The world country risk index (The world country-risk index represents an average of Country @ratings weighted by each country's contribution to world gross production. The index is based on the world average risk level in 2000.) has declined due to the positive watchlisting of the (A2) rating for German companies. Despite that improvement, the European Union risk index is still higher than that of all industrial countries taken together. The emerging country risk index has been stable after a long period of steady improvement. The negative effects of increased oil prices on importing countries are currently being offset by continued strong world demand, high prices for other raw materials, and abundant financial market liquidity. The impact of rising energy costs is nonetheless being watched closely — some emerging countries may have to contend with higher financing needs that could expose them to a liquidity crisis.

A new oil-price upsurge marked the summer season. For the first nine months this year, North Sea Brent prices averaged $53.80, a year-on-year increase of almost 50%. That increase has nonetheless not caused a major economic shock. The slowdown registered in most countries was moderate with the United States and China continuing to drive world growth despite tighter monetary policies.

As we expected, company solvency has thus generally remained sound with payment behaviour tending to improve except for companies in a few European countries (notably Italy and Greece).

However, some economic sectors have particularly suffered. Pressure on margins increased in big oil-user sectors like transportation, chemicals, and steel. The pressure has been particularly intense for companies located in regions with sluggish final demand. Meanwhile, the end of the multifibre arrangement along with increasing competition from Chinese products in many sectors could hurt companies unable to make anticipatory adjustments for the changes.

Substantial oil-price volatility should continue to mark the rest of the year with robust demand, supplies limited by production and refining capacities, weather incidents, and geopolitical uncertainties causing a structural imbalance in the market.

The potential risk to growth stemming from oil should nonetheless not be overstated in a context where world demand is still robust, financial markets continue to enjoy abundant liquidity, and many emerging countries, moreover, have consolidated their financial situations.

Nor should that risk obscure other imbalances like the United States' widening twin deficits or the property bubbles in some countries, which could ultimately have a significant impact on world growth and company solvency.

Regionally, the main developments expected are as follows:

-In the United States, although high petrol prices and rising interest rates could affect consumer purchasing power, the additional economic activity generated by reconstruction of the regions devastated by hurricane Katrina should offset that negative impact. However, the already large public sector and current account deficits could increase.

- In Europe, the euro depreciation should spur exports and stronger growth. However, oil prices may inhibit household consumption with domestic demand remaining sluggish in many countries.

-Asia should continue to benefit from enviable growth rates despite a slowdown caused by slower demand growth in industrialised countries and high oil prices. In general, however, economic conditions and external equilibriums have been holding up well in that less favourable environment. In China, although the expansion should continue with the risk of overheating easing, investment bears watching since the still explosive growth rates could lead to overcapacity in some sectors.

-In Latin America, although growth has sagged, it has remained at historically satisfactory levels. Less dependent overall on oil imports than other regions, the continent has continued to benefit from favourable conditions even if external demand has been somewhat less dynamic (except for oil exports). Meanwhile, tight monetary policies have been affecting purchasing power and heightening already substantial political and social tensions in some countries.

In the Near & Middle East, economic conditions have remained very favourable for oil exporting countries. The economies of other regional countries have been benefiting indirectly from the oil windfall and have continued to trend up thanks notably to the firmness of exports and tourism. However, the region is still subject to geopolitical instability.

The Industrialised countries risk index has declined markedly (down 3.3%) due to the positive watchlisting of Germany's A2 rating. The average expected risk level for companies is nonetheless still higher in the European Union than it is in North America or Japan.

In the United States (rated A1), the Katrina hurricane's impact should not necessarily exacerbate the moderate slowdown already forecasted for this year. That slight downturn is attributable to slightly less dynamic household consumption amid both rising energy prices and higher interest rates. The Fed should continue the gradual tightening of monetary conditions whereas the additional public spending linked to reconstruction of the Gulf of Mexico coast will impede reduction of the fiscal deficit.
Even if companies have been registering slower profit growth due to substantially higher payroll costs and increased raw material prices, their solvency has remained good. The Coface payment-incident index has stabilised at its lowest level.

In Japan (rated A1), the economic upturn registered since spring should continue throughout the second half, underpinned largely by household consumption, which has benefited from the unemployment decline and wage growth. Exports have not been lagging. In face of dynamic demand, companies have been increasing their investments. Continuation of those conditions should soon allow the country to emerge from deflation and begin consolidating the fiscal situation.
In that favourable context, and considering the consolidation accomplished in recent years, the company financial situation has continued to improve markedly, which has resulted in a steady decline in bankruptcies.

In Western Europe, the slight recovery expected in the second half will not mitigate the persistent disparity of growth rates by country, the Italian recession contrasting with the robust Spanish economy, for example.

In Italy (rated A2 and negative watchlisted but downgraded to A3 for exporting companies alone), weak economic activity and recession conditions have persisted from quarter to quarter. Facing competition from emerging countries in their traditional niches and sluggish growth in their principal European markets, export industries have been struggling. The firmness of household consumption and investment has not sufficed to prevent an industrial production downturn. The extent of the fiscal deficit, now 4% of GDP, will limit options available to government authorities for stimulating the economy.
Company solvency deteriorated sharply in 2004-2005 and the risk level should remain high in coming months considering the lack of positive economic prospects. Payment behaviour deteriorated most for companies focusing essentially on exports with their average rating downgraded to A3 in consequence. As for the domestic market, payment incident frequency has justified the continued negative watchlisting of the A2 rating.

In Germany (rated A2 and positive watchlisted), the persistent sluggishness of domestic demand notwithstanding, excellent export performance has contributed to an economic upturn benefiting companies, whose margins have moreover returned to satisfactory levels. Exports have thus continued to post good growth attributable to competitiveness gains accumulated in recent years and favourable sectoral and geographic specialisation, which have made them the country's main economic engine.
However, with the continued rise of unemployment, reduction of social security benefits, along with the as yet unknown final outcome of the last elections, households have tended to be more cautious.
Overall, and despite economic growth that has been moderate on balance, both company solvency and the Coface payment incident index have returned to satisfactory levels. That situation should persist in 2006 especially with a moderate economic upturn expected. Household consumption may finally increase slightly due notably to stabilisation of the employment market. Moreover, exports will continue to grow nicely thanks particularly to the positive impact of the recent euro decline.

In the United Kingdom (rated A1), the economy has lost its lustre since end 2004 amid faltering private demand. That is attributable to past monetary policy tightening and the resulting stabilisation of property prices, which has undercut household refinancing capacity. Over-indebted, households have been reducing spending in favour of savings even with interest rates no longer rising and fiscal policy still accommodating. Conversely, public spending has remained particularly dynamic, buoyed by expansionary fiscal policy. Exports have been in an intermediate situation, benefiting from the pound sterling's decline against the euro.
Although the Coface payment incident index is still headed in the right direction, the increase in bankruptcies registered in the second quarter after several years of decline gives cause for concern. Thus far, however, the difficulties seem to be limited solely to the retail food and textiles sector and should not gain in amplitude considering the still-low unemployment rate, the absence of a property market collapse, and the likelihood of interest rates easing back down.

In France (rated A1), growth has turned sharply down since the second quarter. Although still the main economic engine, household consumption has sagged markedly. An incipient easing of unemployment, announced tax reductions, and the wealth effect linked to the appreciation of property values have thus not sufficed to offset the effect on purchasing power of weak wage growth and higher energy prices. That is particularly unfortunate with exports still lacking dynamism due to the sluggishness of European demand and insufficient competitiveness in some market segments. That lack of export dynamism along with increased competition from imports has led to a decline in industrial activity and an investment slowdown.

Considering this gloomy macroeconomic context, a slight increase in payment incidents could develop in coming months. However, they will usually involve smaller companies and mainly constitute the logical aftermath of the company-creation peak registered in 2003. Overall, companies should prove capable of coping with an economic slowdown as well as increased production costs to the extent that they have been able to clean up their balance sheets and will continue to benefit from sources of low-cost financing.

In Spain (rated A1), the economy has remained strong, still buoyed by domestic demand. Conversely, foreign trade continues to have a negative impact on economic growth with the moderate level of import growth not sufficing to offset the persistent poor performance of exports and tourism. However, the possibility of a slowdown caused by a property market collapse is not out of the question considering the heavy indebtedness of households and the high cost of housing.
Companies have been benefiting from this favourable context even if the textiles and home electronics sectors have met with some specific difficulties.

The risk index for CENTRAL EUROPEAN COUNTRIES has been stable with no country either upgraded or downgraded. Although the impact of higher oil prices on the regional economy should be moderate, it will be more pronounced than in the euro zone with Central Europe consuming relatively more oil because of the economic catch-up process. The higher barrel prices have nonetheless occurred in a regional context of stronger-than-expected growth, which should thus limit their effects. Growth accelerated sharply in the second half this year in the large regional countries except Poland, which has nonetheless been benefiting from an upsurge of foreign investor interest since summer. The region's public and current account imbalances are nonetheless a source of vulnerability generating currency crisis risks that rising American interest rates can only exacerbate.

In Poland (rated A3), economic growth has weakened due to sagging domestic demand and exports. GDP rose 2.8% year-on-year in the 2005 second quarter (against 2.1% in the previous quarter and a 5.4% increase for the full year 2004). The interest rate decline should nonetheless spur investment and make it possible to revive the economy from the second half this year. The public sector deficit should nonetheless only decline slowly, which will make the country's adoption of the single currency uncertain, at least in the near future. Meanwhile, although the current account deficit has remained under control due to an import slowdown, external financing needs have reached appreciable levels due to the debt amortisation burden. The emerging strong investment recovery nonetheless justifies some optimism.

The country seems to have regained attractiveness over the competition due to government efforts to improve its strategy and the quality of products offered, introduction of a new flat 19% corporate tax, resumption of growth, and victory of the centre-right opposition in the September 2005 elections.

The Czech Republic (rated A2) has posted enviable economic performance since the year began. Far from slowing down, growth has been accelerating, up 5.1% year-on-year in the second quarter this year against up 4.7% in the previous quarter and up 4.4% for the full year 2004. Benefiting from substantial direct investment inflows in recent years, industry has become a heavy exporter, a development responsible for the country's dynamism. Although the koruna's appreciation has not affected exports thus far, if that trend continues it could undermine their competitiveness in the medium term. Meanwhile, even though the current accounts have been improving, they have remained in deficit due notably to profit repatriation by foreign companies. Finally, since a new prime minister took office last April, the Social Democratic Party seems to have regained popularity, at the cost, however, of postponing painful reforms until after the June 2006 legislative elections, which will delay consolidation of public sector finances.

Economic growth also rebounded in Hungary (rated A2 and negative watchlisted) in the second quarter this year (up 4.1%, after 2.9% in the first quarter and 4.1% for the full year 2004) fuelled by investments — benefiting from the decline of key interest rates — and exports notably of transport and electronic equipment. The Hungarian economy's weaknesses have nonetheless not disappeared. Although the trade deficit has declined slightly, the current account imbalances will be difficult to sustain (8% of GDP) and the country will remain very dependent on financial markets. Adoption of the euro also seems to be a distant proposition due to the high public sector deficit (5% of GDP). Implementation of major reforms upon which fiscal consolidation will depend will only be possible after the mid-2006 general election.

In Turkey (rated B and positive watchlisted), GDP registered 4.5% growth in the first half this year, down from the exceptional 8.9% rate posted in 2004, the highest in forty years. However, the current growth rate will be more sustainable. This dynamism is linked to the growth of domestic demand with foreign trade making a negative contribution to growth due to a sharp increase in imports resulting mainly from higher oil prices. Conversely, private consumption grew 4.4% in the second quarter and especially private investment again posted excellent performance (up 12%). Financially, public sector and external debt ratios have been falling sharply thanks to very tight fiscal and monetary policies and structural reforms. Turkey's financial vulnerability is nonetheless still high due to the extent of its currency financing needs in a context of a widening current account deficit (between 5.5% and 6% of GDP in 2005 and 2006).

Despite increased foreign investment, the country (especially companies) has continued to take on massive debt, mainly short-term. Turkey will thus be very vulnerable to a change of sentiment in the markets, which have recently been confident due notably to the accession negotiations with the European Union.

Farther east, in Russia, rated B, with public sector surpluses reaching record levels thanks to oil prices, fiscal policy can accept the current additional social spending in the run-up to the 2008 presidential elections. Moreover, the government has been gradually reducing its debt, which has contributed to continued improvement in sovereign risk. However, growth has been slowing (up 5.8% expected this year against up 7.1% in 2004) just when oil prices have been peaking. The deterioration of the business climate under way since end 2003 had been affecting the investment growth needed as much in the energy sector to sustain the expansion of production and hydrocarbon exports as in a manufacturing sector suffering from a lack of competitiveness. The wave of tax investigations targeting major companies in the wake of the Yukos affair has thus been a drag on the economy. It has moreover triggered renewed capital flight, which may herald a possible revival of the predator behaviour that characterised entrepreneurs in the nineties. Politically, the contradictory statements and gestures directed at the business world, difficulty in managing a reform of social security benefits that has been spurring protest, in conjunction with a gradual loss of influence within the Community of Independent States after the successive revolutions would suggest that the government's strategy is becoming less effective. Risk has remained high in the banking sector despite significant progress made recently via adoption of the deposit insurance law. Insufficient financial transparency on the part of companies along with ineffective protection of creditors and shareholders have continued to characterise the market economy's institutional framework.

The average risk index for Emerging Asian countries has remained at the lowest level of all emerging countries. Asia should again post growth rates higher than those of other regions even if most regional economies have been showing some signs of flagging. Very dependent on foreign demand, those countries have been contending with a purchasing slowdown by their main clients. Purchasing by China has been declining as a result of substitution of national production for imports. Demand from the United States and Japan, which are often crucial markets for Emerging Asia, has been less dynamic. Furthermore, with most countries net importers of oil and raw materials, rising costs have been affecting the investment dynamic. Asian economies nonetheless still have assets that allow them to cushion the effects of that less favourable environment: the energy intensiveness of their industries has declined in recent years, mitigating the negative impact of rising prices, their external financial situations are generally robust, and their current account surpluses, although generally declining, have persisted.

China, rated A3, has been posting impudent levels of dynamism (with GDP up 9.5% in the first half) and the expected slowdown has not materialised. Investment, just as dynamic as it was in 2004, has been driving economic growth.

Household consumption, traditionally less explosive, has continued to rise. Foreign trade, meanwhile, has also been making a positive contribution with exports, spurred by price competitiveness, increasing markedly and imports easing due to substitution by national production. Overheating risks seem to have diminished, however, with investment slowing in the most sensitive sectors (property and steel). Nonetheless, considering the growth rate of the money supply and thus of liquidity available to companies (even with a dwindling credit supply), the rationality of investment allocation choices will remain a key factor to watch. Although risks of a hard landing seem to be easing, company margins have continued to shrink due notably to stiff competition in the domestic market. In a context of strained financial results, the slightest shock could trigger numerous payment incidents with some sectors engaged in a price war in the domestic market. Meanwhile, the announcement of a "minimalist" yuan revaluation (up 2.1% against the dollar) end July 2005 has in no way affected China's dynamism. Despite the announcement of a more flexible foreign exchange regime — with the fluctuation bands increased slightly end September 2005 — and a currency basket peg, the yuan will remain pegged to the dollar in practice.

In India (rated A3), this year's good summer monsoon should contribute to the dynamism of growth that has been exceptionally robust for the past three years. Industrial production rose 11.7% in June including 12.5% for manufacturing production. Emerging high technologies along with pharmaceuticals and the car industry have been underpinning the dynamism. Economic growth could thus reach 8% in 2005/06. Notwithstanding a sharp increase in imports (up 37.9% in the second quarter this year) with the country very dependent on oil, continued export growth (up 19,6%) and persistently high levels of private remittances and capital inflows allowed a further increase in foreign exchange reserves, to $144 billion. Conversely, public sector finances are still the countries main weakness and the heterogeneous character of the government coalition has not been conducive to reforms. Although the buoyant economic conditions have fostered better payment behaviour by companies in general, they still do not demonstrate sufficient financial transparency and the possibilities for legal recourse in case of non-payment have remained limited.

In Korea, rated A2, economic growth should end up down from last year despite accommodating monetary policy. Repercussions of the household over-indebtedness crisis have been undermining economic conditions with domestic consumption only recovering sluggishly. Moreover, the economy is very dependent on oil (21% of imports), which has contributed substantially to reducing the current account surplus.

In Thailand, also rated A2, economic conditions have suffered from the import slowdown in China and rising oil prices with growth revised downward (4%) and the country registering a current account deficit. Like in Korea, however, that deterioration has developed in a context of solid fundamentals in solvency and foreign currency liquidity terms. Thai company payment behaviour has remained very satisfactory.
In Indonesia, rated B, the rupiah has been falling sharply — down 10.5% against the dollar since January 2005 — due to the impact of rising oil prices on the foreign exchange market's equilibrium.

The country has become a net importer of oil with its imports particularly costly due to a system for subsidising retail prices financed out of the government budget. The current foreign exchange crisis developed amid dynamic economic conditions and a financial situation that has radically improved since the late 1990s. Despite the sensitivity of public sector accounts to oil prices, sovereign risk has apparently not been affected with the deficit remaining at moderate levels. However, to stem the loss of confidence, the government, which has already made use of monetary policy as a tool, may have to announce a more drastic reduction of subsidies. Such measures could stir strong currents of dissatisfaction. Economic growth, which has been trending up, should ultimately match the 5% pace registered last year. Although certainly remaining at honourable levels, foreign currency reserves have been falling sharply and are much lower than average for Asian countries. Liquidity crisis risks have thus increased. A more pronounced decline of the local currency would probably affect company payment behaviour.

In the Philippines (rated B), the political crisis has eased. President Gloria Arroyo has avoided the impeachment proceedings that the opposition wanted to initiate following accusations of misappropriation of funds during the last elections in May 2004. She continues to enjoy the support of the Catholic hierarchy and the military while the opposition has failed to mobilise the population. Although the country is still financially weak (with public sector debt remaining very high and vulnerable to market swings), sovereign risk has tended to decline gradually: public sector debt has been decreasing and fiscal policy has been relatively tight. Spreads have been stable — investor confidence has thus not deteriorated. Barring a new external shock, the spectre of a sovereign crisis has been fading. Economic growth, meanwhile, has been slowing and should be under 4% this year amid less dynamic Japanese and American demand and rising oil prices, which has had a substantial impact on a very energy-consuming industry.

In Sri Lanka (rated B), tourism seems to be recovering faster than expected after the Tsunami with the textiles sector (representing over half of exports) has coped relatively well with the elimination of quotas. Farm production should finally benefit from a good monsoon season. Growth forecasts have thus been relatively high for 2005 and 2006 (between 5 and 6%).
With a high current account deficit (a negative 5.5% of GDP in 2005 and 2006) and large public sector debt, Sri Lanka has nonetheless remained one of the countries most vulnerable to oil prices increases. Meanwhile, the political climate has been deteriorating in the run-up to presidential elections in November. The electoral campaign should give rise to flag-waving appeals to nationalism not very conducive to peace. Although the cease-fire decided in February 2002 is still in force, there has been a disquieting resurgence of tensions between Tamils and Singhalese evidenced by the assassination of the minister of foreign affairs this summer.

Latin Amercia's risk index has remained unchanged. Although economic growth has slowed, it is still at a historically satisfactory level for the region. The continent should continue to benefit from generally favourable conditions for the remainder of the year, notwithstanding somewhat less buoyant foreign demand. The economies most vulnerable to oil price increases, like the Central American and Caribbean countries, and Uruguay, have attempted to protect themselves by concluding preferential agreements with some Latin American producers, above all Venezuela. In any case, the risk index has remained above the emerging-country average with some countries remaining vulnerable to a sudden increase in American interest rates or to domestic political risks.

In Mexico (rated A4), after rebounding last year, economic growth should slow in 2005 with the dynamism of domestic demand not sufficing to offset flagging exports, mainly of manufactured goods toward the United States. A further slowdown should develop in 2006 due mainly to uncertainties linked to the presidential election as well as to repercussions from a possible downturn of the United State economy on which Mexico is very dependent. Moreover, some sectors continue to suffer from problems competing with China while the peso appreciation in recent months against the US dollar — and thus also against the yuan — could further weaken some companies. Textiles have notably suffered from the elimination of quotas since the year began. In that context, frequent payment incidents have continued to mark company payment behaviour.

The positive watchlisting of Brazil (rated B) has been maintained. The political crisis shaking the country since June following a succession of revelations on the system of corruption set up by the Workers Party has not had any economic or financial repercussions thus far. Growth has remained "healthy", achieved without undermining public sector accounts or worsening the current account deficit. A moderate economic slowdown emerged in the first half this year with GDP growth of 3.4%. The favourable price trend (up 3.6% for the first eight months this year) prompted the Central Bank to reduce the key SELIC rate from 19.75% to 19.50% on 15 September. Other rate cuts could be made by year-end to sustain consumer demand and investment with the various forecasts calling for a new growth slowdown in the second half this year, an annual rate barely above 3%, and continuation of that trend in 2006. Exports are still the economy's most dynamic component with the foreign trade surplus reaching $28.4 billion for the first eight months this year against $30 billion for all of 2004. However, although international financial markets have thus far accepted the disconnection between the country's political crisis and economic situation, Brazil has remained very dependent on sentiment in those markets due to its large external financing needs.

In Argentina (rated C), after the strong recovery of 2003 and 2004, attributable to a catch-up phenomenon following four recession years, economic growth has returned to somewhat more moderate rates, although an increase of 6% to 7% is nonetheless expected this year. Domestic demand and robust world demand for raw materials, notably soybeans, have continued to underpin the economy. That trend should change late this year, however, with domestic consumption no longer stimulated by accommodating fiscal and monetary policies. Insufficient investment in new production capacity should exacerbate the slowdown likely to emerge in 2006 with growth dropping to 3.5%. In that context, local companies will become very cautious, notably those that are foreign-owned, due to uncertainties about government policies.

In Ecuador (rated C), after massive street protests, Alfredo Palacio's new government replaced that of Lucio Gutierrez, removed from office 20 April 2005. Moreover, social unrest concerning the sharing of oil revenues led to a mid-August interruption of production lasting several days. The situation stabilised late August after an agreement between the parties concerned. Although the economy has benefited from exceptional oil prices, growth should slow over the next two years amid less favourable external conditions, an oil production slowdown, and erosion of investor confidence. The country has remained very vulnerable to internal and external economic, financial, and political shocks and the consequences could affect its debt service payments.

The regional risk index for North Africa and the Near & Middle East has remained stable and near the emerging country average. The oil price boom has been driving the economic growth of the region's exporting countries and has allowed them to accumulate solid foreign currency reserves. (UAE, Qatar, and Kuwait rated A2, Saudi Arabia rated A4, Algeria rated B and positive watchlisted, Iran rated B, and Libya rated C). The economies of the other regional countries have benefited indirectly from the oil windfall and have continued to trend up thanks notably to the firmness of exports and tourism. However, the oil price rise could affect the external and fiscal accounts of the most vulnerable importing countries (particularly Jordan). The region's geopolitical instability has moreover remained high and has continued to affect the outlook.

Iran (rated B) has benefited economically from the oil windfall, which has permitted it to amass foreign currency reserves and pursue largely expansionary fiscal policy spurring the growth of the non-oil sector. However, high inflation has accompanied that favourable trend.

Politically, tensions with the international community over the nuclear issue have persisted and the June election of an ultra conservative president, Mahmoud Ahmadinejad, will be unlikely to cause Iranian authorities to change course. In that context, uncertainties have persisted and continue to affect investments.

In Lebanon (rated C), the economic and political situation has remained shaky. The political crisis following the assassination of Raffic Hariri on 14 February 2005 has notably affected tourism and investment, triggering an economic slowdown. The events of February resulted moreover in a loss of confidence in the Lebanese pound that forced the Central Bank to draw on its foreign currency reserves to maintain parity with the dollar. Those reserves are being gradually replenished however. Conversely, sovereign risk, which has been very high due to excessive public sector debt, could worsen as dollar interest rates rise. Servicing that debt has strained government accounts and generated increasing debt. Exacerbation of that risk would affect a banking system very exposed to sovereign risk.
Meanwhile, the political situation continues to give cause for concern and has not been very conducive to implementing reforms and exercising fiscal discipline, prerequisites to mobilising new international aid.

Egypt (rated B) is still on track for a gradual growth recovery (4.8% for the year ending June 2005) and the Sharm el Sheikh attacks last July should only have a limited impact estimated at 0.3%. However, the country has continued to run large fiscal deficits (10% in 2004/05) with little likelihood of bringing them under control in the near term. The September presidential election — multi-party for the first time — returned Hosni Mubarak to office as expected, which should ensure continuation of the reforms actively implemented by Prime Minister Ahmed Nazif since July 2004.

The regional risk index for sub-Saharan Africa has been stable with no rating changes undertaken. The average level of risk has remained high overall for the region. For oil-importing countries, the price increases should have a limited impact on economic growth since they have been accompanied by price increases for raw materials, particularly minerals, which they export. Pressure on prices appears nonetheless likely, which could trigger social unrest.

In South Africa (rated A3), the outlook has remained favourable for 2005 and 2006, with 4% growth expected for those two years. Exports and buoyant domestic demand continue to drive the economy. The interest rate level has been conducive to private investment, and the tight fiscal policy pursued by government authorities has given them ample room for manoeuvre to initiate public investment programmes. The higher oil prices have had little effect on the country.

In that context, company payment behaviour has been excellent. Meanwhile, despite a worsening current account deficit, the country's external financing needs have remained moderate and its debt limited (about 20% of GDP) while its foreign currency reserves have registered a twofold increase. That trend has contributed to progress made on traditional sources of weakness, including a still-high level of short-term debt (including inter-company debt) and insufficient FDI inflows, which have nonetheless been increasing sharply, as evidenced by the acquisition of ABSA Bank by Barclays.

Kenya (rated C and positive watchlisted) is still in a shaky situation due to tensions within the government coalition that have impeded implementation of structural reforms and anti-corruption measures, which has drawn criticism from donor countries. However, those political tensions have not affected the economic situation thus far. The steadiness of the farm, tourism, and telecommunications sectors has contributed to a substantial growth upturn, which could exceed 4% in 2005 and 5% in 2006. The increase in oil prices could nonetheless exacerbate inflationary tensions and strain the country's external account balances even if its exports of refined oil have been partially offsetting the impact.

The situation of Nigeria (rated D) continues to suffer from very high levels of social and political unrest notwithstanding the beneficial effects of the bright period for oil on its external and public sector accounts. Despite the pursuit of reforms (banking sector, privatisations, slow liberalisation of domestic energy prices), which have earned international community backing for the country resulting in a commitment on debt cancellation, the outlook is uncertain. Preparations for general elections scheduled for spring 2007 could slow, or even interrupt, the improvement process.