last December. Platinum and mechanical exports have suffered, meanwhile, from the decline of global demand. And many public sector investments projects in energy and transport infrastructure have been postponed due to the credit crunch (sovereign rating downgraded by the rating agencies). South Africa thus slipped into a technical recession in the first half of the year with two consecutive quarters of negative growth. Economic activity is expected to contract by one per cent for the full current year but begin to recover in the second half — as the rand and stock market rebounds attest.

Botswana's A3 rating downgraded to A4 due to the drop in diamond prices and production.

Economic activity in Botswana is expected to contract this year by about 10 per cent, undermined by the price downturn for diamonds (63 per cent of exports) and the reduction of production capacity resulting from the shutdown of unprofitable facilities. The country's external and fiscal positions are weaker in consequence. And Coface corporate payment records for the second quarter bear out the deterioration of economic conditions. Compounded by inadequate control over the influx of immigrants from Zimbabwe, the rise of unemployment associated with the mine shutdowns has stoked urban unrest.


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