Handbook of Country Risk 2008-2009

THE HANDBOOK OF COUNTRY RISK 2008 A Guide to International Business and Trade Publishers’ note Every possible effor...

Author: Jonathan Reuvid

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THE HANDBOOK OF

COUNTRY RISK 2008

A Guide to International Business and Trade

Publishers’ note Every possible effort has been made to ensure that the information contained in this publication is accurate at the time of going to press and neither the publishers nor any of the authors, editors, contributors or sponsors can accept responsibility for any errors or omissions, however caused. No responsibility for loss or damage occasioned to any person acting, or refraining from action, as a result of the material in this publication can be accepted by the editors, authors, the publisher or any of the contributors or sponsors. Users and readers of this publication may copy or download portions of the material herein for personal use, and may include portions of this material in internal reports and/or reports to customers, and on an occasional and infrequent basis individual articles from the material, provided that such articles (or portions of articles) are attributed to this publication by name, the individual contributor of the portion used and GMB Publishing Ltd. Users and readers of this publication shall not reproduce, distribute, display, sell, publish, broadcast, repurpose, or circulate the material to any third party, or create new collective works for resale or for redistribution to servers or lists, or reuse any copyrighted component of this work in other works, without the prior written permission of GMB Publishing Ltd. GMB Publishing Ltd. Hereford House 23-24 Smithfield Street London EC1A 9LF United Kingdom www.gmbpublishing.com

525 South 4th Street, #241 Philadelphia, PA 19147 United States of America

First published in 1999. Tenth edition published in 2008 by GMB Publishing Limited. © Coface and GMB Publishing Limited, 2008 ISBN: 978-1-84673-111-2 British Library Cataloguing in Publication Data A CIP record for this book is available from the British Library

Typeset by David Lewis XML Associates Ltd., Bungay Graphic images generated by Saxon Graphics Ltd., Derby Printed in the United Kingdom by Biddles Ltd., Kings Lynn

Contents

■ ACKNOWLEDGEMENTS ......... vi ■ FOREWORD ............................. vii 2008: The year of lurking dangers Franc¸ois David, Chairman, Coface

■ INTRODUCTION ...................... ix Jonathan Reuvid, Senior Editor, GMB Publishing

■ COFACE LAUNCHES A NEW BUSINESS CLIMATE RATING....................................xvii ■ THE COFACE WORLDWIDE @RATING SYSTEM .............. xxiii ■ SECTOR RISK OVERVIEW ... xxvi Christine Altuzarra and Dominique Fruchter Economic Studies and Country Risk Department, Coface

■ EUROPE AND THE CIS Outlook for 2008: Europe and the CIS .................. 2 Jean-Louis Daudier, Dominique Fruchter, Christine Altuzarra and Olivier Oechslin Country Risk and Economic Studies Department, Coface

Albania......................................... 10 Armenia ....................................... 11 Austria ......................................... 12 Azerbaijan .................................... 14 Belarus......................................... 15 Belgium ....................................... 17 Bosnia and Herzegovina................. 21 Bulgaria........................................ 23 Croatia ......................................... 26 Cyprus ......................................... 30 Czech Republic ............................. 32 Denmark ...................................... 37 Estonia......................................... 40 Finland......................................... 44 France.......................................... 47 Georgia ........................................ 51 Germany ...................................... 52 Greece ......................................... 56 Hungary ....................................... 59 Iceland ......................................... 64 Ireland ......................................... 66 Italy ............................................. 69 Kazakhstan ................................... 73 Kyrgyzstan .................................... 76 Latvia........................................... 77 Lithuania ...................................... 81 Luxembourg.................................. 84 Macedonia.................................... 86 Malta ........................................... 88 Moldova....................................... 89 Montenegro .................................. 91 The Netherlands............................ 92 Norway ........................................ 95 Poland ......................................... 98 Portugal ......................................103

CONTENTS

Romania......................................106 Russia.........................................111 Serbia .........................................115 Slovakia.......................................119 Slovenia ......................................123 Spain ..........................................127 Sweden .......................................131 Switzerland ..................................133 Tajikistan.....................................137 Turkey.........................................138 Turkmenistan...............................141 Ukraine .......................................142 United Kingdom...........................146 Uzbekistan ..................................150

■ THE AMERICAS Outlook for 2008: The Americas ..........................156

4

Pierre Paganelli and Christine Altuzarra Country Risk and Economic Studies Department, Coface Argentina ....................................163 Bolivia.........................................167 Brazil ..........................................171 Canada .......................................175 Chile ...........................................178 Colombia.....................................182 Costa Rica ...................................186 Cuba...........................................187 Dominican Republic......................191 Ecuador.......................................193 El Salvador ..................................197 Guatemala...................................199 Haiti ...........................................203 Honduras ....................................205 Jamaica .......................................207 Mexico ........................................208 Nicaragua....................................212 Panama.......................................214 Paraguay .....................................216 Peru............................................220 United States ...............................224 Uruguay ......................................228 Venezuela....................................232

■ ASIA Outlook for 2008: Asia...........................................238 Christine Altuzarra, Constance Boublil and Olivier Oechslin Economic Studies and Country Risk Department, Coface Afghanistan .................................245 Australia......................................246 Bangladesh..................................249 Cambodia....................................253 China..........................................255 Hong Kong..................................259 India ...........................................263 Indonesia ....................................267 Japan ..........................................271 Laos ...........................................275 Malaysia......................................277 Mongolia.....................................281 Myanmar.....................................283 Nepal..........................................285 New Zealand ...............................286 Pakistan ......................................289 Papua New Guinea.......................293 Philippines...................................295 Singapore ....................................299 South Korea.................................303 Sri Lanka .....................................307 Taiwan ........................................310 Thailand ......................................314 Vietnam ......................................318

■ THE MIDDLE EAST AND NORTH AFRICA Outlook for 2008: North Africa and Near & Middle East .............................324 Catherine Monteil Economic Studies and Country Risk Department, Coface Algeria ........................................331 Bahrain .......................................335 Egypt ..........................................339 Iran ............................................343

CONTENTS

Iraq ............................................347 Israel ..........................................349 Jordan.........................................353 Kuwait ........................................357 Lebanon ......................................361 Libya...........................................365 Morocco......................................369 Oman .........................................373 Palestinian Territories....................376 Qatar ..........................................378 Saudi Arabia ................................382 Syria ...........................................386 Tunisia........................................390 United Arab Emirates....................394 Yemen ........................................397

■ SUB-SAHARAN AFRICA Outlook for 2008: Sub-Saharan Africa .................402 Marie-France Raynaud Economic Research and Country Risk Department, Coface Angola ........................................410 Benin ..........................................414 Botswana ....................................416 Burkina Faso................................420 Burundi.......................................422 Cameroon ...................................424 Cape Verde..................................427 Central African Republic ................428 Chad...........................................430 Congo.........................................432

Democratic Republic of Congo.......434 Djibouti.......................................435 Eritrea .........................................437 Ethiopia ......................................439 Gabon.........................................441 Ghana.........................................445 Guinea ........................................449 Ivory Coast ..................................451 Kenya..........................................455 Liberia.........................................459 Madagascar .................................462 Malawi ........................................464 Mali............................................465 Mauritania...................................467 Mauritius.....................................470 Mozambique................................474 Namibia ......................................478 Niger ..........................................480 Nigeria........................................481 Rwanda .......................................485 Sao Tome ´ and Principe .................487 Senegal .......................................488 Sierra Leone ................................492 South Africa.................................494 Sudan .........................................498 Tanzania .....................................500 Togo...........................................503 Uganda .......................................505 Zambia .......................................509 Zimbabwe ...................................512

■ ACRONYM TABLE AND LEXICON .................................515

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Acknowledgements The publisher wishes to thank Yves Zlotowski (Coface’s Chief Economist), Coface’s country and short-term risk experts (Christine Altuzarra, Nathalie Ballage, Sophie Botha, Constance Boublil, JeanLouis Daudier, Benjamin Denis, Dominique Fruchter, Mikae¨l Kalfa, Catherine Monteil, Olivier Oechslin, Pierre Paganelli, Marie-France Raynaud, Jean-Franc¸ois Rondest) and Coface’s entities across the world who have contributed to this handbook.

Our thanks are also extended to Sarah Barthe´le´my (La touche anglaise), Govind Bhinder (FEAT – Financial and Economic Authors and Translators), Stanley Glick (Lingua Franca) and Coface’s communications department.

Neither the Ministry of the Economy, Finance and Industry nor Coface can be held liable in any way for the opinions expressed by the authors or various contributors to this guide.

FOREWORD

FOREWORD

2008: The year of lurking dangers Franc¸ois David, Chairman, Coface

The world economy avoided the worst in 2007, experiencing only a controlled slowdown in the United States and disappointing, though not calamitous, growth in Europe. The emerging countries confirmed their position as motors of global economic growth. Yet the year ended in a climate of uncertainty. The possibility of a recession in the United States is on everybody’s mind, the price of oil has hit the US$100-mark and the financial malaise, caused by a structural malfunction of the financial system, gives reason to believe that the markets are still haunted by the spectre of a huge credit crunch. Will 2008 turn out to be the year of the credit crisis? We obverse that such crises occur more or less regularly every 10 years, accompanied by peaks in corporate defaults. In 2001, just before the internet bubble burst, our corporate default index jumped by 30 per cent. The crisis then originated in the United States, just like the storm brewing in 2008. Our central scenario does not envision the disaster announced by some. We stand by our forecast of 1.7 per cent growth in the United States (against 2.1 per cent in 2007). World growth will undoubtedly lose 0.8 percentage points between 2006 and 2008, but it should still reach 3.6 per cent in 2008. Experience shows that all the default peaks recorded by Coface correspond to a decline of at least 0.8 points in global GDP, as is the forecast for 2008. However, growth needs to fall below 2 per cent to bring about a real credit crisis, which is not our current scenario. The year 2008 should therefore be marked by a slowdown – not a recession – due to a slump in US household demand. Against a background of excess supply, the correction in US house prices will continue. The negative wealth effect associated with real estate

assets (as well as financial assets) will hamper the refinancing of individual loans. Overall, these borrowers are expected to increase savings and cut consumption. The current deflating of the US property bubble is fundamentally different from the crisis in 2001. The default peaks observed then had a lot to do with the type of bubble, which was caused by corporate over-investment. Companies corrected this excess by drastically reducing their spending, thus triggering a surge in defaults. In 2007 and 2008, it is not so much companies as households that are over-indebted. Companies are not at the heart of the crisis. They could be hit by collateral damage though in the form of economic shocks and more difficult access to financing. But the overall impact of an economic slowdown on corporate payment behaviour is likely to be less marked than was the case seven years ago. This guarded optimism should not hide the fact that some countries are clearly at risk of catching the correction contagion currently sweeping across the United States. These include the United Kingdom (on our negative watchlist since June 2007), Spain (on our negative watchlist since September 2007) and more recently Ireland (on our negative watchlist since December 2007). What they all have in common is a dangerous cocktail of a deflating housing market and household overindebtedness. In all three countries, growth has been much stronger than in the rest of Europe, in part due to the multiplier effect of a bubble economy. The expected deceleration could affect companies used to a robust environment. As for the emerging countries, their growth is expected to remain resilient. In Asia, especially China, buoyant domestic demand will

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Improvements in governance standards have not kept pace with the massive inflows of volatile capital in search of high returns. A country’s overall liquidity and solvency can no longer be the sole measure of risk. The business climate is a key factor for exporters awaiting payment, as for investors placing their capital. Economic players should know whether corporate accounts give a true picture of a company’s financial position and whether, in the event of a problem, the local legal system is able to settle disputes. Coface – which underwrites risk, gathers information and collects debt – possesses invaluable experience in these matters. Its direct presence in 64 countries gives it a perfect, hands-on understanding of the business climate. Our staff across the world grapple daily with the realities on the ground. Consequently, Coface has included for the first time a business climate rating in this year’s issue of the handbook. It is not governance on paper that interests us, but the realities of the business world. This new rating is available to everyone. It will, I’m sure, help guide the decisions of business people who embark on the somewhat bumpy adventure of globalisation. The year 2008 will unquestionably be a difficult one. The world economy has, in my view, the resources to ensure that the ‘air pocket’ does not turn into a catastrophe. Coface will do its part, providing all economic players with the tools to better manage this year of lurking dangers.

help offset the decline in US sales. A controlled slowdown would even be welcome in China, where the investment boom has created overcapacity that is detrimental to the financial viability of some companies. The growth of the emerging economies has been extraordinary. On the whole, they post healthy current account surpluses – the obverse of the US deficit – which have enabled most of them to reduce debt and accumulate comfortable foreign exchange reserves. Some of them today have exchange reserves equivalent to 10 months’ imports, compared with six months’ in 2001. Others, like Russia, India and China, have even become major international investors. As emerging countries have become less dependent on capital inflows from developed countries, they are less vulnerable to a potential credit crunch. Nonetheless, caution is called for. Firstly, overabundant liquidity is a risk factor. The flood of capital and the creation of excess currency create a series of bubbles. Stock markets have risen beyond reasonable levels, particularly in China, coupled with exploding domestic credit and rising real estate prices. A recession would have serious consequences for this surplus environment. In any case, 2008 is expected to see highly volatile asset prices in a number of emerging countries. More importantly, the brazen financial performance and robust economic growth of these countries has, in some cases, led to essential business reforms being overlooked.

2nd oil shock, recession in the USA and weak growth in Europe

1st oil shock, recession in the USA and Europe

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recession in the USA then in Europe

Internet bubble bursts 2000 September 11, 2001

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INTRODUCTION

Introduction* Jonathan Reuvid, Senior Editor, GMB Publishing

Until the last 10 days of December, it seemed that the political outlook for 2008 and beyond had improved during 2007 in terms of reduced threats to global security while hopes remained that the economic outlook might not deteriorate further following the ‘credit crunch’ sparked off by the sub-prime mortgage crisis in the United States. All that changed with the post-Christmas assassination of Benazir Bhutto, Pakistan’s former prime minister and leader of the Pakistan People’s Party (PPP) in the then forthcoming parliamentary election originally scheduled for early January and then deferred six weeks. The implications for global security are discussed below. By comparison the debacle of Kenya’s rigged presidential election, although a setback for the cause of democracy in Africa and possibly a humanitarian disaster, poses a longer term threat to the economic evolution and political security of sub-Saharan Africa. There has been no relief from two of the economic threats highlighted in this introduction a year ago: the exploitation and control of the world’s oil and gas resources and the stalemate in the Doha Round of WTO negotiations. The dominance of Chinese investment in oil and Russian investment in gas resources in Africa continues to cause concern, and there are now question marks over the WTO’s future following the most recent failure to make progress. The breaching of the world’s crude oil price barrier of US$100 a barrel in the first week of January has more than symbolic significance. It increases inflationary pressures *Coface does not take responsibility for the views expressed in this article.

everywhere and makes recession more likely in the United States and Europe, both as a direct result of cost increases and also in the impact on business confidence. On the other hand, perceptions are changing of the impact of China and India, the major emerging Asian economies, on the developed world. There is little reason to doubt that exceptional GDP growth will continue in South-East Asia through to 2009 in spite of some worrying trends, such as price inflation in China, and Asian growth will help to offset the knock-on effects of a major US economic downturn. Until now, perceived economic wisdom has been that ‘when the US sneezes, the rest of the world catches a cold’. This time, it may be that our symptoms will be relieved by an Asian ‘flu injection’. If so, another marked shift in the tectonic plates of the world’s political economy will be confirmed. Again, a more hopeful note was struck in Bali at the International Environmental Conference in October 2007 which was convened to develop a successor treaty to the Kyoto agreement for signature this time by all the world’s major energy consumer countries, including the United States, with specific targets for emission reductions by 2020. After an unpromising start, the meeting made significant progress when a motion proposed by India that new emission reduction targets should be negotiated and adopted by the end of 2012. The resolution was passed unanimously but time is running out for the 2020 achievement deadline.

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Overall, there is little difference in the economic analysis that follows from those of the other distinguished authors of this edition’s reports although a rather more pessimistic view is taken of the economic outlook for 2008. For the 2008–2009 edition of Risk, the introduction this year focuses as much on political as on economic issues; it begins with commentary on key economic factors having global significance as well shorter term regional impacts.

THE RISK OF RECESSION The United States

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The last US recession began in March 2001 and ended in November that year after three quarters of negative economic growth. The current six-year economic cycle which followed was stimulated by a housing bubble that burst at the end of 2006. House prices fell by about 6 per cent during 2007 (according to the Schiller 20 city composite index). More dramatically, housing starts, always a barometer of US economic health, fell from an annualised monthly rate of 2.3 million units in January to 1.2 million units in November 2007. Surprisingly perhaps, the credit crisis caused by falling house prices and demand for new housing did not hit financial markets until the summer when non-performing sub-prime loans impacted the secondary market for mortgages causing banks to take tens of billions of dollars in housing-related assets on to their balance sheets. Mr. Alan Greenspan, former Chairman of the US Federal Reserve (the Fed), estimates that losses on sub-prime and related securities will probably reach at least US$200 billion and up to US$400 billion. This financial crisis and its impact on the ‘real’ economy is very different from the ‘dotcom’ collapse of 2001 which preceded the last US recession. On that occasion, the US economy was saved from a steep downturn by the availability of cheap consumer credit and a booming housing market. In 2008, the housing market is in reverse and it is difficult to see how the Fed, having surprisingly dropped 1–3.5 per cent in January, will be able to cut its fund rate again in the face of

projected rates of inflation. Strictly speaking, the present situation is a banking crisis rather than a ‘credit crunch’, of which a lack of market liquidity is the main feature. The financial players no longer have confidence in the solvency of their counterparts on an international scale and were unwilling to service each other’s overnight requirements when demand peaked. This situation was saved only by the coordinated action of the European Central Bank (ECB), the Fed and the Bank of England, in which the ECB took the lead, of injecting large amounts of liquidity into the markets. More encouraging features of the last three months were a revival in capital inflows returning to the United States from October 2007 and, setting aside political considerations, the investment of sovereign wealth funds (SWFs), notably those of China, Singapore and Abu Dhabi, and Chinese banks into blue-chip Wall Street and British banks. These injections give a strong signal that central banks in Asia and the Middle East have no present intention to shift their reserve assets out of dollars. US inflation is still projected to run at 2.5 per cent in 2008 but, given oil and food price rises, inflationary pressures will persist. On the other hand, unemployment statistics are rising. The report for December showed a jump in the unemployment rate to 5 per cent from 4.7 per cent, the highest level since November 2005. Stronger export growth as a by-product of the weak dollar and healthy demand from foreign markets are unlikely to offset the negative domestic factors and rising oil prices. For November 2007, the US trade deficit rose to a record US$57.8 million although the trade gap with China narrowed. In the final analysis, the critical factor in determining the scale of the US economic downturn will probably be consumer confidence. Much of the Wall Street financial community is already forecasting recession and exposure risks in other markets such as leveraged loans or more complex financial instruments may have been underestimated. However, consumer expectations are likely to be more decisive. Already confidence levels are at low ebb in spite of direct actions by the Fed in the home

INTRODUCTION

loans sector. Some players claim that the economy has already slipped into recession. While the banks remain bearish, their likely reaction is to reduce lending and raise credit standards in anticipation of further loan losses. If unemployment also rises, then recession may become a self-fulfilling prophecy.

THE EURO AREA So far, business confidence has held up quite well, fortified by a strong export performance. However, the appreciating currency may be taking its toll as the index of manufacturing exports has fallen and is below its long-term average. Nevertheless, the eurozone economy is not severely vulnerable to declining US imports; if they fell twice as fast as GDP, a 1 per cent reduction in US growth would reduce euro area growth by no more than 0.5 per cent. The ECB has narrowed the spread between the interbank rate and its refinancing rate and has switched efforts from increasing the volume of commercial loan books to improving their quality. High borrowing costs will slow investment rather than consumption in the short-term because consumer spending has not been fuelled by past borrowing to the same extent as in the United States and the United Kingdom. Employment and wages continue to grow faster than at any time since 2001 while fuel and food prices have contributed to inflation remaining stubbornly above target. Given its mindset, the ECB is likely to focus in 2008 on constricting inflation rather than stimulating growth. Among the major eurozone economies, where some of the hard-fought for labour market reforms were reversed in 2007, there are dangers for Germany in the new round of wage negotiations and GDP growth is forecast to fall back again below 2 per cent. In France, President Sarkozy has yet to deliver on his promise to scrap the statutory 35-hour working week and the unemployment rate remains at an unacceptably high 9 per cent level. However, both core economies have maintained tight control of public sector borrowing where the ratios to GDP have fallen steadily since 2004.

Spain is expected to maintain its GDP growth in 2008/2009 above the eurozone average, albeit below 3 percent, and a positive public sector balance. However, unemployment will remain above 8 per cent while the current account deficit as a ratio of GDP may rise above the 10 per cent level. The Spanish housing market is beset by rising inflation and a marked downturn in house prices that threatens a negative equity crisis for mortgage holders. Italy, by contrast, is expected to underperform its partners again in GDP growth although other economic indicators are relatively stable. Overall, the outlook for the euro area economies is only mildly negative, barring any potential impact of the major political threats highlighted below.

OTHER MAJOR EU ECONOMIES The UK economy appears more vulnerable to global downturn than its EU partners. Although GDP growth rates were approaching Spanish levels in 2006 and 2007 and the current forecast for 2008 remains above 2 per cent, investment is expected to tumble from around the 7 per cent growth levels of 2006 and 2007 to as little as 2 per cent in 2008. However, even this lower level of growth may prove over-optimistic if the ‘credit crunch’ initiated by the collapse of one British bank, a significant mortgage lender, and accompanied by the end of the property boom results in a major consumer spending cutback as personal credit is curtailed. The Bank of England is expected to reduce interest rates down to 4 per cent by 2008 year-end, but this progression could be arrested by energy cost and food price inflation. The knock-on effects on the commercial and industrial sectors are already apparent with a flood of corporate profit warnings. A lower tax yield from 2007/2008 company profits will exert further pressure on public sector spending and could cause the public sector deficit ratio to climb back to its 2003– 2005 level in excess of 3 per cent. Much will depend on whether the government will be able to contain public sector wage and salary increases to genuinely no more than the rate of inflation. Meantime, partly as a result of sterling’s 10 per cent fall against the euro in the second half of 2007, UK GDP ceded fifth

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INTRODUCTION

place in world ranking to France in the third quarter of 2007. The smaller economies of the European Union, the Baltic States, Slovenia and Ireland have continued to prosper in 2007, and their outlook for 2008 is dimmed only the same energy and food cost considerations as their partners and the extent to which their exports to other EU members are affected. Poland, the largest of the 2004 intake of new members, enjoyed continuing strong growth in 2007 and reduced unemployment. Both trends are forecast to continue in 2008 although GDP growth is expected to fall back under 6 per cent. Although exports are forecast to increase, imports are expected to rise faster so that the trade deficit ratio may rise to 3.3 per cent of GDP or more.

Asia

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Attention is focused on China and India as the two most significant emerging markets while Japan, which remains the second largest global economy, has regained stability at euro area levels of GDP growth. Inflation is forecast to remain below half a per cent throughout 2008 and unemployment to ease below 4 percent. Japan’s current account is expected to remain positive around 4 per cent of GDP with the public sector deficit ratio at a similar level. However, public sector debt is forecast to rise to 180 per cent of GDP in 2008, an overhang from Japan’s banking crisis of the 1990s. India’s economy is expected to power ahead throughout 2008/2009 maintaining GDP growth above 8 per cent, with a favourable impact on world trade and without some of economic tensions that are now emerging in China. However, it is susceptible to the same price inflation in imported energy costs. China’s trade surplus was impacted by rising oil prices in the final quarter of 2007 when its surplus of exports over imports fell from US$26.28 billion in November to US$22.69 billion in December 2007. However, for 2007 as a whole, China’s overall trade surplus rose by nearly 50 per cent to around US$300 billion. Within the total of China’s foreign trade, US trade was less affected than the European Union. While China’s surplus with the United States rose

by 19 per cent to US$163 billion, the surplus with the European Union increased by 46 per cent to US$143.3 billion. In the process, the expanded European Union replaced the United States as China’s largest export market, and Chinese exports to the eurozone overtook those of the United Kingdom in the third quarter of 2007. The increasing Chinese trade surpluses should be viewed in relation to appreciation of the renminbi by about 12 per cent since its peg against the US dollar was officially broken in mid-2005. US and EU trade regulators will continue to argue that an accelerated revaluation policy by Beijing is called for. The current account balance represents more than 10 per cent of China’s GDP, an exceptional level for a large economy and more than twice that of Germany. Rising commodity prices and labour costs arising from the new labour contract law that makes it harder to dismiss workers are already causing Chinese export prices to increase but that is not expected to dampen exports significantly in 2008. With GDP growth continuing at above 10 per cent in 2008 the mounting challenge for China is to channel investment into the creation of wealth in the underdeveloped regions and to stimulate domestic consumption. There are signs now that not only farmers but also the emergent middle class in China’s major cities are becoming more clamorous. Overall, the chances are that the buoyant Asian economies, better prepared to face a global slowdown than in 2001, will survive the present downturn relatively unscathed. The extent to which their superior performance will sustain underperformance of the Western economies remains an open question. At the least, Asia will provide a strong market for US and UK exports made more competitive by their weakened currencies. A recent analysis by HSBC has estimated the contributions to global GDP growth by the major economies. Based on market weight the contribution of the United States fell from more than 20 per cent in 2006 to slightly less than 15 per cent in 2007 while the euro area contribution was reduced marginally to just 15 per cent. Conversely,

INTRODUCTION

China’s contribution rose from less than 25 per cent in 2006 to about 17.5 per cent in 2007. India’s contribution in 2007 matched that of Japan at the level of 5 per cent. Translated into purchasing power parity terms, China contributed 33 per cent to world growth in 2007 and India just over 10 per cent. The US and euro area contributions were about 7.5 per cent each. In past recessions, the weight of the G7 economies was such that when the big economies turned down, commodity prices would drop as demand slackened thereby reducing inflation. The downside of the strong Asian economies increasing demand for commodities is that there will be no compensating relief from cost inflation and this will limit the scope for G7 central bankers to cut interest rates.

Other emerging economies Russia and Brazil are two further emerging economies that have an important impact on the world economy. Neither of them contributes as much as 5 per cent to world GDP growth although both are growing strongly as individual economies. Their importance derives from their global significance as suppliers of oil and gas in the case of Russia and of metals and minerals in the case of Brazil. The insatiable appetite for these core commodities in both Western and Asian economies has provided the engines for their growth and neither is likely to be affected in 2008–2009 by US and European downturns for the reasons given above.

The Middle East In the Middle East, there have been some encouraging local developments but the omens for a regional solution to sectarian conflicts and the issue of Palestinian nationhood are unpromising.

Iraq The year 2008 began with more reason for hope from efforts to re-construct Iraq as a democratic state. The ‘surge’ of US troops introduced under the command of General David Petraeus was more successful than the cynics expected. Even after the dismissal of former Defence Secretary Donald Rumsfeld who had denied the need for more soldiers on the ground, the most likely scenario seemed to be a descent into civil war between Sunni and Shia extremists. However, civilian deaths are sharply down in Baghdad, the local economy is reviving and there is evidence of a return to peaceful cooperation between the Shia and Sunni populations. These rapprochements are more the result of local leaders agreeing to restore good relations than the actions of the multisect elected government that has made painfully slow progress in uniting the country. For the time being, at least, the prospect of partition has dimmed. In Basra, where the initial welcome for British peace enforcement troops turned to disillusion and subsequently minority hostility, partial withdrawal towards the end of the year became politically inevitable. The Iraqi army and Baghdad police that have taken over have yet to prove that they can manage the remaining insurgency.

POLITICAL PERILS

Afghanistan

Only one of the major threats which was still of concern at the beginning of 2007 has receded. Thanks to the combined diplomatic efforts of China and the United States, with assistance from other governments in the region, a settlement was achieved with North Korea to halt its nuclear programme and install a satisfactory inspection regime in consideration for increased economic aid. Elsewhere the outlook for peace and security remains bleak.

The American and British commitment to long-term military engagement in Afghanistan is unchanged. Any dilution of the British effort due to the Iraq commitment has been repaired and autumn offensives against the Taliban yielded positive results. The critical task is to convince the civilian population to support the democratically elected government of President Hamid Karzai rather than the Taliban; the original ‘hearts and minds’ strategy was never accomplished because the

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continual military engagement of allied troops prevented them from focusing on reconstruction projects. Negotiation with local militia leaders to wean them from support of the Taliban is necessary but difficult, particularly since it may not carry President Karzai’s support. The whole security process is undermined by the porous nature of the border between Afghanistan and Pakistan that enables the Taliban and its Al Quaeda supporters to slip away, recruit and regroup among Muslim extremists in Pakistan and return to take up the struggle.

Pakistan The erosion of General Pervez Musharraf’s authority was probably inevitable. His inability to hold the balance between tackling extremists as an ally of the West and holding the confidence of more moderate Pakistani people looking for a return to democratically elected government came to a head with the assassination of Mrs. Benazir Bhutto, one of the two former exiled prime ministers who were granted amnesty to return to Pakistan to prepare for the forthcoming election. The election outcome is highly uncertain. The presidency is not under immediate threat but the result could be some form of coalition government between the main parties or even a government controlled by extremists. In the resultant para-democracy, it is not impossible that the army will again seize control under its new leader. Whatever form of government emerges, the West needs its firm support in closing the border with Afghanistan effectively and in the pursuit of extremists.

Israel and Palestinian Territories

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The understanding reached in November between Prime Minister Ehud Olmert of Israel and President Mahmoud Abbas, under the auspices of President Bush to reach a comprehensive agreement within 12 months for the creation of a Palestinian state with internationally endorsed boundaries shed some weak rays of hope. However, two months later there seems to be little progress. Israel continues to construct settlements on

the occupied territories of the West Bank, and Hamas has persisted in launching rockets at Israel from its Gaza stronghold, incurring retaliatory Israeli action. Both practices have to stop soon if there is to be any hope of a positive result. However, President Abbas does not control the Gaza strip and it is doubtful how successfully Mr. Olmert can persuade his electorate to abandon the building of new homes. Nor is this a game for two or even three players. A lasting solution also requires recognition of the State of Israel and no enduring settlement on Palestine is possible without the participation of Iran, Syria and Arab League members who have already offered engagement. In his first serious foray to the Middle East in the seven years of his presidency, George Bush seems to have lost the plot. Grandstanding speeches to his hosts in Saudi Arabia and the Gulf states to gang-up on Iran as the primary source of terrorism are likely to be counterproductive. Although friendly Arab states with US bases on their soil wish to cooperate and are nervous of the intervention of fundamentalist Iran in their affairs, it is inconceivable that they will combine publicly with the present US administration, the architect and prime mover in the invasion of Iraq to threaten Iran. Nor are President Bush’s continuing forecasts of an ultimate American ‘victory’ in Iraq consistent with a diplomatic initiative. Ex-Prime Minister Tony Blair is similarly damaged as a peace broker by his role as President Bush’s head honcho in the previous ‘coalition of the willing’.

Iran The publication in the autumn of 2007 of a US National Intelligence Estimate stating that Iran had halted its nuclear weapons programme in 2003 could have marked a watershed in US foreign policy. At least, it reduced the short-term risk of a pre-emptive strike on Iran’s nuclear installations during the final ‘lame duck’ year of the Bush administration either by the United States itself or by Israel with tacit US approval. However, President Bush has maintained his adversarial stance by urging the Arab states to isolate Iran. This will only strengthen President Mahmoud Ahmadinejad’s political position at home while

INTRODUCTION

the Arab world waits for a change in US foreign policy under a new presidency in 2009. Meantime, patient dialogue with Tehran by European Foreign Ministers and Mr. Muhammad Al Baradei’s Atomic Energy Agency team keeps open the door to accommodation with Iran. In the overall analysis, no lasting peace in the Middle East or banishment of extremist terrorism will be possible unless underwritten by mainstream Shia and Sunni Islam in concert including the Wahibi sect.

Africa The year 2007 was another poor year for democracy all round in Africa. The United Nations and the African Union (AU) failed to come to grips with the Sudan Government of President Omar al-Bashir and halt its persecution of Darfur. The result has been a humanitarian disaster. Kenya, much praised for its conduct of previous elections, relapsed into chaos with rigged voting in its December 2007 election, which returned President Mwai Kibaki to office and re-opened past tribal divisions. In Zimbabwe, the British Commonwealth and the EU continued to turn blind eyes to the corrupt government of Robert Mugabe that has wrecked the economy and is expected to stage another rigged election in 2008 to maintain Mugabe in power. The diplomacy of President Thabo Mbeke of South Africa to steer Mugabe into retirement, which was the figleaf for international inaction, has failed to deliver. Widely regarded as a safe pair of hands, Mr. Mbeke faces the end of his political career having been ousted by his longstanding rival, Jacob Zuma, from his Presidency of South Africa’s ruling ANC party in another unwelcome development at the close of 2007. This puts Mr. Zuma in the position of favourite to succeed Mr. Mbeke as President of South Africa after the next general election in 2009 and casts a shadow over the country’s prospects for stable, moderate government. Current action by the public prosecutor may secure a conviction for fraud against Mr. Zuma, but there is a bumpy road ahead.

CHANGE OR CONTINUITY OF LEADERSHIP 2007 There were important changes in leadership of three EU member states in 2007: France, the United Kingdom and Poland and confirmation of continuity in China. In Germany, the coalition government of Chancellor Angela Merkel was weakened by the resignation of Mr. Franz Mu˝ntefering, Labour Minister and Vice Chancellor, who was the lynchpin of his Social Democratic Party (SDP) with Mrs. Merkel’s Christian Democratic Union (CDU).

China In China, the confirmation of President Hu Jintao and Premier Wen Jiabao in office for a further five years at the Communist Party Congress in October 2007 proceeded smoothly with new appointments to the State Council of candidates for the next generation of top leaders. No dramatic changes in domestic or foreign policy are foreshadowed as China prepares to bask in the sunshine of its 2008 Beijing Olympic Games.

France Mr. Nicolas Sarkozy trounced his socialist opposition in the French Presidential election with the promise of tough action to restore dynamic to the French economy. To date, he has been unable to deliver the promised structural changes but these are early days. However, he has grabbed media attention with changes in his personal life that have made him an ‘A’ list celebrity. Whether that will be of long-term benefit to him politically also remains to be seen. The Sarkozy style of an ‘open’ Presidency is certainly a break with the past; the peccadilloes of past incumbents have never before disturbed the dignity of the Elyse´es Palace. President Sarkozy’s effectiveness as an international statesman will be tested in the second half of 2008 when France assumes the Presidency of the European Union, and he will probably attempt to seize leadership of EU foreign policy. His repositioning of France as a constant, although sometimes critical, ally of America and a dependable

xv

INTRODUCTION

friend to Saudi Arabia and the Arab world are indications of a softer French foreign policy vision.

United Kingdom Gordon Brown succeeded Tony Blair, unopposed, as Prime Minister at the end of June, after 10 years in waiting as Chancellor of the Exchequer. At first, he exhibited decisiveness and competence leading from the front in his handling of a series of minor domestic crises but was soon blown off course by the Northern Rock bank failure, which was managed indecisively due to ill-defined responsibilities between the Treasury, the Bank of England and Britain’s Financial Services Authority. With a 10-point lead in the political polls at the time of the Labour Party Conference in October, Mr. Brown encouraged the notion that he might call an early general election but backed away from a contest which was judged to be more than winnable and would have given him the authority of an elected Prime Minister. A series of blunders in protecting the identities of individuals benefiting from social services and damaging revelations regarding his party’s funding followed. With the developing credit crunch and decline in house prices, his popularity fell dramatically within a few weeks. More damaging still has been the undermining of his reputation for economic competence during his long period as Chancellor. Meanwhile, his predecessor continues to tap dance joyfully on other stages. Recovery of reputation and popular support during the 18 months or more before a general election become mandatory is perfectly possible, but the likely loss of taxpayer’s money from the Northern Rock episode and his decision to deny the British people a referendum on the new EU treaty, which includes most of the provisions of the rejected European Constitution, are sure to damage Mr. Brown further.

Poland

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The heavy defeat of Mr. Jaroslaw Kaczynski’s Law and Justice Party at the October general elections in Poland at the hands of the Civic Platform puts a new Prime Minister, Donald

Tusk, in the driving seat, with the promise of more competent government and a return to diplomacy in its dealings with EU partners, notably Germany. The change from capricious, clumsy and inefficient government under the Kaczynski twins is welcome both domestically and throughout Europe.

2008 Two highlights of the current year will be the Presidential elections in Russia in April and in the United States next November. The two contests could hardly be more different in character but the outcomes of both are important for the rest of the world. In Russia, President Vladimir Putin has rearranged the political landscape with great dexterity and without disturbing the constitution. Capitalising on his popularity as the strong leader who has revived the Russian economy, he has taken on leadership of his party in the Dumas while still President and has identified his preferred successor who, in turn, has committed himself to appoint Mr. Putin as Prime Minister after the presidential election in April 2008. Assuming that all goes according to plan, it will be interesting to see how much presidential powers are delegated to the new prime minister, given that Mr. Putin may want to reverse the conjuring trick in for four years time when he becomes eligible to stand again for the presidency.

United States It is too early in the campaign for the US presidency to place bets on the likely winner. However, after the early primaries there is a real prospect of America electing either its first woman or its first black President. What seems clear is that there is a mood for change sweeping the country after eight years of the Bush administration’s brand of Republican conservatism. Hopefully, the rest of the world can look forward to a return to more constructive American foreign policy and proactive leadership from 2009 in international affairs. A return to the halcyon days of American shuttle diplomacy by Madeleine Albright and, for those with longer memories, of Henry Kissinger, might achieve real progress.

COFACE LAUNCHES A NEW BUSINESS CLIMATE RATING

Coface launches a new business climate rating

The need for the new business climate rating In assessing country risk, most ratings consider a country’s overall liquidity and solvency. Coface has always been distinguished for basing risk assessments on its own microeconomic experience. Besides the macrofinancial and macropolitical outlooks, payment experience on companies is thus included among the factors considered in determining Coface @ratings for countries and sectors. To improve the accuracy of corporate credit risk assessments, however, Coface has sought to give greater consideration to the business environment. In assessing credit risks, it is indeed equally important to know whether a company’s accounts faithfully reflect its actual financial situation and whether the legal system can provide fair and efficient recourse in case of payment default. By making a new business climate rating available to everyone from 2008, Coface wishes to share its experience in measuring the true business climate in all countries worldwide. The new rating is underpinned by the Coface worldwide network and expertise rooted in its experience with risk underwriting, business information and receivables management.

tion and whether a country’s institutional framework is good for companies. Like country @ratings, the new ratings fall on a scale with seven levels in increasing order of risk where A1 represents least risk: A1, A2, A3, A4, B, C, D.

How Coface developed the new rating The business climate rating comprises two modules. The core of the new rating rests on the Coface experience with the quality of information available on companies and the legal protection given to creditors. The module was developed based on the responses by Coface entities worldwide to a questionnaire covering: • the quality and availability of financial information (legal framework for financial statement publication, availability, accessibility, and reliability of corporate accounts and so on); • creditor protection and debt collection efficiency (eg, rating grids for summary legal procedures, ordinary legal procedure, court costs, bankruptcy procedures).

Rating deﬁnition The new rating is intended to assess overall business environment quality in a country. More specifically, it reflects whether corporate financial information is available and reliable, whether the legal system provides fair and efficient creditor protec-

The above ratings may be compared to other sources like the ‘institutional profiles’ database maintained by the French Ministry of Finance and validated by an internal committee to ensure homogeneous and consistent responses.

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COFACE LAUNCHES A NEW BUSINESS CLIMATE RATING

The above ratings based on the Coface experience are supplemented by a module on institutional framework quality. This module reflects the quality of institutions whose strengths and weaknesses can affect companies. The parameters considered include, for example, public service effectiveness (government, education, health, infrastructure), regulatory quality, respect for the law and extent of corruption. The calculations are based on data from external sources notably including: • the government effectiveness indicator maintained by the World Bank Institute based on the quality of public services provided and on civil service efficiency; • the human development index (HDI), a composite statistical index created by the United Nations to rank countries according to their qualitative development based on the average of three quantitative indices reflecting, respectively, health/life expectancy, knowledge or education level and standard of living; • an infrastructure quality index (energy, transport, telecommunications) published

by the World Economic Forum in its ‘Global competitiveness report’; • a regulatory quality indicator (World Bank Institute) that reflects the possible existence of policies contrary to the smooth running of a market economy (like prices controls or poor bank oversight), and the apparent influence of local regulations on foreign trade and the business climate ; • a rule of law indicator (World Bank Institute) reflecting the confidence of economic agents in their judicial system, legal system efficiency and transparency; • an indicator of corruption (World Bank Institute) reflects the apparent extent of corruption, defined as misappropriation of public property for private purposes.

The above indicators and indices are generally based on information derived from company surveys. The new business climate rating will henceforth be a component of country @ratings beside macroeconomic and political data and the Coface payment experience.

Country @rating Business climate

Economic, financial and economic prospects

Companies’ payment behaviour

Growth vulnerability Coface experience

Quality and availability of financial information Creditor protection and debt collection efficiency Institutional environment

xviii

Sovereign financial vulnerability External overindebtedness Foreign exchange liquidity-crisis risk Banking sector’s fragilities Political vulnerabilities

COFACE LAUNCHES A NEW BUSINESS CLIMATE RATING

The Coface business climate @ratings for 155 countries A1 Australia Austria Belgium Canada Denmark Finland France Germany Ireland Japan Netherlands New Zealand Norway Singapore Spain Sweden Switzerland United Kingdom United States A2 Chile Cyprus Czech Republic Estonia Greece Hong Kong Hungary Israel Italy Luxembourg Malta Portugal Slovakia Slovenia South Korea Taiwan A3 Bahrain Botswana Costa Rica Croatia

Business climate A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1

Country @rating A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1 A1

Business climate A2 A2 A2 A2 A2 A2 A2 A2 A2 A2 A2 A2 A2 A2 A2 A2

Country @rating A2 A2 A2 A2 A2 A1 A3 A4 A2 A1 A2 A2 A3 A1 A2 A1

Business climate A3 A3 A3 A3

Country @rating A3 A2 A4 A4

Kuwait Latvia Lithuania Malaysia Mauritius Poland Qatar South Africa Thailand United Arab Emirates

A3 A3 A3 A3 A3 A3 A3 A3 A3 A3

A2 A3 A3 A2 A3 A3 A2 A3 A3 A2

A4

Business climate A4 A4 A4 A4 A4 A4 A4 A4 A4 A4 A4 A4 A4 A4

Country @rating A4 A4 A3 B A4 A3 A3 A3 A4 A4 A3 A4 B B

Business climate B B B B B B B B B B B B B B B B B B

Country @rating A4 C C B A3 A4 B B B C B C B B B A4 B B

Brazil Bulgaria India Jordan Morocco Mexico Namibia Oman Panama Romania Trinidad and Tobago Tunisia Turkey Uruguay

B Algeria Argentina Armenia Cape Verde China Colombia Dominican Republic Egypt El Salvador Jamaica Kazakhstan Lebanon Peru Philippines Russia Saudi Arabia Senegal Sri Lanka

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COFACE LAUNCHES A NEW BUSINESS CLIMATE RATING

C Albania Azerbaijan Benin Bolivia Bosnia Herzegovina Burkina Faso Cameroon Ecuador Gabon Georgia Ghana Guatemala Honduras Indonesia Iran Ivory Coast Kenya Lesotho Macedonia Madagascar Mali Mauritania Moldova Mongolia Nicaragua Pakistan Paraguay Serbia Syria Uganda Ukraine Venezuela Vietnam Zambia D

xx

Angola Bangladesh Belarus Burundi Cambodia Central African Republic Chad Congo Cuba Democratic Republic of Congo Djibouti

Business climate C C C C C C C C C C C C C C C C C C C C C C C C C C C C C C C C C C

Country @rating D C B D D B B C B C C B C B D D C B C C B C D C D C C C C C C C B C

Business climate D D D D D D D D D D

Country @rating C C D D D D D C D D

D

C

Eritrea Ethiopia Guinea Haiti Iraq Kyrgyzstan Laos Libya Malawi Mozambique Myanmar Nepal Niger Nigeria Papua New Guinea Rwanda Sao Tome Sierra Leone Sudan Tanzania Togo Turkmenistan Uzbekistan Yemen Zimbabwe

D D D D D D D D D D D D D D D D D D D D D D D D D

D C D D D D D C D B D D C D B D C D D B C D D C D

Business climate @ratings compared with country @ratings • In most cases − 93 countries, or 62 per cent of the countries rated − the business climate and country @ratings are identical. • For 39 countries, or 26 per cent of the countries, Coface rated the business climate lower than the country. This often concerns African or Middle Eastern countries, which in most cases enjoy real financial solidity and dynamic economies linked to rising raw material prices. Their business environment may nonetheless be subpar (uneven application of the law that lends uncertainty to debt collection, lack of transparency of corporate accounts).The good performance of these economies underpinned by natural resource export earnings may sometimes even have a lulling effect on implementing reforms intended to strengthen institutions. Good economic performance thus does not always contribute to improving

COFACE LAUNCHES A NEW BUSINESS CLIMATE RATING

the business environment. The case of India, with a business climate rating a notch below the country @rating, and especially that of China, with a business climate rating two notches below the country @rating, are characterised by a persistent gap between their booming economies and their deficient legal and institutional environments for companies. In certain countries with an overall A1 country @rating, like Luxembourg and Hong Kong, the business climate only warrants an A2 rating due to difficulties in obtaining financial information on companies. • For 17 countries, 11 per cent of the 150 countries involved, Coface rated the business climate higher than the country. This concerns countries with relatively satis-

factory business environments but which present financial weaknesses often linked to large current account deficits (Hungary, Turkey, Croatia, Slovakia) or relatively high political risks − in the more classic sense of the term (Lebanon, Israel, Bosnia). Business climate D C

Angola Business climate rating lower than country @rating

Vietnam

B

China

A4

India

Venezuela

Saudi Arabia Russia

A2

A1

Luxembourg

Lebanon

Turkey

Brazil Botswana

A3

Zimbabwe

South Africa

Italy

Hungary

Israel

Germany Business climate rating higher than country @rating A1

A2

A3

A4

B

C D Country @rating

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COFACE LAUNCHES A NEW BUSINESS CLIMATE RATING

The ‘BRIC’ country example: Brazil, Russia, India, China Country @rating

Business Climate rating

Brazil

A4

A4

China

A3

B

India

A3

A4

Russia

B

B

Brazil

India

Financial information 20

Financial information 20

10

10

Institutional Environment

Creditor protection

Brazil’s strengths (business climate rating: A4) include the ready availability of business information, a satisfactory legal environment for collection purposes, and acceptable regulatory quality for business. Deﬁcient infrastructure remains, however, the country’s main weakness.

Institutional Environment

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Institutional Environment

C red ito r protection

In India (business climate rating: A4), ﬁnancial information is available for large companies but not for the smallest companies. Consolidated accounts are also hard to obtain for groups. The legal environment is satisfactory although not always favourable to creditors. Procedures are drawn out. Infrastructure deﬁciencies remain the main weaknesses for companies.

China

Russia

Financial information 20

Financial information 20

10

10

Creditor protection

In China (business climate rating: B), ﬁnancial information is difﬁcult too obtain and often opaque. The reliability of accounts is poor in some cases. The protection provided by the legal environment is particularly limited for foreign creditors. Infrastructure is relatively satisfactory.

Institutional Environment

Creditor protection

In Russia (business climate rating: B), the civil service is relatively efﬁcient but the rule of law and the legal environment offer little security to creditors. Poor law enforcement undermines the business climate. Transparency as regards ﬁnancial information and ownership remains very inadequate.

THE COFACE WORLDWIDE @RATING SYSTEM

The Coface worldwide @rating system

Coface introduced the first worldwide insurable company rating system in 2000. The purpose was to assess the capacity of companies to meet their business obligations towards customers and suppliers. This new system – @rating credit opinions – became the first of four rating systems that international businesses can now access by logging on to www.cofacerating.com or any of the Coface national websites like www.cofacerating.fr. A fifth system – business climate ratings – is now available. The five @rating systems are as follows: @rating credit opinions represent the recommended credit exposure for a company using a very simple assessment scale (1 @ = €20,000; 2 @ = €50,000; 3 @ = €100,000, etc). Credit exposure for B2B credit transactions is insurable by Coface. An @rating credit opinion is assigned to some 44 million companies worldwide, reflecting Coface’s dual expertise in corporate information and credit insurance. @rating scores, launched in October 2002 by Coface and Coface Scrl (which in 2006 became Coface Services, Coface’s French branch specialising in business information and debt recovery) measures a company’s default risk over one year. It comprehensively and accurately rates 4.5 million large-, medium- and small-sized French companies. The ratings are used not only by different sized companies but also by financial institutions looking for a rating system that complies with new banking regulations (McDonough ratio). Measuring credit risk among companies is an important exercise when addressing not only traditional needs (corporate loans, B2B credit, market credit)

but also emerging needs created by new instruments such as loan securitisations and new capital adequacy rules (McDonough ratio). Companies and banks have an even greater need for reliable tools in today’s climate of increasing credit risk and mounting scepticism over corporate accounting practices. Country @rating – one of Coface’s key skills – allows the various players in international trade to enhance the security of their transactions. It indicates the level of medium-term risk presented during the course of short-term commercial transactions by companies in a given country. More precisely, it measures how these financial engagements are influenced by the economic, financial and political outlook of the country, together with the business environment. The rating is based on three modules: a country’s economic, political and financial outlook (such as weaknesses in the geopolitical environment, economic vulnerabilities, risk of foreign currency liquidity crisis, external over-indebtedness, government financial vulnerability and weakness in the banking sector), business climate and company payment experience. These three modules are combined to achieve a global rating to be accorded to each of the 165 countries tracked. The ratings are monitored on the basis of seven risk categories: A1, A2, A3, A4, B, C and D in ascending order of risk. Sector @rating – measures the average level of default risk posed by companies in individual sectors. A rating assesses the likely impact on short-term payment behaviour of the economic prospects and average corporate financial position in a particular

xxiii

THE COFACE WORLDWIDE @RATING SYSTEM

sector. To establish a rating, Coface uses three evaluation criteria: • business trends in the sector, which reflect how market prospects, price levels and production costs might influence company solvency; • average financial position of companies in the sector, which reflects the ability of companies to cope with economic downturns; • payment behaviour in short-term transactions, as reported by Coface databases.

A4 A somewhat shaky political and economic outlook and a relatively volatile business environment can affect corporate payment behaviour. Corporate default probability is still acceptable on average. B

Political and economic uncertainties and an occasionally difficult business environment can affect corporate payment behaviour. Corporate default probability is appreciable.

C

A very uncertain political and economic outlook and a business environment with many troublesome weaknesses can have a significant impact on corporate payment behaviour. Corporate default probability is high.

D

A high-risk political and economic situation and an often very difficult business environment can have a very significant impact on corporate payment behaviour. Corporate default probability is very high.

Business climate @rating The new @rating system is intended to assess overall business environment quality in a country. More specifically, it reflects whether corporate financial information is available and reliable, whether the legal system provides fair and efficient creditor protection, and whether a country’s institutional framework is good for companies.

Country @rating deﬁnitions Coface establishes country @ratings on seven levels – ranging from A1 for the lowest risks to D for the highest, according to the following definitions: A1 The political and economic situation is very good. A quality business environment has a positive influence on corporate payment behaviour. Corporate default probability is very low on average. A2 The political and economic situation is good. A basically stable and efficient business environment nonetheless leaves room for improvement. Corporate default probability is low on average.

xxiv

A3 Changes in generally good but somewhat volatile political and economic environment can affect corporate payment behaviour. A basically secure business environment can nonetheless give rise to occasional difficulties for companies. Corporate default probability is quite acceptable on average.

Sector @rating deﬁnitions Coface establishes sector @ratings on 10 levels − ranging from A+ for the lowest risks to D for the highest, according to the following definitions: A+ In a good sector economic environment A with robust corporate financial health, A- payment experience has been satisfactory. Default probability is low on average. B+ The essentially good economic environB ment in the sector is not exempt from B- short-term deterioration with negative repercussions on corporate financial health. Payment experience has been generally correct and default probability acceptable. C+ In a very uncertain economic environC ment with vulnerable corporate C- financial health, payment behaviour is relatively poor. Default probability becomes a nettlesome problem.

THE COFACE WORLDWIDE @RATING SYSTEM

D

With a very poor economic environment prevailing in the sector, weakened corporate financial health gives rise to generally bad payment behaviour. Default probability is high.

Business climate rating deﬁnition The new rating is intended to assess overall business environment quality in a country. More specifically, it reflects whether corporate financial information is available and reliable, whether the legal system provides fair and efficient creditor protection and whether a country’s institutional framework is favourable to intercompany transactions. A1 The business environment is very good. Corporate financial information is available and reliable. Debt collection is efficient. Institutional quality is very good. Intercompany transactions run smoothly. A2 The business environment is good. When available, corporate financial information is reliable. Debt collection is reasonably efficient. Institutions generally perform efficiently. Intercompany transactions usually run smoothly in a relatively stable environment. A3 The business environment is relatively good. Although not always available, corporate financial information is usually reliable. Debt collection and the institutional framework may have some shortcomings. Intercompany transactions may run into occasional difficulties in an otherwise secure environment.

A4 The business environment is acceptable. Corporate financial information is sometimes neither readily available nor sufficiently reliable. Debt collection is not always efficient and the institutional framework has shortcomings. Intercompany transactions may thus run into appreciable difficulties in an acceptable but occasionally unstable environment. B

The business environment is mediocre. The availability and the reliability of corporate financial information vary widely. Debt collection can sometimes be difficult. The institutional framework has a few troublesome weaknesses. Intercompany transactions run appreciable risks in an unstable, largely inefficient environment.

C

The business environment is difficult. Corporate financial information is often unavailable and when available often unreliable. Debt collection is unpredictable. The institutional framework has many troublesome weaknesses. Intercompany transactions run major risks in a difficult environment.

D

The business environment is very difficult. Corporate financial information is rarely available and when available usually unreliable. The legal system makes debt collection very unpredictable. The institutional framework has very serious weaknesses. Intercompany transactions can thus be very difficult to manage in a highly risky environment.

xxv

SECTOR RISK OVERVIEW

Sector risk overview

Christine Altuzarra and Dominique Fruchter Economic Studies and Country Risk Department, Coface

Sector @rating – measures the average level of default risk posed by companies in individual sectors. A rating assesses the likely impact on short-term payment behaviour of the economic prospects and average corporate financial position in a particular sector. To establish a rating, Coface uses three evaluation criteria: • business trends in the sector, which reflect how market prospects, price levels and production costs might influence company solvency; • average financial position of compa-

nies in the sector, which reflects the ability of companies to cope with economic downturns; • payment behaviour in short-term transactions, as reported by Coface databases.

Coface establishes sector @ratings on 10 levels – ranging from A+ for the lowest risks to D for the highest. Sector @ratings are complementary to @rating credit opinions on individual companies and country @ratings.

Scale of sectoral risk: WORLD

Highest risk D C– C Clothing

C+ B– B

Air transport / Car industry / IT industry

Building & public works

B+ A–

Telecommunications (equip.)

Paper / Mechanical engineering / Mass retail / Pharmaceuticals / Chemicals

A A+

xxvi

Lowest risk

Electronic components / Steel / Telecommunications (oper)

Textiles

SECTOR RISK OVERVIEW

WORLD SECTOR RATINGS

Electronic chips Steel Telecommunications (operators) Chemicals Mass distribution Mechanical engineering Paper Pharmaceuticals Telecommunications (mobile and network equipment) Construction & civil engineering Automobile Information technology Air transport Textiles Clothing

2004

2005

2006

2007

A+ A B+ A AAAA+ B+

A A A B+ AAAA A-

A A A AAAA-➚ A A-

A A A AAAA-➚ AB+

2008 Outlook A A A AAAAAB+

A B+ BBC+ C

A B➘ BCC C-

ABB C+ C C-

B+ BBBC C-

B BBBC+ C

Several negative factors should affect economic sectors in 2008, with a significant economic slowdown developing in the United States and to a lesser extent in Europe. Repercussions of the financial crisis triggered last summer by the US subprime mortgage meltdown will compound the effects of less-dynamic economic growth. Companies can expect to face stiffer credit conditions as a consequence. The crisis effects will nonetheless remain limited to sectors in or near the eye of the storm: construction. Companies are moreover in relatively better financial shape that will generally enable them to cope with stricter financing terms and less-buoyant demand. This relatively positive ’coping’ scenario could deteriorate if the US economy goes into recession. Although not considered the central scenario by Coface, this possibility should not be shrugged off. Several other elements will affect economic sectors, notably the rising cost of raw materials, with oil prices in particular reaching record levels at near US$100 per barrel end 2007[Query: Please check the introduction of curre-

necy abbreviation for values here and in subsequent occurrences.]. Despite the growth slowdown expected in the United States, demand from emerging countries and the rising cost of the investments needed to increase production capacity has prompted producer countries to keep the pressure on prices. A hypothesis of an average price of US$80 per barrel in 2008 against US$72 in 2007 results in higher costs for many sectors dependent on raw materials. Prices have also risen sharply for gas, metal, wood and agricultural products. Transport costs have moreover been growing rapidly. And the dollar continues to trend down: the Federal Reserve Bank’s reactivity as opposed to the European Central Bank’s supposed wait-and-see stance on monetary policy, in conjunction with the growth outlook in the United States have kept the downward pressure on the dollar. The resulting strong euro has of course undermined the competitiveness of European sectors. Coface is nonetheless betting on the firmness of economic conditions in emerging countries. It appears likely

xxvii

SECTOR RISK OVERVIEW

that this ‘disconnect’ will work in favour of many sectors. Companies in emerging regions are now driving textiles and steel and have been moving upmarket and developing real strategies for conquering markets. The context outlined above for economic sectors in 2008 has prompted Coface to change world and regional sector ratings as described below. Despite the more difficult economic conditions, not all sector risk trends are negative.

Negative trends • building and civil engineering: downgrade world rating from B+ to B, western Europe rating from B+ to B and the United States from B➘ to B-; • mass distribution: negative watchlist for North America A- rating;

• paper-cardboard: remove world A- rating from positive watchlist; negative watchlist western Europe B+ rating; • clothing: downgrade Latin America rating from B- to C+.

Positive trends • steel: upgrade emerging Asia rating from B to B+; • textiles: upgrade world rating from C to C+ and concomitantly upgrade western Europe rating from C- to C; • clothing: upgrade world and western Europe ratings concomitantly from C- to C. Sectors rated A+, A, A-: The good economic environment prevailing in the sector has a positive influence on corporate financial health. Payment experience has been satisfactory. Default probability is low on average.

ELECTRONIC COMPONENTS (RATED A) Electronic components 2008 forecast

xxviii

World

North America

Japan

Western Europe Emerging Asia

A

A

B+

B

The components market has been subject to wide and rapid price fluctuations due mainly to variations in stock levels and shifts in price expectations. The growth needs linked to consumer electronics, mobile telephones and information technology has nonetheless been sufficiently strong and continuous to limit the negative repercussions on companies, which have nonetheless sought to reduce production costs by subcontracting to low-cost countries, entering into partnerships and negotiating activity exchanges. Semi-conductor billings rose about 4 per cent against 10 per cent in 2006, with the downward price trend – down 9 per cent on average – more than offset by the growth of sales volume, up 10 per cent). Billings should accelerate in 2008, increasing 9 per cent. While sales volumes should grow strongly, the decline of prices should ease with the end

A

of the destocking process, slower development of production capacity and the beneficial effect on demand of the American elections and the Olympic Games. Asia (including Japan) will remain the most dynamic market, representing about 46 per cent of sales. North America and Europe with, respectively, 40 and 15 per cent, will lag behind due to the economic slowdown and the sluggishness of some market segments like the car industry and telecommunications networks. European players, meanwhile, will contend with unfavourable exchange rates. In this context, three structural trends will persist: • Partial or total sell-off of components business lines by large groups whether via initial public offerings (Qimonda by Infineon or Spansion by AMD) or sales to private equity funds (Motorola and Philips components divisions, now, respectively, Freescale and NXP).

SECTOR RISK OVERVIEW

• Increasing reliance on subcontractors, especially Asian, for manufacturing, control, packaging and shipping, with the soaring costs of research & development and production equipment making it difficult to run integrated manufacturing operations, except for major players, like Intel with its new factory in Arizona. • Strategic agreements on alliances, like the one between Intel and ST Microelectronic in NOR-type flash memories, and

exchanges or transfers of activities prompted by a more competitive market – epitomised by the price war over memories between Intel and AMD – that no longer allows companies to pass on rising production costs in sales prices as easily as in the past. This has an impact on margins, but these nonetheless remain comfortable on the whole.

STEEL (RATED A) Steel

World

2008 forecast

A

North America A

Japan A

Western Emerging Emerging Europe Europe Asia A B+ B+

Upgrade emerging Asia rating from B to B+ The situation should remain favourable in 2008 despite a slight world economic slowdown. Transport, mining, oil exploration, energy production and delivery, as well as construction (public works and non-residential) will remain buoyant consumer sectors. The so-called BRIC demand (Brazil, Russia/ Ukraine, India and China representing 40 per cent of the world market), much like other emerging regions, should continue to grow rapidly. World production, with 7 per cent growth expected in 2008 against 9 per cent in 2007 will struggle to keep pace despite its strong development in those same BRIC countries (up 11 per cent in 2008 after a 13 per cent in 2007). Chinese exports, which have developed strongly, should mark time due to trade pressure from both the United Sates and Europe and to the smaller price differential between regions. It should thus again be possible to pass on a large proportion of the further cost increases expected for inputs (iron ore, scrap iron, coal, coke, freight) in sales prices, which should rise on average 10 per cent. In this context, steelmakers will continue to develop their production capacity particularly in emerging regions with growing demand, especially those endowed with raw material resources (energy, iron ore, coal). They will not, however, abandon developed regions since their markets – weak growth notwithstand-

Latin Middle East, America North Africa A A

CIS A

ing – are nonetheless still large and harbour very sought-after producers of speciality steels. Soaring freight costs and the inadequacy of the world fleet continue to justify maintaining a steel industry in every region with the major steelmakers seeking to diversify their clientele via a worldwide presence and a sufficiently diversified offer and to penetrate profitable niche markets (steel ducts for transporting hydrocarbons, speciality steels and so on).

Asia: a strong growth market Demand for steel in China, one-third of the world total, should grow another 11 per cent in 2008, spurred by ongoing investment in infrastructure (dams, ports, railways, electric power stations) and construction as well as by the development of the car, mechanical engineering, shipbuilding and home appliance industries. Despite rapid development of production capacity, local prices will continue to rise sharply due to an insufficient domestic supply in several product categories. In the wake of the 2008 Olympic Games, the growth of demand will nonetheless bear particularly close watching to check whether it keeps pace with the expansion of supply. Steel production is still dispersed among a multitude of companies with the 10 largest representing only 35 per cent of the total despite the evident commitment of government officials to remedy the situation. Many of

xxix

COFACE LAUNCHES A NEW ‘BUSINESS CLIMATE’ RATING

those companies are small in size and not very productive, and although privately owned they have benefited from the solicitude of local governments. Production in India should be up 12 per cent in 2008 against 14 per cent in 2007, but remain nonetheless far below the level in China. It will struggle to keep pace with the exponential development of the needs of public works, mechanical engineering and the car industry, thus spurring further price increases. The abundant presence of excellent quality iron ore is an asset that government officials seek to exploit locally by imposing export duties and developing domestic production. It has also emboldened Indian steelmakers to burst onto the world scene with acquisitions of manufacturers not benefiting from such resources: Corus by Tata Steel, Algoma and Minnesota Steel by Essar Steel.

In Japan, Korea and Taiwan, 2007 will prove to be another good year – in both volume and revenue terms – for local players who have taken advantage of excellent business conditions in shipbuilding and the car industry (exports) to raise prices. Two crucial factors have facilitated matters for them: the limited market penetration by foreign products and their close ties with users as regards both specific production requirements and supply. Through cross-shareholding, eg between Nippon Steel and Posco or between Nippon Steel, Sumitomo and Kobe Steel and buyouts of the weakest among them (Oji Steel by Nippon Steel), they have been able to protect themselves from foreign takeover bids albeit with the risk of arousing suspicions of price collusion (an investigation began in Japan in autumn 2007). The industry should have another good year in 2008 with strong growth continuing in the region.

TELECOMMUNICATIONS − OPERATORS (RATED A) Operators

World

2008 forecast

A

North Japan America AA+

Western Europe A

The earnings performance of fixed telephony, mobile telephony and Internet operators, particularly European, will continue to suffer in 2008 from competition and from the investments they make to stake out positions in emerging countries where they find new sources of growth. The allocation of frequencies for development of 3G communications, the port of entry to broadband mobile Internet should lead the operators chosen to invest massively in the construction of the networks associated with that new technology. The ar-

Emerging Europe A

Emerging Asia A

Latin America A

Middle East, North Africa A+

CIS A

rival in the sector of Internet heavyweights like Google will spur efforts to form alliances by operators and equipment manufacturers alike. The Japanese and Korean markets are not only the most saturated but also the most technologically advanced. The players have thus been engaged in cut-throat competition over high value-added services and as a result in a race to innovate. China, India and Brazil constitute very promising markets where powerful players have been developing strongly.

CHEMICALS (RATED A-)

xxx

Chemicals

World

2008 forecast

A-

North Japan America A-➘ A

Western Emerging Europe Europe AB+

Emerging Asia A

Latin Middle East, CIS America North Africa B+ A+ B+

SECTOR RISK OVERVIEW

Favourable business conditions continue to prevail in the sector notwithstanding a mild slowdown in North America. The strength of demand from net-importing emerging countries, particularly China and India, has been a positive factor. The sector has largely been able to pass on raw material price increases to

buyers even if the downstream industry continues to experience difficulties on that score. The overall financial health and profitability of sector companies has remained good in that context with ongoing restructuring a contributing factor.

MASS DISTRIBUTION (RATED A−) Mass distribution 2008 forecast

World A-

North America A-➘

Japan A-

Western Emerging Europe Europe AB+

North America A- rating negative watchlisted Steady buying by European and Japanese consumers and especially the voracious purchasing of consumer goods in emerging countries should offset the household consumption slowdown expected in the United States in 2008. Large European and American groups that have internationalised their operations should be the main beneficiaries. The stiff competition between major brands, the increased pressure exerted by hard discount and the rising cost of rent, shipping, energy and agricultural raw materials will continue to squeeze margins. Those groups have sought to protect their margins by diversifying their sales formats (hard discount, mini-markets), launching chains of specialised shops (clothing, sports goods, doit-yourself, home appliances) and developing their own brands and service offers (travel, credit, telecommunications).

North America In the United States, after generally good performance in 2006 and the first three quarters last year, the slowdown of consumption

Emerging Asia A

Latin Middle East, CIS America North Africa A A A

late 2007 and in 2008 should affect the sector to varying degrees. Department stores specialised in the high end will be relatively unaffected by the decline in consumption. Conversely, players focusing on middle- or low-income clientele will fare less well. WalMart should continue to underperform due not only to the high proportion of middle- and low-income households in its clientele but also to the competition from Target, TJX, Dress Barn and Costco in textiles and from specialty shops in general. Chains specialised in do-it-yourself, construction materials, gardening, home furnishings (furniture and appliances) have been or will be suffering from the repercussions of the property sector slowdown. Supermarket food distribution should suffer relatively less despite the persistence of intense competition and the price increases imposed by the food industry. Although neighbourhood stores, including dollar stores and drugstores, should continue to perform well, they will be increasingly faced with the diversification of discounters and supermarkets into small-sales formats.

MECHANICAL ENGINEERING (RATED A-) Mechanical engineering 2008 forecast

World A-

North America A-

Japan A

Western Europe A-

Emerging Europe B+

Emerging Asia A

xxxi

SECTOR RISK OVERVIEW

The slight world economic slowdown expected in 2008 will have only a moderate effect on mechanical engineering markets with sector activity supported by still satisfactory levels of corporate investment in industrialised countries and especially by the con-

tinuing dynamism of emerging countries, above all China, which should allow the sector to partly offset the increasing cost of raw materials. Corporate solvency should thus remain satisfactory in 2008 with non-payment risks remaining limited in consequence.

PAPER INDUSTRY (RATED A-) Paper industry

World

2008 forecast

A-

North America A-

Japan A

World A- rating removed from positive watchlist and the Western Europe B+ rating negative watchlisted

xxxii

Demand for paper products has slumped in developed markets. The sector has probably passed the cyclical peak with sales prices having managed only a modest increase barely sufficing to offset rising input costs. Strong consumption growth in Asia and other emerging regions in conjunction with better control over production capacity have nonetheless resulted in a better balance between supply and demand. Papermaker profitability varies widely according to factory location, production type and the situation in the industry. Countries with extensive forest cover like Russia and Chile and perhaps a climate that speeds up the harvest cycle (Asian and Latin American intertropical regions) have attracted the major Scandinavian and North American players by virtue of their abundant raw material resources, especially with such host countries often located in proximity to rapidly developing markets. The EUR and CAD/ USD parity trends have had a disruptive influence on world paper-product trade. Although benefiting American exports to the detriment of the Europeans, it also increases the cost of pulp supplies (dominated by the Canadians and Scandinavians) to American papermakers. Pulp producers or even sanitary, household or technical paper manufacturers, less sensitive to economic downturns, have generally achieved higher profitability than newsprint or printing and writing paper manufacturers. Paper and cardboard processors like stationery and packaging manufac-

Western Europe B+➘

Emerging Europe A-

Emerging Asia A

Latin America A-

turers faced with direct pressure from mass distribution often present higher levels of risk.

Western Europe In Western Europe, despite a 10 per cent export decline in the 2007 first half largely attributable to the euro appreciation, a moderate 2 per cent increase in demand in conjunction with better control over production capacity resulted in a slight increase in the average price for printing and writing paper in 2007. The increase in prices and demand was concentrated, however, on coated and uncoated wood-free paper intended for use by companies for communication purposes. Conversely, prices for newsprint and wood-coated paper for magazines were flat. Activity in paper and cardboard for bags and boxes continued to trend up in 2007 due to the strength of the economy. Prices for fluting and backlining for cardboard thus increased sharply. Brown paper prices, however, were stable. In 2008, amid the still unfavourable trend on foreign trade and the domestic economic slowdown, prices for paper intended for printing/writing and packaging should level off with newsprint prices declining. The overall increase in prices has not sufficed to completely cover increasing input costs, a trend which could, however, continue. There are thus still risks of payment incidents, particularly in processing and wholesaling. Packaging, a segment with a dispersed industrial fabric – the five largest players represent just 40 per cent of production – has been contending with the loss of

SECTOR RISK OVERVIEW

companies sometimes compelled to cease operations, major Scandinavian players have not hesitated to shutdown production facilities that paradoxically are sometimes acquired at a good price by private equity funds. Such shutdowns are the only way to reduce overcapacity and bolster prices.

business attributable to the growing proportion of imports in consumer goods and to the pressure exerted by food industry players facing their own problems in dealing with rising raw material costs. Stationary has been subject to similarly strong pressure from mass distribution. Besides the smaller

PHARMACEUTICALS (RATED A-) Pharmaceuticals World

North

Japan

America 2008 forecast

A-

A-

B+

Western

Emerging

Emerging

Latin

Middle East,

Europe

Europe

Asia

America

North Africa

B

A

A-

CIS

A-

B

B

(wholesale/

(wholesale/

(wholesale/

(wholesale/

retail)

retail)

retail)

eptail)

The world pharmaceuticals market will grow moderately in 2007, up 6 per cent according to IMS Health. The growth should continue at essentially the same rate in 2008, up 5 per cent (US$735 billion). The expiry of numerous patents has undermined sales of blockbuster drugs while spurring generic drug sales (15 per cent market share). Traditional laboratories in industrialised countries have been subject to intense price pressure that erodes margins. To improve productivity they have invested heavily in R&D. Faced with a dwindling flow of new

drugs in the pipeline they have been opting to outsource research. Emerging regions constitute new sources of growth that currently contribute as much as 25 per cent to the expansion of the world market. But the risks, particularly in relation to industrial property, have proven to be significant. The industry will thus experience a movement of concentration with asset sell-offs remaining commonplace. Although the margins of sector players – even those of the strongest laboratories – will thus be under pressure, they will nonetheless remain at good levels.

TELECOMMUNICATIONS – EQUIPMENT MANUFACTURERS (RATED B+) Equipment manufacturers 2008 forecast

World

North America

Japan

Western Europe Emerging Asia

B+

B+

B+

B+

Sectors rated B+, B, B−: The essentially good economic environment in the sector is not exempt from short-term deterioration with negative repercussions on corporate financial health. Payment experience has been generally correct and default probability acceptable. Growth will substantially benefit again this year from Internet and emerging market dynamism. The intense competition due es-

B+

pecially to the increased presence of Chinese players will, however, affect prices and margins. The sector concentration process will continue in that context while companies will give preference to subcontracting production and not hesitate to relocate other functions like research to low-cost regions. They will pursue diversification into services, where necessary via alliances with software and content editors.

xxxiii

SECTOR RISK OVERVIEW

BUILDING AND CIVIL ENGINEERING (RATED B) Civil engineering 2008 forecast

World North Japan America B BB-

Western Europe B

Emerging Emerging Europe Asia AA-

Latin Middle East, CIS America North Africa B+ A A-

Downgrade World rating from B+ to B Downgrade North America rating from B to B- and Western Europe from B+ to B

xxxiv

After several euphoric years, residential construction has been in decline in the United States, Spain, Italy, Ireland and Denmark. The segment has been decelerating sharply or has stopped growing in the United Kingdom, France, Finland and Norway. A slowdown is expected in Canada, New Zealand and probably, Australia. The residential segment will only continue to grow in Sweden. In Germany and Japan, meanwhile, there has been no sign of a recovery in a sector that has been stagnating for many years. Non-residential construction – offices, commercial premises, industrial facilities – has been holding up well even with a slowdown looming in the United States, United Kingdom, Spain, France and Ireland in view of the price levels reached and a less-buoyant economy. Conversely, Japan and Germany have continued to recover. In emerging countries, ‘bubbles’ have developed in large urban centres raising fears of sudden collapse. At this juncture, however, the overall construction sector has been growing very strongly with the boom conditions mainly attributable to high-economic growth, supply shortages, middle class development, Westernisation of lifestyles, the rural exodus and the liberalisation of credit. Other contributing factors include the opening up of capital markets, abundant low-cost liquidity and the influx of foreign players attracted by the prospect of good returns. The margins of companies highly involved in residential construction, and more broadly in the housing market, will feel the effects of the business downturn. That is already the case in the United States and will also likely concern Spain, the United Kingdom, France and Ireland. The companies concerned include promoters, builders, craftsmen, estate

agents, building materials and home furnishings agents. The credit crunch in conjunction with the business downturn could prove fatal, particularly for those having taken on heavy debt as in leveraged buyouts. Although the major players should be able to ride out the storm, thanks to diversification in geographic terms (presence in emerging countries) and sectoral terms (non-residential, public works, motorway and airport concessions, energy production), the multitude of small players will suffer to a greater extent.

North America: continued decline of residential construction In the United States, spending on construction was down 10 per cent in 2007. That is the natural consequence not only of the 20 per cent decline in residential property investment – which represents about half the total investment – but also of the deteriorating conditions in non-residential construction with the economic slowdown producing a moderating effect on the office, commercial premises and industrial facilities segment. Strong growth has only continued in public works (20 per cent of the total sector) and should stay on track in view of the structural flaws detected in many bridges and other such structures after the Minneapolis catastrophe. Spending should decline again in 2008, but less than in 2007 (down 6 per cent) with the residential segment bottoming out toward year end. Non-residential construction could, conversely, decline even more amid the consumption and investment slowdown and a decline in local community tax revenues. The decline of residential property is attributable to the imbalance in housing supply and demand. Responding to demand from

SECTOR RISK OVERVIEW

households spurred by both attractive loan offers and capital gains perceived as sure, the new housing supply grew strongly from 2001 to 2006. With high volumes and prices bolstering profitability, promoters paid no heed to the weakening of demand triggered in 2005 by several converging trends: excessive increases in prices, which doubled on average between 1997 and 2005 to reach levels representing 3.8 years of average income against 2.8 in 2001, saturation of needs with the proportion of homeowners increasing from 64 to 69 per cent in 10 years, and growth of the debt service burden with 37 per cent of borrowers devoting over 30 per cent of their gross income to spending on housing, and 14 per cent of borrowers over half their income. The disastrous consequences of the financing system have compounded the effects of that market imbalance. There are a multitude of financial institutions with neighbourhood offices specialised in mortgage loans, which only act as intermediaries and may deal with minorities or operate in difficult areas. They maximise their commissions by marketing unconventional loans. The so-called Alternative A and subprime categories constituted a third of the mortgage financing granted between 2004 and 2006. Nearly all, however, are adjustable-rate mortgages after an initial two- or three-year period during which the borrower has to pay interest at rates already very high to compensate for the high-risk profile. The central idea was that prices would continue to rise and thus allow borrowers to refinance the mortgage or sell to repay before upward rate adjustments kick in and the debt service burden becomes unsustainable. When prices stopped rising the contractual rate increases brought the system down like a house of cards. Market conditions will remain difficult. Many subprime loans granted in recent years will be subject to sharp, upward interest rate adjustments in 2008. Neither refinancing nor repayment will be possible due to the price erosion. Legislative measures intended to allow the FHA to insure financial institutions that agree to refinance that type of loan or accord a temporary rate freeze will only benefit a limited number of households. In

such conditions, payment defaults and property repossession orders, already up sharply on subprime mortgages (15 per cent in default, 6 per cent subject to repossession), should rise further. This will result in an increase in properties up for sale with demand meanwhile likely to weaken further amid the increasing cost and scarcity of unconventional loans. The decline of prices will thus in all likelihood accelerate with reductions of from 10 to 20 per cent by end 2008 considered plausible. The market shake-out will be unlikely to run its course before the 2008 second half due to the problem of eliminating the glut of unsold property.

Europe: erosion of residential construction A perceptible slowdown has emerged in the construction sector. That trend has been concentrated in the residential market due to the exhaustion of solvent demand: there has been a marked slowdown in mortgage loans and prices with the delivery of building permits in decline. The dynamism of the private non-residential and public works segments has partly offset that trend. Business should stabilise across the sector in 2008 with erosion in residential construction and a trend reversal in non-residential in a context of slower economic growth. Public works should remain dynamic. Three countries in Europe will particularly bear watching: • With 75 per cent of households in the United Kingdom owning their own homes and carrying debt representing 160 per cent of their annual income, the unfavourable impact of relatively high interest rates on loans with 90 per cent on a adjustable rate basis, as well as the threat the crisis poses to bonuses in the London financial sector, a price decline is likely in 2008. The British and American financing systems, furthermore, are similar in some respects. • In Ireland, where the residential market has also experienced overheating, even more pronounced, thanks to the European Central Bank’s (ECB’s) accommodating policy, the market reversal has gained momentum with both prices and building-

xxxv

SECTOR RISK OVERVIEW

permit applications in decline. As much as 83 per cent of households own their own homes and carry debt, mainly at variable rates, representing 160 per of their annual income. • Spain has been emerging from a 10-year property boom. The average price for a home has doubled in five years and tripled in 10 years with growth peaking at 17 per cent in 2003/2004. The property debt of households is equivalent to 80 per cent of domestic product and 140 per cent of their disposable income. The debt service burden represents 40 per cent of their income with 95 per cent of the debt taken out on

a variable rate basis. Fully 87 per cent of the population are homeowners. Subprime loans are non-existent and refinanced mortgages are estimated at 1 per cent of outstanding loans. The default rate is still low at 0.5 per cent of outstanding loans. Past interest rate increases will, however, have a growing impact on the debt service burden, and the decline in new home construction – 400,000–500,000 expected in 2008 – will affect employment. In a context of tightening credit, undiversified, debt-burdened small- and mid-size players with regional scope will be apt to experience financial difficulties.

AUTOMOTIVE INDUSTRY (RATED B-) Automotive industry 2008 forecast

World B-

North Japan Western Emerging America Europe Europe C A BB+

World car production will rise 4.5 per cent in 2008. Emerging markets will post very strong growth with China up 10 per cent, India 26 per cent, Thailand 19 per cent and Brazil 7.5 per cent. Their dynamism will contrast with the persistent stagnation of production in industrialised countries: up 0.5 per cent in the United States, down 2.0 per cent in Western Europe and up 0.3 per cent in Japan. These three regions will nonetheless continue to represent most of world production (56 per cent). American and European carmakers will continue to suffer from the household consumption slowdown and high petrol prices at the pump in their main markets. Environmental regulations intended to reduce CO2 emissions will also affect them. In emerging countries, the primary bulwark of their growth, they will have to contend with fierce competition in the low-

xxxvi

Emerging Asia B+

Latin America B+

Middle East, CIS North Africa B+ B-

cost car segment. The persistence of high prices for certain inputs will continue to squeeze their operating margins. Their Asian competitors, above all Toyota, will strengthen their positions, thanks to the competitive advantages they enjoy. American and European parts manufacturers will suffer greatly from the difficulties affecting carmakers. Their margins will continue to be squeezed by rising raw material costs, pressure exerted by their clients on prices and the additional costs resulting from the R&D transfers carried out by carmakers. Leveraged buyouts, undertaken with increasing frequency in the sector in the 2007 first half, could moreover undermine their financial structure. Chinese and Indian carmakers have been strengthening their positions locally and on exports to the growing Asian, Russian and Latin American markets.

SECTOR RISK OVERVIEW

INFORMATION TECHNOLOGY INDUSTRY (RATED B-) Information technology industry 2008 forecast

World

North America

Japan

Western Europe

Emerging Europe

Emerging Asia

Latin America

Middle East, North Africa

B-

B-

B-

B-

B+

B+

B+

B

The world IT market should suffer a slight slowdown in 2008. The growing importance of emerging markets and, in mature markets, of the home segment compared to the office segment argues for a rethinking of strategies. The different players (designers, manufacturers, subcontractors and distributors) have to contend with the standardisation and rapid obsolescence of computer equipment and the need to offer tightly priced equipment in emerging or developing regions. With the

resulting decline of average prices only offset by even faster increases in sales volumes, and it prompts the transfer of production to countries offering lower costs. The competition on delivery times and after sales service has been fierce, making stock management a delicate balancing act. Although restructuring programmes have continued in that context, they have nonetheless not succeeded in overcoming the financial difficulties experienced by some players.

AIR TRANSPORT (RATED B-) Air transport 2008 forecast

World North America BC+

Japan Western Emerging Europe Europe BB B-

Although airline turnover will be up 8.2 per cent in 2007, it will slow to up 6.5 per cent in 2008. Freight, up 3.8 per cent in 2008 after stagnating in 2007, will thus cope more effectively with the stiff competition from the other modes of transport. The airlines will report profits of US$5.6 billion in 2007 and US$7.8 billion the following year. The sharp 9.6 per cent increase in the number of passengers has thus far offset price increases for fuel, which represents 28 per cent of total expenses. The sector will remain shaky in 2008: a more sustained increase in the price of fuel would weigh heavily on airline financial performance, especially with the carriers having accumulated debt exceeding US$200 billion overall. This context exacerbates the

Emerging Asia B

Latin Middle East, CIS America North Africa BB+ B-

gravity of the problems associated with the archaic national air traffic control systems and airport infrastructure in some countries. The airlines will moreover have to renew their fleets, particularly in the United States. The Open Skies air liberalisation agreement that comes into effect in April 2008 should offer new opportunities for European and American airlines previously not allowed to fly between Washington and Heathrow. The major airlines will continue to suffer from the competition with low-cost carriers, which have increased their presence on international routes. Restructuring will thus continue in industrialised and emerging countries at the expense of the weakest players.

xxxvii

SECTOR RISK OVERVIEW

Sectors rated C+, C, C-: The economic environment is very uncertain and unlikely to have a positive influence on corporate financial health. Payment be-

haviour is relatively poor compared to the previous rating categories. Default probability becomes nettlesome problem.

TEXTILES(RATED C+) Textiles

World

2008 forecast

C+

North Japan America C B

Western Emerging Emerging Europe Europe Asia C B A

Latin North Africa, CIS America Middle East BB B

CLOTHING (RATED C) Clothing

World

2008 forecast

C

North Japan America C C-

Western Emerging Europe Europe C B

Emerging Asia A-

Latin North Africa, America Middle East C+ B

TEXTILE Upgrade world rating from C to C+ Upgrade western Europe rating from C- to C CLOTHING Upgrade world and western Europe ratings from C- to C Downgrade Latin America rating from B- to C+ The restructuring that marked the sector in Europe led to a selection of the strongest players. Their positioning on high valueadded products will enable them to cope with the effects of the elimination of quotas on certain products made in China since 1 January 2008 and with rising raw material costs. The euro appreciation against the dollar and the yen and the expected household consumption slowdown in Western Europe and the United States could affect their sales but nonetheless without jeopardising their financial structure. In the United States, the household consumption slowdown will affect clothing sales. With a still-limited presence in the export market, American manufacturers will be unable to significantly offset this unfavourable domestic trend. Companies in Mediterranean rim countries will continue to improve subcontracting-related services and will continue to benefit from the geographic proximity of their order issuers. Their move upmarket should mitixxxviii gate the effects of the economic slowdowns in

the countries of order-issuers and help fend off Asian competition. China and Asia in general will continue to be the big winners from production transfers, even if the slump in American demand may affect some Chinese subcontractors. In India, the structuring of textiles and clothing around the major local operators will continue. Latin American countries, meanwhile, will continue to suffer from Asian competition while their market share in American imports declines even further. In Europe in particular, industry companies have the wherewithal to cope with the impact from the lifting of quotas, the household consumption slowdown and rising raw material costs. In the 2007 first half, production in the European Union was up 2 per cent for textiles and 5 per cent for clothing. Italy is the leader in the clothing sector and Germany in textiles. In 2008, European companies that benefit from good financial health, like Spain’s Inditex and Mango and Sweden’s H&M, and that

SECTOR RISK OVERVIEW

have pursued geographic diversificationstrategies, particularly to emerging countries, while keeping control over creation and distribution will be well positioned to cope with the risks expected: • the return of Chinese competition with a vengeance in the wake of the elimination on 1 January 2008 of the quotas reintroduced in June 2005 to limit imports of some 10 products made in China (The quotas imposed on China by other countries, including the United States, will only disappear on 1 January 2009); • the household consumption slowdown in Western Europe and the United States; • the euro appreciation against the dollar and the yen, as well as Asian currencies

pegged to the dollar, which will also impede European exports, particularly from Italy. The restructuring carried out in textiles has strengthened the finances of industrial companies. Their positioning on high valueadded products will moreover limit the impact of rising prices for synthetic fibre and wool. This has been the case for weavers specialised in technical fabrics (Germany and France), thanks to the buoyancy of client sectors, the slowdowns in residential construction and the car industry notwithstanding. Industrialcompanies that use cotton will continue to develop in the face of price volatility. In textiles as in clothing, industrial companies will continue to be confronted with Asian competition.

xxxix

Europe and the CIS Outlook for 2008: Europe and the CIS Albania Armenia Austria Azerbaijan Belarus Belgium Bosnia and Herzegovina Bulgaria Croatia Cyprus Czech Republic Denmark Estonia Finland France Georgia Germany Greece Hungary Iceland Ireland Italy Kazakhstan Kyrgyzstan

2 10 11 12 14 15 17 21 23 26 30 32 37 40 44 47 51 52 56 59 64 66 69 73 76

Latvia Lithuania Luxembourg Macedonia Malta Moldova Montenegro The Netherlands Norway Poland Portugal Romania Russia Serbia Slovakia Slovenia Spain Sweden Switzerland Tajikistan Turkey Turkmenistan Ukraine United Kingdom Uzbekistan

77 81 84 86 88 89 91 92 95 98 103 106 111 115 119 123 127 131 133 137 138 141 142 146 150

1

OUTLOOK FOR 2008

OUTLOOK FOR 2008

Europe and the CIS Jean-Louis Daudier, Dominique Fruchter, Christine Altuzarra and Olivier Oechslin Country Risk and Economic Studies Department, Coface

WESTERN EUROPE The slowdown will increase the risks on some countries and sectors

■

Economic growth and credit risk 7%

300

6%

250

5% 4% 3%

200

3.8% 2.6%

2.9%

3.0%

2.8% 2.0%

1.8%

2%

1.1%

150

2.7% 2.1%

100

1.6%

1.1%

50

1%

0

0% 1997

1998

1999

2000

2001

2002

2003

2004

2005

2006 (e)

2007 (e)

2008 (f)

Economic growth (%) Payment incident index

Scale of sectoral risk: Western Europe Highest risk D C– C Textiles / Clothing

C+ B–

Car industry / IT industry

B Electronic components/ Air transport/ Building & public works

B+ Paper / Telecommunications (equipment manufacturers)

A–

Mass retail / Mechanical engineering Pharmaceuticals / Chemicals

A Steel / Telecommunications (operators)

A+ Lowest risk

Economic growth of the main western European countries (%) 4.5 2007 (e)

4.0 3.5 3.0

2008 (f)

3.8 3.4 3.0

3.2

3.1

2.8

2.6

2.5

2.5

2.0

2.0

2.7

2.6 1.9

1.9 1.9

1.9

2.1 1.8 1.4

1.5 1.0 0.5

2

0.0 Sweden

Spain

Austria United Kingdom Belgium

France

Germany

Italy

Western Europe

After growth peaked in late 2006 and early 2007, the Western European economy went into a moderate slowdown. This trend thus began before the emergence of the summer financial crisis, and it will continue this year while credit conditions have deteriorated and several financial institutions in the region have experienced difficulties. Residential construction, a major growth driver in recent years, has slowed markedly with a downturn likely. The impact will be substantial in economies where the housing market had previously experienced runaway growth as in Spain, the United Kingdom and Ireland. Exports outside Europe will come up against unfavourable exchange rates and the American economic slowdown. Continuing strong demand from emerging countries will nonetheless ease the trend. Intra-European sales, meanwhile, will be affected by the less dynamic economic conditions prevailing in Europe. Only the United Kingdom’s sales to its European trading partners could be more dynamic due to the more favourable pound sterling/euro parity. European household consumption overall should also slow amid rising energy and food costs and slower job growth. However, continued relatively accommodating fiscal policies, despite an incomplete return to balanced public sector accounts, as well as the continuing satisfactory job picture, will mitigate the negative impact of the tighter conditions of access to credit. Households in some countries − notably Germany, France, Portugal, Alpine coun-

OUTLOOK FOR 2008

tries and Sweden − will maintain or increase their spending. Although corporate payment behaviour has been generally good in Western Europe, there are nonetheless pockets of difficulty in some countries and sectors. While almost all regional countries are rated A1, Italy, Portugal and Greece are still rated A2 due to the customary slow pace of payments and collection of past-due payments. Even Luxembourg only warrants an A2 rating for its business climate due to the difficulty in obtaining corporate business information. Textiles and clothing earned an upgrade (from C− to C) in 2007, reflecting the gradual consolidation of the corporate fabric and virtual completion of the production relocation process. They nonetheless remain risky sectors in view of the elimination of the last import barriers and the pressure exerted by distributors. Air transport (rated B) − although benefiting from the recovery of traffic and the absence of significant overcapacity − has to contend with the rising cost of fuel, competition from low-cost carriers and the completion of restructuring entailing takeovers of the former national airlines of several regional countries. The automotive industry (rated B−) has to cope with eroding sales and comply with environmental standards, while the IT industry (also rated B−) and telecommunications equipment (rated B+) remain exposed to growing competition from new Chinese players. The economic slowdown could moreover result in moderate deterioration in the payment behaviour and creditworthiness of certain companies with some countries or sectors particularly sensitive. Several countries rated A1 − Spain, the United Kingdom, Ireland and Iceland − have been negative watchlisted due to the sharp downturn of residential construction activity after 10 exuberant years. Payment behaviour could thus deteriorate in the sector.

■

Some economic sectors will present higher levels of risk

Housing-related sectors (promotion, construction, materials, equipment, furniture and electrical appliances) − whether in manufacturing, distribution or installation − will certainly suffer from the downturn in residential investment. Road transport will have to cope with the economic slowdown and the increasing cost of petrol. Food industries, as well as breeding, still subject to pressures exerted by mass distribution, will suffer from the soaring prices of raw materials. Biscuit-makers, flour mills, cheese-makers and meat processing will suffer the most. The leisure industry (catering, hotels, culture and entertainment) could suffer from the relative sluggishness of consumption and tourism originating in the United States. The IT industry will come against the unfavourable exchange rate trend and the slowdown of corporate investment, especially in the financial sector.

1

CENTRAL EUROPE and TURKEY ■

Despite a more uncertain world economic environment growth should remain buoyant in 2008

Regional growth will slow very moderately in 2008, down from 6.0 per cent to 5.2 per cent on average. The slowdowns that developed in Hungary and Turkey in 2007 after the implementation of restrictive policies should give way to gradual recovery with the impact of those measures waning. In the rest of the region, buoyant domestic demand − spurred by wage growth, a brighter job picture, funding provided by the European Union and foreign investment − should substantially offset the effects of the stiffer conditions of credit and the slowdown of demand from Western Europe. Regional GDP growth should remain 3 points above that of Europe of the 15, reflecting the continuing catch-up process under way in Central European economies. Economic growth should speed up to 3 per cent in Hungary and 5 per cent in Turkey, a gain of one point over 2007. It should only

3

OUTLOOK FOR 2008

one point of growth compared to the previous year. Slovakia should nonetheless keep the trophy for dynamism along with the Baltic States, notwithstanding significant economic slowdowns in most of these states under the effect of measures taken to ease overheating.

slow slightly in Romania (5.2 per cent) amid continued expansionary policy as well as in Serbia (6.0 per cent) and Bulgaria (6.0 per cent), buoyed by dynamic investment and consumption. Poland (5.2 per cent), the Czech Republic (4.6 per cent) and Slovakia (7.0 per cent) should shed slightly over

GDP growth (%)

10 2007 e

2008 f

8 6 4 2 0 Slovakia

■

4

Bulgaria

Serbia

Romania

Inﬂationary surges and still-large public sector deﬁcits have compromised the chances of most new member states of adopting the euro in the near future

After Slovenia, in early 2007, Cyprus and Malta received approval to join the euro zone in January 2008. Although public sector accounts in the Baltic States − members of the ERM2 − and Bulgaria are near equilibrium, or even show surpluses, inflation in those countries has been very high, thus deferring adoption of the euro beyond 2010. Slovakia, which also belongs to ERM2 and which revalued the central parity of its currency in March 2007, is on the verge of meeting the Maastricht fiscal criteria and thus seems ready to adopt the euro in January 2009 as planned. This prospect seems much farther off, however, for the other new members, notably Hungary, which has not met any Maastricht criterion thus far. Most of the others either do not have or no longer have an official target date for joining the euro zone, and it now appears difficult to achieve before 2013/2014.

Poland

Turkey

Czech Republic

Hungary

Public deﬁcit (%of GDP) Bulgaria 4 3 2 1 0 -1 -2 -3 -4 -5 -6 -7

■

Serbia

Turkey

2007 e

Czech Slovakia Romania Poland Republic Hungary

2008 f

Current account deﬁcits have widened and foreign debt has increased. The vulnerability of many regional countries to swings in market sentiment has remained relatively high

The financial crisis linked to American mortgage loans has only had a limited impact on Central European countries thus far. With few exceptions, notably Romania, regional currencies have grown stronger since the financial turbulence last summer. A soft landing for the region’s weaker economies remains the most likely scenario at this juncture.

OUTLOOK FOR 2008

Emerging European countries, nonetheless, remain among the most vulnerable to a crisis of confidence in the markets. In some economies, the size of the current account deficits and the excessive level of foreign debt − mainly private − could lead to sudden adjustments in exchange rates or economic growth in case of increased aversion to emerging risks. While most other emerging regions run current account surpluses, Central Europe runs deficits representing 7.7 per cent of GDP on average. While remaining limited in Slovenia, Poland and Czech Republic (between 3.0 and 4.5 per cent of GDP) or declining sharply in Slovakia (4.5 per cent), the current account deficits have remained large in Hungary, Croatia and Turkey (between 6.0 and 8.0 per cent) and have reached peak levels in Romania, Bulgaria, Serbia and the Baltic States (between 13 and 20 per cent). These very large imbalances will be difficult to sustain in the long haul, especially with the deficits sometimes covered by appreciable inflows of volatile capital − short-term debt, portfolio investment − and a slowdown of FDI expected as a result of the completion of the privatisation programmes. A current account deficit that has deteriorated dangerously (% of GDP) 6% 4% 2% 0% -2% -4% -6% -8% 2001

2002

2003

Central Europe

2004

2005

2006

2007

2008

Emerging Countries

Although public sector debt has been trending down in many cases, the widening of the current account deficits has been coupled with strong growth of the private foreign debt whether due by companies or banks. Some of the financing comes from the parent companies of subsidiaries operating in Central Europe, which reduces somewhat the risk of non-renewal of these inflows. But the debt also involves bank credit, securities issues and non-resident deposits. The foreign

debt burden has reached very high levels in Latvia, Estonia, Hungary, Bulgaria, Croatia and even in Slovenia with debt to GDP ratios ranging from 85 to 110 per cent). The strong growth of foreign-currency loans granted by domestic banks has heightened exchange rate risk in several cases.

1

External debt ratios higher than the emerging country average (% goods and services exports) 150% 100% 50% 0% 2001

2002 2003

Central Europe

■

2004 2005

2006 2007 2008

Emerging Countries

Payment incident frequency has eased but payment behaviour remains volatile

Several years of strong growth and the progress accomplished in restructuring the productive apparatus have resulted in improved corporate payment behaviour in the region, albeit still more volatile than in Western Europe. This overall trend does not preclude either occasional payment defaults in weak or highly competitive sectors of regional economies or an upsurge in payment incidents in case of a marked growth slowdown. Companies in a range of sectors, including electronics, telecommunications, IT industry, the automotive industry and pharmaceuticals, often subsidiaries of major groups, have generally continued to benefit from the buoyant economic conditions. The construction sector seems riskier, notably in countries that have experienced property booms or are currently in a slowdown phase. Agriculture and agri-food industry, in the process of restructuring, thanks to European aid and especially textiles, are still shaky. The consumer goods sector has suffered some difficulties notably in Hungary and Romania amid declining household demand or rising interest rates in a context of high corporate debt.

5

OUTLOOK FOR 2008

Economic growth and credit risk 7%

300

6.3%

Economic growth (%) 6%

6.0%

5.6%

Payment incident index

250

5.2% 4.8%

5%

4.3%

4.0%

200

4% 3.0% 3.1% 3%

2.5%

2.5%

150

2.3% 100

2%

2008 (f)

2006

2007 (e)

2005

2003

2001

1998

1997

2004

0 2002

0% 2000

50

1999

1%

The business climate has improved markedly but deﬁciencies persist

■

The business environment in Central European countries is favourable overall. It improved substantially during the European

Union accession process. The countries that have made the most progress on reforms, like Hungary, the Czech Republic and Slovakia, are also the leaders on business environment quality. Countries with poorer quality corporate financial information and less legal protection for creditors or lessdeveloped infrastructure and sometimes a higher level of corruption, like Poland and most Baltic States, present a higher but nonetheless satisfactory level of risk. This applies even more to Romania, Bulgaria and Turkey, where a major effort is particularly necessary to strengthen the anticorruption campaign and legal system effectiveness. The deficiencies in the institutional environment are, moreover, greater in the other Balkan States.

Business climate rating: Central Europe & Turkey

D C B A4 A3 A2

ia rb

ia on ed

M

ac

Se

a

a

vin

Bo

sn

ia

H

er

ze

go

ni

ey

ba Al

Tu

rk

ia

ia

an

ar

m Ro

nd la

lg Bu

tv

ia

Po

a ni ua

La

tia th Li

Cr

oa

ia en

Sl

ov

ak

ia

p.

ov

h ec

Sl

Re

ta al Cz

ry ga

un H

M

a ni to

Es

Cy

pr

us

A1

■

6

Country @rating trends

The region presents generally low risks. The ratings of the main regional economies, except Turkey, rated B, range from A2 to A4. The risk of deterioration in the economic environment triggering a wave of payment defaults remains very moderate. The situation of individual companies depends primarily on the economic sector. Although the repercussions of the turbulence that buffeted financial markets in 2007 have remained very limited in the region, the situations of countries with

difficult-to-sustain external deficits and private sectors highly exposed to exchange rate risk, nonetheless, remain weak. In that context, Hungary, whose rating was downgraded in 2006, retains its A3 rating and Turkey’s B rating also remains unchanged. In 2007, the A2 rating of Estonia, A3 of both Latvia and Lithuania and the A4 ratings of Romania and Bulgaria were all negative watchlisted due to economic overheating risks and their greater vulnerability to a change in market sentiment. Conversely, Poland’s A3 rating

OUTLOOK FOR 2008

was positive watchlisted in view of the solidity of its growth, the improved creditworthiness of Polish companies and the limited extent of its external imbalances.

Cyprus and Malta, authorised to join the euro zone in January 2008 and with their economies beginning to grow again, have been upgraded to A2.

COUNTRY @RATING RANKING FOR THE REGION’S PRINCIPAL ECONOMIES

Czech Republic Hungary Poland Slovakia Romania Bulgaria Turkey Serbia

January 2002 A3 A2 A4➘ B B B C D

January 2003 A3 A2 A4➘ A4 B B C D

January 2004 A2 A2 A4 A3 B B B D

COMMUNITY OF INDEPENDENT STATES ■

Strong growth spurred by high raw material prices … GDP growth higher than the emerging country average (%)

10 8 6 4 2 0 2001

2002

2003

2004

Emerging Countries

2005

2006

2007

2008

CIS

Driven by the strong Russian economy and robust demand for raw materials, economic activity in CIS countries should remain buoyant with 7.0 per cent growth in 2008, down slightly from 7.7 per cent in 2007. High growth should continue in Russia, thanks to buoyant household consumption and investment, and the more expansionary fiscal policy pursued during the current electoral period, with the December 2007 legislative elections being followed by presidential elections in March 2008. Sectors not subject to foreign competition, like construction and commerce, have been driving the economy. There are nonetheless still weaknesses. The rouble appreciation has handicapped sectors ex-

January 2005 A2 A2 A3 A3 B B➚ B➚ C

January 2006 A2 A2➘ A3 A3 A4 B➚ B➚ C

January 2007 A2 A3 A3 A3 A4 A4 B C

1

January 2008 A2 A3 A3➚ A3 A4➘ A4➘ B C

posed to competition from imports: the car industry, light industry and so on. Oil production volume has been slowing − up 2.2 per cent in 2006 compared with up 11 per cent in 2003 − as it has for gas production (up 1.0 per cent in 2006 against up 4.0 per cent in 2003). The outlook is not as bright for Kazakhstan, likely to suffer in 2008 from the tighter credit conditions resulting from the subprime crisis, with Kazakh banks having borrowed heavily abroad to finance a rapid expansion of credit to the private sector. The tighter credit conditions could significantly slow consumption. Rising hydrocarbon, ore and grain sales abroad should continue to drive the economy. Economic growth could thus be about 6.0 per cent in 2008, a marked decline, however, compared with the approximately 10 per cent growth achieved on average in the past nine years. GDP growth (%) 10 9

2007 (e)

8

2008 (f)

7 6 5 4 3 2 1 0 Uzbekistan

Russia

Kazakhstan

Ukraine

7

OUTLOOK FOR 2008

Economic growth should remain above 7.0 per cent in Uzbekistan, with the international and regional environments remaining very good for the economy (high gold and gas prices, transfers from expatriate workers in Russia and strong demand from the latter country). The Ukrainian economy should slow moderately to 6.3 per cent in 2008, down slightly from 7.2 per cent in 2007, due to a possible decline in metal prices − the country’s main export − and a further price increase for imported gas. The private sector could also feel the effects of tighter credit and borrowing conditions abroad.

… but a business climate lagging far behind the good ﬁnancial health

■

Business climate rating: CIS D C B A4 A3 A2

an

ta n

ist en

be

m rk

Uz

Tu

Ky

rg hy

zs

kis

ta n

s

e

la ru Be

va

ra in Uk

gi a

do

or

ol M

Ge

ia

ba ija n er

Az

ia

en m Ar

ss

st Ka za kh

8

Ru

an

A1

No regional country has a business climate rating better than B. Where available, corporate financial information is often opaque. Corporate ownership also lacks transparency. Debt collection is difficult. Although the improvement in regulations in favour of foreign investors and lenders is undeniable, the rule of law remains uneven. Although very high political risk generally compounds that far-from-reassuring business climate in Central Asian countries, Kazakhstan is distinguished by lower risk of instability and a better legal environment for foreign investors. In Ukraine internal rivalries continue to undermine the political landscape in the wake of the early elections late September 2007. The Coface business climate rating for Russia is B, reflecting the deficiencies in the rule of law and in debt collection possibilities and the lack of investment in infrastructure. The lack of investment moreover pervades

the entire economy with a low investment rate of about 20 per cent of GDP, partly attributable to the recurrent instability of property rights. The government’s tendency, meanwhile, to expand its presence in the energy and manufacturing sectors could ultimately undermine management effectiveness. Despite a policy of opening up to foreign investment, Kazakhstan’s business climate is rated no better than Russia’s. The current severe tensions between the consortium led by Technip and government officials, as well as the technical difficulties, will doubtless be overcome. Like the other Central Asian exSoviet regimes, however, corruption is widespread in Kazakhstan and exacerbated by the presence of the revenues from oil exports. Armenia (also rated B) has succeeded in making a radical transition to a market economy, and the legal and institutional environment is better than it is in the other regional countries. Corruption is still, however, a major weakness. The business climate in Ukraine, Azerbaijan and Georgia warrants only a C rating despite the significant improvement achieved in Georgia’s case. The level of corruption is very high in the three countries, however, and the legal environment provides little security. Corporate financial information and ownership structure are often opaque. The other CIS countries are rated D. ■

Country @rating trends

With a generally poor business climate for companies thus offsetting a strong overall financial position, the average country @rating for the region still reflects a higher level of risk than in the other emerging countries. Russia is still rated B. Despite the economic dynamism and strong financial position, the country continues to suffer from governance shortcomings. The Coface payment incident index continues to improve. The lack of transparency on corporate finances and ownership remains, however, unsatisfactory and the weakness of the legal system undermines collection possibilities. Kazakhstan has also retained its B rating with concerns over the solidity of the banks and the effects of the tighter credit conditions offset by the government’s strong financial position and the

OUTLOOK FOR 2008

prospects associated with the increase in oil production. Despite a satisfactory financial position, Ukraine has maintained its C rating due to a still-shaky political and business environment along with a strong energy dependency. High political risk in Uzbekistan along with continual government intervention in trade, daily corporate activities and the banking system still justifies maintaining the D rating.

In the region, only Georgia’s rating was upgraded. Economic conditions have improved sharply since the revolution of the roses in 2003, thanks to significant progress on governance, privatisations and implementation of a more stable macroeconomic framework, which spurred an influx of foreign capital. Nonetheless, the improvement has particularly benefited a minority of the population and there are still major political uncertainties.

1

COUNTRY @RATING RANKING FOR THE REGION’S PRINCIPAL ECONOMIES

Russia Kazakhstan Ukraine Uzbekistan

January 2002 B C➚ D D

January 2003 B C D D

January 2004 B B C D

January 2005 B B C D

January 2006 B B C D

January 2007 B B C D

January 2008 B B C D

9

EUROPE AND THE CIS

Albania Population (million inhabitants) GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

3.1 9,136 D High risk C

RISK ASSESSMENT Good performance in the export market and manufacturing in 2007 offset the repercussions of an electricity shortage and drought. Growth should accelerate slightly in 2008 driven by strong domestic demand and increased public sector investment. The economic dynamism, substantially underpinned by higher direct investment inflows, development of the financial sector and a substantial volume of expatriate worker remittances, made it possible to significantly raise living standards in the country, even if it remains among the region’s poorest. The government will, however, have to take pains to quickly consolidate the national electric power company’s financial situation, restructure the energy sector and contain rising public spending in 2008 to limit inflationary pressures. The rapid credit ex-

pansion will also bear watching notwithstanding the limited development of financial intermediation. While the country continues to suffer, moreover, from the lack of diversification of its exports (centred on textiles), the volume of imports has continued to grow due to an inadequate domestic supply and rising energy costs. Albania has much ground to make up, furthermore, on infrastructure development and improvement of the business environment, which includes combating corruption and organised crime. Politically, the government should henceforth have a free hand to implement its reform programme. The election by parliament in July 2007 of a president from the ranks of the ruling Democratic Party of Albania strengthened Prime Minister Sali Berisha’s position and avoided the holding of early legislative elections.

MAIN ECONOMIC INDICATORS USD millions Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports) e = estimate, f = forecast

10

2003

2004

2005

2006

2007(e)

2008(f)

5.7 2.3 -4.5 447 1,784 -1,336 -7.9 21.8 2.9 4.6

5.9 2.9 -5.1 603 2,195 -1,592 -6.0 20.8 2.5 5.0

5.5 2.4 -3.6 656 2,478 -1,821 -8.0 21.0 2.6 4.3

5.0 2.4 -3.2 793 2,916 -2,123 -7.2 19.8 3.6 4.6

5.5 2.5 -3.9 1,051 3,581 -2,530 -8.6 19.9 3.7 4.6

6.0 3.4 -7.9 1,283 4,063 -2,780 -7.6 19.8 4.5 4.2

ARMENIA

Armenia Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

3.0 6,406

1

C High risk B

RISK ASSESSMENT In 2007, Armenia again posted two-digit growth. Construction remained the main economic engine, thanks to major investments in mining, metallurgy and energy as well as in residential property and office buildings in the capital Erevan. Transfers from Armenians residing abroad spurred demand. GDP growth, although down slightly from 2007, should remain high in 2008. The dynamism of domestic demand has undermined external accounts but with foreign exchange reserves still at comfortable levels. Although debt ratios have been moderate, thanks to prudent fiscal policy, tax revenues have not sufficed to meet the

country’s infrastructure and education needs. Armenia has successfully carried out a radical transformation to a market economy. Although the legal and institutional environment is relatively satisfactory, corruption is still a major weakness. The legislative elections in June 2007 and the presidential election early this year will not affect Armenia’s political and economic overtures to the West and the country also maintains very good relations with Moscow. Armenia’s main weakness has been its geographic and political isolation, its borders with its two principal neighbours, Turkey and Azerbaijan, being closed. A renewal of hostilities with Azerbaijan over disputed Nagorno-Karabakh, moreover, remains a possibility.

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

13.9 8.6 −1.1 696 1,130 −434 −6.8 43.4 11.6 4.3

10.1 2.0 −1.8 738 1,196 −458 −4.5 39.1 6.5 4.3

14.0 −0.2 −3.0 1,005 1,593 −588 −3.9 33.0 7.2 4.0

13.3 5.2 −2.7 1,019 1,921 −902 −1.4 22.4 4.9 5.4

11.1 6.0 −3.0 1,242 2,574 −1,332 −4.0 18.9 9.3 5.3

10.0 5.0 −2.9 1,429 3,052 −1,623 −4.2 15.6 7.9 5.2

e = estimate, f = forecast

11

EUROPE AND THE CIS

Austria Population (million inhabitants): GDP (US$ million): Country @rating: Business climate rating:

8.3 323,500 A1 A1

RISK ASSESSMENT The economy continued to grow strongly in 2007, driven by exports and investment. Sales to Germany and Eastern European countries were good, while corporate investment in machinery and equipment accelerated amid high production capacity utilisation. Household spending, except on housing, was disappointing, however, despite job growth. Economic growth will slow somewhat in 2008. Exports will weaken, affected by the slowdown in the German economy and unfavourable exchange rates. This trend will remain moderate, thanks to continuing strong demand from Eastern Europe. Corporate investment will develop along similar

lines as will the building sector. Household consumption should accelerate, however, spurred especially by the conclusion of relatively generous wage agreements and by the continuing decline of unemployment. Over the first nine months of 2007, bankruptcies declined 4 per cent after easing 5 per cent in 2006. The Coface payment incident index for Austria is at a satisfactory level. After two years of favourable economic conditions, the moderate slowdown will be unlikely to undermine corporate financial health, which will remain good. The building sector (especially electrical installation) and the home furnishing (production, retail), textiles and, due to increased fuel prices, road transport sectors will continue to present above average risk.

MAIN ECONOMIC INDICATORS %

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth Consumption (var.) Investment (var.) Inﬂation Unemployment Short-term interest Public sector balance (%GDP) Public sector debt (%GDP) Exports (var.) Imports (var.) Current account balance (%GDP)

1.2 1.3 7.7 1.3 4.3 2.3 −1.6 64.6 2.3 5.3 1.4

2.3 1.8 −2.3 2.0 4.8 2.1 −1.2 63.8 8.2 6.8 2.4

2.0 2.0 1.0 2.1 5.2 2.2 −1.6 63.4 6.2 5.2 3.0

3.3 2.1 1.5 1.7 4.7 3.1 −1.4 62.0 7.5 5.6 3.4

3.2 1.8 6.7 1.9 4.3 3.9 −0.8 60.0 6.5 5.1 4.0

2.5 2.2 3.6 1.9 4.2 4.0 −0.7 58.0 4.5 4.8 3.7

e = estimate, f = forecast

12

AUSTRIA

■ Payment Bills of exchange and cheques are neither widely used nor recommended, as they are not always the most effective means of payment.To be valid, bills of exchange must meet relatively restrictive mandatory criteria. This deters business people from using them. Cheques need not be backed by funds at the date of issue but must be covered at the date of presentation. Banks generally return bad cheques to their issuers, who may also stop payment on their own without fear of criminal proceedings for misuse of this facility. Bills of exchange and, to a lesser degree, cheques are more commonly used as a means of financing or payment guarantee. Conversely, SWIFT transfers are widely used for domestic and international transactions and offer a cost-effective, rapid and secure means of payment. ■ Debt collection As a rule, the collection process begins with the debtor being sent a demand for payment by registered mail, reminding him or her of his or her obligation to pay the outstanding sum plus any default interest stipulated in the sales agreement or terms of sale. Where there is no interest rate clause in the agreement, the rate of interest applicable semiannually from 1 August 2002 is the Bank of Austria’s base rate, calculated by reference to the European Central Bank’s refinancing rate, marked up by eight percentage points. For claims that are certain, liquid and uncontested, creditors may seek a fast-track court injunction (Mahnverfahren) from the district court via a pre-printed form. The competent district court for this type of fasttract procedure expedites the requisite action for ordinary claims up to €30,000 (previously €10,000) based on an amendment to the civil procedure code Zivilprozessordnung (ZPO) in effect since 1 January 2003. With this procedure, the judge will issue an injunction to pay the amount claimed plus the legal costs incurred. If the debtor does not appeal the injunction (Einspruch) within two weeks of service of the ruling, the order is enforceable relatively quickly.

A special procedure (Wechselmandantverfahren) exists for unpaid bills of exchange under which the court immediately serves a writ ordering the debtor to settle within two weeks. Should the debtor contest the claim, however, the case will be tried through the normal channels of court proceedings. Similarly, should the judge consider the grounds for an injunction request to be insufficient, it will not strictly speaking be rejected since this procedure is automatically converted into ordinary proceedings, which precludes any other recourse by the claimant. Where no settlement can be reached, or where a claim is contested, the last remaining alternative is to file an ordinary action (Klage) before the district court (Bezirksgericht) or the regional court (Landesgericht) depending on the claim amount or type of dispute. A separate commercial court (Handelsgericht) exists in the district of Vienna alone to hear commercial cases (commercial disputes, unfair competition suits, insolvency petitions, etc). During the preliminary stage of proceedings the parties must make written submissions of evidence and file their respective claims. The court then decides on the facts of the case presented to it but does not investigate cases on its own initiative. At the main hearing, the judge examines the evidence submitted and hears the parties’ arguments as well as witnesses’ testimonies. An enforcement order can usually be obtained in first instance within about 10–12 months. The civil procedure code provides that the winning party on all points at issue of the lawsuit is entitled to receive full compensation from the losing party of all necessary legal fees previously incurred.

1

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300

250

WORLD Austria

200

150

100

50

0

Ju ne D 93 ec Ju -93 ne D 94 ec Ju -94 ne D 95 ec Ju -95 ne D 96 ec Ju -96 ne D 97 ec Ju -97 ne D 98 ec Ju -98 ne D 99 ec Ju -99 ne D 00 ec Ju -00 ne D 01 ec Ju -01 ne D 02 ec Ju -02 ne D 03 ec Ju -03 ne D 04 ec Ju -04 ne D 05 ec Ju -05 ne D 06 ec Ju -06 ne D 07 ec -0 7

PAYMENT AND COLLECTION PRACTICES

13

EUROPE AND THE CIS

Azerbaijan Population (million inhabitants) GDP (US$ million) Country @rating: Medium-term rating: Business climate rating:

8.5 20,122

C Moderately high risk C

RISK ASSESSMENT Economic growth was very strong again in 2007, up 30 per cent after 34.5 per cent in 2006 and 26.2 per cent in 2005, thanks to a sharp increase in volume sales of oil in a context of high hydrocarbon prices. The rapid increase in oil export revenues has benefited the services sector, mainly telecommunications, transports and construction. GDP growth should ease in stages to considerably more reasonable rates – up 17.4 per cent in 2008 and up ‘just’ 10 per cent in 2009 – with oil production expected to reach a threshold, after its threefold increase in the previous four years. Oil export revenues fuelled a spectacular improvement in the country’s financial health, exemplified by robust current account surpluses representing 30 per cent of GDP. Foreign debt, after growing sharply a few

years ago to finance oil facilities, has returned to very moderate levels. Foreign exchange reserves and especially an oil fund now insulate the country from any hydrocarbon price shocks in the near term. However, the oil export revenues, by fostering strong wage growth and robust private consumption, have been responsible for a marked upsurge of inflation: 16 per cent in 2007. Of even greater concern, the Azerbaijani manat appreciation spurred by the inflation and an influx of foreign currency has undermined the competitiveness of a private manufacturing sector that has particularly suffered from a poor legal and institutional environment. With the country’s limited oil reserves, however, the export revenues will not last long. A competitive private sector will thus ultimately be essential to pick up the slack for flagging oil-sector export revenues.

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (period-end %) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

11.2 2.1 −5.1 2,625 2,723 −98 −28.3 38.4 6.5 1.8

10.2 6.7 −2.6 3,743 3,581 162 −30.6 40.8 5.5 1.8

26.2 9.6 −2.3 7,649 4,350 3,299 1.4 34.7 2.9 1.6

34.5 8.3 −4.8 13,015 5,269 7,746 20.9 27.4 2.1 2.7

30.0 16.2 −5.2 19,525 6,060 13,465 30.0 25.3 1.8 4.1

17.4 12.9 −4.8 25,859 6,969 18,890 36.7 21.4 1.0 4.7

e = estimate, f = forecast

14

BELARUS

Belarus Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

9.7 36,945

1

D Very high risk D

RISK ASSESSMENT After several years of strong growth largely based on subsidised prices for energy imported from Russia, the short- and mediumterm outlook now appears less favourable. Deterioration of the terms of trade, notably resulting from the raising of the price for Russian gas, will tend to slow wage growth, reduce financing by the public sector and inflate the energy bill for companies and households with slower economic growth the end result. Offsetting effects on two levels – the rise of oil prices (re-export activity) and the energy savings made in industry – should, however, somewhat limit the severity of the slowdown. A better understanding of such trends will be possible once efforts are made to improve the reliability of statistical data. The current account balance has slipped back into the red since 2006 with Belarus having to contend with a reduction in its market share in Russia, rising unit labour

costs and appreciation of the real exchange rate compounded by the increase in imported gas prices. In this context, the country’s previously limited foreign debt has been growing rapidly. The still insufficient level of foreign exchange reserves and the continued high levels of short-term debt reflect the country’s lack of financial room for manoeuvre. The economy is still largely under state control and its productivity very low. Although Belarus has been lagging seriously on implementing reforms and improving the business environment, it nonetheless boasts good social indicators. In the political arena, Belarussian President Alexander Lukashenko seems to have a firm grip on the government with the ongoing centralisation of all levers of power only increasing the country’s international isolation. Despite occasionally tense economic relations, the government should seek to preserve its close ties with Russia.

15

EUROPE AND THE CIS

MAIN ECONOMIC INDICATORS USD millions Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports) e = estimate, f = forecast

16

2003

2004

2005

2006

2007(e)

2008(f)

7.0 28.4 −1.7 10,076 11,324 −1,247 −2.4 23.7 5.1 0.5

11.4 18.1 0.0 13,942 16,126 −2,184 −5.2 21.5 3.7 0.5

9.3 10.3 −0.7 16,109 16,610 −501 1.4 17.2 3.3 0.9

9.9 7.0 0.5 19,838 22,237 −2,398 −4.1 18.6 2.6 0.7

7.8 8.1 0.5 21,035 25,307 −4,272 −7.9 25.6 3.3 0.8

6.4 10.0 0.5 23,572 28,388 −4,816 −8.1 31.4 4.9 0.9

BELGIUM

Belgium Population (million inhabitants): GDP (US$ million): Country @rating: Business climate rating:

10.6 397,200

1

A1 A1

STRENGTHS • A privileged position at the heart of the Western European economic area and the presence of community institutions enhance its capacity to host foreign companies. • Foreign trade benefits from quality road, rail and port infrastructure. • The current account shows a surplus attributable to solid positions in intermediary goods. • A public sector balance near equilibrium has facilitated gradual reduction of public sector debt.

WEAKNESSES • By narrowing central authority at the national level, regionalisation has made it more difficult to reduce territorial disparities. • The limited degree of internationalisation of service companies has not been conducive to either innovation or development of high valueadded sectors. • By undermining job prospects for youth, deficient vocational training has been a factor in continuing high structural unemployment. • The fiscal equilibrium rests on isolated measures inadequate in relation to the ageing of the population.

RISK ASSESSMENT Economic growth remained strong in 2007, thanks to firm domestic demand. Job growth and an increase in their incomes prompted households to continue spending. Corporate investment made it possible to maintain productivity to a very satisfactory level, which partly offset the wage increases. A slight fiscal budget deficit is attributable to lower-than-expected tax revenues. The economy will grow more slowly this year. The erosion of household and corporate confidence that began late 2007 will continue, which will affect domestic demand. Household spending will come to a standstill, consistent with the moderation of job and income growth and rising consumer prices. Residential construction will only increase slightly amid stricter financing conditions,

and the building and public works segment will suffer the sluggishness of public investment. The reduced access to credit will be unlikely to hinder corporate investment with companies still enjoying substantial cash positions. It will slow, however, with the easing of the production capacity constraint. Export performance will be strong despite the euro appreciation. The still very strong demand from high-growth countries, China and oil countries in particular, should offset the expected slowdown of buying from European and American partners. The euro/dollar parity will, however, affect corporate competitiveness. In a politically difficult context, there will be little likelihood for adoption of fiscal measures to limit public spending, which will, on the contrary, accelerate. The

17

EUROPE AND THE CIS

fiscal budget should thus remain slightly in deficit, despite the easing of debt service. Bankruptcies increased sharply late last year. Corporate profitability and cash positions will nonetheless remain generally satisfactory, a situation reflected by the Coface payment incident index for Belgium below

the world average. In 2008, several exportintensive sectors will maintain good growth performance including chemicals, steel, mechanical engineering and transport facilities. Risks will persist in sectors like construction, textiles/clothing, retailing, car dealers and garages and hotel/catering.

MAIN ECONOMIC INDICATORS Percentage

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth Consumption (var.) Investment (var.) Inﬂation Unemployment Short-term interest rate Public sector balance (%GDP) Public sector debt (%GDP) Exports (var.) Imports (var.) Current account balance (%GDP)

1.0 0.7 -0.3 1.5 8.2 2.3 0.0 98.7 2.9 2.8 4.1

3.0 1.4 7.1 1.9 8.4 2.1 -0.1 94.2 6.5 6.5 3.5

2.0 1.3 6.7 2.5 8.4 2.2 0.0 92.2 3.6 3.6 2.4

2.9 2.1 4.2 2.3 8.3 3.0 0.2 88.2 2.6 2.5 2.7

2.6 2.2 6.7 1.8 7.7 4.0 -0.2 85 5.2 5.9 2.6

1.9 1.9 3.4 2.3 7.3 4.0 -0.4 82.1 4.3 5.1 2.9

e = estimate, f = forecast

MAIN ECONOMIC SECTORS ■ Textiles Belgian textile production continued to grow in the first four months last year, up 6.5 per cent, particularly in spinning and weaving, while it declined in hosiery. Textile investment increased about 24 per cent, making it possible to stabilise production capacity near 79 per cent. Intra-community trading represents 86 per cent of the textile business and 95 per cent of the clothing business. That highly biased market focus toward the European Union could weaken sector companies in 2008 in view of the expected demand slowdown. That will particularly be the case for the smaller clothing companies continuing to suffer from Asian competition. Clothing investment was thus down 30 per cent in that segment in 2007. ■

18

Distribution Belgian distribution (11 per cent of GDP) should slow in 2008 with consumer confidence indices pointing to a slowdown end 2007 attributable to rising foodstuff prices. The retailer confidence trend is following

suit, with the sector expecting cost increases across the board (merchandise purchasing, transport, personnel and so on). All segments should nonetheless continue to grow – food, clothing, gifts and toys, do-it-yourself and luxury products – except home appliances and telephony. ■

Construction In 2007, residential construction, infrastructure works and public works experienced slowdowns that should continue in 2008 amid steadily increasing material prices, rising mortgage rates and the decline in public sector investment. The trend will, however, result in a soft landing. Favourable trends in several industry segments, like renovation, offset last year’s decline in building permits for new housing construction.

■

Chemicals Highly export-intensive with sales abroad representing about 80 per cent of production, the sector should suffer from the world demand slowdown especially with production costs in the branch higher than those of its European neighbours and thus reducing its

BELGIUM

competitiveness. Companies dealing in basic chemicals, positioned on high value-added products, will continue to fend off competition from emerging countries. This will not be the case for the smaller companies that are in the majority in the plastic materials and rubber sector. With those companies already feeling the effects of competition from emerging countries, rising raw material prices and the gloomy economic conditions in client sectors, especially the automotive industry, could weaken them. At this juncture, however, their profitability is still satisfactory. PAYMENT AND COLLECTION PRACTICES ■ Payment The bill of exchange is a common means of payment in Belgium. In the event of default, a protest may be drawn up through a bailiff within two days of the due date whereby the bearer can also initiate proceedings against the bill’s endorsers. The National Bank of Belgium publishes a list of protests that can be consulted by the public at the office of the clerk of the commercial court and in some business and financial newspapers (Journal des proteˆts, Echo de la Bourse). Such publication is an effective means of pressuring debtors to settle disputes because of the possibility that they might be refused credit by banks and suppliers. Cheques are commonly used but to a lesser extent than bills of exchange. Issuing uncovered cheques is a criminal offence. The Belgian public prosecutor’s office is frequently willing to press criminal charges for claims over €5,000. Uncovered cheques (like protested drafts) are equivalent to an acknowledgement of debt and, when needed, can be used to obtain an attachment order. Although bank transfers are the fastest means of payment (all major Belgian banks use the SWIFT system), they do not offer a foolproof guarantee of payment as the transaction is very much dependent on the buyer’s good faith. They should, therefore, be used where background financial information on the buyer is available to the seller. ■ Debt collection Out-of-court settlement begins with formal notice sent to the debtor by recorded-delivery

letter or served by bailiff, requesting that the debtor pay within 15 days the outstanding principal, plus past-due interest or application of a penalty clause (clause pe´nale) stipulated in the terms and conditions of sale. In the absence of a prior contractual agreement, interest on an unpaid invoice is automatically applicable from the day following the due date at a six-monthly rate set by the Ministry of Finance based on the European Central Bank’s refinancing rate plus seven percentage points (the Act on ’combating late payment in commercial transactions’ in force since 7 August 2002). Summary procedures resulting in an injunction to pay for claims under €1,860 fall within the sole jurisdiction of a justice of the peace. They must be supported by a document drawn up by the debtor pointing to the undisputed nature of the claim. But owing to their excessive formalism and the need for a lawyer’s signature, summary proceedings are little used. Such action must moreover be preceded by an injunction to pay served by bailiff or sent by recorded-delivery letter with acknowledgement of receipt. And the injunction must include the text of the articles of the Code Judiciaire relevant to the injunction procedure. If a debtor refuses to settle amicably or fails to respond to a formal demand, the creditor can then initiate ordinary proceedings against that debtor and summon him to appear before the court of first instance or, for overdue commercial payments, the competent commercial court. For undisputed claims, rulings are usually delivered either immediately from the bench (sur les bancs) or within a month of the final hearing. Proceedings can take longer for disputed claims sometimes up to two years (especially in the event of an appeal). However, under the Belgian code of civil procedure the judge may set a deadline for the submission of arguments and evidence at the request of the parties. Since 1 January 2008, the law on the ’recoverability of attorney fees’ allows the judge to fix a procedural indemnity determined on a progressive scale according to the amount in default.

1

19

EUROPE AND THE CIS

The Bankruptcy Act of 8 August 1997 (amended by the law of 4 September 2002) and the Composition Act of 17 July 1997 – both of which came into force on 1 January 1998 – moreover recognise retention of property rights in specific cases and circumstances. For instance, an action for recovery is only admissible if initiated before the registered list of admitted debts is drawn up (proce`s-verbal de ve´rification de cre´ances). Another safeguard benefiting creditors is the right granted to sellers of moveable property stipulated under article 20-5 of the

16 December 1851 mortgage law. This right concerns all durable goods employed directly in an industrial, commercial, or craft activity and generally considered as ’real estate’ by incorporation or economic destination. A creditor may act on this right during a fiveyear period, a debtor’s bankruptcy notwithstanding, provided he or she has registered certified true copies of invoices with the clerk’s office of the commercial court in the debtor’s district of residence, within 15 days of delivery of the goods.

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300

250

WORLD Belgium

200

150

100

50

Ju

ne D 93 ec Ju -93 ne D 94 ec Ju -94 ne D 95 ec Ju -95 ne D 96 ec Ju -96 ne D 97 ec Ju -97 ne D 98 ec Ju -98 ne D 99 ec Ju -99 ne D 00 ec Ju -00 ne D 01 ec Ju -01 ne D 02 ec Ju -02 ne D 03 ec Ju -03 ne D 04 ec Ju -04 ne D 05 ec Ju -05 ne D 06 ec Ju -06 ne D 07 ec -0 7

0

20

BOSNIA AND HERZEGOVINA

Bosnia and Herzegovina Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

1

3.9 11,296 D Very high risk C

RISK ASSESSMENT Economic growth remained strong in 2007 amid a favourable external environment coupled with strong consumption driven by rising real wages and the expansion of credit. The economy should remain buoyant in 2008, thanks to still robust domestic demand. Inflation declined sharply in 2007 after the effects of the VAT introduction the previous year petered out. The fixed nature of the exchange rate should facilitate limiting inflationary pressures in 2008, rising energy and food prices notwithstanding. The country nonetheless still suffers from many weaknesses including a bloated and inefficient public sector, an over-regulated business environment and a segmented labour market reflecting to some extent the institutionally and ethnically fragmented context in the country. Efforts will have to be made to improve policy coordination between entities and create a unified economic space. Bank oversight and fiscal prudence need to be strengthened. Exports still lack diversification – with metals, mineral products and

wood representing nearly half of sales abroad – and are still vulnerable to price trends for commodities. The country continues to run high current account deficits albeit limited by expatriate worker remittances. In the political arena, the crisis the country has been contending with, resulting from the deterioration of relations between Bosnian Serb leaders and the High Representative of the International Community, seems to have abated. The Action Plan proposed by the High Representative, which includes a reform of the police, had raised protests and led the Bosnian government’s Serbian prime minister to resign in November 2007. Parliament finally adopted the Action Plan in early December 2007. This has permitted the EU to sign a stabilisation and association agreement, the first step towards membership. However, these events have given rise to a mounting nationalist rhetoric in the Serbian Republic (one of the two entities comprising the country, with the Croatian-Muslim Federation). Tensions could resurface should Kosovo become independent.

21

EUROPE AND THE CIS

MAIN ECONOMIC INDICATORS USD millions Economic growth (%) Inﬂation (%) Public sector balance (%GDP)* Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports) *ex grants, e = estimate, f = forecast

22

2003

2004

2005

2006

2007(e)

2008(f)

3.5 0.6 −8.1 1,478 5,637 −4,159 −19.5 55.5 6.1 3.5

6.1 0.4 −3.8 2,087 6,656 −4,570 −17.9 52.1 7.4 4.0

5.0 3.7 −2.2 2,590 7,545 −4,955 −19.7 49.9 4.1 3.7

6.2 7.4 0.4 3,382 7,680 −4,298 −10.8 49.4 5.0 4.8

5.5 1.4 −3.9 4,058 9,753 −5,695 −15.5 49.2 5.0 5.1

6.0 2.1 −4.3 4,600 10,700 −6,100 −15.0 45.6 5.2 5.8

BULGARIA

Bulgaria Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

7.7 31,483

1

A4 Quite low risk A4

STRENGTHS • Accession to the EU has been a stimulatory factor and triggered a catchup dynamic in the country. • Prudent fiscal policy and active debt management have resulted in a considerable reduction in sovereign default risk. • The banking sector has been consolidated. • The country benefits from a skilled labour force. • Buoyant investment and increased capital goods imports augur well for growth in the future.

WEAKNESSES • The current level of external financing needs will be difficult to sustain in the medium term. • Foreign debt has grown considerably under the effect of rising private debt. • Maintaining a steady inflow of foreign capital will require implementation of new reforms and improvements in the business environment. • Dissension within the centrist coalition in power has delayed reform implementation.

RISK ASSESSMENT Economic growth remained strong in 2007, driven mainly by domestic demand with FDI and the expansion of credit spurring investment. Job and wage growth fuelled private consumption. Continued strong import growth, however, particularly of capital goods, led to a further widening of the trade deficit. Corporate payment behaviour has remained generally satisfactory with some sectors, like agriculture and construction, presenting above average risk. The strong growth should continue in 2008. Investment should continue to grow at a satisfactory rate due notably to fund transfers from the EU. Private consumption should remain buoyant. There should be little easing of inflation, however, due to the strong domestic demand and wage pressure,

which could keep the country from joining the euro zone before 2012. Fiscal policy has remained prudent but the extent of the current account deficit has led to an increase in private foreign debt and greater dependence on foreign capital. This deficit seems difficult to sustain in view of the country’s rigid exchange rate system (currency board) with FDI expected to slow from 2008. This situation may ultimately only unwind at the price of a sharp growth slowdown. The risk of governmental instability will not jeopardise the major economic policy options. The possibility of early elections being held before the June 2009 scheduled date would not, however, facilitate implementation of new reforms, notably those concerning the business environment.

23

EUROPE AND THE CIS

MAIN ECONOMIC INDICATORS USD millions Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Unemployment (%) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

2003

2004

2005

2006

2007(e)

2008(f)

5.0 2.3 0.0 14.3 7,081 9657 −2,576 −1,022 −5.1 67.2 12.5 5.8

6.6 6.1 2.3 12.7 9,931 13,619 −3,688 −1,671 −6.8 70.0 19.8 5.8

6.2 5.0 2.0 11.5 1,1754 1,7204 −5,450 −3,244 −11.9 65.5 38.4 4.4

6.1 7.3 3.2 9.6 15,064 21,874 −6,810 −5,011 −15.9 84.1 23.9 4.8

6.3 7.8 3.0 8.0 19,709 28,779 −9,070 −7,270 −18.4 85.6 27.4 4.3

6.2 6.2 3.1 7.1 24,700 34,600 −9,900 −7,740 −17.0 81.5 22.5 3.8

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■ Market overview A country with some 7.7 million inhabitants and a standard of living that – while below the 25-member EU average – is steadily rising, Bulgaria has seen its per capita GDP jump from €1,919 in 2001 to €3,250 in 2007. However, income disparity (the average monthly wage is €200) is a source of frustration, exacerbated by EU accession on 1 January 2007 and the inevitable comparisons that this brings. ■ Means of entry Bulgaria is a market economy. The banking sector is largely dominated by foreign banks, and power supply and telecommunications have been privatised. The privatisation programme is nearing completion with the sale of the Bulgarian state-owned shipping company. Following EU accession in early 2007 (at the same time as Romania), customs duties on almost all EU products have been

24

abolished. With regard to intellectual and industrial property protection, on 28 November 2003 a bilateral agreement was signed between the French industrial property agency, Institut National de la Proprie´te´ Intellectuelle (INPI), and the Bulgarian Patents Office. In practice, there is a fairly limited supply of counterfeit consumer goods in the country. ■

Attitude towards foreign investors The country is extremely open to foreign investment. FDI, which has climbed sharply since 1996, totalled US$20.2 billion at endMarch 2007. At US$5.172 billion, estimated foreign investment inflows reached record levels in 2006, up 34 per cent against the previous year. The government hopes to attract foreign investors through a highly competitive tax policy (10 per cent corporation tax and income tax planned for 2008). However, new foreign investors may encounter problems in their dealings with local officials.

BULGARIA

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

40 11 16

1 Imports: 77% of GDP

Exports: 61% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

2000

4000 3500 3000 2500 2000 1500 1000 500 0

1500 1000 500 0 Turkey

Italy

Germany Greece Belgium

Russia

Germany

Italy

Turkey

China

IMPORTS by products ■ Fuels 19% ■ Ores and metals 12% ■ Machinery and equipment 12% ■ Vehicles and cars 10% ■ Textiles 8% ■ Chemicals and plastics 6% ■ Other raw materials 11% ■ Other 22%

EXPORTS by products ■ Metals 22% ■ Clothing 13% ■ Oil products 13% ■ Agricutural products and foodstuffs 8% ■ Machinery and equipment 5% ■ Chemicals and plastics 5% ■ Other raw materials 19% ■ Other 14%

STANDARD OF LIVING / PURCHASING POWER Indicators

Bulgaria

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

10,140 3,990 0.816 24 70 14 59

11,613 6,859 0.772 28 62 20 122

5,983 2,313 0.672 31 44 30 50

25

EUROPE AND THE CIS

Croatia Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

26

4.4 42,653

A4 Moderately high risk A3

STRENGTHS • The EU integration process has enhanced Croatia’s economic prospects with the country already benefiting from strong, essentially non-inflationary growth. • Croatia boasts a higher level of development than most Balkan countries and an already advanced degree of economic convergence with Europe. • The country continues to make substantial efforts on investment, infrastructure has been improved and there is great tourist potential (currently representing 20 per cent of GDP). • Better management of public sector finances along with privatisations have facilitated stabilising the extent of government.

WEAKNESSES • The current account deficit remains too large. • The foreign debt of banks and companies has increased sharply. • The expansion of credit and the exposure of households to exchange rate risk will bear watching. • With the restructuring of the public sector lagging, it continues to play a large role in the economy and red tape continues to undermine the business climate. • The pace of negotiations with the EU continues to depend on implementation of politically difficult reforms.

RISK ASSESSMENT Economic growth accelerated in 2007, driven by consumption and investment. Productivity gains and a buoyant job market contributed to this. Industrial activity remained robust. Despite rising food prices and energy costs, inflation continued to ease with the central bank maintaining its exchange rate stabilisation policy. In 2008, domestic demand should remain dynamic, even with a decline in social allowances (non-renewal of exceptional payments linked to pensions) and a slight slowdown in the expansion of credit. Exports should continue to gain momentum, benefiting from the improvement in productivity.

Despite the growth of sales abroad and tourism revenues, however, external deficits will remain large with imports continuing to grow rapidly, fuelled by domestic consumption and the high import content of exports and investments. To enhance its growth potential and counter the vulnerabilities resulting from its large current account deficit and high foreign debt, the country will have to continue the consolidation work on public sector finances and intensify the efforts on reform. The accession negotiations with the EU have continued, with talks opened thus far on 14 of the 33 chapters of the acquis communautaire and provisionally closed on

CROATIA

two chapters. While refusing to consider a date of admission to the Union at this juncture, Brussels has focused attention on the persistence of major shortcomings in several areas including the judicial system, public administration, anti-corruption measures and shipyard restructuring. Prime Min-

ister Ivo Sanader’s conservative Croatian Democratic Union (Hrvatska Demokratska Zajednica, HDZ) party, which won the legislative elections in November 2007, should be able to put together a new majority and hopes to lead the country into the Union by 2010.

1

MAIN ECONOMIC INDICATORS USD millions Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Unemployment (%) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

2003

2004

2005

2006

2007(e)

2008(f)

5.3 1.8 −6.2 19.5 6,308 14,216 −7,908 −2,132 −7.2 84.6 17.8 5.2

4.3 2.1 −4.9 18.7 8,210 16,560 −8,350 −1,841 −5.1 86.9 19.3 4.8

4.3 3.3 −4.1 18.0 8,955 18,301 −9,346 −2,576 −6.6 77.4 21.7 4.4

4.8 3.2 −3.0 17.2 10,606 21,117 −10,511 −3,175 −7.3 88.6 23.2 5.1

5.7 2.3 −2.7 16.6 12,110 25,787 −13,677 −3,838 −7.5 87.0 22.4 4.8

5.4 2.5 −2.7 16.0 14,322 29,641 −15,319 −4,408 −7.5 85.4 23.0 4.4

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■ Market overview In a country of 4.44 million inhabitants, the working population is 1.7 million. The official unemployment rate in August 2007 was 13.8 per cent (CROSTAT). The net wage in July 2007 was HRK 4,855 (about €663), up 4.4 per cent over the same period in 2006. The central bank forecasts around 3.5 per cent inflation due to the impact of rising cereal and energy prices in the second half of the year. Imports do not normally require prior approval, except for products regulated by international agreements (firearms, gold, works of art, etc) or on ground of public health (foodstuffs, etc). Accession talks with the EU began on 4 October 2005. The screening period for Croatian laws, some of which are already in line with EU integration criteria, expired on 18 October 2006. The Croatian government aims to join the EU in 2009. Customs duties have been reduced under WTO agreements and the stabilisation and as-

sociation agreement signed with the EU. Most industrial goods are duty-exempt. The maximum tariff is 5 per cent, although the average applied rate is around 2.9 per cent. Duty on foodstuffs under WTO arrangements varies between 2 per cent and 45 per cent, while preferential rates apply to non-quota items in line with EU rules. Croatian agriculture is, on the whole, quite uncompetitive. The EU’s screening report has highlighted the existence of government subsidies incompatible with Common Agricultural Policy (CAP) mechanisms. All means of payment are available in Croatia. For consumer purchases, credit cards are more widely used than cheques, which are not common. It is often possible to obtain a 10 per cent discount on cash payments. Utility services delivered to the home are usually settled by money order or e-banking. For commercial settlements, the most widely used instruments are bank transfers, bank guarantees confirmed by a foreign bank and cheques drawn on a well-known local bank.

27

EUROPE AND THE CIS

■ Attitude towards foreign investors The principle of national treatment is extended to foreign investors who, like local investors, have to deal with a slow and cumbersome bureaucracy, which is gradually improving (Doing Business 2008 Report). The real estate register is being updated and is already available on the Internet, with the land register due to follow suit. The judicial system for commercial disputes is clogged with a backlog of 1 million cases. However, reforms are under way in the form of new labour, bankruptcy and competition legislation. Between 1993 and 2007 (Q2), FDI totalled €16.1 billion, including €2.1 billion in the first half of 2007. In the 15-year period

28

under review, the four leading investors are Austria (26.2 per cent), the Netherlands (16.8 per cent), Germany (14.6 per cent) and France (7.8 per cent). ■

Foreign exchange regulations The national currency, the kuna, is not convertible outside the country. Foreign companies must open a foreign currency account as well as a kuna account to do business in Croatia. The central bank (HNB) has adopted a slightly overvalued floating exchange rate for the kuna, which it regulates by intervening on the currency market. The exchange rate in August 2007 was 7.31 kunas to the euro.

CROATIA

OPPORTUNITY SCOPE

BREAKDOWN IN DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

37 13 20

1 Imports: 56% of GDP

Exports: 47% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

4000 3500 3000 2500 2000 1500 1000 500 0

2500 2000 1500 1000 500 0 Italy

Bosnia Germany Slovenia Austria

Italy

Germany Russia

Austria Slovenia

IMPORTS by products ■ Fuels 16% ■ Mechanical machinery and equipment 12% ■ Chemicals 11% ■ Vehicles 10% ■ Electrical machinery and equipment 8% ■ Foodstuffs and livestock 8% ■ Plastics 4% ■ Other 32%

EXPORTS by products ■ Fuels 15% ■ Electrical and mechanical machinery and equipment 16%

■ Ships and boats 11% ■ Foodstuffs and livestock 11% ■ Chemicals 9% ■ Wood and wood by-products 4% ■ Other raw materials 6% ■ Other 27%

STANDARD OF LIVING / PURCHASING POWER Indicators

Croatia

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

13,680 9,330 0.846 25 57 16 190

11,613 6,859 0.772 28 62 20 122

5,983 2,313 0.672 31 44 30 50

29

EUROPE AND THE CIS

Cyprus Population (inhabitants): GDP (US$ million):

765,483 18,235

Country @rating: Medium-term rating: Business climate rating:

A2 Low risk A2

RISK ASSESSMENT Economic growth remained relatively strong in 2007 due notably to the expansion of credit, which spurred retail sales, car purchases and construction activity, and thereby offset the poor performance in tourism. Growth could slow slightly in 2008 amid a decline in car purchases, slower expansion of credit and a new slowdown of demand from the euro zone and from the United Kingdom, its number-one customer. With inflation under control, a public deficit in decline and a stable exchange rate, Cyprus has received approval to adopt the euro in January 2008. The fiscal consolidation process will nonetheless have to continue to reduce public sector debt that still exceeds the 60 per cent of GDP threshold. The rise of energy costs, the strength of domestic demand and losses of competitiveness have, moreover, contributed to the widening of the current account

30

deficit. Foreign debt has reached high levels in this context, notably with a sharp increase in the debt of banks. Adoption of the singlecurrency will, however, allows Cyprus to reduce the exchange rate risk associated with that debt. Since the rejection of the reunification plan that the United Nations proposed for the Island in 2004, progress on that issue has been at a standstill. With the situation complicating the EU’s foreign relations, international pressure could intensify in favour of a renewal of talks. EU accession negotiations with Turkey will be subject to partial suspension until Ankara opens its ports and airports to Greek Cypriots. The Party for Justice and Development’s (AKP’s) large election victory in Turkey in July 2007 should, however, improve its European prospects. That could in turn prompt Turkey to demand a reopening of discussions on the Cyprus issue.

CYPRUS

MAIN ECONOMIC INDICATORS USD millions Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

2003

2004

2005

2006

2007(e)

2008(f)

1.8 4.1 −6.3 925 4,108 −3,183 −2.2 57.3 6.8 5.1

4.2 2.3 −4.1 1,174 5,222 −4,049 −5.2 82.0 12.1 4.9

3.9 2.6 −2.3 1,545 5,776 −4,231 −5.5 88.3 13.8 4.7

3.8 2.5 −1.5 1,417 6,440 −5,023 −5.9 121.4 15.5 5.6

3.7 2.3 −1.0 1,496 6,828 −5,332 −6.0 127.6 18.2 5.7

3.4 3.9 −1.4 1,596 6,912 −5,316 −5.1 120.6 18.5 5.6

1

e = estimate, f = forecast

31

EUROPE AND THE CIS

Czech Republic Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

32

10.2 141,801 A2 Very low risk A2

STRENGTHS • Admission to the European Union has enhanced economic stability. • The country continues to be a prized destination for foreign investors. • The macroeconomic imbalances are still manageable. • Foreign and public sector debt remain limited.

WEAKNESSES • The economy continues to be highly dependant on foreign trade – particularly on economic trends in the Europe of the Fifteen. • Deterioration of public sector accounts has delayed the country’s integration into the euro zone. • Repatriation of investment income has undermined the current account. • The coalition government’s weakness does not augur well for far-reaching public finance reform.

RISK ASSESSMENT Economic growth remained relatively strong in 2007. Consumption benefited from increases in real wages and social benefits and the easing of unemployment, partly compensating for a slight investment slowdown. Export-oriented sectors (the automotive industry, electric and electronic equipment and machinery) continued to be the most dynamic. Conversely, food and textiles are still mired in difficulty. The Coface payment incident index is back in line with the world average. Growth should slow from 2008 with private consumption undermined by a slower expansion of credit and tighter fiscal policy. Investment should be stronger however, thanks to increases in European funding and a steady influx of foreign investment, notably in the automotive industry. The current account deficit, sustained especially by investment-income payments abroad, should ease amid a continuing trade surplus. FDI

should moreover continue to cover a significant proportion of the country’s external financing needs. Increases in indirect taxes and regulated prices should however stoke inflation in 2008. The public sector finance situation is furthermore still shaky. The fiscal deficit widened again in 2007 as a result of a sharp increase in social spending. The government’s stabilisation programme should result in a reduction in that imbalance from 2008. It appears uncertain however whether the government will be capable of durably reducing public spending in the absence of major reforms in the areas of health and pensions. In this context, adoption of the euro seems likely to be postponed beyond 2012. The June 2006 elections resulted in a parliament with no majority with the political gridlock not untangled until January 2007 when centre-right coalition won a

CZECH REPUBLIC

vote of confidence, thanks to the abstention of two former social democratic deputies. This precarious situation

compounded by discord within the coalition will not facilitate implementation of a fiscal overhaul.

MAIN ECONOMIC INDICATORS USD billions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Unemployment (%) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

3.6 0.1 -6.6 10.3 48.7 51.2 -2.5 -5.8 -6.3 38.2 6.9 4.9

4.6 2.8 -3.0 9.5 67.2 67.7 -0.5 -5.7 -5.2 41.3 6.7 3.9

6.5 1.8 -3.5 8.9 78.0 75.4 2.5 -1.9 -1.6 37.2 6.4 3.6

6.4 2.5 -2.9 7.7 95.1 92.1 3.0 -4.6 -3.2 40.9 5.5 3.2

5.7 2.7 -3.8 5.6 116.6 112.7 3.9 -6.3 -3.8 39.4 5.1 2.7

4.6 4.9 -3.2 5.7 135.5 132.3 3.2 -6.9 -3.7 37.9 4.1 2.4

1

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■ Means of entry Since the Czech Republic’s accession to the EU on 1 May 2004, there are no tariff or nontariff barriers to products imported from the EU. The country has made a tremendous effort to meet EU integration criteria and attract foreign investment. Tax reforms, which come into effect on 1 January 2008, provide for the establishment of a single rate of income tax (15 per cent then 12.5 per cent) and corporation tax (phased reduction from 24 per cent to 19 per cent in 2010). Its legislation complies with Community standards in such matters as harmonisation of business legislation and regulations – especially as regards public procurement (adoption of European Directive No. 2004/18/EC) – competition rules and labour law (adoption of a new Labour Code that provides for simpler and more flexible labour relations and adjustable non-wage contracts). ■ Attitude towards foreign investors The investment promotion agency, Czechinvest, runs several schemes. There are two types of tax incentive. New companies formed in connection with an investment project

may demand exemption from corporation tax for a period of five years. For investments in plant modernisation or capacity expansion at a Czech company, firms may ask for partial exemption from corporation tax. These exemptions lapse the moment a firm breaches the official grant ceiling. To be eligible, firms must invest a minimum of CZK100 million over three years. This threshold is reduced to CZK60 million or CZK50 million if their activity is based in a ‘high-unemployment’ region. Half the minimum investment must be made up of the investor’s own funds. Expenditure on industrial equipment must account for at least 60 per cent of overall investment. Moreover, investors must maintain their investment and keep the jobs created for at least five years. This scheme also offers discounts on building land and infrastructure acquired through the state or the municipalities. It also offers job creation, training and regrading grants based on the region’s unemployment rate. Companies investing in so-called ‘strategic’ services (call centres, shared services centres, software development, information and communications technology, high-tech

33

EUROPE AND THE CIS

equipment repair) are eligible for government business and training grants, provided they invest a minimum of CZK10 million (€1 million) over three years and create a minimum number of jobs, which varies according to region. Job-creation grants are also available in high-unemployment regions, even if a firm is not yet operational there. The minimum investment required is CZK10 million, 50 per cent of which must be self-financed, for a two-year period. At least ten jobs must be created by the end of this period and the company must maintain its activity for at least three years. In addition, European funding is available to the tune of €26.7 billion over the period 2007–2013 for operational schemes such as ‘Business and Innovation’ and ‘Training for Competitiveness’ if they invest in and contribute to the establishment of foreign companies in the Czech Republic. ■ Foreign exchange regulations The Czech koruna is fully convertible. The currency’s long-term trend is bullish. Whereas it took CZK35.61 to buy €1 in 2000, in September 2007 it took just CZK27.57. Business transactions are usually settled by bank transfer in euros or Czech korunas. The bulk of payments between companies doing business together on a regular basis is made by SWIFT and passes off smoothly. However, for initial business transactions or large orders, it is advisable to use documentary credit opened with a major Czech bank or the local branch of a French bank.

PAYMENT AND COLLECTION PRACTICES

34

■ Payment Bills of exchange and cheques are not widely used, as they must be issued in accordance with certain criteria to be valid. For unpaid and protested bills of exchange (sme˘nka cizı´), promissory notes (sme˘nka vlastnı´) and cheques, creditors may access a fast-track procedure for ordering payment under which, if the judge admits the plaintiff’s application, the debtor has only three days to contest the order against him or her. Bank transfers are by far the most widely used means of payment. Leading Czech

banks – after successive phases of privatisation and concentration – are now linked to the SWIFT system, which provides an easier, quicker and cheaper method for handling domestic and international payments. Inspired by EU regulations, a recent payment systems law, in force since 1 January 2003, sets the rules for transferring funds in the enlarged European area and empowers ˇ eska´ Na´rodni the Czech National Bank (C Banka) to oversee local use of electronic payment instruments. ■

Debt collection It is advisable, as far as possible, not to initiate recovery proceedings locally because of the country’s cumbersome legal system, the high cost of legal action and lengthy court procedures – it takes almost three years to obtain a writ of execution due to a lack of judges properly trained in the rules of the market economy and proper equipment. Service of final demand for payment supported by proof of debt reminds the debtor of his payment obligations, increased by pastdue interest payable from the day after the payment date stipulated in the commercial contract. Since 28 April 2005, the applicable rate, unless agreed otherwise by the parties, is the ’repo’ rate applied by the Czech National Bank, in force on the first day of the reference half-year; increased by seven percentage points. Should the debtor lack the funds needed for immediate payment, it is advisable to seek an out-of-court settlement based on a schedule of payment, preferably drawn up by a public notary, accompanied by an enforcement clause that allows them, in case of default by the debtor, to go directly to the enforcement stage, after the court admits the binding nature of that document. Where creditors have significant proof of claim (unpaid bills of exchange or cheques, acknowledgement of debt, etc), they may obtain an injunction to pay (platebnı´ rozkaz) under a fast-track procedure, which may nonetheless take from three months to a year depending on the workload of the courts, but which does not necessitate a hearing as long as the claim is sufficiently well founded. The

CZECH REPUBLIC

advance on court fees, at the claimant’s expense, amounts to 4 per cent of the total claim. Where a debtor contests an injunction within 15 days of its service, an ordinary procedure will then apply with the parties subsequently summoned to one or more hearings to be heard and produce evidence. The judge will then decide whether to throw out the plaintiff’s application or order the debtor to pay principal and costs. Ordinary proceedings are partly in writing with the parties filing submissions accompanied by all supporting case documents (original or certified copies) and partly oral with the litigants and their witnesses heard on the main hearing date. Any settlement reached between the parties during these proceedings and ratified by the court is tantamount to a writ of execution,

in case of subsequent non-compliance with the agreement obtained. The laws governing commercial companies, commercial papers (bills of exchange, cheques, promissory notes, etc), unfair competition and bankruptcy, for example, fall under the jurisdiction of regional courts (krajsky´ soud) or the Prague regional court known as the municipal court (me˘stsky´ soud). To speed up execution of the excessive number of pending judgements moreover, a new body of bailiffs (soudnı´ exekutor), established since May 2001 and invested with broad investigative powers to identify and locate a debtor’s assets before proceeding with actual execution of the court order, is gradually eliminating processing delays. For that bailiff category, a different fee schedule applies, based on the amount concerned by the execution.

1

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 350 300

WORLD Czech Republic

250 200 150 100 50

D ec Ju 94 ne 9 D 5 ec -9 Ju 5 ne 9 D 6 ec -9 Ju 6 ne 9 D 7 ec -9 Ju 7 ne 9 D 8 ec -9 Ju 8 ne 9 D 9 ec -9 Ju 9 ne 0 D 0 ec Ju 00 ne 0 D 1 ec -0 Ju 1 ne 0 D 2 ec -0 Ju 2 ne 0 D 3 ec -0 Ju 3 ne 0 D 4 ec -0 Ju 4 ne 0 D 5 ec -0 Ju 5 ne -0 D 6 ec Ju 06 ne -0 D 7 ec -0 7

0

35

EUROPE AND THE CIS

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

29 13 16 Imports: 70% of GDP

Exports: 72% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

35000

30000

30000

25000

25000

20000

20000

15000

15000

10000

10000

5000

5000 0

0 Germany Slovakia

Poland France

Germany Netherlands Slovakia Poland

Austria

EXPORTS by products ■ Mechanical machinery and equipment 21% ■ Vehicles 17% ■ Electrical machinery and equipment 15% ■ Chemicals and plastics 9% ■ Iron and steel 9% ■ Textiles and clothing 4% ■ Other 27%

Russia

IMPORTS by products ■ Mechanical machinery and equipment 17% ■ Electrical machinery and equipment 15% ■ Metals 14% ■ Chemicals and plastics 13% ■ Fuels 9% ■ Vehicles 9% ■ Other 24%

STANDARD OF LIVING / PURCHASING POWER

36

Indicators

Czech Republic

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

21,470 12,680 0.885 22 74 15 240

11,613 6,859 0.772 28 62 20 122

5,983 2,313 0.672 31 44 30 50

DENMARK

Denmark Population (million inhabitants): GDP (US$ million): Country @rating: Business climate rating:

5.4 276,200

1

A1 A1

RISK ASSESSMENT Growth ran out of steam in 2007. Households cut back on spending under the twofold effect of the property market correction and rising interest rates. Wage growth spurred by record employment nonetheless had a mitigating effect on that slowdown. Meanwhile, companies suffered from erosion of their productivity and a sharp export downturn. The economic activity will continue to slow down in 2008. Households will not increase their spending despite the expected growth of their disposable income. Property prices will stabilize at a good level, thereby facilitating a soft landing in residential activity. Companies will continue to contend with erosion of their competitiveness amid continuing tight conditions in the labour market compounded by difficulties in recruiting skilled workers. Although still underpinned by sales of oil and natural gas, export growth will be hampered by the limited availability of production capacity for companies and the economic slowdowns affecting traditional

trading partners. Concurrently, less robust domestic demand will affect imports, which will tend to limit the decline of the current account surplus. The fiscal budget will show a surplus again this year, bolstered by revenues linked to prices for North Sea oil. Public spending could be higher than expected, however, due to commitments made during the general elections in autumn 2007. The government will continue in any case to reduce public sector debt. In this context of relatively sluggish growth, costs in labour-intensive sectors should be under pressure. Sectors relying on domestic demand should suffer from the slowdown of household consumption and corporate investment. Corporate bankruptcies thus accelerated in the first 10 months of 2007, rising 20 per cent, particularly in industry, construction, distribution, the hotel-catering sector, information technology and paper/printing. The Coface payment incident index is nonetheless still below the world average and payment behaviour should remain generally satisfactory in 2008.

37

EUROPE AND THE CIS

MAIN ECONOMIC INDICATORS %

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth Consumption (var.) Investment (var.) Inﬂation Unemployment Short-term interest Public sector balance (%GDP) Public sector debt (%GDP) Exports (var.) Imports (var.) Current account balance (%GDP)

0.7 1.6 0.2 2.1 5.3 2.4 -0.1 44.4 -1.2 -1.7 3.2

1.9 3.4 1.3 1.2 5.5 2.1 1.7 42.6 2.7 6.4 2.3

3.0 3.8 8.4 1.8 5.7 2.2 3.9 35.9 8.0 10.9 2.9

3.5 3.1 13.0 1.9 4.5 3.0 4.6 30.1 10.1 14.4 2.4

1.9 2.1 5.1 1.6 3.5 4.0 3.7 24.6 3.9 5.3 1.3

1.6 1.7 2.5 2 3.3 4.0 3.1 20.1 3.9 4.8 1.1

e = estimate, f = forecast

PAYMENT AND COLLECTION PRACTICES ■ Payment Like the cheque, the bill of exchange is not frequently used in Denmark. Both are an embodiment and, therefore, an acknowledgement of debt. Accepted but remaining unpaid bills and cheques are legally enforceable instruments that exempt creditors from obtaining a court judgement. In such cases, the ’judge-bailiff’ (Fogedret) is appointed to oversee enforcing attachment. First, however, the debtor is summonsed to declare his or her financial situation for the purposes of determining his or her ability to repay the debt. It is a criminal offence to make a false statement of insolvency. Bank transfers are the most commonly used means of payment. All major Danish banks use the SWIFT network – a rapid and efficient payment of domestic and international transactions.

38

■ Debt collection Out-of-court collection begins with the creditor or his or her legal counsel sending debtor a final demand for payment by registered or ordinary mail in which the latter is given 10 days to settle the principal amount, plus any interest penalties provided for in the agreement. Where there is no such clause agreed by the parties, the rate of interest applicable to commercial agreements contracted after 1 August 2002 is the Danish National Bank’s

benchmark or lending rate (udla˚nsrente) in force on 1 January or 1 July of the year in question, plus seven percentage points. It should also be noted that, where the due date for payment is not complied with, any settlement or acknowledgement of debt negotiated at this stage of the recovery process is directly enforceable, on condition that an enforcement clause is duly included in the new settlement or agreement. For claims that are not settled out of court, creditors usually engage a lawyer to defend their interests, even though Danish law allows plaintiffs and defendants direct representation in court. Unlike other countries, Denmark has only one type of legal professional: lawyers (ie there are no notaries, barristers, bailiffs-at-law, etc). Where debtors fail to respond to a demand for payment or where the dispute is not serious, creditors may obtain, usually after three months of proceedings, a judgement following an adversarial hearing or a judgement by default ordering the debtor to pay, within 14 days, the principal amount plus interest and expenses, which include court fees and, where applicable, a contribution to the creditor’s legal costs. The legal system reform effective since 1 January 2007 is intended to speed up procedures and provide citizens with a more homogeneous and better quality service. All cases, whatever the size of the claim involved, whether they are complex or dis-

DENMARK

puted, are heard by the court of first instance (Byret) – presided by a three-judge panel or one judge assisted by experts – and entail both written and oral procedures. Appeals on claims exceeding 10,000 Danish krone (DKK) are heard by one of the two regional courts: the Vestre Landsret in Viborg or the Østre Landsret in Copenhagen. Exceptional cases involving questions of principle can, however, be submitted directly to one of these two regional courts. The proceedings here involve a series of preliminary hearings, in which

the parties present written submissions and proofs, and a plenary hearing, in which the court hears witness testimonies and the parties’ arguments. Denmark does not have a system of commercial courts outside the Copenhagen area, which has a maritime and commercial court (Sø-og Handelsretten) presided by a panel of professional and non-professional judges competent to hear cases involving commercial and maritime disputes, the law on competition and bankruptcy proceedings.

1

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300

250

WORLD Denmark

200

150

100

50

Ju

ne D 93 ec Ju -93 ne D 94 ec Ju -94 ne D 95 ec Ju -95 ne D 96 ec Ju -96 ne D 97 ec Ju -97 ne D 98 ec Ju -98 ne D 99 ec Ju -99 ne D 00 ec Ju -00 ne D 01 ec Ju -01 ne D 02 ec Ju -02 ne D 03 ec Ju -03 ne D 04 ec Ju -04 ne D 05 ec Ju -05 ne D 06 ec Ju -06 ne D 07 ec -0 7

0

39

EUROPE AND THE CIS

Estonia Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

40

1.3 16,410 A2 Low risk A2

STRENGTHS • Implementation of far-reaching reforms and maintenance of macroeconomic stability have fostered exceptionally rapid improvement in the standard of living. • The country is known for the flexibility of its productive apparatus and the quality of the business climate. • Estonia has rapidly modernised its industry with development of the electronics sector in particular. • Public finances have been in surplus and government debt has been negligible. • The very substantial presence of foreign banks has benefited the banking sector.

WEAKNESSES • Buoyant domestic demand and the high import content of subcontractingindustry exports have generated large current account deficits. • With the economy very open to foreign trade, sales performance abroad depends on international economic situation. • High inflation has compromised chances for rapid admission to the euro zone. • The expansion of credit, particularly for property, has been too rapid. • The foreign debt burden, particularly in banking, has grown strongly.

RISK ASSESSMENT After growing very rapidly, spurred by rising real wages and the expansion of credit, the economy began to slow early last year. Rising interest rates and the tightening of the conditions for extending credit led to a slowdown in spending on consumption and, linked with the end of the property boom, in investment. That trend should continue in 2008, with GDP growth easing to a more sustainable level. Sectors linked to property will be weakened, but companies should continue to invest albeit at a slower pace. Similarly, the employment of European structural funds should support public investment. Inflation surged sharply in 2007 and should remain high in 2008 amid continuing high oil prices, increases in excise taxes and persistent tensions in the labour market. In

this context, adoption of the euro will be unlikely before 2011. The expected import slowdown raises hopes of stabilisation of the current account deficit although it should remain very large. Foreign debt, notably resulting from financing granted by Nordic banking groups to their local subsidiaries, will continue to grow with foreign direct investment only covering the current account deficit to a very limited extent. In the political arena, the riots triggered late April 2007 when government officials undertook to move a statue to the glory of Soviet Union soldiers brought to light the difficulties with integration of the Russianspeaking minority. Although relations with Russia soured as a result, that should have little impact on the economy except transit trade. Since his party’s victory in the March

ESTONIA

2007 legislative elections, the incumbent prime minister has been leading a new coalition that could prove shaky going for-

ward. But that will nonetheless be unlikely to jeopardise the broad lines of economic policy.

MAIN ECONOMIC INDICATORS USD millions Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Unemployment (%) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

2003

2004

2005

2006

2007(e)

2008(f)

7.2 1.3 1.8 10.0 4,597 6,164 −1,567 −1,115 −11.4 72.0 10.6 2.0

8.3 3.0 1.8 9.7 5,983 8,002 −2,019 −1,458 −12.2 84.2 11.8 2.0

10.2 4.1 1.9 7.9 7,771 9,675 −1,904 −1,392 −10.0 81.2 12.1 1.8

11.2 4.4 3.6 5.9 9,654 12,613 −2,959 −2,581 −15.5 101.2 13.2 2.0

7.1 6.4 3.0 4.7 11,322 14,695 −3,373 −3,118 −14.8 104.6 14.7 2.3

5.3 7.4 1.9 4.8 12,711 16,389 −3,678 −3,418 −13.7 99.3 16.4 2.2

1

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■ Market overview At purchasing power parity, per capita GDP at end-2006 was 67 per cent of the EU average – the third highest in Central and Eastern Europe, behind Slovenia and the Czech Republic, but ahead of Hungary. The average gross wage in mid-2007 was €808, up 21.2 per cent on 2006. ■ Means of entry Estonia has founded its market economy on liberal trade principles. Until 2000, there were no import duties. Since 1 July 2002, Estonia has applied the EU’s common external tariff to non-EU goods. Trade with EU countries has been exempt from customs duties since EU-accession on 1 May 2004. Excise duties are levied on certain products, without any distinction between domestic and imported goods. Estonia administers a system of non-tariff barriers based on automatic licensing for some products (wines and spirits, lubricants, drugs). The same licensing rules apply to domestically produced goods. There are no restrictions on market access. As expected, Estonia has clearly softened its stand vis-a`-vis beef and pig

imports from France after EU accession. The country’s standards legislation does not contain any restrictions of note that might serve to protect local industry. Although downpayments are advisable for initial business transactions, 30- or 60-day credit is the most widely used means of payment. Credit cover is advisable. The Estonian banking sector is perfectly sound. The four leading banks, owned by Swedish and Danish banks, account for 97 per cent of the country’s banking assets. ■

Attitude towards foreign investors Estonia’s foreign investment law, in force since September 1991, provides for simple and non-discriminatory company registration procedures. A foreign company may hold a 100 per cent stake in a local company. There is no special incentive scheme, and foreigners are accorded the same treatment as nationals in matters of direct taxation. There are no restrictions on the repatriation of profits after-tax, dividends or proceeds from the sale or liquidation of an investment. Estonia has a reciprocal investment promotion and protection agreement as well as a double taxation agreement with France, both of which are in force. Personal income tax

41

EUROPE AND THE CIS

and corporation tax in 2007 were levied at a flat rate of 22 per cent. The rate is to be lowered by one basis point a year until the end of the parliamentary term to 18 per cent in 2011. Since 1 January 2000, retained earnings have been tax-exempt. Estonian manpower is an asset for foreign investors as it is highly skilled. However, because of rapidly rising wages, the country is no longer a source of cheap labour. Social security contributions, borne entirely by employers, amount to 33 per cent of wages, of which 13 per cent is for compulsory health insurance and 20 per cent for pensions. Unemployment contributions – 0.5 per cent of an employee’s wage borne by the employer and 1 per cent by the employee – were introduced on 1

42

January 2002. A pension fund, the second pillar of the country’s pension system, has been in operation since 1 April 2002. ■

Foreign exchange regulations With an exchange rate parity of eight kroons to the deutschmark that has remained unchanged since its launch in June 1992, the Estonian kroon is freely convertible and consequently enjoys a de facto fixed exchange rate versus the euro (€1 = EEK 15.64664). Exchange controls have been abolished and local banks accept accounts in both local and foreign currency. Estonia joined ERMII in June 2004, the last stage before the adoption of the euro. However, rising inflation in an overheating economy will delay entry into the euro zone until 1 January 2011 or beyond.

ESTONIA

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

29 9 17

1 Imports: 90% of GDP

Exports: 84% of GDP

MAIN DESTINATIONS OF EXPORTS

MAIN ORIGINS OF IMPORTS

Mn USD

Mn USD

2000

2500 2000

1500

1500 1000 1000 500

500

0

0 Finland

Sweden

Latvia

Russia

USA

Finland

Russia Germany Sweden Lithuania

IMPORTS by products ■ Fuels 16% ■ Electrical equipment 16% ■ Vehicles 11% ■ Mechanical equipment 10% ■ Base metals 10% ■ Chemicals and plastics 10% ■ Other 27%

EXPORTS by products ■ Electrical equipment 19% ■ Fuels 16% ■ Wood 9% ■ Furniture 7% ■ Vehicles 6% ■ Base metals 9% ■ Foodstuffs 7% ■ Other 27%

STANDARD OF LIVING / PURCHASING POWER Indicators

Estonia

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

17,540 11,410 0.858 28 69 15 483

11,613 6,859 0.772 28 62 20 122

5,983 2,313 0.672 31 44 30 50

43

EUROPE AND THE CIS

Finland Population (million inhabitants): GDP (US$ million): Country @rating: Business climate rating:

5.3 209,600 A1 A1

RISK ASSESSMENT Strong growth continued in 2007, driven by foreign demand and household consumption. Exports remained at a good level, thanks to performance in key sectors (electronics, mechanical engineering) and the buoyant economic conditions enjoyed by Finland’s main trading partners (Germany, Sweden and Russia). Despite an upsurge in inflation and a limited increase in wages, household consumption remained dynamic, thanks to an improving employment picture and an increase in spending from savings. Investment was mainly driven by non-residential construction and capital goods purchases by companies. The growth rate will decline further in 2008. Households will ease up somewhat on spending amid persistent inflationary pressures, more difficult conditions of access to credit and high debt. Household consumption will nonetheless remain at a good level, thanks to the expected strong increase in wages and continuing withdrawals from savings, whose rate will significantly decline.

44

Foreign demand, albeit less dynamic, will allow export growth to remain reasonably strong despite the euro appreciation and constraints related to production capacity. Residential investment will stall under the effect of high interest rates whereas public and commercial projects will remain very dynamic. The very satisfactory financial results achieved by companies overall should allow them to cope with rising production costs and go forward with their investment programmes. They will nonetheless have to contend with a shortage of skilled labour. Public sector finances will continue to improve with the government having decided to postpone tax reductions and give budgetary priority to debt reduction. Corporate bankruptcies stabilised at a low level in 2007 attesting to their financial health overall, a fact borne out by the good Coface payment incident index for Finland. The slowdown of household consumption and residential construction should nonetheless affect weaker companies in sectors like leisure, hotel-catering, distribution and sectors connected with the home.

FINLAND

MAIN ECONOMIC INDICATORS %

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth Consumption (var.) Investment (var.) Inﬂation Unemployment Short-term interest Public sector balance (%GDP) Public sector debt (%GDP) Exports (var.) Imports (var.) Current account balance (%GDP)

2.4 4.4 4.1 1.3 9.1 2.3 2.4 42.9 1.5 3.3 6.5

3.5 3.2 3.6 0.7 8.9 2.1 2.1 44.1 8.6 7.8 7.7

2.9 3.8 3.7 0.4 8.4 2.2 2.7 41.4 7.1 12.2 4.9

5.0 4.3 4.1 1.6 7.7 3.0 3.7 39.3 10.4 8.3 5.8

4.3 3.5 4.6 2.6 6.7 4.0 4.3 36 6.8 4.2 5.2

3.4 3.0 5.0 2.7 6.4 4.0 4.3 33 5.5 6.0 5.0

1

e = estimate, f = forecast

PAYMENT AND COLLECTION PRACTICES ■ Payment Bills of exchange are not commonly used in Finland because, as in Germany, they signal the supplier’s distrust of the buyer. A bill of exchange primarily substantiates a claim and constitutes a valid acknowledgement of debt. Cheques, also little used in domestic and international transactions, only constitute acknowledgement of debt. However, cheques that are uncovered at the time of issue can result in the issuers being liable to criminal penalties. Moreover, as cheque collection takes particularly long in Finland (20 days for domestic cheques or cheques drawn in European and Mediterranean coastal countries, 70 days for cheques drawn outside Europe), this payment method is not recommended. Conversely, SWIFT bank transfers are increasingly used to settle domestic and international commercial transactions. Finns are familiar with this efficient method of payment. When using this instrument, sellers are advised to provide full and accurate bank details to facilitate timely payment, while it should not be forgotten that the transfer payment order will ultimately depend on the buyer’s good faith. ■ Debt collection Out-of-court collection begins with the debtor being sent a final demand for payment by

registered or ordinary mail in which he is asked to pay the outstanding principal together with any contractually agreed interest. In the absence of an interest rate clause in the agreement, interest automatically accrues from the due date of the unpaid invoice at a rate equal to the Central Bank of Finland’s (Suomen Pankki) six-monthly rate, calculated by reference to the European Central Bank’s refinancing rate, plus seven percentage points (Interest Act Amendment, effective since 1 July 2002). The Interest Act (Korkolaki) of 20 August 1982 already requires debtors to pay up within contractually agreed timeframes or become liable to interest penalties. Note, moreover, that according to contract law the ordinary term of limitation, previously 10 years, has been reduced to three years since 1 January 2004 and that it applies retroactively to contracts already in force. For certain documented and undisputed claims, creditors may resort to the fast-track procedure resulting in an injunction to pay (suppea haastehakemus). This is a simple written procedure based on submission of whatever documents substantiate the claim (invoice, bill of exchange, acknowledgement of debt, etc). The presence of a lawyer, although commonplace, is not required for this type of action. The reform of civil procedure, enacted on 1 December 1993, requires plaintiffs to submit all supporting documents and evidence sub-

45

EUROPE AND THE CIS

stantiating a claim before the debtor is asked to provide, in response, a written statement explaining his or her position. During the preliminary hearing, the court bases its deliberations on the parties’ written submissions and supporting case documents. The court then convokes the litigants to hear their arguments and decide on the relevance of the evidence. It is possible for the dispute to be resolved between the litigants during this preparatory phase of the proceedings. Where the dispute remains unresolved after this preliminary hearing, plenary proceedings are held before the court of first instance (Ka¨ra¨ja¨oikeus) comprising one to three presiding judges depending on the case’s complexity. During this hearing, the judge examines probative documentary evidence, hears the parties’ witnesses and the

litigants state their final claims before the judge delivers the ruling very rapidly, generally within 14 days. The losing party is liable for all or part of the legal costs incurred by the winning party. The average time required for obtaining a writ of execution is about 12 months. Commercial cases are generally heard by civil courts, although a Market Court (Markkinaoikeus), located in Helsinki, has been in operation as a single entity since the 1 March 2002 merger of the Competition Council and the former Market Court. This court is competent to examine fraudulent business practices, denounce unfair trading, investigate corporate mergers, deliver prohibition orders against such practices and slap fines on offenders.

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300

250

WORLD Finland

200

150

100

50

Ju

ne D 93 ec Ju -93 ne D 94 ec Ju -94 ne D 95 ec Ju -95 ne D 96 ec Ju -96 ne D 97 ec Ju -97 ne D 98 ec Ju -98 ne D 99 ec Ju -99 ne D 00 ec Ju -00 ne D 01 ec Ju -01 ne D 02 ec Ju -02 ne D 03 ec Ju -03 ne D 04 ec Ju -04 ne D 05 ec Ju -05 ne D 06 ec Ju -06 ne D 07 ec -0 7

0

46

FRANCE

France Population (million inhabitants): GDP (US$ million): Country @rating: Business climate rating:

63.4 2,248,000

1

A1 A1

STRENGTHS • Good demographics facilitate generational renewal and spur household spending. • Diversification of energy supply sources has resulted in relative energy independence. • France boasts a trove of internationalised and completive major groups in many fields including energy, pharmaceuticals, cosmetics, luxury and distribution. • A dynamic banking and financial sector has a strong presence abroad. • A highly skilled labour force and high hourly productivity partly compensate for a short work year. • Good quality infrastructure contributes to the country’s attractiveness to tourists.

WEAKNESSES • The public finance deficit and debt are too high, particularly in view of the growth of health and pension spending. • The concentration of decision-making authority in Paris and the multiple local administrative levels has not been conducive to reducing geographic inequality. • Deficiencies in education and training have not facilitated access to the employment market for youth and the relatively unskilled. • The investment effort on R&D remains inadequate. • A somewhat unsuitable sectoral specialisation and the limited presence of French companies in high-growth emerging regions have affected foreign trade performance.

RISK ASSESSMENT Economic growth was slightly slower in 2007, underpinned mainly by household consumption (57 per cent of GDP). Spending did not accelerate as expected, however, with households preferring to increase their savings substantially. The tax exemption granted for interest on property loans made it possible to postpone a soft landing for residential investment. Corporate productive investment remained at an acceptable level spurred by a lack of production capacity in many sectors. Foreign trade again made a slightly negative contribution to growth. The growth trend should remain steady in 2008. Households should continue to spend

at essentially the same rate registered last year with additional tax breaks partly offsetting rising prices for energy and food products. Stricter conditions for property loans will affect residential investment, which will continue to mark time and thereby contribute to the job creation slowdown. Public works, meanwhile, will remain buoyant, thanks to orders from local communities spurred by municipal elections. Higher loan rates and difficulties in arranging financing should prompt companies to postpone somewhat their investment project. The continuing decline of their profitability (down from 8.5 per cent of GDP in 2000 to 5.2 per cent in 2007) and cash flow ratios – (from 85 per cent

47

EUROPE AND THE CIS

in 2000 to 60 per cent in 2008) has made them particularly sensitive to the cost of the credit on which they have increasingly relied since 2004. The weaker domestic demand will slow the growth of imports. Less buoyant demand from European trading partners and the euro appreciation in dollar zones will keep exports from achieving enough growth to improve the current account balance. Bankruptcies have begun to increase again (up 9 per cent in the first half last year). This trend reflects the erosion of corporate margins, particularly those of smaller companies, unable to pass price increases for energy and

certain raw materials on in their sales prices. The effects of that phenomenon have been exacerbated by excessively slow productivity growth coupled with the overly steep rise of labour costs. Rising agricultural raw material prices could undermine certain intensive grain-user food sectors like meat and dairy products. The situation has, moreover, remained shaky in subcontracting to the car industry and aeronautics, paper/cardboard processing and textiles. The Coface payment incident index has nonetheless stabilised near the world average, and companies should generally remain profitable in 2008.

MAIN ECONOMIC INDICATORS %

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Consumption (var.) Investment (var.) Inﬂation Unemployement Short-term interest rate Public sector balance (%GDP) Public sector debt (%GDP) Exports (var.) Imports (var.) Current account balance (%GDP)

1.1 2.0 2.2 2.1 9.8 2.3 −4.1 62.3 −1.2 1.5 0.8

2.5 2.5 3.6 2.1 9.6 2.1 −3.6 64.9 4.0 7.1 −0.6

1.7 2.2 4.0 1.7 9.7 2.2 −2.9 66.7 2.8 5.0 −1.7

2.0 2.2 4.1 1.9 9.5 3.0 −2.6 64.2 6.3 7.0 −1.3

1.9 2.0 3.7 1.5 8.6 4.0 −2.5 63.9 3.5 4.5 −1.3

1.9 2.1 2.8 2.1 8.2 4.0 −2.6 63.8 3.1 4.4 −1.7

e = estimate, f = forecast

MAIN ECONOMIC SECTORS

48

■ Steel Production eased 1.5 per cent in the first 10 months of 2007. Flat-product activity remained at a generally satisfactory level, thanks notably to the many new models put on the market by carmakers. Long products benefited from European demand for heavy vehicles and from building activity that only began to slow late last year. The market should steady this year with neither production nor demand varying much, while the industry will be slow to pass on rising input costs in sales prices. A marked growth of demand from the car, aeronautics and rail industries will offset sluggish demand from the construction and home appliance sectors.

■

Building and public works The residential property segment slowed in 2007 with building permits and new housing starts down slightly. Under the effect of the sales slowdown notably in the new and highend segments, stocks increased and prices levelled off or even declined. Prices should continue to ease in 2008. Faced with uncertainties linked to the subprime crisis in the United States and more difficult conditions of access to credit, households could elect to wait for a decline in housing prices. The public works segment will continue to trend up in the run-up to municipal elections.

■

Textiles and clothing Business conditions were good in the first nine months last year, with the consumption

FRANCE

of clothing up 3 per cent in value terms and of textiles nearly 2 per cent. Sales abroad also performed well to European partners as well as to Euromed countries for textiles with that segment beginning to benefit from its positioning in high value-added technical textiles. French textiles and clothing companies registered a slight increase in turnover. That trend reflects the overall improvement in the sector, which has nonetheless remained pregnant with risk. ■ Paper-cardboard The level of orders in the sector – whether for art paper or packaging paper – was very satisfactory in both the domestic and export markets. In 2008, the sector will continue, however, to contend with the increasing cost of fibrous raw materials, due especially to the sharp increase, since July 2007, of duties on wood imported from Russia. Prices should continue to rise, spurred by rising production costs, notably higher energy prices. North American competition, meanwhile, will continue to affect the newsprint market. ■ Mechanical engineering New orders continue to trend up in the sector for all segments except transmission manufacturers, which seem to have reached a threshold. Sector growth could suffer in 2008 from the investment slowdown albeit partly offset by a good export trend reflecting the still strong demand from emerging markets. The precision engineering segment will also participate in the buoyant conditions in the sector. ■ Automotive With passenger car registrations up 1.7 per cent in the first 11 months last year, national carmakers have nonetheless seen sales and production decline. In the West European market, which has begun to strengthen (up 1.1 per cent in volume terms), the PSA Peugeot Citroe¨n Group succeeded in stabilising sales growth at about 1 per cent whereas Renault registered weaker performance albeit offset by success with the Logan. The two carmakers managed to improve their operating margins in 2007, thanks to drastic cost cutting. This year, they will have to

continue to cope with high input prices and environmental restrictions on CO2 emissions whose negative impact Moody’s estimates at 1 per cent of operating margins. Parts manufacturers should continue to experience a process of alliance making and acquisitions.

1

PAYMENT AND COLLECTION PRACTICES ■

Payment Among methods of payment, the bank card is now the instrument used most in France, dethroning cheques, which are nonetheless still widely used. In 2006, bank cards represented 38 per cent of the payment operations cleared through the interbank system against nearly 26 per cent for cheques.*. For cheques remaining unpaid over 30 days from the date they were first presented for payment, the beneficiary may immediately obtain an enforcement order (without the need of further procedural act or cost) based on a certificate of non-payment provided by his or her banker after a second unsuccessful presentation of the check for payment and where the debtor has not provided proof of payment within 15 days of formal notice to pay served by a bailiff (article L 131-73 of the monetary and financial code). Bills of exchange, a much less frequently used mode of payment than cheques, have been in virtually constant decline in terms of number of operations with volume remaining essentially steady in value terms. Bills of exchange are attractive for companies insofar as they may be discounted or transferred, thus providing a valuable source of shortterm financing. Moreover, they allow creditors to bring legal recourse in respect of ‘exchange law’ (droit cambiaire) and are particularly suitable for instalment payments. Still lagging behind cheques, the use of transfers increased in 2006 representing about 17 per cent of total interbank operations. In value terms, however, cheques and transfers still represent most of script payment volume with 36 and 37 per cent, respectively, of the total amount processed.* Bank transfers can be made within France or internationally via the SWIFT electronic network used in French banking circles,

49

EUROPE AND THE CIS

50

1 Source: French Banking Federation and GSIT

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300

WORLD France

250

200

150

100

50

0 -0

01 ec -0 1 Ju ne 02 D ec -0 2 Ju ne 03 D ec -0 3 Ju ne 04 D ec -0 4 Ju ne 05 D ec -0 5 Ju ne -0 6 D ec -0 6 Ju ne -0 7 D ec -0 7

ne

D

Ju

9

00

ec D

99

-9 ec

ne Ju

ne

D

Ju

7

98

ec

-9

ne

D

ec

-9 8

0

D

■ Debt collection Since the new economic regulations law of 15 May 2001, commercial debts automatically bear interest from the day after the payment due date shown on the invoice or specified in the commercial contract. Unless the terms and conditions of sale stipulate interest rates and conditions of application, the applicable rate will be the interest rate applied by the European Central Banks in its most recent refinancing operations, increased by seven percentage points. Serving the debtor with formal notice to pay the principal claim and interest due nonetheless remains a precondition for any legal action taken by creditors. Where a debt claim results from a contractual undertaking and is both liquid and indisputable, creditors may use the injunction-to-pay procedure (injonction de payer), a flexible system based on the use of pre-printed forms not requiring applicants to argue their case before the magistrates’ court (tribunal d’instance) or competent commercial court – the court having jurisdiction in the district where the debtor’s registered offices are located. Via that procedure, credits can rapidly obtain a court order to be served subsequently by bailiff. A fast-track procedure (re´fe´re´-provision) provides creditors with a rapid means of debt collection, even in routine cases lacking any real urgency, provided the claims are not subject to substantive dispute; in such cases, the judge can grant a provisional payment in favour of the applicant than can represent up to 100 per cent of the claim.

However, the summary procedure requires the presence of an attorney to represent the creditor in court. If a claim proves to be litigious, the judge competent to rule on special urgency (juge des re´fe´re´s) evaluates whether the claim is well founded. As appropriate, the judge may then declare himself or herself incompetent and, based on his or her assessment of the apparent validity of the case, invite the plaintiff to seek a ruling on the substance of the case through the formal court process. Formal procedures of this kind permit having the validity of a claim recognised by the court, a relatively lengthy process lasting about a year or more owing to the emphasis placed on the adversarial nature of proceedings and the numerous phases involved in the French procedural system: submission of supporting case documents, written submissions by the litigants, examination of the types of evidence, various recesses for deliberations and so on. If justified by a claim’s size and the uncertain solvency of the debtor, legal action may include a petition to obtain an attachment order on available assets and thereby protect the plaintiff’s interests pending completion of the proceedings and enforcement of the court’s final verdict.1

Ju

which offers a reliable platform for timely payment subject to mutual trust and confidence between suppliers and their customers.

GEORGIA

Georgia Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

4.4 7,550

1

C High risk C

RISK ASSESSMENT The influx of foreign capital and a good harvest allowed Georgia to achieve near 10 per cent growth despite Russian sanctions, with it successfully redirecting its exports towards Turkey and the EU. The dynamism of manufacturing, construction and telecommunications sectors combined with good performance in agriculture. Growth should remain strong in 2008. This will cause substantial deterioration of external accounts, however. The resulting trend is unsustainable in the long term, especially due to Georgia’s many persistent weaknesses, which include an industrial apparatus lacking competitiveness, a very insufficient savings rate and a bloated informal sector. Economic conditions have nonetheless im-

proved markedly since the rose revolution in 2003, thanks to significant progress on governance, privatisations and establishment of a more stable macroeconomic framework. Financially, there has also been notable improvement as much in public sector accounts as in foreign indebtedness. This improvement has nonetheless mainly benefited a minority of the population, essentially the young and educated. The continued ascendancy of the opposition, which forced President Saakachvili to bring the presidential elections forward to January 2008, should nonetheless not jeopardise the economic liberalisation policy. Relations with Russia constitute the main risk and they should remain very tense, much like the situation with the two separatist regions, Abkhazia and South Ossetia.

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

11.1 4.8 −2.5 730 1,328 −598 −7.4 46.4 8.0 1.2

5.9 5.7 −0.2 1,272 1,991 −719 −8.4 36.2 8.3 1.7

9.6 8.3 −2.4 1,472 2,686 −1,214 −9.8 27.1 6.6 1.6

9.4 9.2 −2.8 1,667 3,686 −2,019 −13.8 21.9 6.7 2.4

10.0 8.5 −1.3 1,788 4,498 −2,710 −16.0 17.5 5.5 3.5

7.5 6.9 0.5 1,947 5,056 −3,109 −15.2 15.2 3.2 3.6

e = estimate, f = forecast

51

EUROPE AND THE CIS

Germany Population (million inhabitants) : GDP (US$ million) : Country @rating: Business climate rating:

52

82.3 2,913,200 A1 A1

STRENGTHS • Good geographic and sectoral specialisation allied with high competitiveness has generated an ample trade surplus. • Smaller – Mittelstand – companies play a pivotal role in the German economy as regards employment, innovation and competitiveness. • ‘Co-determination’ of joint-stock companies, mandatory with over 500 employees, has fostered consensus on strategic decisions, particularly involving restructuring. • Restoring equilibrium to public and social security accounts has given the government more room for manoeuvre. • The presence of Central and East European countries in the EU and their geographic proximity have provided companies with sales and production opportunities.

WEAKNESSES • Marked regional disparities between the traditional economic fabric in the North and the growth-sector focus in the South compound the persistent problem posed by the lagging economies of the Eastern La¨nder (federal states). • The familial character of Mittelstand companies tends to complicate matters in obtaining bank financing that must comply with Basel II transparency rules. • Despite mergers the banking landscape is still fragmented, which tends to undermine bank profitability. • The inadequacy of facilities for small children has contributed to the low birth rate and the ageing of the population, which, in turn, have affected consumption. • The inadequate general education of many youth has led companies to reduce their involvement in the apprenticeship programmes that concern two-thirds of a given age group and has also contributed to a lack of engineers.

RISK ASSESSMENT Exports and productive investment were the main economic engines again in 2007, with exports holding up well in the face of the euro appreciation against the dollar. They comprise mostly capital goods, high-end cars and chemical and pharmaceutical products relatively insensitive to price variations. Moreover, 60 per cent go to the EU with a good proportion of the balance representing sales

to emerging countries in Asia and Central and Eastern Europe where demand has remained strong. Expiry of advantageous amortisation rules late last year spurred productive investment. Household consumption and residential construction suffered conversely from the increase in VAT. A slowdown is expected in 2008 with a smaller positive contribution from foreign trade not offset by the recovery of private

GERMANY

consumption. The growth of exports will be slower due to the still unfavourable exchange-rate effect on price-competitiveness and to the economic slowdowns in Europe and the United States. Import growth will remain strong meanwhile reflecting the revival of household demand, buoyed by the continuing decline of unemployment and the concomitant decline in the unemploymentinsurance contribution rate as well as by increases in civil service wages, pensions and aid for the education of children. The revival of private consumption will nonetheless be modest due to the unfavourable effect of the rising cost of credit as well as of energy and food. Faced with weaker foreign demand, industry will slow the pace of its investments.

Corporate payment behaviour has remained good as evidenced by the excellent level of the Coface payment incident index for Germany and the 8 per cent decline in bankruptcies in the first nine months of 2007. The reduction of corporate income tax this year in a context of balanced public finances will have a positive influence on that trend. The residential construction sector will remain mired in difficulty, however, particularly in the eastern regions. The kitchen furniture sector also presents a high-risk profile at this juncture. The automotive subcontracting sector, meanwhile, has suffered from the increasing pace of relocations to the eastern part of the continent.

1

MAIN ECONOMIC INDICATORS %

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth Consumption (var.) Investment (var.) Inﬂation Unemployment Short-term interest Public sector balance (%GDP) Public sector debt (%GDP) Exports (var.) Imports (var.) Current account balance (%GDP)

−0.2 0.2 0.9 1.0 9.3 2.3 −4.0 63.8 2.5 5.4 2.1

0.6 −0.3 4.4 1.8 9.7 2.1 −3.7 65.0 10.0 7.2 4.5

1.1 0.1 6.0 1.9 10.7 2.2 −3.4 68.0 7.1 6.7 4.7

3.0 1.1 8.2 1.7 10.8 3.1 −1.6 68.0 12.9 11.5 5.0

2.6 −0.2 8.0 2.1 9 3.9 0.1 65 8.4 6.4 5.9

1.9 1.9 3.4 2.2 8.4 4.0 −0.1 63 5.5 6.0 5.8

e = estimate, f = forecast

MAIN ECONOMIC SECTORS ■ Construction Total turnover for the sector was up 4.5 per cent in 2007. This represents the net result of an 18 per cent increase in the commercial property segment, up 6.0 per cent for public works and down 5.0 per cent for a residential segment affected by a three-point VAT increase and elimination of tax breaks for owner-occupants. Turnover should still increase 3 per cent this year, thanks to nonresidential construction and public works. The residential segment, except for renovation, should be flat. Corporate financial health, particularly for smaller companies, will remain precarious amid the rising cost

of materials and the shortage of specialised labour. On average, margins should remain below 1 per cent. ■

Steel National steel production rose 3 per cent in 2007, which assured German Steel – the European leader – of high-capacity utilisation. Despite forecasts of rising energy and raw material costs and continuing unfavourable exchange rates, the outlook for 2008 is bright. Demand will increase 1.5 per cent, with economic conditions remaining buoyant in steel-using sectors, exemplified by the capital good sector and the car industry, where export sales increased. High produc-

53

EUROPE AND THE CIS

tivity will offset the relatively higher cost of energy in Germany. ■ Mechanical engineering Both export (80 per cent) and domestic activity were dynamic in 2007, and 2008 should be another growth year. Despite unfavourable exchange rates and cost increases resulting from the shortage of specialised labour, margins should remain ample in the sector. ■ Paper The German paper industry, the European leader, posted a 3 per cent increase in production in 2007 with sales particularly dynamic in the domestic market (up 4.8 per cent) and Central and Eastern European countries (up 4.6 per cent). Outside Europe sales declined 11 per cent, however, due to the effect of unfavourable exchange rates and rising production costs. The trend this year is towards stagnation of both production and sales but with sales outside Europe stabilising. ■ Food production and distribution The increase in VAT did not apply to basic foodstuffs. For the products affected, discounters (Aldi/Lidl) used their clout to obtain agreement from suppliers not to pass on the entire increase. Prices nonetheless rose due to increasing raw material costs. The meat sector suffered again from scandals and localised break-outs of avian flu pandemic that undermined consumer confidence and affected prices. Exports to the eastern portion of the continent have considerably increased. ■ Furniture The sector grew 7 per cent in 2007, thanks to a dynamic office and shop segment (up 17 per cent). While the VAT increase affected the domestic market, exports increased significantly including sales to the EU. The concentration process continued in the sector, with some established companies like Schieder Imperium disappearing. The trend should remain favourable overall in 2008.

PAYMENT AND COLLECTION PRACTICES

54

■ Payment Standard payment instruments such as bills of exchange and cheques are not used very

widely in Germany. For Germans, a bill of exchange implies a precarious financial position or distrust on the part of the supplier. Cheques are not considered a payment as such but a ‘payment attempt’. As German law ignores the principle of covered cheques, the issuer can cancel payment at any time and on any ground.Bounced cheques are therefore fairly common. Bills of exchange and cheques clearly do not seem to be effective payment instruments even though they entitle creditors to access a fast-track procedure for debt collection. ¨ berweisung), by contrast, Bank transfer (U remains the prevalent means of payment. Leading German banks are connected to the SWIFT network, which enables them to provide a quick and efficient funds transfer service. ■

Debt collection The collection process begins with the debtor being sent a final demand for payment, via ordinary or registered mail, reminding him or her of his or her contractual obligations. The law on ‘speedier matured debts’, in force since 1 May 2000, states that, where the due date is not specified in the conditions of sale, the customer is deemed to be in default if he does not pay up within 30 days of receipt of the invoice or a demand for payment and is liable to interest penalties thereafter. From 1 January 2002, the benchmark default interest rate is the Bundesbank’s sixmonthly base rate, calculated by reference to the European Central Bank’s refinancing rate, plus eight basis points for retailers or commercial companies and five basis points for consumers (non-commercial). If payment or an out-of-court settlement is not forthcoming despite this approach, the creditor must initiate court proceedings. Provided a claim is payable and uncontested, the creditor can seek an injunction to pay (Mahnbescheid) through a simplified and inexpensive procedure involving the use of pre-printed forms and resulting in a writ of execution fairly quickly. This procedure has been standardised and automated in most La¨nder. Foreign creditors must file their claim with the Scho¨neberg Court in Berlin, which, after

GERMANY

examining the claim, may deliver an injunction to pay. The debtor is given two weeks to pay up or challenge the injunction (Widerspruch). Ordinary legal proceedings tend to be oral, with the judge reaching his decision on the arguments presented by both parties present in court. If the case is contested, the judge hears the litigants or their lawyers and asks them to submit any evidence deemed relevant by him or her, which he or she alone is then authorised to assess. Each litigant is also requested to submit a pleading memorandum outlining his or her expectations, within the specified time limit. Once the claim has been properly examined, a public hearing is held at which the

court hands down a well-founded judgement. The reform of civil procedure, enacted on 1 January 2002, is designed to provide all German citizens with more transparent, timely and effective application of the law. The new measures encourage parties to attempt conciliation before resorting to legal action and give the district courts (Amtsgerichte) stronger powers. They also require the majority of cases to be settled in first instance, either through an out-of-court settlement or through a court decision. An appeal will thus only entail verifying whether a case involves a question of principle or necessitates revision of the law in order to ensure ‘consistent jurisprudence’.

1

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300

250

WORLD Germany

200

150

100

50

Ju

ne D 93 ec Ju -93 ne D 94 ec Ju -94 ne D 95 ec Ju -95 ne D 96 ec Ju -96 ne D 97 ec Ju -97 ne D 98 ec Ju -98 ne D 99 ec Ju -99 ne D 00 ec Ju -00 ne D 01 ec Ju -01 ne D 02 ec Ju -02 ne D 03 ec Ju -03 ne D 04 ec Ju -04 ne D 05 ec Ju -05 ne D 06 ec Ju -06 ne D 07 ec -0 7

0

55

EUROPE AND THE CIS

Greece Population (million inhabitants): GDP (US$ million): Country @rating: Business climate rating:

11.1 308,400 A2 A2

RISK ASSESSMENT The economy continued to grow strongly in 2007, driven by domestic demand. Household consumption continued to benefit from a bright job picture, wage growth and a credit expansion. The reduction of corporate income tax and the undertaking of large infrastructure projects have spurred corporate investment. Although exports continued to grow, the increase was not enough to significantly reduce the current account deficit with imports still rising too rapidly. The public sector deficit remained under control despite additional spending associated with the summer fires and preparations for early general elections. Proceeds from privatisations were allocated to the reduction of public sector debt. The economy will post strong growth again in 2008. Households spending will continue at a high rate despite high interest rates and slower wage growth. Continuation of public investment programmes partly funded by Europe will spur corporate investment and construction. The current account balance will continue to show a large deficit despite very good export performance supported by the dynamism of the tourism industry and the merchant navy, which has capitalised on the increase in world trade and freight rates. The reduction of the public deficit may be

56

significant, thanks to the slowdown of government operating expenses and the additional revenues resulting from taxes both indirect (VAT) and direct (the campaign against tax evasion). Continuation of the privatisation programme, particularly in the telecommunications sector, will contribute to reduction of public debt pending the health and pension system reforms essential to keeping public accounts under control in the medium term. The downward bankruptcy trend and stabilisation of the Coface payment incident index near the world average reflect the buoyant growth. Corporate profitability has improved, thanks to the reduction of income tax, modernisation of the financial system and reform of the corporate legal framework. Weaknesses have persisted in the clothing and shoe industries, both exposed to Asian and Eastern European, and in commercial distribution where small family companies will continue to suffer from the competition of major international players. In the export market, the competitiveness of Greek companies has been eroding, affected by unit labour costs higher than those of euro zone partners. The A2 business climate rating is born out by the complex and ponderous implementation of legal collection procedures.

GREECE

MAIN ECONOMIC INDICATORS %

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth Consumption (var.) Investment (var.) Inﬂation Unemployment Short-term interest Public sector balance (%GDP) Public sector debt (%GDP) Exports (var.) Imports (var.) Current account balance (%GDP)

4.6 4.5 13.3 3.4 9.9 2.3 −4.2 98.2 4 4.8 −6.4

4.7 4.4 5.8 2.9 10.5 2.1 −7.9 98.4 11.7 9.3 −7.6

3.7 3.7 0.2 3.5 9.8 2.2 −5.5 98 2.8 −1.3 −9

4.3 3.8 12.9 3.2 8.9 3 −2.5 95.3 5.4 9.8 −11.1

4 3.6 7.8 2.8 8.9 4 −2.9 93.7 6.6 7.7 −10.8

3.7 3.2 7 2.7 8.4 4 −1.8 91.1 5.1 7 −10.8

1

e = estimate, f = forecast

PAYMENT AND COLLECTION PRACTICES ■ Payment Bills of exchange are widely used by Greek companies in domestic and international transactions and, along with promissory notes, are no longer subject to stamp duty from 1 January 2002. In the event of payment default, a protest certifying the dishonoured bill must be drawn up by a public notary within two working days of the due date. Similary, cheques are still widely used in international transactions. In the domestic business environment, however, cheques are customarily used less as an instrument of payment than as a credit instrument, making it possible to materialise successive payment due dates. Post-dated endorsed by several creditors thus represent common and widespread practice. Furthermore, issuers of dishonoured cheques may be liable to prosecution, provided a complaint is lodged. Promissory letters (hyposhetiki epistoli) are another means of payment widely used by Greek companies in international transactions. They are a written acknowledgement of an obligation to pay issued to the creditor by the customer’s bank committing the maker to pay the creditor at a contractually fixed date. Although promissory letters are a sufficiently effective instrument in that they constitute a clear acknowledgement of debt on the part of the buyer, they are not deemed

a bill of exchange and so fall outside the scope of the ‘exchange law’ (droit cambiare). SWIFT bank transfers, well established in Greek banking circles, are used to settle a growing proportion of transactions and offer a quick and secure method of payment. ■

Debt collection The recovery process commences with the debtor being sent a final demand for payment by registered mail, reminding him or her of his or her payment obligations, including any interest penalties as may have been contractually agreed or, failing this, those accruing at the legal rate of interest. Under a presidential decree passed on 5 June 2003, interest is due from the day following the date of payment stipulated in the invoice or commercial agreement at a rate, unless the parties agree otherwise, equal to the European Central Bank’s refinancing rate, plus seven percentage points. Creditors may seek an injunction to pay (diataghi pliromis) from the court via a lawyer under a fast-track procedure that generally takes one month from the date of lodging of the petition. To engage such a procedure, the creditor must possess a written document substantiating the claim underlying his or her lawsuit, such as an accepted and protested bill, an unpaid promissory letter or promissory note, an acknowledgement of debt established by private deed or an original invoice summar-

57

EUROPE AND THE CIS

ising the goods sold and bearing the buyer’s signature certifying receipt of delivery or the original delivery slip signed by the buyer. The ruling issued by the judge allows immediate execution subject to the right granted to the defendant to lodge an appeal within 15 days. An appeal will generally not have suspensive effect. To obtain suspension of execution, the debtor must petition the court accordingly. Based on competence thresholds in effect since 1 October 2003, a ‘justice of the peace’ (Eirinodikeio) hears claims up to €12,000. Above that amount, a court of first instance presided by a single judge (Monomeles Protodikeio) hears claims not exceeding €80,000 and set up with a panel of three judges (Polymeles Protodikeio) to hear larger claims.

Regarding the latter court with a collegial composition, conforming to the provisions of the civil procedure code, a prior attempt by the parties to settle out of court, under the aegis of the claimant’s lawyer, is mandatory since September 2002, subject to inadmissibility of the claimant’s writ. Where creditors do not have written and clear acknowledgement of non-payment from the debtor, or where the claim is disputed, the only remaining alternative is to obtain a summons under ordinary proceedings. Such litigation can take over a year, even two years, depending on the backlog of cases in each jurisdiction and the complexity of the action, whether it requires extensive evidence – such as examination of all the documents related to a commercial transaction – and obligatory witness testimonies.

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300

250

WORLD Greece

200

150

100

50

Ju

ne D 93 ec Ju -93 ne D 94 ec Ju -94 ne D 95 ec Ju -95 ne D 96 ec Ju -96 ne D 97 ec Ju -97 ne D 98 ec Ju -98 ne D 99 ec Ju -99 ne D 00 ec Ju -00 ne D 01 ec Ju -01 ne D 02 ec Ju -02 ne D 03 ec Ju -03 ne D 04 ec Ju -04 ne D 05 ec Ju -05 ne D 06 ec Ju -06 ne D 07 ec -0 7

0

58

HUNGARY

Hungary Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

10.1 112,899

1

A3 Quite low risk A2

STRENGTHS • Hungary remains among the most advanced Central Europe countries in terms of reforms. • Integration into the European Union has enhanced the prospects for growth. • The country’s infrastructure, work force, regulatory framework and banking system are of good quality.

WEAKNESSES • The situation of public finances and external accounts remains nettlesome, and FDI covers only a limited proportion of financing needs. • The levels of government and foreign debt have been high. • Foreign exchange reserves are limited. • The rapid increase in loans denominated in foreign currencies has increased the exposure of banks to exchange rate risk. • Social tensions have hindered reform implementation.

RISK ASSESSMENT Growth slowed under the effect of austerity measures. Both private and public consumption declined in 2007. Investment growth was weak due to higher taxes and a decline in consumption spending, which squeezed corporate profit margins. Foreign trade was the main growth engine. The decline in public sector orders and household purchasing power weakened the construction industry and sectors associated with consumption. The increase in the Coface payment incident index for the past few months reflects that deterioration of corporate solvency. Export sectors (vehicles, electronics and telecommunications, pharmaceuticals and manufactured products) are still buoyant, however, and growth should gradually recover this year with domestic demand growing stronger and the effects of the austerity measures waning.

Although the increase in indirect taxes and administered prices contributed to an upsurge in inflation, it also facilitated reducing the public deficit to more sustainable levels. Government debt, albeit still high, has been levelling off (66 per cent of GDP). An import slowdown, meanwhile, made it possible to limit the increase in the current account deficit and slightly reduce it in relation to GDP. The growth recovery and continued widening of the deficit in the investment income balance should, however, result in further widening of the current account deficit in 2008. In this context, foreign debt should remain steady at a high level with foreign exchange reserves remaining relatively limited. The forint, shaken by the turbulence triggered last summer by the subprime mortgage crisis in the United States, remains among the region’s most vulnerable currencies.

59

EUROPE AND THE CIS

The forint exchange rate trend will continue to depend heavily on whether the centre-left government lives up to its commitments on fiscal matters. Unpopular and

increasingly riven by internal divisions, however, it has limited capacity to pursue public spending reform.

MAIN ECONOMIC INDICATORS USD billions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Unemployment (%) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

4.2 4.9 -7.2 5.9 42.9 46.2 -3.3 -6.7 -8.0 68.9 14.2 2.5

4.8 6.8 -6.5 6.1 55.7 58.7 -3.0 -8.6 -8.4 73.5 14.8 2.5

4.1 3.7 -7.8 7.2 62.2 64.0 -1.8 -7.6 -6.8 71.1 12.2 2.6

3.9 4.1 -9.2 7.5 74.4 75.5 -1.2 -7.3 -6.5 96.7 12.8 2.6

2.0 7.8 -6.4 7.4 87.2 86.9 0.3 -7.5 -5.8 94.5 12.2 2.6

3.0 4.5 -4.2 7.5 98.3 99.0 -0.7 -9.2 -6.3 96.5 12.4 2.4

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■ Means of entry Following EU membership on 1 May 2004 and despite some difficulties over harmonisation with Community regulations, there are no longer any obstacles to trading with Hungary today. However, exporters should note the existence of a fairly expensive and lengthy registration procedure for cosmetics. In addition, vehicle registration tax for used cars purchased in another member state can be fairly high depending on the vehicle’s age and pollution rate. Finally, while public procurement legislation complies with community law, its application is not entirely satisfactory and tendering procedures still, at times, lack transparency.

60

■ Attitude towards foreign investors Mindful of the importance of FDI in the country’s modernisation and in the financing of its external trade deficits, Hungary has been quick to develop a foreign investorfriendly legal and economic system. This system served as a bulwark for the privatisations carried out in the 1990s and facilitated massive capital inflows into the Hungarian economy (around €62 billion over 15 years).

With the privatisation programme nearing completion (1,600 of the 1,700 state-owned enterprises have been privatised), for the last two years the Hungarian government has been pursuing a proactive policy of maintaining FDI inflows. Its strategy consists in making Hungary a high added-value investment hub and a regional base for exports and production. To this end, investment grants favour technology projects, regional service centres and logistics platforms. Tailored grants encourage investments deemed of ‘strategic’ or ‘national’ importance. The threshold for such grants is €10 million. Investments below this amount are eligible for grants only through EU structural funds. As well as subsidies, labour and taxation costs have to be factored in. The average gross monthly wage is €650. Corporation tax stands at 16 per cent. A 4 per cent solidarity tax came into effect in 2007. Employer social security contributions are 33.5 per cent. In sum, the cost factors are competitive for this part of Central Europe. Investment in Hungary is unrestricted, regardless of the source of funds or the size of foreign shareholdings. The only restrictions relate to the acquisition of farmland and forests, in respect of which

HUNGARY

Hungary has obtained a transition period until May 2011. It has been granted a derogation until May 2009 for the purchase of secondary residences by foreigners. ■ Foreign exchange regulations Since the widening of the forint’s fluctuation band to ±15 per cent in May 2001 (versus a benchmark of HUF282 to the euro), the Hungarian currency has been subject to a fair degree of fluctuation but has remained within the top half of its fluctuation band, reaching its ceiling of 240 forints to the euro in April 2005. Since mid-2006, the forint has been fairly volatile mainly due to a higher than expected budget deficit. The exchange rate in August 2007 was HUF263 to the euro. Since September, the forint has edged back to HUF250 to the euro. Key interest rates remain fairly high in Hungary, rising from 6 per cent in September 2005 to 7.75 per cent in September 2006, before falling to 7.5 per cent in September 2007.

PAYMENT AND COLLECTION PRACTICES ■ Payment Bills of exchange and cheques are not commonly used since their validity depends on compliance with several formal issuing requirements. For dishonoured and duly protested bills and cheques, creditors nonetheless have recourse to a summary procedure to obtain an injunction to pay. The promissory note in blanco (u¨res a´truha´za´s), which involves an incomplete payment deed when issued – with only the term promissory note and the issuer’s signature appearing on it – and a complement of missing elements upon collection, is much less common than in Poland. Bank transfers are by far the most common payment method. After successive phases of privatisation and concentration, the main Hungarian banks are now connected to the SWIFT network, which provides low cost, flexible and speedy processing of domestic and international payments. ■ Debt collection It is advisable, where possible, to avoid taking legal action locally due to the formal-

ism and high cost of legal procedures and lengthy court proceedings: it takes almost two years to obtain a writ of execution due to the lack of judges with adequate training in market economy practices and proper equipment. Service of a demand for payment accompanied by proof of debt reminds the debtor of his obligation to pay the outstanding sum plus any accrued interest. Since 1 May 2004, interest is due from the day after the payment date stipulated in the commercial contract and, unless otherwise agreed by the parties, the applicable rate will be the base rate of the National Bank of Hungary (Magyar Nemzeti Bank) in force on the last day preceding the reference halfyear, plus seven percentage points. It is advisable to seek an amicable settlement based on a payment schedule drawn up by a public notary, which includes an enforcement clause that allows creditors, in case of default by the debtor, to go directly to the enforcement stage, subject to acknowledgement by the court of that document’s binding nature. Holding a debt instrument due and payable (acknowledgement of debt, unpaid bill of exchange, dishonoured cheque, etc), creditors may obtain an injunction to pay (fizete´zi meghagya´s), using a pre-printed form. That speedier and less-costly summary procedure allows the judge – if he or she considers the petition justified – to grant an injunction without hearing the defendant enjoining him or her to pay the principal and legal costs within 15 days of service of the ruling (or within three days for an unpaid bill of exchange). Although not mandatory, the presence of a lawyer is nonetheless advisable for this type of procedure. The advance on court fees, at the claimant’s expense, amounts to 3 per cent of the total claim. In case of objection by the debtor, the case is treated as a dispute and transferred to ordinary proceedings. The parties will then be summoned to one or more hearings to plead their respective cases. Ordinary proceedings are partly in writing with the parties or their attorneys filing submissions accompanied by all supporting case documents (original or certified copies) and partly oral with the litigants and their

1

61

EUROPE AND THE CIS

witnesses heard on the main hearing date. At any stage of such proceedings and where possible, the judge may attempt conciliation between the parties. It is relatively common practice to issue a winding up petition against the debtor immediately to prompt

a speedier reaction or payment. Commercial disputes are heard by the commercial chambers in either the local courts (Helyi Bı´ro´sa´g), or the regional courts (Megyei Bı´ro´sa´g), depending on the size of the claim.

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300

250

WORLD Hungary

200

150

100

50

D ec Ju 94 ne 9 D 5 ec -9 Ju 5 ne 9 D 6 ec -9 Ju 6 ne 9 D 7 ec -9 Ju 7 ne 9 D 8 ec -9 Ju 8 ne 9 D 9 ec -9 Ju 9 ne 0 D 0 ec Ju 00 ne 0 D 1 ec -0 Ju 1 ne 0 D 2 ec -0 Ju 2 ne 0 D 3 ec -0 Ju 3 ne 0 D 4 ec -0 Ju 4 ne 0 D 5 ec -0 Ju 5 ne -0 D 6 ec Ju 06 ne -0 D 7 ec -0 7

0

62

HUNGARY

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

40 6 14

1 Imports: 69% of GDP

Exports: 66% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

25000

25000

20000

20000

15000

15000

10000

10000

5000

5000

0

0 Germany

Italy

Austria

France

UK

Germany

Russia

China

Austria

Italy

IMPORTS by products ■ Electrical machinery and equipment 23% ■ Mechanical machinery and equipment 17% ■ Vehicles 8% ■ Other manufactured goods 36% ■ Fuels and electricity 11% ■ Foodstuffs 4% ■ Other 2%

EXPORTS by products ■ Electrical machinery and equipment 27% ■ Mechanical machinery and equipment 23% ■ Vehicles 10% ■ Plastics 4% ■ Foodstuffs 6% ■ Other manufactured goods 27% ■ Other 4%

STANDARD OF LIVING / PURCHASING POWER Indicators

Hungary

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

18,290 10,950 0.869 22 66 16 146

11,613 6859 0.772 28 62 20 122

5,983 2,313 0.672 31 44 30 50

63

EUROPE AND THE CIS

Iceland Population (inhabitants): GDP (US$ million): Country @rating: Business climate rating:

308,000 16,300 A1 A1

RISK ASSESSMENT The economic slowdown continued in 2007, with completion of the massive investments in the production of aluminium and, its corollary, hydraulic energy. The dynamism of other demand factors partly offset, however, that sharp decline in industrial investment. Despite delays in the start-up of the new foundries, aluminium exports posted good growth. Household spending benefited from a VAT reduction and strong wage growth attributable to the low unemployment. Residential investment remained dynamic, thanks particularly to the advantageous financing terms available via the government-backed Housing Financing Fund. The slowdown will continue in 2008 under the pressure exerted by the Central Bank that should help relieve tensions – inflation, trade deficit, labour shortage – affecting the economy for several years. Despite even substantial wage increases, household consumption should decline towards year end in conjunction with a resurgence of unemployment, an increase in the cost of credit (with the real interest rate exceeding 14 per cent) and the downturn of the housing market. Industrial investment will decline again. Conversely, the construction of office and

64

commercial premises will remain dynamic as will public sector investment spurred by the fiscal surplus and the low level of public sector debt. Exports will be up sharply with the metallurgy factories getting up to speed. Sales of fish products will remain at a good level with the declines in volume resulting from the lowering of quotas for cod counterbalanced by rising world prices. The financial health of some companies could deteriorate due to the slowdown. Companies with operations in the north-east will of course benefit from windfalls from the new aluminium factories. In the same way, the fish industry should be able to cope with the reduction of quotas, thanks to rising prices, by substituting other species and streamlining production. Conversely, small- and medium-sized companies in the construction and retail sectors located in the south-west, especially in the capital area, could suffer. With 60 per cent of corporate debt denominated on average in foreign currencies and with corporate investment having increased sharply in recent years the exchange rate remains an uncertainty for the companies concerned. Fluctuations in the Icelandic krona trend, considering the significant rate differential with major currencies, are strongly influenced by carry trade plays and the international financial situation.

ICELAND

MAIN ECONOMIC INDICATORS %

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth Consumption (var.) Investment (var.) Inﬂation Unemployment Short-term interest Public sector balance (%GDP) Public sector debt (%GDP) Exports (var.) Imports (var.) Current account balance (%GDP)

2.4 6.1 26.0 2.1 3.4 5.0 −2.8 41.0 1.4 10.8 −5.0

7.7 6.8 34.0 3.2 3.1 8.6 0.2 35.0 8.3 14.3 −9.9

7.1 13.0 60.0 4.0 2.1 10.2 5.2 26.0 7.0 29.0 −16

4.2 4.4 20.0 6.8 1.3 12.0 7.0 29.0 −5.0 10.0 −25

2.0 3.7 −28.0 4.9 1.1 14.0 4.5 29.0 5.0 −9.0 −18.0

0.6 −1.0 −30.0 4.2 2.7 13.0 2.0 27.0 14.0 1.0 −14.0

1

e = estimate, f = forecast

65

EUROPE AND THE CIS

Ireland Population (million inhabitants): GDP (US$ million): Country @rating: Business climate rating:

4.3 220,000 A1 A1

RISK ASSESSMENT Affected by the decline in residential investment, the economy began to slump in the 2007 second half with the severity of the slowdown limited, however, by the dynamism of other components of growth. Household consumption accelerated amid a brighter employment and wage picture in both industry and services. Many wageearners who lost their jobs in residential construction found new employment in the non-residential segment and public works. Exports have been underpinned by the financial services sector and pharmaceuticals, meanwhile corporate investment in machinery and equipment spurred by the strong demand. The slowdown will continue in 2008, with a further decline in residential investment offset to a lesser extent this time by growth in other sectors. Although public spending on infrastructure (roads, railway and so on) and building should remain dynamic, corporate investment, especially by subsidiaries of American companies, should be considerably hampered by relatively weaker demand. Exports will suffer from both unfavourable

66

exchange rates and the slowdown in the United States, which represents one-fifth of sales abroad. Consumption will slow down as well amid flagging growth of jobs and wages as well as rising unemployment exacerbated by the growing numbers of people losing their jobs in residential construction. This will ultimately tend to reduce imports and a current account deficit that will nonetheless remain very large. Payment behaviour remained satisfactory in 2007. Accustomed to living in a strong growth environment, companies could, however, suffer in 2008 even from a limited economic slowdown. The property sector will continue to present much higher-than-average risk. Margins will remain tight in printing and also in a road transport sector hammered by rising petrol costs. Catering will suffer from the repercussions of an intensified campaign against driving while under the influence of alcohol and elsewhere the entire tourist sector may be faced with a dearth of American tourists. Export sectors, especially those billing in dollars and selling in the dollar zone, like electronics and the computer industry, will prefer to see their margins erode than to lose market share.

IRELAND

MAIN ECONOMIC INDICATORS %

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth Consumption (var.) Investment (var.) Inﬂation Unemployment Short-term interest Public sector balance (%GDP) Public sector debt (%GDP) Exports (var.) Imports (var.) Current account balance (%GDP)

4.3 3.0 −0.7 4.0 4.7 2.3 0.4 31.1 0.7 −1.6 0.9

4.3 4.1 7.5 2.3 4.5 2.1 1.3 29.6 7.0 8.5 −0.6

5.9 7.3 19.9 2.2 4.3 2.2 1.2 27.4 5.2 7.7 −3.5

5.7 5.7 −6.7 2.7 4.4 3.1 2.9 25 4.4 4.4 −4.5

4.9 6.8 16.0 3.0 4.6 3.9 1.1 24.0 6.0 5.2 −5.0

2.5 3.9 4.0 2.8 5.6 4.0 −0.8 26.0 5.0 4.0 −4.8

1

e = estimate, f = forecast

PAYMENT AND COLLECTION PRACTICES ■ Payment Although the use of bills of exchange is uncommon in domestic commercial transactions between Irish companies, they are sometimes used in international trade. The cheque, defined as ‘a bill of exchange drawn on a bank and payable on demand’, is more widely used for commercial transactions but does not provide a foolproof guarantee as issuing an unfunded cheque is not a criminal offence. On the other hand, SWIFT bank transfers, well established in Irish banking circles, are widely used as they are quick and efficient. Payment orders issued via the Web site of the client’s bank are a rapidly growing instrument. ■ Debt collection The collection process usually begins with the debtor being sent a final demand, or ‘7day’ letter, by registered mail asking him to pay the principal along with any contractually agreed default interest. Where there is no specific interest clause, the rate applicable to commercial contracts concluded after 7 August 2002 (Regulation number 388, 2002) is the benchmark rate, ie the European Central Bank’s refinancing rate, in force before 1 January or 1 July of each year, marked up by seven percentage points and calculated on a daily percentage.

For claims exceeding €1,270, creditors may threaten debtors with a statutory demand for the winding up of their business, if they fail to make payment or come to terms within three weeks after a final demand for payment is sent to them ( a ‘ 21-day notice’). Thereafter the debtor is regarded as insolvent (Companies Act 1963, amended in 1990, section 214). Irish law and the Irish legal system are mainly founded on British ‘common law’ inherited from the past, although separate national legislation has subsequently been developed. In ordinary proceedings, creditors who hold material evidence of their claim (contractual documents, acknowledgement of debt, unpaid bills of exchange) may seek a summary judgement from the court where their claim is not contested. This allows them to obtain a writ of enforcement more quickly. If a debtor fails to respond to a civil summons before the District Court or a civil bill before the Circuit Court, the creditor may obtain a judgement by default based on the submission of an affidavit of debt without a court hearing. An affidavit of debt is a sworn statement that substantiates the outstanding amount and cause of the claim. It bears a signature attested by a notary or an Irish consular office. The claim amount at stake will determine the competent court: the District Court, the Circuit Court or, for claims exceeding €38,092.14, the High Court in Dublin, which has unlimited jurisdiction to hear civil and

67

EUROPE AND THE CIS

criminal cases and to assess in the first instance the constitutionality of laws enacted by Parliament (Oireachtais). The creation on 12 January 2004 of a commercial court – as a special High Court division – competent to hear commercial disputes exceeding €1 million, included in a commercial list or cases concerning intellectual property, is intended to provide suitable and rapid examination of the cases submitted. When a defendant answers a summons, asserts his rights and refuses to make pay-

ment, relatively formal plenary proceedings are instituted wherein the court gives equal importance to the case documents submitted by the parties – with possible use of the disclosure system in the submission of evidence – barrister arguments, and oral evidence presented at the main hearing. For claims brought before the District Courts (with under €6,348.69 at stake), there is a simplified written procedure, but the accent is mainly on hearing respective litigants’ witnesses.

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300

250

WORLD Ireland

200

150

100

50

Ju

ne D 93 ec Ju -93 ne D 94 ec Ju -94 ne D 95 ec Ju -95 ne D 96 ec Ju -96 ne D 97 ec Ju -97 ne D 98 ec Ju -98 ne D 99 ec Ju -99 ne D 00 ec Ju -00 ne D 01 ec Ju -01 ne D 02 ec Ju -02 ne D 03 ec Ju -03 ne D 04 ec Ju -04 ne D 05 ec Ju -05 ne D 06 ec Ju -06 ne D 07 ec -0 7

0

68

ITALY

Italy Population (million inhabitants): GDP (US$ million): Country @rating: Business climate rating:

59.1 1,850,900

1

A2 A2

STRENGTHS • The excellent reputation enjoyed by sectors like luxury, home furnishings and clothing partly offset high cost prices. • The smaller companies that constitute some 200 industrial districts generate strong sector synergy. • Italy’s exceptional attractiveness to tourists allows it to withstand competition from new European destinations. • Labour market reform has contributed to increasing employment and decreasing unemployment even if the employment of women and seniors is still low. • Pension reform will facilitate coping with unfavourable demographics.

WEAKNESSES • The insufficient proportion of high valueadded and technology-intensive products undermines exports. • The insufficiency of productivity gain is attributable to the limited means devoted to research and the limited penetration of high technologies in companies. • Tax evasion and the grey economy not only fail to contribute to either public sector financial recovery or debt repayment, but they also increase the tax and social contributions borne by reported income. • Administrative and legal procedures are slow. • Subsidies have not sufficed to close the gap between the south and the rest of the country.

MAIN ECONOMIC INDICATORS %

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth Consumption (var.) Investment (var.) Inﬂation Unemployment Short-term interest rate Public sector balance (%GDP) Public sector debt (%GDP) Exports (var.) Imports (var.) Current account balance (%GDP)

0.1 1.0 -5.8 2.8 8.6 2.3 -3.5 104.3 -2.4 0.8 -0.9

1.2 0.7 2.3 2.3 8.1 2.1 -3.5 103.8 3.3 2.7 -0.5

0.1 0.6 -0.8 2.1 7.7 2.2 -4.2 106.2 -0.5 0.5 -1.2

1.9 1.5 2.3 2.2 6.8 3.3 -4.4 107.0 5.3 4.3 -2.1

1.8 1.8 1.9 1.8 6 4.3 -2.7 105 4 3.3 -1.8

1.4 1.5 1.9 2.1 5.8 4.2 -2.8 103 3 3 -1.8

e = estimate, f = forecast

69

EUROPE AND THE CIS

70

RISK ASSESSMENT Economic growth remained sluggish in 2007, despite a degree of support from consumption and exports. Household spending, although still limited by weak wage growth, increased somewhat, thanks increased credit recourse and a bright employment picture. The erosion of export market share came to a halt, thanks to switching to higher value-added goods in traditional sectors like machinery, wood products, clothing, shoes and the car industry. An increase in export volumes has not, however, accompanied the increase in value. Growth should slow very slightly this year, mainly in the first half. Despite tax breaks (tax credits for taxpayers with no tax liability and youth entering the rental market and reduction of the local share of property tax) made possible by the improvement in public finances and the campaign against tax fraud, household consumption will slow amid a weakening job market and rising bread and grain prices. Although the automotive industry will continue to perform well in Europe, other export sectors will suffer from the unfavourable exchange rates and the deterioration of economic conditions in the United States and Europe. Public sector investment will lack buoyancy while residential construction will decline slightly under the effect of the credit crunch. Corporate capital equipment purchases will increase further due to the high capacity utilisation rates resulting from the lack of investment in recent years. Despite sharp improvement since 2005, the Coface payment incident index remains well above the European average. Initiating collection procedures is still a slow process. Swindles and rackets have not disappeared, particularly in south. Even if the depth of the economic slowdown expected this year proves to be limited, and if the income tax rate applicable to profits eases from 33 to 27.5 per cent, limited and localised deterioration of payment behaviour will remain possible in view of the less buoyant international environment and higher energy costs. The margins of companies trading with the dollar zone will suffer from the unfavourable exchange rates. Construction material manufacturers (ceramic, stone, tile) will moreover feel the effects of the construction downturn

in the United States. Tourism will probably have to contend with a reduction in revenues. Milling (flour, pasta) and biscuit making will have to contend with the increasing cost of agricultural raw materials. Exporters of clothing articles and fine leather goods should suffer less from the consumption slowdown across the Atlantic since they often focus on high-end clientele little affected by the economic difficulties. And home furnishings, like furniture and appliances, should continue to perform well in Europe, benefiting from dynamic renovation activity and the time lag between construction and this type of purchase. MAIN ECONOMIC SECTORS ■

Food After the steady trend in 2007, several risks have clouded the outlook for 2008. Exports will begin to suffer from the unfavourable exchange rates. The rising cost of agricultural raw materials will affect companies that use and/or process them. The relatively limited size of those companies compared to their mass-distribution customers will make it difficult to pass on the entire cost increase in sales prices.

■

Automotive Fiat had a good year in 2007 as much in passenger cars as in industrial and commercial vehicles. Forecasts for 2008 have been guarded: intense competition will not facilitate achievement of market share objectives and the failure to renew the ‘rottamazione’ car-purchase bonus could affect the market. ■

Electronics and electrical engineering Despite good export performance, notably to countries outside Europe, the sector suffered a slight slowdown in 2007. Rising costs and the strong euro put pressure on corporate margins. In less buoyant economic conditions this year, demand for capital goods could moreover weaken.

■

Mass distribution Sales growth slowed in 2007 even if hard discount chains outperformed other formats. Energy and transport costs along with intense competition between chains – which

ITALY

can also take the form of new services – have affected profitability. Although the operators say they are confident for 2008, the expected economic slowdown and higher prices could affect demand. ■

Fashion Relentless competition from Asian countries notwithstanding, the textiles/clothing sector has maintained the slightly upward trend that emerged in the second half 2006, thanks to repositioning on the high-end and relocation of production (but at the cost of a reduction in the number of players). Performance in the leather and shoe segments has, however, been less convincing despite a good export trend. ■ Mechanical engineering The sector had a good year in 2007 underpinned again by the good performance of machinery for industry, textiles in particular, in both the domestic market and abroad. Things will be more difficult in 2008 with the expected investment slowdown.

PAYMENT AND COLLECTION PRACTICES ■ Payment Trade notes (cambiali) are available in the form of bills of exchange or promissory notes. Cambiali must be duly accepted by the drawee and stamped locally at 12/1000 of their value or at 6/1000 if stamped beforehand abroad. In case of default, they constitute de facto enforcement orders as the courts automatically admit them as a writ of execution (ezecuzione forzata) against the debtor. Signed bills of exchange are a fairly secure means of payment but are rarely used on account of the high stamp duty, the somewhat lengthy cashing period and the drawee’s fear of damage to his or her reputation caused by the recording and publication of protested unpaid bills at the Chambers of Commerce. Since the rules on cheque amounts were relaxed in April 1990, the cheque has experienced substantial development: besides the date and place of issue, cheques established in amounts exceeding 12,500 euros and intended to circulate abroad must bear the

endorsement non trasferibile (not transferable) since they can only be cashed by the beneficiary. To make the use of cheques more secure and efficient, the new banking provisions reaffirm that, since 1 September 2006, any bank or postal cheque issued without authorisation or with insufficient funds will subject the cheque drawer to administrative penalties and listing by the CAI (Centrale d’Allarme Interbancaria), which automatically results in exclusion from the payment system for at least six months. Bank vouchers (ricevuta bancaria) are not a means of payment, but merely a notice of bank domicile drawn up by the creditor and submitted by him or her to his or her own bank for presentation to the debtor’s bank for the purposes of payment (the vouchers are also available in electronic form, in which case they are known as RI.BA elettronica). Courts may accept bank vouchers, if signed by the buyer, as acknowledgement of debt. However, they do not have the force of a writ of execution. Bank transfers are widely used (90 per cent of payments from Italy are made by bank transfer), and in particular SWIFT transfers, as they are considerably faster than ordinary transfers. The bank transfer is a cheap and secure means of payment once the contracting parties have established mutual trust.

1

■

Debt collection As elsewhere, an out-of-court settlement is always preferable to legal action. Demands and telephone dunning are quite effective, as are onsite visits that provide an opportunity to restore dialogue between supplier and customer, and so to conclude a settlement. Settlement negotiations focus on payment of the principal, plus any contractual default interest as may be provided for in writing and accepted by the buyer. Where there is no such agreement, the rate applicable to commercial agreements concluded after 8 August 2002 (Decree-Law of 9 October 2002) is the six-monthly rate set by the Ministry of Economic Affairs and Finance by reference to the European Central Bank’s refinancing rate, increased by seven percentage points.

71

EUROPE AND THE CIS

Failing an out-of-court settlement with the customer, the type of legal action taken will depend on the type of documents justifying the claim. Based on cambiali notes – bills of exchange, promissory notes – or cheques, creditors may proceed directly with forced execution beginning with a demand for payment (atto di precetto) served by a bailiff preliminary to attachment of the debtor’s moveable and immoveable property barring receipt of actual payment within the allotted time. The resulting auction proceeds will be used to discharge outstanding claims. Creditors can obtain an injunction to pay (decreto ingiuntivo) via a fast-track procedure if they can produce, besides invoice copies,

written proof of the claim’s existence. The injunction issued by the court will also specify the amount of legal costs, according to an established schedule, payable by the debtor. Lacking the requisite supporting documents, a creditor must take ordinary legal action to establish his or her right to payment, a process still considered slow despite the civil procedure reform adopted in May 1995. Such proceedings can take up to two years, although the applicant may obtain, during that period, a provisional payment order equivalent to a writ of execution. A recent amendment to the civil code, effective since March 2006, is intended, however, to speed up the pace of proceedings by imposing strict time limits on the parties for submitting evidence and making their case.

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300

250

WORLD Italy

200

150

100

50

Ju

ne D 93 ec Ju -93 ne D 94 ec Ju -94 ne D 95 ec Ju -95 ne D 96 ec Ju -96 ne D 97 ec Ju -97 ne D 98 ec Ju -98 ne D 99 ec Ju -99 ne D 00 ec Ju -00 ne D 01 ec Ju -01 ne D 02 ec Ju -02 ne D 03 ec Ju -03 ne D 04 ec Ju -04 ne D 05 ec Ju -05 ne D 06 ec Ju -06 ne D 07 ec -0 7

0

72

KAZAKHSTAN

Kazakhstan Population (million inhabitants) GDP (US$ million) Country @rating: Medium-term rating: Business climate rating:

15.3 77,237

1

B Moderately high risk B

STRENGTHS • Kazakhstan not only boasts the world’s eighth largest oil and second largest uranium reserves but is also endowed with a wealth of other natural resources like gas and iron. • Large investments in oil extraction and transport should result in a threefold increase in exports. • The oil fund should wall off the fiscal budget from oil price and the public sector has little debt. • A consensus on opening the country to foreign capital and balanced policy on ethnic minorities have resulted in a level of political risk that is more moderate than in other Central Asian countries.

WEAKNESSES • External debt ratios have deteriorated sharply, due to the growth of private sector debt. • The credit explosion has weakened the banking sector. • Uncertainty over the process of succession to President Nazarbaev can be a source of instability and deter foreign investment. • A lack of transparency and a high level of corruption are major elements of weakness.

RISK ASSESSMENT The growth rate exceeded 9 per cent in 2007, for the eighth consecutive year. The economy was driven not only by increased production of oil in both value and volume terms but also of iron, uranium and other types of ore. The outlook for 2008 is dimmer since the country will suffer from a stiffening of credit conditions in the wake of the subprime crisis with Kazakh banks having taken on heavy debt abroad to fund the rapid growth of lending to the private sector. A significant proportion went into property and as much 35 per cent into consumption. The bursting of the property bubble and the stiffening of credit conditions could weaken the financial and construction sec-

tors and consumption could slow significantly. A large-scale financial crisis will, nonetheless, be unlikely to develop with the government, whose solvency is very good, able to intervene in any systemic crisis. The economy should, moreover, continue to benefit from support in 2008 from rising hydrocarbon, ore and grain sales. GDP growth could thus come to around 6 per cent in 2008, a nonetheless substantial decline compared to performance these past nine years. Further out, the threefold increase in oil production resulting from exploitation of the Kashagan field will spur growth. The severe tensions between the consortium headed by Technip and government officials, and technical difficulties encountered, should ultimately be resolved.

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EUROPE AND THE CIS

MAIN ECONOMIC INDICATORS USD billions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

9.3 6.5 −0.9 13.2 9.6 3.6 −0.3 −1.0 74.0 33.8 2.4

9.6 6.9 −0.2 20.6 13.8 6.8 0.5 1.2 75.9 36.5 2.6

9.7 7.6 0.6 28.3 18.0 10.3 −0.5 −0.9 76.0 41.1 3.4

10.6 8.6 0.8 38.8 24.1 14.7 −1.8 −2.2 91.4 31.6 3.9

9.6 10.6 −0.8 44.8 30.1 14.7 −4.9 −4.8 101.2 42.8 4.6

6.3 14.8 −1.7 51.2 35.1 16.1 −6.9 −5.3 93.0 55.2 5.7

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■ Market overview Kazakhstan is going ahead, at its own pace, with reforms designed to list it, in the words of its head of state, ‘among the world’s top 50 economies by 2030’. A candidate for WTO accession, the country is confronted with corruption, bureaucracy, an inefficient tax system and social cleavages exacerbated by the economic boom. Privatisation of stateowned enterprises, albeit rushed from the very outset and incomplete, adoption of liberal legislation and soaring foreign direct investment (over US$46 billion net stocks at the end of 2006) reflect the scale of progress achieved. An emerging economy highly prized by international financiers, Kazakhstan’s banking sector has racked up huge foreign borrowings and made loans to the construction sector that could backfire in the event of a correction. However, the government is keeping a watchful eye and has decided to create emergency funds in case of need.

74

■ Means of access While recognised as a market economy by the United States in 2002 but not by the European Union, the market is only mildly protectionist. Landlocked Kazakhstan is first and foremost a market for seasoned exporters. With a view to WTO accession, currently under negotiation, customs duties in the non-

farm sector average around 8.2 per cent. Tariff peaks persist in sensitive sectors such as steel (15.2 per cent), toys (15.3 per cent) and furniture (10.2 per cent). Customs clearance continues to be stifled by red tape. A number of products are also subject to certification. The fact that certificates from non-CIS countries are not valid in Kazakhstan significantly slows import formalities. The government has undertaken to eradicate illegal practices, but much remains to be done in an entire economy driven by a getrich-quick approach. ■

Attitude towards foreign investors Kazakhstan still has the second biggest volume of foreign direct investment in the CIS, after Russia. Foreign investor interest is driven by the country’s oil and gas reserves and its undeniable political stability. A new law passed in January 2003 strengthens the government’s interventionist powers during a downturn. Higher oil taxes were introduced in early 2004, but slightly eased in 2005. Furthermore, retroactive legislation was passed in early 2005 granting the state a pre-emptive right to mine ore. Due to the sustained improvement in the country’s economic situation and soaring commodity prices, relations between the government and foreign investors are occasionally ‘rebalanced’ in favour of domestic interests, whether public or quasi-public. The private

KAZAKHSTAN

sector, in particular retailing, is flourishing on the back of more than five years of robust economic growth. However, experience

shows that investors would do well to take every legal precaution before entering into a joint venture agreement with local partners.

OPPORTUNITY SCOPE

1

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

37 8 19 Imports: 45% of GDP

Exports: 55% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

10000

4000 3500 3000 2500 2000 1500 1000 500 0

8000 6000 4000 2000 0 Germany Russia

China

Italy

France

Russia

China Germany France

Ukraine

IMPORTS by products ■ Machinery and equipment 45% ■ Ores 14% ■ Metals 13% ■ Chemicals 11% ■ Foodstuffs 7% ■ Other 9%

EXPORTS by products ■ Hydrocarbons 69% ■ Other ores 3% ■ Metals 16% ■ Chemicals 3% ■ Other 9%

STANDARD OF LIVING / PURCHASING POWER Indicators

Kazakhstan

Regional average CIS

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

7,780 3,790 0.774 26 57 23 n/a

8,612 3,821 0.771 28 64 19 72

5,983 2,313 0.672 31 44 30 50

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EUROPE AND THE CIS

Kyrgyzstan Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

5.2 2,694 D Very high risk D

RISK ASSESSMENT Economic growth accelerated in 2007 (up 7.5 per cent), underpinned by the dynamism of construction and services and spurred by high prices for gold, the country’s number one export. Remittances of wages from expatriate workers in Russia and Kazakhstan have also bolstered consumption. Strong domestic demand and especially the sharp increases in wheat prices have, however, caused a resurgence of inflation that reached 8 per cent in 2007. Even more troubling, the strong domestic demand in conjunction with rising hydrocarbon prices contributed to a widening of the current account deficit, which represented about 18 per cent of GDP in 2007 compared to 6.6 per cent in 2006.

The high gold prices and expatriate worker remittances should allow the economy to grow in 2008 at a rate near that registered in 2007. This rate will be hard to sustain over the long haul, however, due to the imbalances it causes. With the formal sector, outside the gold mines, not very developed, the growth has moreover not benefited most of the population and the political and social situation has remained very tense nearly three years after the Tulip Revolution. The December 2007 legislative elections, despite the victory of President Kurmanbek Bakiev’s party, will be unlikely to bring the necessary political stability, with the continued tensions within the political class compounded by a profound north–south geographic cleavage.

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

7.0 3.1 −4.9 590 724 −134 −3.0 95.1 8.0 4.6

7.0 4.1 −4.4 733 904 −171 −3.4 88.2 6.4 5.3

−0.2 4.3 −3.7 794 1,106 −312 3.2 78.0 7.4 5.0

2.7 5.6 −2.1 1,011 1,792 −781 −6.6 70.2 5.6 4.3

7.5 8.0 −2.2 1,379 2,792 −1,413 −17.9 57.7 5.9 3.7

7.0 7.0 −2 1,705 3,085 −1,380 −15.1 50.5 5.3 3.8

e = estimate, f = forecast

76

LATVIA

Latvia Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

2.3 20,116

1

A3 Quite low risk A3

STRENGTHS • As a result of strong growth, the rate of increase of per capita income has been among the highest of new EU member states. • Commercial and financial services – particularly transport and telecommunications – have capitalised on Latvia’s geographic position as an East–West trading hub. • Fiscal prudence has made it possible to keep public sector debt at a low level. • Foreign exchange reserves cover the monetary base. • The banking sector benefits from the strong presence of foreign banks in its ownership structure.

WEAKNESSES • Overheating has weakened the economy increasing its vulnerability to a currency crisis or a sharp economic slowdown. • The dynamism of domestic demand and the limited added value of a high proportion of exports (wood products, metals) have resulted in a substantial widening of external account deficits, of which FDI covers just a small fraction. Recourse to borrowing abroad will be necessary. • Inflation has increased sharply, which has delayed Latvia’s integration into the euro zone. • A very rapid credit expansion focused mainly on financing property with high proportion denominated in foreign currencies has weakened the banking sector. • The labour market has become tight.

RISK ASSESSMENT Economic growth was strong for most of 2007, driven by the increase in real wages and the expansion of credit. Consumption showed signs of slowing down late in the year while a correction had developed in the property market by summer. The government’s action plan for cooling off the economy was a contributing factor. A slowdown has developed in new property loans while retail sales have begun to sag. More moderate GDP growth is thus expected in 2008. Households will continue to cut back on consumption reflecting the negative wealth effect and rising debt service on their debt. Residential

investment will stall. Continuation of public investment projects should, however, limit the extent of the growth slowdown. The easing of inflationary pressures will be a slow process due to increases in food and imported gas prices and regulated prices. Adoption of the euro is thus not expected before 2011. A severe foreign trade imbalance will moreover persist due to the offsetting effects of the slowdown of foreign demand and the cooling off of domestic demand. The increase in investment income payments should also fuel a current account deficit that will continue to represent nearly 20 per cent of GDP. In this context, foreign debt, due

77

EUROPE AND THE CIS

mainly by banks, should remain at a high level. Although the risks of a currency crisis and an economic trend reversal have increased, a soft-landing scenario remains the most likely outcome. Sovereign risk, meanwhile, has been very limited with the country

maintaining prudent fiscal policy and benefiting from a public sector debt ratio among the lowest in the EU. Corruption scandals may cause some political instability but should not jeopardise the current economic policy options.

MAIN ECONOMIC INDICATORS USD millions Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Unemployment (%) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves(in months of imports)

2003

2004

2005

2006

2007(e)

2008(f)

7.2 2.9 −1.6 10.5 3,171 5,173 −2,002 −920 −8.2 84.0 15.0 2.6

8.7 6.2 −1.0 10.4 4,221 7,002 −2,781 −1,761 −12.8 97.7 17.0 2.6

10.6 6.7 −0.4 8.9 5,361 8,379 −3,018 −1,991 −12.4 94.7 30.3 2.5

11.9 6.5 −0.3 6.8 6,140 11,271 −5,131 −4,518 −22.5 118.2 18.5 3.5

10.7 10.1 0.9 5.8 7,663 13,868 −6,205 −5,897 −22.2 111.3 19.9 3.4

7.5 8.5 0.8 5.5 8,789 15,192 −6,403 −6,385 −19.4 104.4 20.3 3.3

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■ Market overview Since the accession of Romania and Bulgaria in 2007, Latvia, with its population of 2.3 million, is no longer the poorest country in the enlarged EU. It has even beaten Poland with per capita GDP at 53.4 per cent of the EU average. The country is developing fast with 11 per cent growth in the first half of 2007, albeit accompanied by strong inflation and a current account deficit.

■

Attitude towards foreign investors he country is open to foreign investors. Since 2004, Latvia has one of the lowest rates of corporation tax in the enlarged EU (15 per cent, compared with 19 per cent in 2003, 22 per cent in 2002 and 25 per cent in 2001). The new Labour Code, adopted in 2002, is in line with European directives. Social security contributions in general amount to 33.09 per cent of wages, with 24.09 per cent borne by the employer and 9 per cent by the employee.

■ ■

78

Means of entry The Latvian market is open and highly competitive and there are no particular protectionist measures to note. A WTO member since February 1999, Latvia is one of 10 new members that joined the EU on 1 May 2004 and so applies the Common External Tariff. Such import prohibitions as exist are common to all member countries. The country’s intellectual property laws are still a shade unsatisfactory.

Foreign exchange regulations Following the pegging of the lat to the euro on 1 January 2005 and entry into ERM II on 29 April 2005, the central rate of LVL0.7028 to the euro remains unchanged. The Latvian central bank has decided to narrow the lat’s fluctuation band against the euro from ±15 to ±1 per cent of the central rate. Henceforth, the currency’s exchange rate should fluctuate between LVL0.695776 and LVL0.709832 to the euro. In early 2007, the Latvian currency was

LATVIA

hit by the worsening economic situation. In February, the lats neared the upper limit of its fluctuation band versus the euro and had to be defended repeatedly by the central bank, which spent €330 million in March 2007 to maintain the exchange rate. Even though this trend was later reversed as lats reserves were rebuilt following a period of inverse speculation, the central bank’s key interest rates will remain consistently high and lead to a partial shortage of lats on the currency market. The lats peg to the euro

within a 1 per cent fluctuation band remain open to debate. However, the reappointment on 1 November of Ilmars Rimsˇevicˇs – the self-styled guarantor of the Latvian currency’s stability – as governor of the Bank of Latvia for a six-year term confirms the government’s opposition to any devaluation. EMU entry, originally scheduled for 1 January 2008, will have to be pushed back to 2013 at the earliest due to extremely high inflation, the only criterion hampering Latvia’s entry into the euro zone.

1

79

EUROPE AND THE CIS

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMANDS (%GDP + IMPORTS) Private consumption Public consumption Investment

38 11 21 Imports: 62% of GDP

Exports: 48% of GDP

MAIN DESTINATIONS OF EXPORTS

MAIN ORIGINS OF IMPORTS

Mn USD

Mn USD

1000

2000

800

1500

600 1000 400 500

200 0

0 Lithuania Estonia

Russia Germany

UK

Germany Lithuania Russia

Estonia

Poland

IMPORTS by products ■ Chemicals and plastics 13% ■ Vehicles 13% ■ Fuels 13% ■ Mechanical machinery and equipment 12% ■ Agricultural raw materials and foodstuffs 11% ■ Metals 10% ■ Electrical equipment 8% ■ Other 21%

EXPORTS by products ■ Wood 22% ■ Metals 15% ■ Foodstuffs 13% ■ Textiles 8% ■ Fuels 5% ■ Vehicles 5% ■ Electrical equipment 5% ■ Other 27%

STANDARD OF LIVING / PURCHASING POWER

80

Indicators

Latvia

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population % Percentage under 15 years old Number of computers per 1,000 inhabitants

15,350 8,100 0.845 29 68 15 217

11,613 6,859 0.772 28 62 20 122

5,983 2,313 0.672 31 44 30 50

LITHUANIA

Lithuania Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

3.4 29,791

1

A3 Low risk A3

STRENGTHS • The country has rapidly modernised its economy and has proven capable of meeting the challenges of integration into the EU. Per capita income has been rising sharply in conjunction with a marked decline in unemployment. • Lithuania boasts a skilled workforce, a constantly improving institutional environment and a favourable geographic situation. • The public sector has little debt. • The very substantial presence of foreign banks has limited systemic banking risk.

WEAKNESSES • The external imbalances are growing more severe. Uncertainties remain regarding the entry into the euro zone. • Labour shortages exacerbated by emigration have pushed the cost of labour higher and undermined competitiveness. • Foreign direct investment has covered a limited proportion of the current account deficit while the growth of private foreign debt has been substantial. • An excessively rapid credit expansion, particularly property and foreigncurrency loans, will bear watching.

RISK ASSESSMENT Investment, especially in construction and property, and consumption, buoyed by the increase in household income, fuelled strong growth in 2007. Economic overheating, rising energy and food prices and increases in certain taxes resulted, however, in a marked surge of inflation. External account deficits widened amid strong domestic demand and a reduction in refining capacity due to fire damage and closure of the Mazeikiu refinery for modernisation. With interest rates higher, credit should ease in 2008. Investment should, however, benefit from the infrastructure projects undertaken with consumption remaining dynamic due to wage growth and a further reduction of income tax. A new increase in excise taxes and the price of Russian gas

should stoke inflation. Already turned down in 2007 for excessive inflation, Lithuania will be unlikely to join the euro zone before 2011. The current account deficit will remain high despite the reopening of the refinery and increases in both remittances from expatriate workers and transfers from the EU. Foreign debt, especially bank debt, should continue to grow. All this deterioration has been partly offset by the pursuit of prudent fiscal policy and the low level of public sector debt. The banking sector, moreover, has great staying power. Although the minority coalition in power has remained shaky, it should be able to withstand challenges until the next legislative elections, scheduled in October 2008. Relations with Russia have been tense since the interruption of oil deliveries to the Mazeikiu refinery in July 2006.

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EUROPE AND THE CIS

MAIN ECONOMIC INDICATORS USD millions Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Unemployment Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

2003

2004

2005

2006

2007(e)

2008(f)

10.3 −1.1 −1.3 12.4 7,658 9,362 −1,704 −1,278 −6.9 44.9 15.8 3.6

7.3 1.2 −1.5 11.4 9,306 11,689 −2,383 −1,725 −7.7 46.5 13.9 3.0

7.9 2.7 −0.5 8.3 11,774 14,690 −2,916 −1,831 −7.1 48.8 15.4 2.5

7.7 3.8 −0.6 5.6 14,152 18,361 −4,210 −3,218 −10.8 63.7 15.1 3.0

8.5 5.6 −0.9 4.2 16,487 22,548 −6,061 −5,155 −14.2 65.8 15.7 3.2

7.5 6.5 −1.4 4.2 19,520 26,945 −7,424 −6,405 −14.6 64.4 15.3 3.0

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■ Market overview The country continues to post strong economic growth for the sixth year in succession and is one of the most vibrant economies of the 27-member EU. Initial results for 2007 also point to a robust performance. The country’s robust growth is due partly to strong domestic demand driven by rising wages and incomes and soaring bank loans, and partly to buoyant investment boosted by European funding. ■ Means of entry Since EU accession on 1 May 2004, Lithuania has been a member of the European single market. It is now an open and competitive market; in fact it is one of the most competitive and dynamic markets of the 27-member EU. As for the country’s legal system, EU directives and regulations are transposed and applied to local law. Lithuania leads the 27-member states in this field. Excise duties and levies apply to a mere handful of products, including alcoholic beverages and oil. Some products may be imported only by licence holders. Licences are no longer difficult to obtain, even for alcoholic beverages. For settlements, bank transfers and short-term credit are increasingly used

82

and have all but replaced pre-payment and documentary credit. ■

Attitude towards foreign investors A sound economy and an improved business environment have contributed to attracting a growing number of foreign investors. FDI has steadily risen over the last 10 years to a record €1.41 billion at end-2006 (5.9 per cent of GDP), compared with €807.6 million in 2005 and €623 million in 2004. Lithuania is attractive to foreign investors for many good reasons: favourable tax laws (15 per cent corporation tax); free and unrestricted repatriation of profits, income and dividends derived from one’s activity; highly skilled workforce; low (though rapidly rising) wage costs and no discrimination against foreign investors.

■

Foreign exchange regulations The Lithuanian currency, the litas, has been tied to the euro at a fixed rate (€1 = LTL3.4528) since 1 February 2002. Numerous Lithuanian firms already hold euro-denominated accounts. Lithuania entered ERM II in June 2004. However, its entry into the euro zone, initially scheduled for early 2007, could be pushed back to 2011 at the earliest due to the government’s inability to contain the alarming rise in inflation.

LITHUANIA

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

39 10 15

1 Imports: 65% of GDP

Exports: 58% of GDP

MAIN DESTINATIONS OF EXPORTS

MAIN ORIGINS OF IMPORTS

Mn USD

Mn USD

2000

5000 4000

1500

3000 1000 2000 500

1000

0

0 Russia

Latvia

Germany Estonia Poland

Russia

EXPORTS by products ■ Fuels 24% ■ Foodstuffs 13% ■ Chemicals 9% ■ Vehicles 8% ■ Electrical equipment 7% ■ Mechanical machinery and equipment 6% ■ Furniture 6% ■ Other 28%

Germany Poland

Latvia Netherlands

IMPORTS by products ■ Fuels 22% ■ Vehicles 12% ■ Chemicals 12% ■ Mechanical machinery and equipment 10% ■ Foodstuffs 8% ■ Electrical equipment 7% ■ Metals 7% ■ Other 21%

STANDARD OF LIVING / PURCHASING POWER Indicators

Lithuania

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

14,930 7,870 0.857 28 67 17 155

11,613 6,859 0.772 28 62 20 122

5,983 2,313 0.672 31 44 30 50

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EUROPE AND THE CIS

Luxembourg Population (inhabitants): GDP (US$ million): Country @rating: Business climate rating:

462,042 41,382 A1 A2

RISK ASSESSMENT Despite a slight slowdown, economic growth remained very strong in 2007. Financial services, which represent 40 per cent of domestic product and 30 per cent of tax revenues, have made a substantial contribution to GDP growth and the current account surplus through management commissions received by Undertakings for Collective Investment (UCI). The good conditions prevailing in steel have moreover made it possible to reduce the manufacturing trade deficit. The slowdown will continue in 2008. The financial crisis will undercut the financial performance of banks. The reduction of UCI net assets will undermine commissions. The loss of dynamism should remain limited, however, with the specialities of choice in the Luxembourg financial centre – private banking and UCI management – affected less than investment banking. Consumption should prove more dynamic moreover due to rising civil service wages, the adoption of tax

84

incentives and bright job picture in services no longer benefiting only non-residents (onethird of the working population). The other components of growth, investments and exports, should remain buoyant despite a residential property slowdown and less favourable external conditions. The corporate financial situation has remained good. Despite the upward economic trend, bankruptcies began to increase again, up 13 per cent from January through September 2007. A high proportion of the bankruptcies concern long-established companies, with a failure to deal with succession problems probably responsible for many of them. Difficulties in obtaining business information have not improved matters, a fact underlying the Coface business climate rating for Luxembourg. At the sectoral level, services to private individuals are still the most vulnerable. Residential construction and services to the financial sector could also become shakier in coming months.

LUXEMBOURG

MAIN ECONOMIC INDICATORS %

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth Consumption (var.) Investment (var.) Inﬂation Unemployment Short-term interest Public sector balance (%GDP) Public sector debt (%GDP) Exports (var.) Imports (var.) Current account balance (%GDP)

2.0 1.0 −12.7 2.5 3.7 2.3 0.5 6.3 5.0 6.1 8.0

4.9 2.1 18.6 3.2 5.1 2.1 −1.1 6.4 9.8 9.8 11.8

5.0 3.7 −1.1 3.8 4.5 2.2 −0.1 6.1 6.3 6.1 10.9

6.1 2.0 4.9 3.0 4.7 3.1 0.7 6.6 9.6 7.2 10.3

5.4 2.1 4.7 2.4 4.6 4.3 1.1 6.9 7.5 7.7 11.5

4.5 3.2 8.5 2.7 4.5 4.3 0.9 6.0 7.2 7.4 12.7

1

e = estimate, f = forecast

85

EUROPE AND THE CIS

Macedonia Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

2.0 6,217

C Moderately high risk C

RISK ASSESSMENT Economic growth accelerated in 2007, driven by exports, the financial sector and construction. Consumption and especially investment strengthened, buoyed by the introduction of a unified tax system in conjunction with a reduction in bureaucracy. The confidence of economic agents should remain high in 2008 with buoyant domestic demand offsetting weaker foreign demand. The denar’s de facto euro peg has contributed to limiting inflationary pressures, and fiscal and monetary policy management has remained prudent. The good export performance and the influx of remittances from expatriate workers facilitated bringing external accounts into balance. Amid profit repatriations by a major foreign investor, the dynamism of domestic demand, and the upsurge in energy prices, a moderate current account deficit should re-emerge in 2008. Greater economic stability notwithstanding, the structural weaknesses have not

86

disappeared, with exports still too centred on metals and clothing, the institutional and regulatory framework still undermined by persistent deficiencies, the pace of industrial restructuring and labour market reform still lagging and unemployment still very high. Although enjoying an absolute parliamentary majority, the government has been dependent on the backing of an ethnic Albanian opposition party to implement the more sensitive reforms – according to the 2001 Ohrid Agreement, such reforms require the approval of a majority of deputies belonging to ethnic minorities. But continuing antagonism between the government and the opposition has slowed the legislative process, delaying Macedonia’s integration into the EU in consequence. The country is currently implementing a stabilisation and association agreement. Domestic security, meanwhile, could deteriorate in case of instability in Kosovo.

MACEDONIA

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

2.8 1.2 -1.1 1,363 2,211 -848 -3.2 38.1 16.4 4.1

4.1 -0.4 0.0 1,672 2,785 -1,112 -7.7 38.7 10.3 3.2

4.1 0.5 0.2 2,040 3,097 -1,058 -1.4 43.7 8.9 3.9

3.1 3.2 -0.6 2,396 3,682 -1,285 -0.4 40.9 13.2 4.8

4.6 2.1 -0.9 2,990 4,397 -1,407 0.5 40.3 12.1 4.4

4.7 2.7 -1.5 3,507 5,139 -1,632 -2.8 39.8 10.9 4.0

1

e = estimate, f = forecast

87

EUROPE AND THE CIS

Malta Population (inhabitants): GDP (US$ million):

404,989 6,331

Country @rating: Medium-term rating: Business climate rating:

A2 Low risk A2

RISK ASSESSMENT The economic recovery continued in 2007, driven not only by public investment but also by private consumption spurred by rising disposable incomes, credit expansion and the decline of hoarding linked to the country’s admission to the euro zone in January 2008. Only a very marginal growth slowdown should develop in 2008 due to completion the previous year of construction of the new general hospital and the waning effect of tax reductions. Accordance for Malta’s, admission to the euro zone constitutes recognition of its good management of the economy. The pressure on prices has been limited despite rising world energy prices. The government has

reduced the fiscal deficit to a level well below the threshold stipulated in the Maastricht Treaty. Additional measures of consolidation will nonetheless be necessary to improve the long-term sustainability of public sector finances and further reduce a government debt burden still exceeding 60 per cent of GDP. Malta’s small, very open and highly specialised economy – with tourism and electronics generating more than one-third of GDP and half of exports – remains, moreover, vulnerable to external shocks. A substantial current account deficit has persisted in a context of weak competitiveness and an overvalued exchange rate. The high concentration of bank loans in the property sector will bear close watching by officials.

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

−0.3 1.9 −9.8 2,592 3,232 −640 −3.1 41.8 2.8 6.5

0.1 2.7 −4.9 2,721 3,597 −876 −6.3 51.1 2.9 5.8

3.3 2.5 −3.0 2,557 3,683 −1,127 −9.1 52.7 3.9 4.9

3.3 2.6 −2.4 2,909 4,130 −1,222 −6.5 49.7 3.5 4.7

3.2 0.9 −1.9 3,281 4,654 −1,373 −9.2 45.8 3.1 4.3

2.8 1.9 −1.7 3,656 5,220 −1,564 −8.0 43.5 2.9 3.8

e = estimate, f = forecast

88

MOLDOVA

Moldova Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

3.8 3,266

1

D Very high risk C

RISK ASSESSMENT Strong investment and private consumption more than offset the negative impact of the drought on the farm and food sectors in 2007. Robust domestic demand and the lifting end 2007 of trade restrictions imposed by Russia on the sale of wine, a primary source of revenue for Moldova, should boost growth in 2008. Despite the recovery of wine exports to Russia and the extension in 2008 of autonomous trade preferences by the EU, Moldova should continue to run a substantial trade deficit representing nearly 50 per cent of GDP due to the strong demand for consumer goods and the rising cost of energy spurred notably by the gradual raising of the prices for imported Russian gas. Although increases in expatriate worker remittances and international financial aid should partly offset that deficit, the current account deficit will remain high. The limited diversification of both the

economy and exports (centred on food products, vegetable products and textiles) along with the country’s great dependency on Russia continue to cloud the growth outlook. There is still widespread poverty despite continuing wage growth. Divisions within Communist Party in power and tensions with the opposition could grow in the run-up to the legislative and presidential elections scheduled in the 2009 first half. The government will nonetheless have to proceed with implementation of the action plan negotiated with the EU especially as regards media freedom, anti-corruption measures, judicial reform and the business environment. Government officials have been moving closer to Moscow again and, in the conflict with Transnistria, although the Moldovan president and the officials representing the secessionist region have apparently adopted more flexible positions, a resolution of the conflict is not yet on the horizon.

89

EUROPE AND THE CIS

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

6.6 11.7 0.2 805 1,428 −623 −6.8 88.7 12.3 2.0

7.4 12.5 0.8 994 1,748 −754 −2.3 63.8 13.0 2.5

7.5 11.9 1.3 1,105 2,296 −1,192 −8.8 53.4 12.0 2.5

4.0 12.7 0.3 1,054 2,644 −1,591 −12.0 53.3 8.4 2.8

6.0 12.5 −0.5 1,430 3,590 −2,160 −13.2 49.6 6.1 2.9

6.3 12.8 −0.5 1,670 4,150 −2,480 −10.5 47.1 5.8 3.2

e = estimate, f = forecast

90

MONTENEGRO

Montenegro Population: GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

606,000 2,347

1

C Very high risk C

RISK ASSESSMENT Services, which generate nearly 60 per cent of GDP, drove growth in 2007 and remain the economic engine for 2008. Recent investments in the tourist sector have begun to produce results while the influx of FDI has spurred activity in the property sector. Financial services have experienced strong growth with the expansion of credit buoying consumption. Along with increases in energy prices and the minimum wage which contributed to the growth of inflation in 2007. The use of the euro as the national currency in conjunction with prudent fiscal policy has, however, limited inflationary pressures. The rapid credit expansion, compounded by the upsurge in imports of equipment and construction products accompanying the influx of FDI, has caused external accounts to deteriorate sharply since 2006. Invisibles,

including tourism, have only offset a small part of the trade deficit. The country continues to suffer from a number of structural weaknesses: exports still lack diversification (with aluminium, steel and fuels representing 70 per cent of total sales abroad), major bottlenecks persist in the energy sector, the business climate remains difficult and the employment market lacks flexibility. The social democratic coalition government won adoption by Parliament in October 2007, nearly a year and a half after the country proclaimed its independence, a constitution largely inspired by European principles. The country concluded a stabilisation and association agreement the same month. Integration into the EU nonetheless seems a remote prospect due notably to the inadequacy of efforts to combat corruption and organised crime and modernise the civil service.

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

2.4 7.9 -5.4 306 712 -406 -7.3 33.2 n/a 0.9

4.2 3.3 -2.7 562 1,080 -518 -7.7 31.2 n/a 0.8

4.0 3.4 -1.6 574 1,214 -640 -8.8 29.6 n/a 1.7

6.5 2.1 1.3 646 1,783 -1,137 -29.4 26.1 n/a 2.4

6.5 3.5 0.5 841 2,378 -1,538 -32.2 24.9 n/a 3.2

6.0 3.0 1.5 1071 2,903 -1,832 -31.6 25.2 n/a 3.3

e = estimate, f = forecast

91

EUROPE AND THE CIS

The Netherlands Population (million inhabitants): GDP (US$ million): Country @rating: Business climate rating:

16.4 670,300 A1 A1

RISK ASSESSMENT The economy continued to expand strongly in 2007, driven by exports and domestic demand. Despite the production slowdown affecting gas products early in the year, exports continued to grow buoyed by reexport activity, representing about 50 per cent of the total and chemical industry performance. A dynamic job market spurred household spending. Companies continued to invest meanwhile albeit at a more moderate pace. With less-than-expected growth of royalties from natural gas exploitation, however, the public sector ran another budget deficit. Although the same economic engines will drive growth in 2008, most will be less buoyant. Moderating demand from the main European trading partners, particularly Germany and the United Kingdom, will limit export growth. The current account balance will nonetheless continue to show a large surplus. Increased taxes and social security contributions, high interest rates and an upsurge in inflation will undermine household spending. This negative impact will nonetheless be partially offset by the pressures buffeting the job market with unem-

92

ployment declining to record lows and a labour shortage driving wages higher. Companies, meanwhile, will slow the pace of their investments in view of the more difficult conditions of access to credit and the deterrent effect of higher labour costs. The new tax and social measures included in the 2008 budget in conjunction with the growth of revenues from natural gas exploitation will allow the government to run a slight surplus that will help fund spending on health, pensions and education and repayment of public debt. Bankruptcies continued to decline in 2007, down 23.3 per cent over the first nine months, a positive trend reflected by the Coface payment incident index, which has remained below the world average. The world demand slowdown could weaken the less robust companies in the very export-dependent manufacturing sector. The scarcity of skilled labour will moreover have a greater effect on labour-intensive companies and those relying labour with cutting-edge skills. Despite an increase in corporate tax, which nonetheless spared smaller companies, corporate financial health should remain good overall in 2008.

THE NETHERLANDS

MAIN ECONOMIC INDICATORS %

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth Consumption (var.) Investment (var.) Inﬂation Unemployment Short-term interest Public sector balance (%GDP) Public sector debt (%GDP) Exports (var.) Imports (var.) Current account balance (%GDP)

0.3 −0.2 −1.5 2.1 4.0 2.3 −3.2 51.9 2.0 2.0 2.8

2.2 1.0 −1.6 1.2 4.6 2.1 −1.8 52.4 7.9 5.7 3.3

1.5 0.7 3.0 1.7 4.7 2.2 −0.5 52.3 5.9 5.5 7.1

3.0 2.7* 7.2 1.4 3.9 3.0 0.6 47.9 7.0 8.1 7.6

2.7 2.3 4.4 1.7 3.0 4.0 −0.6 46.8 6.3 6.7 6.9

2.4 1.9 3.4 2.3 2.7 4.0 0.5 44.8 5.5 5.6 7.5

1

e = estimate, f = forecast *Rate adjusted for reallocation of health spending in national accounts from private to public consumption (1 January 2006 health insurance reform).

PAYMENT AND COLLECTION PRACTICES ■ Payment Bills of exchange are rarely used in the Netherlands because it is not standard business practice to do so. As in Germany, they signal mistrust on the part of the supplier and so are incompatible with the climate of trust needed to maintain a stable business relationship. Cheques too are little used. They are an unreliable means of payment as they can be cashed only if covered. Consequently, issuing an uncovered cheque is not a criminal offence and those on the receiving end of a bounced cheque incur rather high bank charges. Under Dutch law, bills of exchange and cheques serve mainly to substantiate the existence of a debt. By contrast, bank transfers (Bankgiro) are by far the most common means of payment. All leading Dutch banks are linked to the SWIFT electronic network, which provides low-cost, flexible and speedy processing of international payments. Centralising accounts, based on a centralised local cashing system and simplified management of fund repatriation, are also widely used. ■ Debt collection The collection process begins with the debtor being served with a formal demand for the payment of principal plus accrued interest.

This is followed, where necessary, by the service of a summons to pay by bailiff or solicitor. Where the sales agreement makes no mention of the interest rate, from 1 December 2002 the rate of interest applicable is the European Central Bank’s refinancing rate, marked up by seven percentage points. The rate in force before the first day of the six-monthly period concerned applies throughout that period. In the absence of payment or an agreement, creditors may engage a local lawyer to initiate legal proceedings. The Dutch legal system allows lawyers to act as both barristers and solicitors: as solicitors they practise within the jurisdiction of their registration, whereas as barristers they may plead cases before any court in the country. Since 1 March 2008, the function of ‘solicitor’ has been abolished, and lawyers themselves are now allowed to present the requisite documents before any court in the Netherlands. At this stage of the legal action, effective pressure can be brought to bear on a debtor by means of a winding up petition. Such petition can succeed without much difficulty, provided two conditions are met: the applicant has submitted evidence of payment default on an undisputed debt claim to the civil court – there are no commercial courts – and a second claim of any kind (commercial, alimony, tax debt and so on) exists.

93

EUROPE AND THE CIS

Another procedure, also reserved for undisputed claims, involves recourse to a simplified fast-track procedure (kort geding) in relatively widespread use, especially for civil claims. With this procedure, the parties often accept the provisional award granted by the judge as final, thereby putting an end to the dispute. The summary ruling thus obtained results in provisional execution even if the debtor lodges an appeal. Ordinary proceedings in which both parties are heard are for the most part based on written submissions, with a simplified procedure before a district court (kantongerecht) for claims under €5,000. Larger claims are heard by a court of first instance (Rechtbank), whereby both parties argue their case via written submissions. Unless the parties expressly request the right to make an oral submission, which is rarely the case, the

judge bases his ruling on the principal case documents provided by the parties after they have appeared in court (notably to seek an amicable settlement). For complex cases requiring special examination, the judge will follow a more formal procedure based on the examination of each litigant’s brief and counter-briefs. In such matters, the judge will carefully assess the parties’ compliance with the general terms and conditions of sale appearing on invoices and purchase orders, since they form the legal framework of the commercial contract and thus play a crucial role in the proceedings. Finally, recourse to arbitration is common in the Netherlands. Most arbitration bodies work in specific fields and arbitrators are often selected from among specialist lawyers. Arbitral awards tend to be based on equity rather than on legal considerations.

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300

250

WORLD Netherlands

200

150

100

50

Ju

ne D 93 ec Ju -93 ne D 94 ec Ju -94 ne D 95 ec Ju -95 ne D 96 ec Ju -96 ne D 97 ec Ju -97 ne D 98 ec Ju -98 ne D 99 ec Ju -99 ne D 00 ec Ju -00 ne D 01 ec Ju -01 ne D 02 ec Ju -02 ne D 03 ec Ju -03 ne D 04 ec Ju -04 ne D 05 ec Ju -05 ne D 06 ec Ju -06 ne D 07 ec -0 7

0

94

NORWAY

Norway Population (million inhabitants): GDP (US$ million): Country @rating: Business climate rating:

4.7 336,100

1

A1 A1

RISK ASSESSMENT In a country where one-quarter of the national product and half of industrial production are directly or indirectly linked to hydrocarbon exploitation, it is hardly surprising that 2007 was another strong growth year. Particularly accommodating fiscal policy underpinned by a wealth of hydrocarbonrelated resources has benefited all economic players. Underpinned by a marked increase in their disposable income amid both rising wages, spurred by a bright employment picture and moderating prices, households considerably increased their consumption. Already running at full production capacity, companies further increased their investments. Exports, especially services and equipment related to hydrocarbon exploitation, benefited from strong demand notwithstanding the Norwegian krone appreciation. In 2008, despite a marked slowdown, GDP growth should still exceed 3 per cent. The

consumption slowdown will be substantial for households faced with the rising prices for electricity – from abnormally low levels in 2006 – and slower job and wage growth. Residential investment should decline slightly amid markedly higher interest rates. Conversely, continuing capacity restraints will prompt companies to go forward with purchases of equipment and investments in industrial and commercial premises. Traditional exports will slow somewhat amid further appreciation of the krone, less favourable external conditions and the continuing growth of production costs. Corporate profits have grown strongly in recent years with bankruptcies stabilising at a low level. The Coface payment incident index for Norwegian companies is excellent. The expected slowdown will be unlikely to jeopardise the overall situation even if some deterioration is expected in the housing industry.

95

EUROPE AND THE CIS

MAIN ECONOMIC INDICATORS %

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth* Consumption (var.) Investment (var.) Inﬂation Unemployment Short-term interest Public sector balance (%GDP) Public sector debt (%GDP) Exports (var.) Imports (var.) Current account balance (%GDP)

1.4 2.9 -4.9 2.5 4.5 4.1 7.6 50 5.1 4.3 12.9

3.8 4.7 6.1 0.5 4.5 2.0 11.4 52 3.0 11.0 13.8

3.7 3.4 9.7 1.5 4.6 2.3 16.0 44 5.7 8.3 16.7

4.6 4.4 7.8 2.3 3.4 2.8 19.0 55 9.0 8.5 16.0

5.2 6.1 8.5 0.6 2.6 4.6 18.0 53 6.8 9.0 17.0

3.2 3.9 6.5 2.9 2.5 5.2 18.0 54 4.0 5.0 20.0

* mainland, e = estimate, f = forecast

PAYMENT AND COLLECTION PRACTICES ■ Payment Bills of exchange and cheques are neither widely used nor recommended, as they must meet a number of formal requirements in order to be valid. In addition, creditors frequently refuse to accept cheques as a means of payment. As a rule, both instruments serve mainly to substantiate the existence of a debt. Conversely, promissory notes (gjeldsbrev) are much more common in commercial transactions and offer superior guarantees when associated with an unequivocal acknowledgement of the sum due that will, in case of subsequent default, allow the beneficiary to obtain a writ of execution from the competent court (Namrett). Bank transfers are by far the most widely used means of payment. All leading Norwegian banks use the SWIFT electronic network, which offers a cheap, flexible and quick international funds transfer service. Centralising accounts, based on a centralised local cashing system and simplified management of fund transfers, also constitute a relatively common practice. Electronic payments, involving the execution of payment orders via the Web site of the client’s bank, are rapidly gaining popularity.

96

■ Debt collection The collection process commences with the debtor being sent a demand for the payment

of the principal amount, plus any contractually agreed interest penalties, within 14 days. Where an agreement contains no specific penalty clause, interest starts to accrue 30 days after the creditor serves a demand for payment and, since 1 January 2004, is calculated at the Central Bank of Norway’s base rate (Norges Bank), in effect on 1 January and 1 July of the relevant year, increased by seven percentage points. In the absence of payment or an agreement, creditors may go before the Conciliation Board (Forliksra˚det), a quasi administrative body, located in each municipality, comprising three elected, non-professional judges sitting collectively, to obtain a speedy ruling at low cost. To benefit from this procedure, they must submit documents authenticating their claim, which should be denominated in Norwegian kroner (NOK). The Conciliation Board then summons the debtor at short notice to acknowledge or dispute the claim before hearing the parties, either in person or through their official representatives (stevnevitne). At this stage of proceedings, lawyers are not systematically required. The agreement thus reached will be binding as would be a judgement. If a settlement is not forthcoming, the case is referred to the court of first instance for examination. However, for claims found to be valid, the Conciliation Board has the power to hand down a decision, which has the force of a court judgement. Where a

NORWAY

defendant fails to respond to the arbitrator’s summons or appear at the hearing, the Board passes a ruling in default, which also has the force of a court judgement. More complex or disputed claims are heard by the court of first instance (Byret). The plenary proceedings of this court are based on oral evidence and written submissions. The court examines the arguments and hears the

parties’ witnesses before delivering a verdict. Norway does not have a system of commercial courts, but the probate court (Skifteret) is competent to hear disposals of capital assets, estate successions, as well as insolvency proceedings. Arbitration (voldgift) is mainly used for commercial disputes with international ramifications.

1

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300

250

WORLD Norway

200

150

100

50

Ju

ne D 93 ec Ju -93 ne D 94 ec Ju -94 ne D 95 ec Ju -95 ne D 96 ec Ju -96 ne D 97 ec Ju -97 ne D 98 ec Ju -98 ne D 99 ec Ju -99 ne D 00 ec Ju -00 ne D 01 ec Ju -01 ne D 02 ec Ju -02 ne D 03 ec Ju -03 ne D 04 ec Ju -04 ne D 05 ec Ju -05 ne D 06 ec Ju -06 ne D 07 ec -0 7

0

97

EUROPE AND THE CIS

Poland

98

Population (million inhabitants): GDP (US$ million):

38.1 338,733

Country @rating: Medium-term rating: Business climate rating:

A3 Low risk A3

STRENGTHS • Integration into the EU and modernisation of the productive apparatus have enhanced Poland’s growth potential. • Exports, which have diversified, have benefited from increasing productivity gains that partly offset the zloty appreciation. • A still-limited current account deficit and relatively large inflows of foreign direct investment have eased Poland’s vulnerability to a crisis of confidence. • Foreign debt ratios remain limited.

WEAKNESSES • The investment rate is still relatively low. • Continued effort is needed as regards improvement in the regulatory environment, functioning of public administrations and modernisation of infrastructure. • Corporate foreign debt bears watching. • The improvement in the fiscal situation could be compromised by the economic slowdown and political foot-dragging on far-reaching reform of public spending.

RISK ASSESSMENT Economic growth remained strong in 2007 after peaking in the first quarter. Both investments, underpinned by the good financial health of Polish companies, and private consumption, buoyed by rising real wages and a brighter employment picture, have remained dynamic. Sectors close to building and public works, electronics, information technology and pharmaceuticals have substantially benefited from the buoyant economic conditions. The textile sector is still shaky, however, while agriculture and the food industry will have to continue their restructuring by taking advantage of the ample financial resources made available by the EU. Companies will, however, have to cope with two pitfalls: the increase in their foreign debt and the difficulty in finding skilled labour due to extensive emigration. Wage growth, FDI and European funding

will continue to spur domestic demand in 2008. Growth should slow, however, under the effect of rising payroll costs and weakening European demand, which will affect investment and exports. The central bank has moreover been tightening monetary policy to limit inflationary pressures attributable to a tight labour market and rising food prices and energy costs. Although growing, the current account deficit is still moderate compared to other regional countries. FDI inflows and borrowing abroad should continue to cover that imbalance with no particular difficulty. The firmness of public sector revenues has, moreover, facilitated limiting the fiscal deficit and stabilising government debt (47 per cent of GDP). Poland’s integration into the euro zone nonetheless remains a remote prospect: 2013 at the earliest after possible admission to the EU’s ERMII in 2009.

POLAND

The victory by the liberal opposition in the early elections in October 2007 raises hopes for revival of the reform process – privatisa-

tions and the business environment in particular – and easier relations with the rest of the EU.

MAIN ECONOMIC INDICATORS USD billions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Unemployment (%) Exports Imports Trade Balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

3.9 0.8 −6.3 20.0 61.0 66.7 −5.7 −4.6 −2.1 49.5 20.2 4.7

5.3 3.5 −5.7 19.1 81.9 87.5 −5.6 −10.7 −4.2 51.4 18.8 3.7

3.6 2,1 −4.3 17.6 96.4 99.2 −2.8 −4.8 −1.6 43.7 17.2 3.9

6.2 1.1 −3.8 14.9 117.5 124.5 −7.0 −11.1 −3.3 49.4 11.1 3.4

6.5 2.2 −2.7 11.4 138.1 150.8 −12.7 −18.1 −4.3 49.2 10.6 3.5

5.2 3.0 −3.2 10.2 161.7 178.3 −16.6 −22.7 −4.5 47.3 10.0 3.1

1

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■ Market overview Since 1 January 2007, the gross minimum wage has been 936 zlotys (€250) while the average wage at end October 2007 was 2,859 zlotys (about €765). ■ Means of entry Sweeping reform of the laws and regulations governing market access has brought Poland into line with EU standards. Since EU accession on 1 May 2004, there are no longer any customs barriers between Poland and the member states of the EU. ■ Attitude towards foreign investors Drawing on the country’s clear competitive advantages, the Polish government has successfully attracted numerous foreign investors. According to the Polish central bank (NBP), in four years, FDI inflows have more than doubled from €46 billion in 2002 to €94.4 billion at end-2006. FDI in 2006 rose by 82 per cent over 2005 from €8.3 billion to €15 billion. The sectors favoured by foreign investors in 2006 were services – including real estate services – (€5 billion), followed by manufacturing (€3.5

billion), retail and commercial property (€2.4 billion), financial services (€1.6 billion), buying and selling of real estate (€0.9 billion) and other sectors (€1.6 billion). The real estate sector accounts for over 40 per cent of overall FDI as, in addition to the purchase and sale of existing property worth €0.9 billion, most investment in retail, manufacturing and services has a sizeable real estate component. Furthermore, the rise of the service sector supplanting manufacturing is a new trend and is indicative of the gradual transition of Poland’s still manufacturing-dominated economy to a services-led one. Of this total, privatisation-related FDI is tiny because of the all but complete suspension of privatisations since the rise to power of the conservative right, Prawo i Sprawiedliwos´c´ (PiS, Law and Justice), in 2005. Safeguards for foreign investors have been strengthened and there are now no restrictions on the repatriation of dividends. However, the administrative apparatus is still far from perfect. Administrative procedures remain lengthy and complex, despite the commitment of successive governments to simplifying them. The election in November

99

EUROPE AND THE CIS

2007 of a new government led by the liberal platform, Platforma Obywatelska (PO, Citizens’ Platform), should lead to greater flexibility in this field and even help to kick start the privatisation process. ■ Foreign exchange regulations The zloty’s exchange rate is freely determined by the market with a central peg set daily by the National Bank of Poland. The zloty has been fully convertible since 1 October 2002. Poland has not yet set a timetable for the adoption of the single currency as Mr. Kaczynski’s government did not consider that an economic priority. But the arrival of the ultraliberal PO-led coalition government in autumn 2007 could accelerate moves towards the euro’s adoption. During the election campaign, the PO declared several times its intention of including Poland into the euro-area shortly. The date commonly mentioned is 2012. The prospect of joining sooner seems unrealistic.

PAYMENT AND COLLECTION PRACTICES

100

Payment Bills of exchange and cheques are not widely used, as they must meet a number of formal issuing requirements in order to be valid. Nevertheless, for dishonoured and protested bills and cheques, creditors may resort to a fast-track procedure, resulting in an injunction to pay. Until now, cash payments were commonly used in Poland by individuals and firms alike, but under the ‘Freedom of business activity Act’ (Ustawa o swobodzie działalnos´ci gospodarczej), of 2 July 2004, which came into force on 21 August 2004, companies are required to make settlements via bank accounts for any transaction exceeding the equivalent in złotys of €15,000 even when payable in several instalments. This measure aims to counter fraudulent money laundering. One highly original instrument is the weksel in blanco, an incomplete promissory note bearing only the term ‘weksel’ and the issuer’s signature at the time of issue. The signature constitutes an irrevocable promise to pay and this undertaking is enforceable upon completion of the promis-

sory note (amount, place and date of payment) in accordance with a prior agreement between issuer and beneficiary. Weksels in blanco are widely used, as they also constitute a guarantee of payment in commercial agreements and the rescheduling of payments. Bank transfers have become the most widely used payment method. Leading Polish banks – after an initial phase of privatisation and a second phase of concentration – use the SWIFT network, which offers a cheap, flexible and quick domestic and international funds transfer service. Debt collection It is advisable, as far as possible, not to initiate recovery proceedings locally due not only to the cumbersome formalities and the high cost of legal action, but also to the country’s lengthy court procedures: it takes almost two years to obtain a writ of execution due to the lack of judges adequately trained in the rules of the market economy and proper equipment. Serving a demand for payment, properly accompanied by proof of debt, reminds the debtor of his obligation to pay the outstanding sum, plus any accrued interest. Since the term of limitation for receivables arising from a merchandise sales contract, and any ensuing past-due interest, is only two years, suppliers should exercise extreme vigilance. From 1 January 2004, interest may be claimed as of the 31st day following delivery of the product or service, even where the parties have agreed to a longer payment time. The legal interest rate will apply from the 31st day until the contractual payment date. Thereafter, in case of late payment, the tax penalty rate will apply and it will very often be higher than the legal interest rate, unless the contracting parties have agreed on a higher interest rate. It is advisable to seek an amicable settlement based on a payment schedule drawn up by a public notary, which includes an enforcement clause that allows creditors, in the event of default by the debtor, to go directly to the enforcement stage, subject to acknowledgement by the court of the binding nature of this document.

POLAND

Creditors may seek an injunction to pay (nakaz zaplaty) via a fast-track and less expensive procedure, provided they produce positive proof of debt (like bills of exchange, cheques or unpaid weksels in blanco or else acknowledgements of debt.). If the judge is not convinced of the substance of the claim – a decision he or she alone is empowered to make – he or she may refer the case to full trial. Ordinary proceedings are partly in writing with the parties filing submissions accompanied by all supporting case documents (original or certified copies) and partly oral with the litigants, their lawyers and their wit-

nesses heard on the main hearing date. At such legal proceedings, the judge is required, as far as possible, to attempt conciliation between the parties. Although each party bears his own legal costs incurred in the course of the proceedings, after making a ruling the court will generally require the losing party to bear most of the cost of the procedure. Commercial disputes are generally heard by the economic courts (sa˛d gospodarczy), falling under the jurisdiction of either district courts (sa˛d rejonowy) or regional courts (sa˛d okre˛gowy) or Voı¨vodies courts, depending on the size of the claim.

1

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300

WORLD Poland 250

200

150

100

50

7 D

ec

-0

7

6 Ju

ne

-0

-0

6 -0

ec D

5

ne Ju

D

ec

-0

05

4 Ju

ne

-0

04

ec D

3

ne Ju

D

ec

-0

03

2

ne Ju

ec

-0

02 D

1

ne Ju

D

ec

-0

01

0

ne Ju

D

ec

-0

00

9 -9 ec

ne Ju

D

ne Ju

D

ec

-9

99

8

0

101

EUROPE AND THE CIS

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

45 14 14 Imports: 37% of GDP

Exports: 37% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

40000 35000 30000 25000 20000 15000 10000 5000 0

30000 25000 20000 15000 10000 5000 0 Germany

Italy

France

UK

Czech Republic

Germany

Russia

Italy

Netherlands France

IMPORTS by products ■ Chemicals and plastics 17% ■ Mechanical machinery and equipment 14% ■ Metals 12% ■ Electrical machinery and equipment 11% ■ Fuels 10% ■ Vehicles 9% ■ Plastics 6% ■ Other 21%

EXPORTS by products ■ Vehicles 14% ■ Metals 13% ■ Mechanical machinery and equipment 12% ■ Electrical machinery and equipment 12% ■ Agricultural products and foodstuffs 10% ■ Furniture 6% ■ Fuels 5% ■ Other 29%

STANDARD OF LIVING / PURCHASING POWER

102

Indicators

Poland

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

14,830 8,190 0.862 27 62 16 193

11,613 6,859 0.772 28 62 20 122

5,983 2,313 0.672 31 44 30 50

PORTUGAL

Portugal Population (million inhabitants): GDP (US$ million): Country @rating: Business climate rating:

10.6 194,600

1

A2 A2

RISK ASSESSMENT Growth accelerated slightly in 2007, driven by domestic demand and exports. Weak wage growth prompted households to take on more debt to fund their spending. Corporate investment registered a significant upturn that allowed productivity and competitiveness to improve slightly. Exports thus grew at a high rate, particularly in the services sector. An increase in debt service notwithstanding, the government continued to pursue its public debt reduction objectives. In 2008, the economy should grow at a rate to that registered in 2007. With households carrying heavy debt representing 124 per cent of their disposable, they will cut back on consumption amid slow job creation, high interest rates and increasing taxes. The recovery – albeit weak – of property investment spurred by tourism and population movements from rural to large urban areas could be undermined by more difficult conditions of access to credit. Companies will continue to reap the benefits of restructuring done in recent years and will continue with their investment programmes. Low labour costs will underpin their competitiveness. Thanks to the performance of tourism-re-

lated services and transport industries, exports will remain at a good level despite the demand slowdown expected in the EU, which represents 70 per cent of the external market. The excessively large current account deficit will thus continue to decline. Despite the lagging pace of the public administration restructuring programme, the government will continue the process of growth convergence with the other euro zone countries by further reducing its public deficit. After declining for nearly two years, corporate bankruptcies surged, up 21.8 per cent in the first nine months of 2007, a trend reflected by the Coface payment incident index, which is above the world average. The economic fabric will remain weakened by the ground that has to be made up in many sectors in integrating new technologies and improving labours skills. That applies in particular to the textiles-clothing and shoe industries that have been contending with intense competition not only from low-cost countries but also from emerging Europe and Euromed. The consolidation of those sectors will thus continue in 2008. Portugal’s A2 business climate rating is born out by the complexity of the legal collection procedure.

103

EUROPE AND THE CIS

MAIN ECONOMIC INDICATORS Percentage

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth Consumption (var.) Investment (var.) Inﬂation Unemployment Short-term interest Public sector balance (%GDP) Public sector debt (%GDP) Exports (var.) Imports (var.) Current account balance (%GDP)

−1.1 0.1 −10.0 3.3 6.3 2.3 −2.8 62 4.0 −0.4 −5.9

1.2 2.4 −0.9 2.5 6.7 2.1 −3.1 63.9 4.6 6.8 −7.3

0.4 2.0 −2.7 2.1 7.7 2.2 −6.0 64.0 0.9 1.8 −9.3

1.3 1.1 −1.6 3.1 7.7 3.0 −3.9 64.8 8.9 4.3 −9.9

1.8 1.4 0.9 2.4 8.0 4.0 −3.3 64.4 6.9 3.4 −9.1

1.9 1.4 2.1 2.3 8.0 4.0 −2.9 63.7 6.0 4.2 −8.6

e = estimate, f = forecast

PAYMENT AND COLLECTION PRACTICES

104

■ Payment Bills of exchange are widely used for commercial transactions in Portugal. In order to be valid, however, they are subject to stamp duty whose rate is set each year in the country’s budget. The current rate of stamp duty is 0.5 per cent of the amount of the bill, or a minimum of €1. A bill of exchange is generally deemed independent of the contract to which it relates. While creditors, in the event of payment default, are not required to issue a protest notice before bringing an action to court, such a notice can be used to publicise payment default and pressure the debtor to honour his obligations, albeit belatedly. Cheques too are widely used. They are payable on presentation and subject to the minimum stamp duty that is borne by the bank. It is no longer an offence to issue uncovered cheques as a guarantee for staggered payments. In the event of default, cheques, bills of exchange and promissory notes offer effective guarantees to creditors as they are enforceable instruments in law and entitle holders to initiate executory proceedings. Under this process, creditors may petition the court to issue a writ of execution and notify the debtor of such an order. Where the debtor still fails to pay up, creditors may request the court to issue an attachment order against debtor’s

property. Flexible and efficient bank transfers via the SWIFT electronic network, for which large Portuguese banks are equipped, are also used for a growing proportion of payments. ■

Debt collection Out-of-court collection starts with the debtor being sent a final demand for the payment of the principal amount, plus any default interest that may have been agreed between the Parties, within eight days. Except when stipulated otherwise in the commercial agreement, the rate of interest applicable is the European Central Bank’s refinancing rate marked up by seven percentage points. Since 1 October 2004, interest rate set henceforth by decree of the Treasury Department, will be published in the Dia´rio da Repu´blica during the first fortnight of January and July each year and be applicable for the six coming months. The fast-track procedure (injunction to pay, – injunc¸a˜o) applicable to commercial claims considered uncontested – and, since 19 March 2003, whatever the amount involved – must be heard by the court in whose jurisdiction the obligation is enforceable. Since September 2005, the injunction may be served as an electronic file. For disputed claims, creditors may initiate formal and costly ‘declarative proceedings’ (acc¸a˜o declarativa), lasting a year or more, to obtain a ruling establishing their right to

PORTUGAL

payment. They must then initiate ‘enforcement proceedings’ (acc¸a˜o executiva) to enforce the court’s ruling. Under the revised Code of Civil Procedure introduced in January 1996, any original deed established by private seal (ie any written document issued to a supplier) in which the buyer unequivocally acknowledges his debt is henceforth deemed an instrument enforceable by law. This provision aims to encourage buyers to comply with contractual undertakings and offers creditors a safeguard against protracted legal action. Legal recourse in civil matters was revised in

October 2006 to allow the judge to adapt the procedure to the needs of each case and accelerate the pace of the proceedings. As Portugal does not have commercial courts – other than those in Lisbon and Vila Nova de Gaia (Porto), which deal with actions to void partner resolutions, insolvency proceedings, dissolution of companies and protection of industrial property – courts of first instance (tribunal de comarca) have generic competence in this regard. The Varas Cı´veis, civil courts with a three-judge panel presiding, hear large commercial claims exceeding €30,000.

1

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300

250

WORLD Portugal

200

150

100

50

Ju

ne D 93 ec Ju -93 ne D 94 ec Ju -94 ne D 95 ec Ju -95 ne D 96 ec Ju -96 ne D 97 ec Ju -97 ne D 98 ec Ju -98 ne D 99 ec Ju -99 ne D 00 ec Ju -00 ne D 01 ec Ju -01 ne D 02 ec Ju -02 ne D 03 ec Ju -03 ne D 04 ec Ju -04 ne D 05 ec Ju -05 ne D 06 ec Ju -06 ne D 07 ec -0 7

0

105

EUROPE AND THE CIS

Romania Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

106

21.5 121,609 A4 Quite low risk A4

STRENGTHS • Romania boasts a relatively large domestic market and a skilled, low-cost, work force. • Integration into the EU has improved the country’s economic outlook. • FDI inflows have thus far allowed the country to cover its external deficits with no particular difficulty and build up a cushion of foreign exchange reserves. • The public sector has little debt.

WEAKNESSES • Procyclical economic policy has exacerbated the current account deficit and spurred inflation. • The country’s dependency on foreign capital has been growing. • Rising interest rates and the depreciation of the leu will affect the budgets of companies and households with part of their debt denominated in foreign currencies. • The tensions at the highest reaches of the government, in conjunction with its minority position and the approach of legislative elections, have not facilitated reform implementation or economic policy management.

RISK ASSESSMENT Although down compared to 2006, due mainly to a more negative foreign trade contribution, economic growth nonetheless remained relatively strong in 2007. The government’s reaction to the overheating risk was inadequate and Romania was the regional country most affected by the financial turmoil triggered in the United States last summer. The Romanian leu was still under strong pressure late last year. Both income and fiscal policy continue to be expansionary, which could heighten inflationary pressures and exacerbate external imbalances. Despite the strong growth, rising interest rates and the greater selectivity exercised by local banks have weakened companies already deeply in debt. Although the consumer goods sector has shown a

degree of vulnerability on that score, subsidiaries of major groups, in the automotive industry and telecommunications in particular, have remained solid. In the face of foreign competition, the textile sector has continued, meanwhile, to experience serious difficulties. Government spending and rising real wages will continue to buoy the economy this year, while the current account deficit should grow slightly in relation to GDP. This continuing imbalance has increased the country’s vulnerability to a crisis of investor confidence especially with FDI likely to decline due to completion of the privatisation programme. The rapid growth of private foreign debt and bank credit, largely denominated in foreign currencies, could render the private sector

ROMANIA

vulnerable in case of a sharp exchange rate correction or marked economic slowdown. Bitter dissension continues to wrack the top echelons of the government and the

upcoming legislative elections could be brought forward to June 2008, which does not augur well for progress on reforms or for tighter fiscal policy any time soon.

1

MAIN ECONOMIC INDICATORS USD billions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Unemployment (%) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

5.2 14.1 −1.5 7.4 17.6 22.2 −4.5 −3.3 −5.6 40.1 14.2 3.7

8.4 9.3 −1.5 6.3 23.5 30.2 −6.7 −6.4 −8.5 41.4 13.8 4.7

4.1 8.6 −1.4 5.9 27.7 37.3 −9.6 −8.6 −8.7 38.1 11.8 5.0

7.7 4.9 −1.9 5.2 32.3 47.2 −14.8 −12.8 −10.5 43.9 11.3 5.6

5.8 6.1 −2.7 4.5 39.6 63.8 −24.2 −22.3 −13.8 48.6 14.4 5.1

5.2 4.6 −3.2 4.4 46.8 79.4 −32.6 −27.4 −14.6 60.0 12.6 4.4

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■ Market overview Romania joined the EU on 1 January 2007. Accession has been accompanied by special clauses in three key areas. First, the administration of justice and home affairs where a cooperation and verification mechanism allows the European Commission (EC) to monitor progress towards legal reform (notably the drawing up of new rules of criminal procedure and operation of the justice system) and the fight against corruption. In its first report published on 27 June 2007, the EC acknowledges the progress achieved, but considers the efforts to fight corruption inadequate. It deplores the fact that no convictions have been forthcoming in cases involving high-level corruption and directed the Romanian government on 10 October 2007 to put in place an anti-corruption action plan. If the EC deems progress unsatisfactory, it could implement sanctions under the accession treaty, including withdrawal of automatic recognition, by other member states, of sentences handed down by Romanian courts.

Second, on the subject of community aid, in a letter sent to the Romanian Ministry of Agriculture on 10 October 2007 by the agricultural and rural development commissioner, the EC warns of the possibility of a 25 per cent (€110 million) cut in agricultural subsidies granted to Romania. To avoid this penalty, the Romanian government must remedy serious flaws in the integrated control system for the payment of Common Agricultural Policy (CAP) subsidies. Finally, restrictive measures have been taken over the free movement of goods in the domestic market in a bid to ensure food safety. These measures mainly focus on foodstuffs of animal origin. Following approval of five out of seven of Romania’s Sectoral Operational Programmes by Brussels in July 2007, the first invitations to tender for projects co-financed by the Structural and Cohesion Funds 2007– 2013 were issued in September 2007. In all (rural development included), almost €30 billion of European funding could be allocated by the EC to Romania over the 2007–2013 period. Of this amount, nearly €9 billion could be set aside for the development of

107

EUROPE AND THE CIS

transport, infrastructure and the environment, both areas in which Romania is seriously lagging behind. The prospect of accession has helped boost FDI . FDI inflows rose sharply from €4 billion in 2004 to €5 billion in 2005 and then to €9 billion in 2006. They might ease back to €5 billion in 2007 because of fewer privatisations and a relative decline in other inflows. Foreign trade has also surged on the prospect of accession, 70 per cent of which is carried out with the EU. ■ Means of entry On 1 January 2007, Romania fully adopted the Common External Tariff of the EU, including its preferential provisions (Community’s generalised system of preferences and free-trade agreements) in respect of third countries. Systematic customs inspections involving the submission of a Single Administrative Document (SAD) now only apply to trade with third, non-EU, countries. EU companies looking to trade with Romania must complete a traded goods declaration (De´claration d’Echange de Biens, DEB) form. This declaration serves a twin purpose: monitoring compliance with VAT rules and compiling trade statistics.

108

■ Attitude towards foreign investors Romania is inherently open to foreign investment. Since 1 January 2005, it applies 16 per cent flat-rate corporation tax (against 25 per cent previously) and income tax. The law of July 2001 defines the legal framework for foreign investment and reaffirms equal treatment for all investments. The Romanian government has for several months been involved in preparing an investment bill for both foreign and domestic investment in an effort to comply with EU government subsidies criteria. The bill’s first section, which concerns state subsidies for regional development, was made public by government decree. Generally speaking, the relationship between the private sector and government departments remains difficult. While the overall business environment has improved, it is still tributary to slow and incoherent administrative and judicial procedures. Con-

sultation with the private sector is all too often a pure formality. There is still some way to go towards a complete overhaul of the Romanian administrative apparatus. Lack of trained staff and inadequate co-ordination between ministries and between central and local government are the most frequently mentioned drawbacks. Corruption remains a problem. Using a corruption perception index based on a survey of experts and business leaders, Transparency International’s 2007 annual report ranks Romania 69 out of 177, just behind Colombia and on a par with Ghana. It is the worst ranked EU country, after Bulgaria (ranked 64). ■

Foreign exchange regulations The ron is a floating currency with an inflation target. It has risen sharply against both the euro and the dollar since 2004 on the back of massive capital inflows generated by the liberalisation of capital accounts in September 2006. The currency edged back in August/September 2007 following the international credit squeeze. The ron’s nominal depreciation against the euro by 8 per cent in September 2007 shows that its appreciation was caused mainly by speculative capital inflows. By mid-October, the ron had recovered to its March 2007 level. Romanian importers can obtain foreign currency from their banks. Business persons and private individuals can open foreign currency accounts with, and obtain foreign currency loans from, Romanian and foreign banks. Both nationals and foreigners who are registered and doing business in Romania may hold and freely dispose of all their foreign currency funds. Non-residents can now open and operate ron accounts. PAYMENT AND COLLECTION PRACTICES

■

Payment Bills of exchange and especially promissory notes are the payment methods most commonly used for domestic, and sometimes international, transactions. In case of nonpayment, duly protested bills of exchange constitute, once recognised as valid by the court, an enforcement order permitting the

ROMANIA

beneficiary to proceed with immediate forced execution (execut¸ie silita˘) against the debtor. The use of cheques is also relatively commonplace, especially locally. Cheques allow creditors to exert substantial pressure on debtors since an unpaid cheque not only gives access to forced execution but also constitutes a criminal offence with the offender liable to a proportional fine, or even a prison sentence of six months to a year. That is why articles of associate often stipulate that only company managers have the authority to write cheques. Furthermore, a Registry of Payment Incidents (Centrala Incidentelor de Pla˘t¸i) maintained by the Romanian National Bank, comprises two computer files – updated by the interbank communications network – one on late payments involving bills of exchange and cheques and the other on major payment defaults involving legal entities or natural persons. Finally, bank transfers are becoming the most common payment method with the main Romanian banks – after an initial privatisation phase and a subsequent concentration phase – now linked to the SWIFT electronic network, which provides low-cost, flexible and rapid processing of domestic and international payments. ■ Debt collection It is advisable, where possible, to avoid taking legal action locally due not only to the formalism and high cost of legal procedures but also to the slow pace of court proceedings: it takes almost three years to obtain an enforcement order because of a lack of judges with adequate training in market economy practices and proper equipment. To improve the efficiency and transparency of the Romanian judicial system the Act of 19 July 2005 amended several legislative texts on judicial organisation and the status of the magistrature. Formal notice to pay served on the debtor, accompanied by documents supporting the claim, remind him of his payment obligations, increased by past-due interest. Since January 2000, in interna-

tional trade relationships the annual pastdue interest rate is set at 6 per cent unless agreed otherwise by the parties and provided Romanian law applies to the contract. As stipulated in the civil procedure code, any legal action based on a cash commercial claim must be preceded by an attempt at conciliation between the parties within 30 days of the creditor’s summons. In this regard, it is always wise to give preference to out-court-settlement, based on a rescheduling plan for the arrears prepared by the creditor’s legal counsel or established in preference as a notarial deed, which will make it possible to obtain an enforcement order against the debtor more quickly in case of failure to comply with the agreement. Possessing clear proof of debt that is due for payment and undisputed (acknowledgement of debt, promissory note, unpaid cheque, for example), the creditor can have recourse, since mid-August 2001, to an injunction to pay (somat¸ie de plata˘), a summary procedure that allows the judge – if he considers the demand substantiated – to issue a writ ordering the debtor to pay the principal and legal costs within 10–30 days of notification of the ruling. Conversely, if the creditor‘s petition for an injunction is dismissed by the court, the judge’s decision is irrevocable and the only remaining recourse would then be to initiate an ordinary procedure. Similarly, in case of objection (cererea ıˆn anulare) filed by the defendant within 10 days, the case is treated as a dispute subject to an ordinary procedure. Ordinary proceedings are partly in writing with the parties or their lawyers, filing submissions accompanied necessarily by all supporting case documents (original or certified copies) and partly oral with the litigants and their witnesses heard on the main hearing date. Courts fees are set annually by government order. Commercial disputes are heard by either local courts (judecatoria) or regional courts (tribunalul), acting as a commercial section, depending on the size of the claim.

1

109

EUROPE AND THE CIS

OPPORTUNITY SCOPE

BREAKDOWN IN DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

55 7 16 Imports: 43% of GDP

Exports: 33% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

5000

10000

4000

8000

3000

6000

2000

4000

1000

2000

0

0 Italy

Germany

Turkey Hungary France

Germany

EXPORTS by products ■ Clothing and shoes 22% ■ Mechanical machinery and equipment 20% ■ Metals 15% ■ Mineral products 10% ■ Machinery and transport equipment 10% ■ Other 23%

Italy

China

Russia

Hungary

IMPORTS by products ■ Mechanical machinery and equipment 24% ■ Mineral products 15% ■ Machinery and transport equipment 12% ■ Metals 10% ■ Clothing 8% ■ Chemicals 8% ■ Other 24%

STANDARD OF LIVING / PURCHASING POWER

110

Indicators

Romania

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

9,820 4,850 0.805 24 54 15 113

11,613 6,859 0.772 28 62 20 122

5,983 2,313 0.672 31 44 30 50

RUSSIA

Russia Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

142.4 986,940

1

B Quite low risk B

STRENGTHS • Russia is endowed with a wealth of natural resources and a skilled labour force. • Clearing public sector debt has given the government greater leeway for action. • The 2014 Winter Olympic Games in Sotchi afford a new opportunity to develop infrastructure and enhance the country’s attractiveness to tourists. • Benefiting from notable political stability, Russia has strengthened its regional and energy status.

WEAKNESSES • The investment rate is among the lowest for major emerging countries. • The industrial sector lacks competitiveness due to pressures exerted by the real exchange rate and the obsolescence of capital equipment. • Government direct or indirect takeovers of an increasing number of companies could harm their development and foster management ineffectiveness. • Reforms adopted are generally not implemented or, when implemented, often perverted from their original purpose to serve special business interests.

RISK ASSESSMENT The economy remains buoyant, thanks to dynamic household consumption and more expansionary fiscal policy in the run-up to the December 2007 legislative elections and presidential elections held in March 2008. Investment has been growing at an accelerated rate but still remains low in relation to GDP. The increased demand has benefited the retail trade, construction and industry, whose performance has been good. Oil-sector production, meanwhile, should be relatively flat. In this context, the Coface payment experience on Russian companies remains good, with domestic payment failures still easing. Corporate ownership and financial transparency is still, however, very inadequate with limited application of the law and

extensive corruption continuing moreover to undermine the business climate. The external financial situation remains healthy despite the growth of imports and the slowdown of non-oil exports. Massive inflows of FDI have, however, offset the shrinkage in the current account surplus. Russia continues to accumulate foreign exchange reserves – the world’s third largest in value terms after China and Japan. Liquidity crisis risk is thus very limited at this juncture. And the government has entirely repaid its debt. The exponential growth of corporate and bank debt constitutes, however, a vulnerability. Credit risk – in a context of unstable relations between the government and the private sector – could be underestimated. With the rapid expansion of

111

EUROPE AND THE CIS

credit, particularly to households, risks in the banking system remain substantial. In the political arena, the government has reasserted, sometimes with vehemence, Russia’s regional power status, which has stoked tensions, particularly with neighbouring countries. Domestic political stability, meanwhile, rests on a far-reaching recentralisa-

tion of power. The large majority won by the United Russia Party in the December legislative elections last year will allow Vladimir Putin to preserve his central role in the Russian political system, whatever his official function after the forthcoming presidential elections this March.

MAIN ECONOMIC INDICATORS USD billions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports).

7.3 12.0 1.7 135.9 76 59.9 35.4 8.2 40.3 13.0 8.9

7.2 12 4.3 183.2 97.4 85.8 58.6 9.9 34.4 21.9 11.4

6.4 10.9 7.5 243.6 125 118.1 83.6 10.9 30.6 22.5 13.3

6.7 9.0 7.4 303.9 165 139.2 94.5 9.6 28.7 18.2 17.4

7.0 11.9 4.7 315.2 210.3 104.9 61.7 5.1 30.1 11.8 19.8

6.8 9.3 2.5 332.6 249.2 83.4 42.8 2.9 30.1 12.6 20.6

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET

112

■ Conditions of access to the market Russia has carried out customs reforms since 2001, resulting in a reduction in the average rate of duty from 16 to 11 per cent, the unification of customs duties by product group and the introduction on 1 January 2004 of a new customs code. The code aims to facilitate trade through the establishment of a system of simplified procedures and the alignment of customs procedures with international (notably European) standards. It further seeks to enhance legal transparency and cut customs clearance times. Article 152 of the code requires customs officers to clear imported goods within three days of a declaration’s acceptance. In practice, however, the simplified procedures are not followed because of a lack of proper implementing regulations. Moreover, the interpretation of rules varies from one customs post to another. Also corruption in the customs service remains endemic.

■

Attitude towards foreign investors Tax reform, the main policy achievement of the 2000–2001 period, has helped create a more favourable environment for foreign investors. Taxation has been eased by cutting, among other things, corporation tax (capped at 24 per cent), personal income tax (13 per cent flat rate) and VAT (down to 18 per cent from 20). Changes to the tax code introduced in July 2006 further curtail the powers of the tax authorities. Audit procedures should therefore become more transparent. Administrative reforms designed to reduce the state’s economic role have led to legislation that simplifies company registration and licence award procedures. But the reforms are still at an embryonic stage. A number of activities in Russia are subject to a licence (construction, banking, health care and pharmaceuticals, alcohol production, metalworking, gem-cutting, transport, gaming, money lending, telecommunications, aeronautics, carrying of firearms, etc). Federal Law no.

RUSSIA

128 on the award of licences lists 105 activities in all subject to federal licensing. Awareness of the advantages of protecting intellectual property rights has resulted in improved safeguards legislation and concerted discussions on ways to combat infringement, especially of drug patents. Adopted in December 2006, the fourth section of the civil code dealing with intellectual property protection will come into force on 1 January 2008. The law of 13 July 2005 establishing special economic zones could be of interest to foreign investors as it grants duty exemptions and tax incentives. It creates three such zones: manufacturing, technology development and tourism, plus the industrial port areas set up under the law of 14 June 2007 and the special economic zones of Magadan and Kaliningrad. The zones should help reduce administrative obstacles for companies, facilitating access to credit and cut rental costs. A bill on foreign investment procedures in strategically important commercial organisations, jointly prepared by the Ministries of Industry and Energy, Trade and Economic Development, Defence and the FSB, is under review by the Douma. This bill, which limits foreign investment in certain sectors, defines the activities deemed strategically important

for Russia where foreign investment is regulated. It focuses on the introduction of an approvals procedure similar to that found in French, US and Spanish legislation and covers 39 activities related to defence, aircraft manufacture, space exploration, nuclear power, etc. If it appears in a deal that a foreign investor is in the process of acquiring control of a Russian company that is strategically important for national security, the investor must seek permission from the competent government commission, which has a duty to reply within three months. It is however not uncommon for investors to encounter difficulties arising from ineffective law enforcement and excessive red tape. For instance, the application of the tax code by the tax authorities occasionally tends to penalise foreign companies (revocation of previously acquired benefits, lengthy and biased tax audits). Besides, the Yukos affair has created uncertainty about both the direction of government economic policy and the uniform application of law in Russia.

1

■

Foreign exchange regulations A law implemented in June 2004 calls for the gradual lifting of exchange controls by 2007. Full liberalisation though was brought forward to 1 July 2006. Special accounts and compulsory capital reserves for Russians and foreigners have since been abolished.

113

EUROPE AND THE CIS

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

40 14 17 Imports: 22% of GDP

Exports: 35% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

20000

40000 35000 30000 25000 20000 15000 10000 5000 0

15000 10000 5000 0 Netherlands Germany

China

Ukraine Turkey

Germany

China

Ukraine

Japan

South Korea

IMPORTS by products ■ Machinery and equipment 51% ■ Chemicals 17% ■ Agricultural products and foodstuffs 17% ■ Metals 7% ■ Other 9%

EXPORTS by products ■ Oil and oil by-products 44% ■ Gas 13% ■ Metals 14% ■ Machinery and equipment 6% ■ Chemicals 6% ■ Other 18%

STANDARD OF LIVING / PURCHASING POWER

114

Indicators

Russia

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

11,630 5,780 0.797 31 73 15 122

8,612 3,821 0.771 28 64 19 72

5,983 2,313 0.672 31 44 30 50

SERBIA

Serbia Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

7.4 31,808

1

C Very high risk C

STRENGTHS • The political normalisation and reforms undertaken since 2000 have allowed Serbia to win the backing of the international financial community and to consolidate its economic and financial situation. • Debt relief sharply reduced the public sector debt burden, the banking system was restructured and privatised, and a suitable framework was established for investments. • Foreign exchange reserves have reached very high levels. • The country benefits from a skilled, lowcost workforce.

WEAKNESSES • An excessively large current account deficit has generated external financing needs at difficult-to-sustain levels. • Private foreign debt has been growing rapidly. • Many projects remain to be implemented or continued including the restructuring of state-owned companies, intensification of the anti-corruption campaign and reform of legal and administrative institutions. • The political situation remains precarious due to the failure of the Kosovo final-status negotiations and the risk of a nationalist backlash.

RISK ASSESSMENT The economy continues to grow at a fast clip, driven by domestic demand and a dynamic services sector. The effects of the more restrictive monetary policy options adopted since August 2007 and the likely world demand slowdown should be offset by dynamic consumption spurred by the continuing rise of wages as well as by investments made in recently privatised companies and increased public capital spending. Major imbalances, nonetheless, continue to mark that growth, epitomised by a nettlesome widening of the current account deficit, notably reflecting the slow pace of stateowned company restructuring. The sharp increase in wages and the loosening of fiscal discipline have intensified that unfavourable trend since 2006. Despite the high volume of FDI inflows,

private external debt has increased substantially, reducing the beneficial effect of the debt restructuring granted by official creditors in 2001 and the London Club in 2004. Besides the risk of a hard landing for the economy, the sharp deterioration of external accounts has increased currency crisis risk despite the limited amount of short-term debt and the very comfortable levels of foreign exchange reserves. Political risk has, moreover, remained high despite the formation of a reformist government in May 2007, following elections in January. Further to the failure of negotiations between Serbs and Albanian Kosovars in December 2007, it seems that Kosovo’s declaration of independence is a likely outcome. This situation brings a risk of government instability and deterioration of relations with the European Union.

115

EUROPE AND THE CIS

MAIN ECONOMIC INDICATORS USD millions Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Unemployment (%) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

2003

2004

2005

2006

2007(e)

2008(f)

2.5 7.8 -3.2 14,6 2,477 7,324 -4,847 -1,928 -9.5 66.6 6.4 4.9

8.4 13.7 0.0 18.5 3,897 10,944 -7,047 -2,922 -12.0 57.8 9.6 3.9

6.2 17.7 0.7 20.1 4,647 10,210 -5,563 -2,088 -8.0 59.4 10.9 5.4

5.7 6.6 -1.6 19.5 6,487 12,715 -6,228 -3,654 -11.7 62.9 16.7 8.4

6.5 7.0 -2.5 18.8 7,849 15,512 -7,663 -5,217 -13.3 63.0 20.8 8.0

6.0 5.9 -1.0 17.4 9,184 17,374 -8,190 -5,522 -12.7 68.0 22.3 8.1

e = estimate, f = forecast

116

CONDITIONS OF ACCESS TO THE MARKET ■ Market overview Despite all the questions, Serbia’s political context undoubtedly raises over the future status of Kosovo and the ramifications of its cooperation with the International Criminal Tribunal for the former Yugoslavia (ICTY) regarding a stabilisation and association agreement, its EU candidate country status, and indeed the development of democratic institutions in the country, the economic situation is excellent, underpinned by strong growth, sound public finances, low inflation, rising foreign exchange reserves and a record level of FDI in 2006. Multilateral and bilateral funding towards the country’s reconstruction make sectors like building and public works, transport, energy, water and the environment especially attractive. The restructuring of large state-owned companies and the growing pace of privatisation are opening up outlets for industrial machinery. Major deals earmarked for 2008 include the privatisation of the country’s large oil and gas provider, NIS, and the second largest insurer DDOR; the launch of motorway, waste treatment and water management concessions and a series of joint ventures in the power sector. ■ Means of entry Measures to open up foreign trade adopted by the Serbian government have involved

cutting the number of import tariffs from 36 to 6, with 8 per cent of goods now subject to a ceiling rate of 30 per cent (down from 40). The rates of duty vary between 1 and 10 per cent for 73 per cent of goods and between 1 and 5 per cent for 50 per cent of goods. Technical discussions on reaching a stabilisation and association agreement with the EU have ended. Serbia wishes to obtain candidate country status by the end of 2008. Negotiations are under way in Geneva on WTO accession. Public procurement legislation passed by the Serbian parliament in August 2002, 90 per cent of which is EU-inspired, is still in force. Open tendering is well established throughout Serbia and should, in theory, lead to greater transparency.

■

Attitude towards foreign investors The country has a very open attitude to foreign investors. The 2001 privatisation act, the 2002 foreign investment act establishing equal rights between foreign and local investors and simplifying start-up formalities, banking sector restructuring, tax incentives (at 10 per cent, corporation tax is one of the lowest in the region) and cheap skilled labour make Serbia one of the most tax friendly countries in the region.

SERBIA

Serbia has signed and ratified CEFTA. The free-trade agreement with Russia is still in effect, opening up a potential market of 150 million consumers to locally established companies alone. However, a number of basic laws are still to be passed (bankruptcy, commercial courts, accounting standards). Property law remains opaque and court decisions are lengthy.

■

Foreign exchange regulations Serbia has kept the dinar (CSD) as the national currency. Since 2002, the dinar is convertible and foreign exchange for international settlements freely available to individuals and companies. In early 2006, the dinar traded at CSD86 to the euro. It has since strengthened and in October 2007 was trading at CSD76 to the euro.

1

117

EUROPE AND THE CIS

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

57 12 12 Imports: 50% of GDP

Exports: 27% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

2000

800 700 600 500 400 300 200 100 0

1500 1000 500 0 Italy

Bosnia Germany Montenegro, Russia Rep.

Russia Germany

Italy

China

Romania

IMPORTS by products ■ Fuels 20% ■ Foodstuffs 6% ■ Textile and clothing 4% ■ Chemicals and plastics 7% ■ Metals 9% ■ Machinery and equipment 6% ■ Wholesale and retail trade, repair 43% ■ Other 7%

EXPORTS by products ■ Metals 24% ■ Chemicals and plastics 16% ■ Foodstuffs 11% ■ Textile and clothing 7% ■ Wood, paper 4% ■ Machinery and equipment 8% ■ Other 32%

STANDARD OF LIVING / PURCHASING POWER

118

Indicators

Serbia

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

7,029 4,206 n/a 23 52 18 48

1,1613 6,859 0.772 28 62 20 122

5,983 2,313 0.672 31 44 30 50

SLOVAKIA

Slovakia Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

5.4 55,049

1

A3 Low risk A2

STRENGTHS • EU membership has been a catalyst of reform. • With robust growth and an easing current account deficit, the country is reaping the benefits today from the investments made in the automotive and electronics industries. • A limited level of inflation and reduction of the public sector deficit should allow Slovakia to join the euro zone in 2009.

WEAKNESSES • The economy’s dependence on car exports could undermine growth in case of a sharp slowdown of foreign demand. • Although FDI inflows remain relatively strong, foreign debt, notably in the form of short-term bank deposits, has been growing. • The participation in the government of populist formations does not augur well for marked progress on reforms.

RISK ASSESSMENT Increased production capacity, particularly in the automotive industry, spurred growth in 2007 and facilitated reducing external deficits. Household consumption benefited, meanwhile, from rising real wages and the expansion of credit. Investment remained dynamic despite the limited increase in public capital spending and the completion of new car factories. In this context, corporate solvency remained generally satisfactory even with a deterioration of risk in sectors like textiles, food and wood. Growth should be slower in 2008 with production start-up of new facilities having peaked in 2007. Although weakening slightly, domestic demand will benefit from the firmness of corporate earnings, direct investment and the growth of household income. Export dynamism, coupled with an import slowdown, should result in further improvement in external accounts. The fiscal deficit should ease to under 3 per cent of GDP by end 2007, thanks to

increased public sector revenues. Furthermore, the limited increase in regulated energy prices and the appreciation of the exchange rate since mid-2006 have resulted in a decline of inflation. The government is on the verge of meeting the Maastricht criteria, which should allow Slovakia to join the euro zone in January 2009 as expected. EU officials will nonetheless have to assess the durable character of the improvements. Rising world prices are likely to stoke inflation in 2008, and the government will have to demonstrate the extent of its control over public spending. Although the government coalition led by the left-wing party Smer, in power since mid2006, has revised certain reforms (labour market, health, pensions), it will be unlikely to go back on the essential features of measures adopted by the preceding majority, since it is intent on joining the European Monetary Union as soon as possible and preserving the country’s attractiveness to investors.

119

EUROPE AND THE CIS

MAIN ECONOMIC INDICATORS USD billions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Unemployment (%) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

4.8 8.4 -2.7 17.5 21.9 22.5 -0.6 -2.0 -5.9 54.4 14.2 4.9

5.2 7.5 -2.4 18.1 27.6 29.2 -1.5 -3.3 -7.8 56.3 10.7 4.8

6.6 2.8 -2.8 16.2 31.9 34.3 -2.4 -4.0 -8.4 56.5 11.2 4.3

8.5 4.3 -3.7 13.3 41.9 44.9 -3.1 -4.6 -8.2 57.6 4.9 2.8

9.0 1.9 -2.9 11.8 54.2 56.4 -2.3 -3.4 -4.7 54.3 4.5 3.1

7.0 2.3 -2.5 n/a 69.7 70.1 -0.3 -2.7 -3.1 49.1 4.0 2.8

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■ Market overview The job situation in the country is improving, with unemployment falling from 16.2 per cent in 2005 to 13.3 per cent in 2006 and to 11.1 per cent in the first half of 2007. But there are still extremely wide regional disparities. Despite substantial wage increases in the past few years, the average monthly wage is only about €550 and the minimum wage €225. The socialist government has suspended the privatisation programme for the duration of its four-year term. Consequently, the railways, rail freight management and local authority-administered urban heating are to remain the property of the Slovak state or of local authorities. While the expanding consumer goods market provides many business opportunities, capital goods supply and industrial cooperation projects clearly offer the best growth prospects. The latter can take the form of subcontracting, manufacture under licence or, more importantly, locally based joint ventures.

120

■ Means of entry Industrial products are allowed in duty-free and the exceptional arrangements in respect of farm products have been abolished. The Slovak customs code has adopted in full the European harmonised code, the common external tariff applicable to non-EU countries and the procedures (declaration of traded

goods) in respect of intra-EU trade. The most widely used means of payment are SWIFT transfers and documentary credit. Disputes and litigation are relatively rare. ■

Attitude towards foreign investors Slovakia’s resolutely liberal legislation permits foreign investors to wholly own a local company, with a 34 per cent stake constituting a blocking minority. The law establishes equality of treatment between Slovak and foreign investors. The Slovak Investment and Trade Development Agency, SARIO (Slovenska´ agentu´ra pre rozvoj investı´ciı´ a obchodu), is more proactive than before in the development of the country’s industrial areas. The Fico government has reintroduced restrictions on foreign shareholdings in socalled strategic sectors (energy, etc) and frozen the sale of the government’s stake in partially privatised enterprises, mainly in the power sector. However, the government’s refusal to increase public debt offers good concession and purchasing power parity (PPP) opportunities, despite the loopholes in Slovak legislation regarding institutionalised PPPs.

■

Foreign exchange regulations Since the abolition of exchange controls and the introduction of a new banking law, the trend is towards greater simplification of foreign commercial transactions. On 28 November 2005, Slovakia joined the second

SLOVAKIA

phase of EMU. Since March 2007, the Slovak koruna’s central rate versus the euro is SKK35.4424 to the euro, with a fluctuation margin of ±15 per cent. In actual fact, the currency is trending upwards and at 1 November 2007 traded at SKK33.30 to the euro. Entry into the euro area on 1 January

2009 is one of the priorities of the Fico government, which is sparing no effort to comply with the Maastricht criteria. If the policy succeeds, the final exchange rate will be a key factor in the country’s future competitiveness.

1

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300

WORLD Slovakia

250

200

150

100

50

02 D ec -0 Ju 2 ne 03 D ec -0 Ju 3 ne 04 D ec -0 Ju 4 ne 05 D ec -0 Ju 5 ne -0 6 D ec -0 Ju 6 ne -0 7 D ec -0 7

-0 1

ne Ju

D ec

01

-0 0

ne Ju

D ec

00

-9 9

ne Ju

D ec

99

-9 8

ne Ju

D ec

98

-9 7

ne Ju

D ec

Ju

ne

97

0

121

EUROPE AND THE CIS

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

31 11 16 Imports: 83% of GDP

Exports: 79% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

10000

12000

8000

10000 8000

6000

6000 4000

4000

2000

2000 0

0 Germany

Czech Republic

Italy

Poland

Austria

Germany

Czech Russia Hungary Republic

Austria

IMPORTS by products ■ Electrical and mechanical equipment 32% ■ Metals 13% ■ Chemicals 10% ■ Fuels 10% ■ Vehicles 8% ■ Foodstuffs 5% ■ Other manufactured goods 11% ■ Other 12%

EXPORTS by products ■ Electrical and mechanical equipment 35% ■ Vehicles 17% ■ Metals 11% ■ Chemicals 6% ■ Base products and gasoline 6% ■ Foodstuffs 3% ■ Other manufactured goods 11% ■ Other 11%

STANDARD OF LIVING / PURCHASING POWER

122

Indicators

Slovakia

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

17,600 9,870 0.856 21 56 17 358

11,613 6,859 0.772 28 62 20 122

5,983 2,313 0.672 31 44 30 50

SLOVENIA

Slovenia Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

2.0 37,303

1

A1 Very low risk A2

STRENGTHS • The country has enjoyed strong GDP growth and boasts the highest per capita income in Central Europe. • Its industry is both diversified – car manufacturing, electric appliances, pharmaceuticals, metal processing and paper products – and mostly exportoriented, which largely reflects the solid ties long established between local and West European companies. • Slovenia has a limited external deficit. • The country’s integration into the euro zone in January 2007 rewarded its tight management of public sector finances.

WEAKNESSES • The economy is very dependent on economic conditions in the euro zone. • The rapid expansion of credit and the growth of private external debt will bear watching. • Slovenia’s competitiveness could suffer from an excessive real exchange-rate appreciation. A low level of FDI has hampered modernisation of the productive apparatus. • The ageing population constitutes a potential risk for public sector finances. • Progress on labour market reform and privatisation has been lagging.

RISK ASSESSMENT The economy continued to grow strongly in 2007, underpinned mainly by investment dynamism particularly in the construction sector (infrastructure and housing). Private consumption remained strong spurred by rising employment and tax reductions. A sharp rise in imports was nonetheless responsible for a negative foreign trade contribution to GDP growth. Exports, boosted by the country’s integration into the euro zone in January 2007 and rising sales in the car industry continued, however, to grow at a high rate. In this buoyant economic context, the Coface payment incident index remained well below the world average. Growth should slow slightly in 2008 with a reduction of investment likely as a result of the marked expansion of production capacity achieved in recent years, the world economic slowdown and a probable deceler-

ation in housing construction. The import slowdown that should also result, however, will lead to a reduction in the external account deficit. The conjunction of wage growth and an economic slowdown should cause the public sector deficit to widen slightly. Government debt will, however, remain stable at a very moderate level, representing 27 per cent of GDP. Inflation should not ease much, meanwhile, amid the wage pressure and rising prices for commodities and energy. Despite an expected increase in the proceeds from privatisation, net FDI inflows will remain low with a further increase in foreign debt a likely consequence. The centre-right government coalition, which survived a no-confidence vote after the defeat of its candidate in the November 2007 presidential election, should be able to stay in power until the legislative elections scheduled in autumn 2008.

123

EUROPE AND THE CIS

MAIN ECONOMIC INDICATORS USD millions Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Unemployment (%) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

2003

2004

2005

2006

2007(e)

2008(f)

2.8 5.6 −2.7 11.2 12,916 13,539 −622 -216 −0.8 53.2 14.9 6.2

4.4 3.6 −2.3 10.6 16,065 17,322 −1,258 −893 −2.7 58.4 13.1 5.0

4.1 2.5 −1.5 10.1 18,146 19,404 −1,258 −681 −1.9 71.0 14.8 4.1

5.7 2.5 −1.2 9.4 21,327 22,814 −1,487 −1,104 −2.9 79.5 17.6 3.1

5.6 3.2 −0.9 7.8 28,184 30,218 −2,034 −1,429 −3.2 86.6 18.3 2.9

4.6 3.0 −1.5 8.0 34,760 36,640 −1,880 −1,240 −2.4 91.4 20.1 2.8

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET

124

■ Means of entry While there are no longer any tariff barriers – the rules of the internal market applying in full since 1 May 2004 when Slovenia entered the EU – various non-tariff barriers remain in place, necessarily narrowing access to the home market. Stringent inspections and tests are regularly carried out during a product’s – especially foodstuffs – release on the market by the relevant authorities ostensibly to protect the consumer. It is still necessary to translate all customer information notices and leaflets into Slovenian, even though the majority of the population speaks English. Regarding public procurement, the cartelisation of some sectors (construction and public works in particular) restricts market access for foreign players with the tacit support of local firms. This problem affects not only public procurement but also consumer goods, as evidenced by the dominance of a small group of organised retailers in the award of new contracts. Slovenia appears to be lagging behind its neighbours in Visegrad in terms of competitiveness. This is reflected in market share won in Western Europe and across the OECD. According to Slovenian employers, while sizeable hourly productivity gains have been achieved in manufacturing, thanks to

more focused investment and better management of industrial tools and manpower, the stronger job market is putting upward pressure on wages. Recruitment of foreign manpower, much favoured by the country’s business community, continues to be restricted by employment regulations and hardly extends beyond construction and heavy industry. It is in the Balkans and further to the east where the investments and the market penetration strategy of Slovenian companies are concentrated, and where the success story of Slovenian foreign trade lies. Trading relations with Russia and Ukraine are also expanding rapidly. ■

Attitude towards foreign investors It has to be said that Slovenia has not really received much in the way of foreign investment these last few years. According to the Bank of Slovenia, at end-2004 aggregate FDI inflows came to a mere €5.6 billion. In 2004, they amounted to €662 million and in 2005 to €427 million. The policy of attracting FDI was revived in 2006 with the reform of the Slovenian investment support agency, JAPTI. The government has relaunched its programme to privatise steel and telecommunications – a key component of the structural reforms announced in October 2005 – but so

SLOVENIA

index. It takes about three to four months to start up a company. Market access may bring growth opportunities, but it is also subject to a heavy administrative burden, not to mention fairly steep wage costs and high corporation tax (undergoing reform). An ambitious tax reform came into effect in 2007 and payroll tax continues to be cut in a phased manner.

far only steel’s privatisation has been completed in a sell-off to a Russian family group. The government’s refusal to let Belgian minority shareholder KBC take over Slovenia’s leading bank, Nova Ljubljanska Banka (NLB), is an excellent illustration of its footdragging attitude on the matter. In a number of competitive sectors, the two public investment funds, KAD (Kapitalska druzˇba, Pension Fund Management) and SOD (Slovenska odsˇkodninska druzˇba, Slovenian reimbursement Fund), are selling off their minority stakes. Groups like Gorenje (electrical appliances) Krka (pharmaceuticals), Petrol (hydrocarbon supply) and Intereuropa (logistics and transport) already have foreign minority shareholders, but with low stakes (under 15 per cent). Greenfield investments are welcomed but limited by the narrowness of the home market and poor Central European and Balkan regional competitiveness. Slovenia fares very badly on the ease of doing business

1

■

Foreign exchange regulations Slovenia entered the euro area as planned and without incident on 1 January 2007. The tolar is pegged to the euro at a fixed rate of 239.64 tolars to the euro. Henceforth, the country’s sole instruments of economic policy are budgetary and wage adjustments, the Bank of Slovenia having joined the European system of central banks. Entry into this system has not been accompanied by an inflationary surge as many sectors, including organised retail, signed a price moderation agreement on that occasion.

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 350

WORLD Slovenia

300 250 200 150 100 50

7

7

-0 ec

-0 ne

Ju

D

6

6

-0 ec

D

5

-0

-0

ne

ec D

Ju

4

05

Ju

ne

-0

04

ec D

3 -0

ne

ec D

Ju

2

03

-0 ec

ne Ju

D

1

02

-0

ne

ec D

Ju

0

01 ne

Ju

D

ec

-0

00

9 -9

ne

ec D

Ju

8

99 ne

Ju

D

ec

-9

98

-9

ne Ju

ec D

Ju

ne

97

7

0

125

EUROPE AND THE CIS

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

33 12 16 Imports: 65% of GDP

Exports: 65% of GDP

MAIN DESTINATIONS OF EXPORTS

MAIN ORIGINS OF IMPORTS

Mn USD

Mn USD

5000

5000

4000

4000

3000

3000

2000

2000

1000

1000 0

0 Germany

Italy

Croatia

Austria

France

Germany

Italy

Austria

France

Croatia

IMPORTS by products ■ Metals 16% ■ Mechanical machinery and equipment 12% ■ Chemicals 12% ■ Vehicles 12% ■ Fuels 11% ■ Electrical machinery and equipment 8% ■ Textiles 6% ■ Other 23%

EXPORTS by products ■ Metals 15% ■ Vehicles 14% ■ Mechanical machinery and equipment 13% ■ Electrical machinery and equipment 11% ■ Pharmaceutical products 7% ■ Other chemicals 7% ■ Furniture 6% ■ Other 28%

STANDARD OF LIVING / PURCHASING POWER

126

Indicators

Slovenia

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

23,970 18,890 0.910 21 51 14 404

11,613 6,859 0.772 28 62 20 122

5,983 2,313 0.672 31 44 30 50

SPAIN

Spain Population (million inhabitants): GDP (US$ million): Country @rating: Business climate rating:

44.5 1,230,600

1

A1 A1

STRENGTHS • The economy has benefited from the growth of the working population generated by the increasing proportion of women employed and by immigration. • Public investment in infrastructure financed by European subsidies has continued and allowed the country to make up lost ground in communication networks. • The public finance surplus is attributable to both the economic growth and the surplus positions of social security accounts generated by the growth of employment. • The continuing development of regional autonomies has made local players more responsible and brought decision makers closer to the general public. • Spain’s close ties and common language with a large part of the Americas hold promise for the future. • Spain remains a leading tourist destination.

WEAKNESSES • The large role played by residential construction in the economy constitutes a risk in case of a downturn. • The shortcomings of the education system, the failure to adequately train the vast reserves of temporary workers and the inadequacy of research and development have resulted in limited productivity gains. • Low productivity, inflationary pressures and positioning on products with insufficient value added to meet Asian and East European competition effectively has undermined the overall competitiveness of the products and services offered by the country. • The outlook for many industrial sectors will depend on decisions taken by foreign multinationals increasingly attracted by more competitive locations. • The management of water continues to be a problem due to its immoderate use in agriculture and its uneven distribution among the various regions.

RISK ASSESSMENT The economy remained very dynamic in 2007, despite the incipient slowdown of residential construction and household consumption. Investment by companies and public institutions was up sharply, again thanks to their good financial health. Even with the trade deficit remaining large, the foreign trade contribution was less negative due to good export and tourism performance. The Spanish economy should make a soft landing this year attributable to the decline

of residential construction and a further slowdown of private consumption. The trend will nonetheless remain consistent with the economy’s potential. The downturn of residential investment and housing prices should nonetheless be limited by continued strong demand from foreign tourists and immigrants (40 per cent of the total) and the limited supply of rentals. Consumption will suffer from the upsurge in inflation spurred by the increasing cost of energy and food. Growing unemployment, the result of both a

127

EUROPE AND THE CIS

more sluggish job market and the growth of the working population attributable to immigration and an increase in the proportion of actively employed women, will also be a negative factor. Other factors will, however, cushion the effects of the downturn, particularly the comfortable net worth positions still enjoyed by households along with financial support extended by the government in the form of rental subsidies for youth and lowincome families, increases in low pensions and income tax reductions made possible by good public-sector financial health. Although corporate investment in facilities and buildings will slow, that will be partly offset by continued public spending on infrastructure under a multi-year modernisation programme (Strategic Plan for Infrastructures and Transport or Plan Estrage´tico de Infrastructuras y Transporte, PEIT). The considerable development of research and development programmes intended to remedy the lack of competitiveness will also

serve as a shock absorber. Exports will continue to develop at a rate close to that of world trade and remain relatively unaffected by the American slowdown. Payment behaviour that has been satisfactory until now – notwithstanding a few setbacks in textiles, small electric equipment or computer assembly – could deteriorate. Already in 2007, the bankruptcy trend turned slightly up in the third quarter, and then, towards year end, the Coface payment incident index showed some deterioration. The smaller, often debt-burdened companies associated with the housing market (light work, real estate agencies, promoters, manufacturers and distributors of material and furnishings for the home) that have proliferated in recent years would then be the most exposed. Road transport could, however, suffer from rising petrol prices while the car industry will have to contend increasingly with competition from Eastern Europe and the sluggishness of domestic vehicle sales.

MAIN ECONOMIC INDICATORS Percentage

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth Consumption (var.) Investment (var.) Inﬂation Unemployment Short-term interest rate Public sector balance (%GDP) Public sector debt (%GDP) Exports (var.) Imports (var.) Current account balance (%GDP)

3.1 2.8 4.1 3.1 11.0 2.3 −0.2 48.7 3.6 6.1 −4.0

3.3 4.2 4.4 3.1 10.5 2.1 −0.2 46.2 4.2 9.5 −5.9

3.6 4.2 9.0 3.4 9.2 2.2 1.0 43.0 2.6 7.7 −7.4

3.9 3.7 10.4 3.5 8.5 3.3 1.8 40.0 5.1 8.3 −8.8

3.8 3.2 11.6 2.7 8.2 4.3 1.6 37.0 5.2 6.8 −9.4

2.8 2.7 6.5 3.2 8.6 4.2 0.9 35.0 5.0 5.5 −9.6

e = estimate, f = forecast

MAIN ECONOMIC SECTORS ■

128

Automotive industry The automotive industry represents 6.0 per cent of GDP, 11 per cent of jobs and 24 per cent of exports. The sluggishness of the domestic market, a trend likely to continue due notably to the expiry of the Prever Programme, has been offset by successes achieved in several major European markets. With the transfer of vehicle assembly opera-

tions to Eastern Europe, Asia and Turkey continuing, the parts segment will go forward with restructuring via capacity and cost reduction measures. Much will depend on the willingness of the parent companies to continue to invest in research and development in their Spanish factories. This sector will thus bear watching with an increase in payment defaults being an appreciable risk.

SPAIN

■ Food distribution Despite recent acquisitions activity, with the takeover of number four Caprabo by number three Eroski and of number 13 Plus by the leader Carrefour, the sector is still relatively fragmented with the five leaders representing only half the sales premises – and among the five leaders there are two foreign players. Regional chains continue to play an important role. The supermarket format has had the greatest development (55 per cent of the total) with megastores, discount and small retailers representing 15 per cent each. Sector business has grown substantially in recent years but the growth should slow this year in phase with consumption.

the increasing cost of energy and raw material and obligations agreed under the Kyoto protocol.

■ Construction The downturn in the residential market is under way. It is too early to say how severe it will ultimately be. Companies saddled with heavy debt, recently created or having achieved spectacular development in recent years, with a strong presence on the seacoast and in leisure homes, must be carefully supervised. The same applies to those who worked for the now bankrupt Valencia company Llanera. Besides construction strictly speaking, vigilance is also in order with activities associated with ceramics, glazing, furniture, wood, doorframes, piping and so on.

■

■ Information technology industry Due to the low penetration rate of computers in Spanish households with 57 per cent owning a computer compared to 75 per cent in the United States, the sector continues to grow steadily. Competition in both price and innovation terms has been intense including at the distribution stage. Growth will slow this year along with consumption. ■ Paper In a phase of strong growth in both production and sales terms, and of production at full capacity particularly in paper and cardboard packaging, most paper industry segments posted profits in 2007. In 2008, the sector will be faced with challenges that could affect profitability and volume, among which the expansion of emerging markets,

■

Chemicals Production should continue grow at a good clip (up 4.6 per cent). Although the progression of exports will ease to 5.3 per cent, they will still absorb 53 per cent of total production. The sector will be able to cope with the incertitude surrounding the future oil price trend and the additional costs generated by compliance with the Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH) directive (between 6 and 20 per cent of the cost of production).

1

Textiles and clothing The textiles and clothing sector employs 7.0 per cent of the work force and represents 4.0 per cent of GDP and 4.5 per cent of exports. While it seemed the sector had weathered the worst of the crisis in 2006–2007, at this juncture 2008 is shaping up as a difficult year, with elimination of European barriers to imports from Asia and maintenance for another year of American protective measures. The shock will not, however, be as great as in 2005, thanks to higher productivity, an upward export trend, and the increasing participation of sector companies in technological development programmes. Under a public support programme the sector will benefit from appreciable aid not only financial and industrial in nature but also on training and employment until end 2008. PAYMENT AND COLLECTION PRACTICES

■

Payment The bill of exchange is frequently used for commercial transactions in Spain. In the event of default, it offers creditors certain safeguards, including access to the new ‘exchange procedure’ (juicio cambiario) introduced by the recent civil procedure rules under which, based on his appraisal of the documents submitted, a first instance judge (juzgado de primera instancia) may order a debtor to pay within 10 days and have his or her property attached. Where a claim is contested, a court hearing is held to examine

129

EUROPE AND THE CIS

■ Debt collection Collection begins with formal notice served by recorded delivery letter inviting the debtor to pay, within 10 days, the principal increased by any past-due interest set by the parties. Barring special clauses included in the commercial contract, the applicable rate since 31 December 2004, is the interest rate applied by the European Central Bank in its most recent refinancing operation performed prior to the first calendar day of the half year concerned, increased by seven percentage points.

130

Semi-annually, the Finance Minister publishes the rate thus determined in the Boletı´n Oficial del Estado. Where there is a lack of settlement agreement with the customer, the creditor will initiate a legal collection process by reference to the recent law on civil procedures (ley de Enjuiciamento civil) which came into force on 8 January 2001. The rules cut the time taken up by litigation significantly and give oral arguments priority over written submissions – the cornerstone of the previous system – even though the authentication of large numbers of documents remains a requirement. Besides the ‘exchange procedure’, a seller unable to settle with a buyer out of court, may enforce his right to payment through the new civil procedure (juicio declarativo), divided into ordinary proceedings (juicio ordinario) for claims over €3,000 and oral proceedings (juicio verbal) for smaller claims. The aim of the new procedure is to speed up delivery of enforcement orders by reducing and simplifying the stages of the old procedure. In addition, for monetary claims for an overdue and payable amount under €30,000, creditors now benefit from a more flexible special procedure (juicio monitorio); this system does not require the presence of a barrister or solicitor to file a peticio´n inicial, prepared with a pre-printed form and submitted to the judge of first instance (juzgado de primera instancia) who may, after reviewing supporting documents, order the debtor to pay within 20 days. This innovative law, with the notable establishment of a summary procedure, has been progressively gaining acceptance and breaking with the tradition of formalism cultivated by the Spanish judiciary for many decades. PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 400 350 300

WORLD Spain

250 200 150 100 50 0

Ju ne D 93 ec Ju -93 ne D 94 ec Ju -94 ne D 95 ec Ju -95 ne D 96 ec Ju -96 ne D 97 ec Ju -97 ne D 98 ec Ju -98 ne D 99 ec Ju -9 9 ne D 00 ec Ju -00 ne D 01 ec Ju -01 ne D 02 ec Ju -02 ne D 03 ec Ju -03 ne D 04 ec Ju -04 ne D 05 ec Ju -05 ne D 06 ec Ju -06 ne D 07 ec -0 7

both parties’ arguments and a judgement handed down within 10 additional days of said hearing. Widely accepted though somewhat difficult to obtain, the bill of exchange guaranteed by a bank limits the risk of payment default by offering creditors additional recourse to the endorser of the bill. The cheque, which is less widely used than the bill of exchange, offers similar legal safeguards under the ‘exchange procedure’ (proce´dure cambiaire) in the event of default. The same is true of the promissory note (pagare´), which, like the bill of exchange, is an instrument enforceable by law. However, defaults on this instrument are not recorded in the RAI (Registro de Aceptationes Impagadas). An outgrowth of the Centre for Interbank Cooperation, the RAI is the most important registry at the national level, where the payment defaults of commercial companies are recorded and where banks and other deposit institutions can check a company’s payment record before extending credit. The RAI was sanctioned by the Tribunal de Defensa de la Competencia in February 2005 for undermining competition as regards free access to its files by interested third parties. Electronic transfers via the SWIFT network, widely used by Spanish banks, are a quick, fairly reliable and cheap instrument, provided the purchaser, in good faith, orders payment. If the buyer fails to order a transfer, the legal remedy consists in instituting ordinary proceedings, or a summary procedure based simply on an unpaid invoice.

SWEDEN

Sweden Population (million inhabitants): GDP (US$ million): Country @rating: Business climate rating:

9.1 384,927

1

A1 A1

RISK ASSESSMENT The economy continued to grow strongly in 2007 despite the beginning of a slowdown in the fourth quarter. Investment was very dynamic as much by companies faced with exhaustion of their production capacity as by public institutions and by households whose spending on construction increased sharply. Although the slowdown should continue in 2008, GDP growth could nonetheless reach 3 per cent. Exports will be hampered by unfavourable exchange rates and the demand slowdown in North America and to a lesser extent in Europe. Corporate and household investment will be less dynamic due to rising costs, the restored balance between production capacity and actual throughput and the increasing cost of credit. In the face of the inflationary pressures resulting from the strong growth and the labour shortage in

some sectors, the Riksbank is expected to continue its policy of raising interest rates. Household consumption should nonetheless accelerate slightly in a still-favourable environment marked by new tax reductions (facilitated by the fiscal surplus) and job and wage growth. After four years of strong growth, companies in general are enjoying good financial health. Bankruptcies continued to decline, easing 5 per cent in the first 10 months of 2007 and the Coface payment incident index for Sweden remained at an excellent level. Sawmills and the car industry nonetheless have experienced some difficulties. In electronic product distribution, the competition intensified with the irruption of German Media Markt. The slight slowdown expected will be unlikely to undermine payment behaviour.

MAIN ECONOMIC INDICATORS %

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth Consumption (var.) Investment (var.) Inﬂation Unemployment Short-term interest Public sector balance (%GDP) Public sector debt (%GDP) Exports (var.) Imports (var.) Current account balance (%GDP)

1.7 1.8 3.3 2.3 5.6 3.2 −0.9 53.5 4.5 5.0 6.6

4.1 2.2 6.5 1.0 6.3 2.3 0.8 52.4 11.1 7.0 6.5

2.9 2.4 12.9 0.8 7.4 1.9 2.4 52.2 6.5 7.0 5.8

4.2 2.8 5.2 1.5 7.1 2.6 2.5 47.0 8.9 7.9 7.0

3.4 3.0 12.0 2.0 6.1 3.6 2.9 41.0 5.5 7.0 7.1

3.0 3.3 5.0 2.3 5.8 4.3 2.6 36.0 5.0 6.0 7.0

e = estimate, f = forecast

131

EUROPE AND THE CIS

■ Payment Bills of exchange and promissory notes are neither widely used nor recommended as they must meet a number of formal requirements in order to be valid. Just as the rules for issuing cheques have become more flexible, so the sanctions for issuers of uncovered cheques have been relaxed over the years. Moreover, the use of cheques has been gradually declining in favour of bank cards. Conversely, use of the SWIFT electronic network by Swedish banks provides a secure, efficient and fairly cheap domestic and international fund-transfer service. However, as payment is dependent on the buyer’s good faith, sellers are advised to take great care to ensure that their bank account details are correct if they wish to receive timely payment.

132

■ Debt collection As a rule, the collection process begins with the debtor being sent a final demand by registered mail asking him to pay, within 10 days, the principal amount together with any contractually agreed interest penalties. Where there is no specific interest clause in the contract, the rate of interest applicable from 1 July 2002 is the Bank of Sweden’s (Sveriges Riksbank) six-monthly benchmark rate (repora¨ntan), plus eight percentage points. Under the Swedish Interest Act (ra¨ntelag, 1975, last amended in 2002), interest starts to accrue 30 days after the invoice date or after a demand for payment is sent to the debtor by registered mail. Where claims meet certain requirements – denominated in Swedish krona, certain, liquid and indisputable – creditors can obtain an injunction to pay (Betalningsfo¨rela¨ggande) within more or less four months from the Enforcement Service, set up since 1 January 1992. This Enforcement Service (Kronofogde-myndigheten) may order a debtor to settle the claim or justify late payment within two weeks. If the debtor fails to respond within four weeks, the Office issues a writ of execution at the creditor’s request.

While formal, this system offers a relatively straightforward and quick remedy in respect of undisputed claims and has greatly freed up the courts. Creditors are not required to engage a lawyer but, in some circumstances, would be well advised to do so. Lacking a settlement agreement or where claims are disputed, the Enforcement Service, if contacted previously, will no longer have jurisdiction over the dispute. Creditors must obtain legal remedy through the ordinary court process by bringing their claims before a court of first instance (Tingsra¨tt). It should be noted that civil courts have also jurisdiction to hear commercial disputes. Proceedings involve a preliminary hearing in which the judge attempts to reconcile the parties after examining their case documents, evidence and arguments. If the dispute remains unresolved, the proceedings continue with written submissions and oral arguments until the main hearing, where the accent is on counsels’ pleadings (defence and prosecution) and examination of witnesses’ testimonies. In accordance with the ’immediacy of judgement’ principle, the court bases its decision exclusively on the evidence presented at the trial. As a general rule, the code of civil procedure requires the losing party to bear all legal costs considered reasonable as well as the attorney fees incurred by the winning party, beyond a given threshold claim amount (about SEK20,150). It takes about 12 months on average to obtain a writ of execution in first instance, bearing in mind that there is a widespread tendency in Sweden to appeal against judgements. PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300

250

WORLD Sweden

200

150

100

50

0

Ju ne D 93 ec Ju -93 ne D 94 ec Ju -94 ne D 95 ec Ju -95 ne D 96 ec Ju -96 ne D 97 ec Ju -97 ne D 98 ec Ju -98 ne D 99 ec Ju -99 ne D 00 ec Ju -00 ne D 01 ec Ju -01 ne D 02 ec Ju -02 ne D 03 ec Ju -03 ne D 04 ec Ju -04 ne D 05 ec Ju -05 ne D 06 ec Ju -06 ne D 07 ec -0 7

PAYMENT AND COLLECTION PRACTICES

SWITZERLAND

Switzerland Population (million inhabitants): GDP (US$ million): Country @rating: Business climate rating:

7.5 387,800

1

A1 A1

STRENGTHS • A privileged geographic location, political and social stability, quality financial services and a moderate tax system have attracted investors. • The presence of large industrial and financial groups that are among the world leaders has underpinned the current account surplus. • The high density of cantonal and regional bank networks has fostered the development of smaller companies. • The high level of R&D has spurred corporate competitiveness. • Limited taxation of legal entities has fostered the creation of new companies.

WEAKNESSES • Lack of membership in the EU, notwithstanding the mitigating effect of bilateral agreements, has hampered products and services trade (customs, shipping restrictions, standards). • The lack of coordination between the Confederation and cantons on financial and administrative matters has impeded reforms. • Public and private regulations have hampered foreign competition and weighed on corporate productivity. • Low unemployment and the shortage of skilled labour have impeded development in certain sectors. • The continuing equilibrium of public finances will require continued efforts on reforms to cope with rising social security benefits.

RISK ASSESSMENT Domestic demand and exports drove economic growth in 2007, with household consumption keeping pace with increases in wages and jobs. A particularly marked increase in capital goods investment by companies largely offset the decline in investment in residential construction. Exports continued to benefit not only from the dynamism of trading partners in the euro zone (about 60 per cent of sales abroad) but also from the Swiss franc depreciation. In 2008, the growth rate will weaken. Domestic demand will be the main growth driver with export growth sagging in the

wake of the economic slowdown in the euro zone and the waning stimulatory effect of the weak franc. The services sector will continue to achieve excellent performance through commissions generated on financial transactions with foreign customers and revenues derived from international trading and tourism. The import slowdown will ease under the effect of corporate investment demand with companies needing to increase their technical production capacity and thereby progressively normalise a very high utilisation rate. The job market will be subject to tensions amid exceptionally low unemployment and exacerbation of the shortage of

133

EUROPE AND THE CIS

skilled labour. Despite inflationary surges, rising wages will continue to support household consumption. The possibility of tighter conditions of access to credit and less attractive interest rates will nonetheless tend to slow the growth of spending. The consolidation of public finances will continue with the budget showing a slight surplus for the third straight year. Corporate financial health stayed solidly on track in 2007 with bankruptcies continuing moreover to decline (3.4 per cent for the first 10 months of 2007). The Coface payment incident index bears out this very good situa-

tion. Companies have generally been able to pass on high raw material costs to customers. Industrial order books grew in 2007 and in the first months of 2008. Particular attention should nonetheless be given to operator effectiveness in managing their increased production capacity and the shortage of specialised labour. This will be particularly the case in the finance and construction sectors. Sectors sensitive to economic conditions like communications, the furniture industry, home appliances, clothing, leisure and culture will bear watching.

MAIN ECONOMIC INDICATORS Percentage

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth Consumption (var.) Investment (var.) Inﬂation Unemployment Short-term interest rate Public sector balance (%GDP) Public sector debt (%GDP) Exports (var.) Imports (var.) Current account balance (%GDP)

−0.2 0.9 −1.2 0.6 3.7 0.3 −1.4 53.5 −0.2 1.3 13.4

2.5 1.5 4.5 0.8 3.9 0.7 −1.2 53.0 7.8 7.3 15.1

2.4 1.8 3.7 1.2 3.8 0.9 −0.5 51.2 7.1 6.7 13.7

3.2 1.6 4.2 1.1 3.3 1.5 0.5 51.0 10 6.9 17.3

2.5 2.0 4.1 0.6 2.8 2.6 0.3 50.2 6.8 5.7 16.0

2.0 1.9 3.3 1.3 2.5 3.0 0.6 49.4 5.1 5.4 17.0

e = estimate, f = forecast

MAIN ECONOMIC SECTORS ■ Watchmaking By specialising in luxury watchmaking, companies have ensured the continuity of their domestic and international sales. With export sales up 15 per cent in the first half last year, demand has not flagged, with Asia the main market (33 per cent) followed by the EU (28 per cent) and the United States (17 per cent) and with the domestic market representing only 5 per cent of total sales. The large profits made in the past by most operators have facilitated compensating for slower price increases.

134

■ Chemicals-pharmaceuticals Sales to the EU (60 per cent of the total) accelerated in 2007 amid the decline of the franc, which offset the disappointing turno-

ver generated domestically. Although the expected economic slowdown in Europe could slightly affect performance in the industries, the outlook nonetheless remains bright. ■

Mechanical engineering Demand from the main trading partners, particularly Germany, and the weakness of the Swiss franc have underpinned export growth with this performance enhanced by domestic demand for capital goods. Production and profits have thus been trending up with order books in satisfactory shape. Business conditions should remain buoyant in the sector this year.

■

Tourism The sector continued to enjoy healthy conditions in 2007 with strong foreign demand (up 6 per cent in the first eight months last year)

SWITZERLAND

from German and French neighbours focused particularly on large cities, especially Zurich and Geneva. A slight franc appreciation – if one should develop – or an erosion of growth in the EU will not reverse the favourable trend for 2008. ■ Building and public works Despite a marked slowdown, residential construction activity has remained at a good level, while corporate investment in infrastructure has spurred the construction of industrial facilities. Rising prices for certain raw materials and increasing payroll costs will squeeze the margins of sector operators. To offset that handicap, many companies have been increasingly diversifying into higher value-added services, particularly in new technologies. In the public works segment, the trend for order books has been relatively gloomy.

PAYMENT AND COLLECTION PRACTICES ■ Payments Bills of exchange and cheques are not commonly used, owing to prohibitive banking and tax charges; the stamp duty on bills of exchange is 0.75 per cent of the principal amount, for domestic bills and 1.5 per cent for international bills. Similarly, commercial operators are particularly demanding as regards the formal validity of cheques and bills of exchange as payment instruments.Domestic and international payments are commonly made by bank transfer, especially via the SWIFT electronic network to which the major Swiss banks are connected and which provide speedy and efficient processing of payments at low cost. ■ Debt collection The Swiss legal system presents technical specificities, as follows: The existence of an administrative authority (eg Office des poursuites et des faillites or Betreibungs und Konkursamt) in each canton which is responsible for executing court orders and whose functioning is regulated by federal law. Interested parties may consult or obtain extracts of the Office’s records. Specific rules for legal procedure prevail in each canton (there are 26 different codes of

civil procedure), which sometimes vary greatly depending on the legal doctrine that has inspired them. As such, before instigating actions, plaintiffs should ensure that their counsel is familiar with the law of the concerned jurisdiction as well as the language to be used before the court (French, German or Italian). With those constraints impeding the justice system’s speed and effectiveness, a commission of experts has developed a proposal for unifying the various civil procedures that will be submitted to parliament in the future. The proposal notably stipulates that the parties must make an attempt at conciliation or submit to mediation before requesting a hearing before the court of competent jurisdiction. The debt collection process commences with the issuing of notice to pay by ordinary mail or registered letter (thus enabling interest penalties to be charged). This gives the debtor two weeks in which to pay the principal amount, plus – unless otherwise agreed by the parties – interest penalties equivalent to the bank rate applicable in the place of payment. In the absence of payment, the creditor will submit a duly completed and signed petition form (re´quisition de poursuite) to the Enforcement and Bankruptcy Office (Office des poursuites et des faillites), which then serves the debtor with a final order to pay within 20 days. While very easy to use by creditors, that procedure nonetheless permits debtors to oppose the order within 10 days of being served, without having to provide grounds. In such case, the only alternative for creditors is to seek redress through the courts. Conversely, where a seller holds unconditional proof of debt signed by the buyer (any original document in which the buyer recognises his debt, bill of exchange, cheque, etc), he may request the temporary lifting of the debtor’s opposition (main leve´e de l’opposition) without having to appear before the court. This is a summary procedure, quick and relatively easy to obtain, in which the court’s decision is based upon the documents submitted by the seller.

1

135

EUROPE AND THE CIS

Once this lifting order has been granted, the debtor has 20 days in which to refer the case before the judge to obtain the debt’s release (libe´ration de dette) and, in turn, obtain an executory order. This entails initiating a formal procedure – with a written phase and an oral examination of witnesses during court hearings – lasting from one to three years depending on the canton. Legal costs vary widely depending on the rates charged by the various cantons. Once the court hands down a final ruling, the Enforcement and Bankruptcy Office delivers an execution order or, in the case of traders, a winding up petition (commination). In all cases, the law decides which measure – execution order or winding up

petition – is applied. Either a court of first instance or a district court hears legal procedures. Commercial courts, presided by a panel of professional and non-professional judges, exist in four Germanic cantons: Aargau, Berne, Saint-Gall and Zu¨rich. Once an appeal has been lodged with the cantonal court, as a last resort for claims exceeding CHF30,000, cases are heard by the main federal judicial institution, the Swiss Federal Court (Tribunal fe´de´ral Suisse or Schweizerisches Bundesgericht), in Lausanne – the other judicial institutions are the Federal Criminal Court located in Bellinzone, which was set up in April 2004, and the Federal Administrative Court scheduled to begin operations in January 2007, in SaintGall.

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300

250

WORLD Switzerland

200

150

100

50

Ju

ne D 93 ec Ju -93 ne D 94 ec Ju -94 ne D 95 ec Ju -95 ne D 96 ec Ju -96 ne D 97 ec Ju -97 ne D 98 ec Ju -98 ne D 99 ec Ju -99 ne D 00 ec Ju -00 ne D 01 ec Ju -01 ne D 02 ec Ju -02 ne D 03 ec Ju -03 ne D 04 ec Ju -04 ne D 05 ec Ju -05 ne D 06 ec Ju -06 ne D 07 ec -0 7

0

136

TAJIKISTAN

Tajikistan Population (million inhabitants) GDP (US$ million) Country @rating: Medium-term rating: Business climate rating:

6.7 2,811

1

D Very high risk D

RISK ASSESSMENT After a long decline due in part to the civil war that lasted from 1992 to 1997, the economy has been growing strongly ever since, up 9.0 per cent a year on average from 2000 to 2006. But only in 2008, will GDP return to its level of 1992, with Tajikistan remaining the poorest country in the CIS (Community of Independent States). Growth exceeded 7.0 per cent in 2007. Transfers from expatriate workers, the country’s main source of foreign exchange representing 20 per cent of GDP, have underpinned consumption and investment. The country has moreover benefited from the demand for aluminium, its main export. Cotton production has been flat, however, hovering around 900,000 metric tons a year,

only two-thirds as large as the pre-independence harvest due to both a lack of investment in irrigation and severe droughts in recent years.Growth should remain high in 2008 but remain dependent on sales of aluminium, cotton and electricity. The transit of opium from neighbouring Afghanistan – 1,000 metric tons a year by United Nations estimates – has also stimulated domestic demand with Tajikistan the scene of 90 per cent of drug seizures in Asia. This traffic breeds violence and corruption in a country still riven by profound cleavages between clans. In office since 1992, President Imomali Rahmon (formerly “Rahmonov”), reelected for seven years in November 2006, has nonetheless tightened his grip on power with the opposition weak and divided.

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

10.2 13.7 0.9 906 1,026 −120 −0.3 63.7 8.4 1.9

10.6 5.7 0.7 1,097 1,232 −135 −2.7 39.7 33.9 1.8

7.5 7.1 0.5 1,108 1,431 −323 −0.8 38.4 17.4 2.1

7.0 12.7 0.8 1,512 1,955 −443 −0.8 30.6 13.1 2.0

7.2 9.8 0.4 1,736 2,357 −621 −3.0 40.3 16.2 2.1

7.4 8.5 0.4 1,783 2,491 −708 −3.5 50.5 16.4 2.3

e = estimate, f = forecast

137

EUROPE AND THE CIS

Turkey Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

138

72.9 402,710

B Moderately high risk A4

STRENGTHS • The tight fiscal policy maintained by the government since the 2001 financial crisis has resulted in a significant easing of sovereign risk. • The banking sector has undergone profound restructuring. • Improving significantly in recent years, especially in the negotiating framework with the European Union, the business climate is now generally satisfactory. • Dynamic and flexible, Turkish companies have held up well to shocks in the past. • Certain sectors like the automotive industry or kitchen appliances have been very competitive.

WEAKNESSES • With the oil bill and the influx of intermediate goods imports widening the current account deficit, Turkey has the largest external financing needs of any emerging country. • A large stock of volatile capital – shortterm debt, portfolio investment – makes Turkey very sensitive to sentiment in financial markets. • Competition from Asian countries has partly weakened the textile sector. • Relations between the government and the army continue to be a source of uncertainty, particularly on the secularism issue. • A large-scale incursion in Iraqi Kurdistan would significantly undermine relations with the United States.

RISK ASSESSMENT The Turkish economy was up 4 per cent in 2007, the slowest rate since the 2001 crisis. The summer drought affected agricultural production. The lira appreciation against the dollar appears to have particularly hampered companies as evidenced by further deterioration of external accounts. Domestic demand, meanwhile, has felt the effects of the tightening of monetary policy implemented in May 2006. Corporate payment behaviour deteriorated slightly in this context albeit remaining near the world average. An easing of monetary policy this year could result in somewhat higher growth, but the external constraint remains the main weakness. The current account deficit could

approach 8.0 per cent of GDP compared to 7.7 per cent a year earlier. Although FDI inflows have covered an increasing proportion of financing needs, the large stock of volatile capital – short-term debt, portfolio investment – raise the spectre of sudden capital flight. A possible crisis of confidence in the lira would undermine the solvency of certain companies carrying debt denominated in foreign currencies, with debt in the private sector, unlike the public sector, having increased markedly in recent years. The prospect of greater stability fostered by last summer’s legislative and presidential elections has, however, reduced the risk of domestic factors precipitating a crisis of confidence in the markets. Sovereign risk has moreover eased considerably since 2001.

TURKEY

MAIN ECONOMIC INDICATORS USD billions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports).

5.8 18.4 -11.7 51.2 65.2 -14.0 -7.9 -3.3 59.6 42.9 5.0

8.9 9.3 -4.7 67.0 90.9 -23.9 -15.6 -5.2 53.4 32.8 3.9

7.4 7.7 -0.2 77.0 110.5 -33.5 -22.8 -6.3 48.7 35.0 4.6

6.1 9.7 -0.4 91.6 131.5 -39.9 -31.3 -7.8 54.6 30.9 4.8

4.0 7.0 -1.8 107.1 153.7 -46.6 -38.8 -7.8 51.7 34.6 4.6

5.0 5.4 -1.6 124.3 179.1 -54.8 -48.2 -8.0 48.8 24.4 4.4

1

e = estimate, f = forecast

■ Attitude towards foreign investors On 5 June 2003, Turkey’s Grand National Assembly passed a law regulating FDI in the country. The law limits the number of administrative restrictions and approvals and protects the rights of foreign investors. Article 1 of the law aims to encourage FDI, protect the rights of foreign investors, harmonise the definitions of investment and investor with

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300

WORLD Turkey 250

200

150

100

50

0

ne D 93 ec Ju -93 ne D 94 ec Ju -94 ne D 95 ec Ju -95 ne D 96 ec Ju -96 ne D 97 ec Ju -97 ne D 98 ec Ju -98 ne D 99 ec Ju -99 ne D 00 ec Ju -00 ne D 01 ec Ju -01 ne D 02 ec Ju -02 ne D 03 ec Ju -03 ne D 04 ec Ju -04 ne D 05 ec Ju -05 ne D 06 ec Ju -06 ne D 07 ec -0 7

■ Means of entry The Turkish market is open to foreign goods and services. The customs union with the European Union covers all sectors of the economy, except for unprocessed agricultural products and services. Turkish companies are particularly keen to enter into partnerships and joint ventures. All means of payment are used and accepted. Documentary credit is strongly recommended for initial transactions and during periods of economic instability. It may be opened with a foreign bank, although Turkish companies generally prefer their own banks. Documentary acceptance credit is the most widely used instrument. However, because of its cost, cash against documents or payment against goods are often preferred by Turkish importers. Several inspection companies of international standing have offices in Turkey.

international standards and replace the system of prior authorisations and approvals with a new information system. The minimum threshold of US$50,000 for foreign investors has been abolished as has the obligation to obtain prior approval from the Directorate General for Foreign Investment (DGIE) at the office of the Under-Secretary of State for the Treasury. Investors are now only required to inform the competent authorities. However, the opening of a representative office remains subject to DGIE approval. Following their inevitable decline on the back of the financial crisis in 2001, FDI inflows have picked up since 2003, rising substantially in 2005 to US$9.7 billion and even more sharply in 2006 and 2007 to about US$20 billion – an annual increase of 107 per cent.

Ju

CONDITIONS OF ACCESS TO THE MARKET

139

EUROPE AND THE CIS

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

51 10 19 Imports: 34% of GDP

Exports: 27% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

20000

10000 8000

15000

6000 10000 4000 5000

2000 0

0 Germany

UK

Italy

USA

France

Russia

Germany China

Italy

France

IMPORTS by products ■ Fuels 21% ■ Machinery 14% ■ Road vehicles 8% ■ Iron and steel 8% ■ Plastics 4% ■ Foodstuffs and agricultural raw materials 6% ■ Chemicals 14% ■ Other 26%

EXPORTS by products ■ Textiles and clothing 21% ■ Road vehicles 14% ■ Iron and steel 7% ■ Electrical equipment 7% ■ Foodstuffs 11% ■ Fuels 4% ■ Chemicals 4% ■ Other 32%

STANDARD OF LIVING / PURCHASING POWER

140

Indicators

Turkey

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

9,060 5,400 0.757 34 67 28 52

7,746 4,167 0.716 27 59 32 92

5,983 2,313 0.672 31 44 30 50

TURKMENISTAN

Turkmenistan Population (million inhabitants) GDP (US$ million) Country @rating: Medium-term rating: Business climate rating:

4.9 10,496

1

D Very high risk D

RISK ASSESSMENT With the hydrocarbon sector remaining the primary economic engine in 2007 and 2008, the economy will grow by nearly 10 per cent a year, though still limited by a lack of investment in the sector. A country with little debt and endowed with extensive gas reserves, Turkmenistan has real development potential but its isolation had been the main obstacle until the death in December 2006 of the former president Saparmourat Niazov. The new Head of State Gurbanguly Berdymukhamedov seems more pragmatic than his predecessor. By playing off the rivalry between Russia, China and the West, he has been able to impose a doubling of the price of gas sold to Gazprom and an increase in the capacity of the pipeline

linking his country to Russia. In August 2007, the new president granted China the rights to a gas field located in Eastern Turkmenistan with the option of building a gas pipeline that would be the first to link with a country other than Russia. Implementing those projects should nonetheless take time. Some real signs of liberalisation, like the reopening of theatres, cinemas and two Internet-access centres, the shunting aside of hardliners from the preceding regime and a marked downplaying of the cult of personality would suggest that the president has the power to bring about change. The economy remains nonetheless excessively centralised with no apparent plans to liberalise economic policy at this juncture.

MAIN ECONOMIC INDICATORS USD billions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

13 3.1 −1.3 3.5 2.6 0.9 2.7 13.3 10.9 8.8

8 9.0 0.4 3.9 3.1 0.7 0.6 9.0 9.0 7.5

9 10.4 0.8 4.9 2.9 2.0 5.1 5.4 6.1 11.8

9 7.2 5.1 7.2 2.6 4.6 15.3 3.3 3.4 21.2

10 6.0 0.4 8.6 4.1 4.5 11.7 2.0 2.3 22.3

9 6.0 0 10.1 5.0 5.1 11.7 1.3 1.6 26.6

e = estimate, f = forecast

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EUROPE AND THE CIS

Ukraine Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

142

46.6 106,111

C Moderately high risk C

STRENGTHS • The advance of the democratic process, particularly the freedom of the media, constitutes the Orange Revolution’s main achievement. • Ukraine is strategically placed between Russia and the EU and benefits from the proceeds of transit duties on Russian gas. • The resumption of growth since 2006 attests to a certain disconnection between the political and economic spheres. • The workforce is skilled and low cost. • The low level of public debt has limited sovereign risk.

WEAKNESSES • Restructuring the productive sector has been lagging. • The economy has remained very energy intensive. • Still insufficiently diversified, exports remain centred on metallurgical products. • In this context, the economy remains vulnerable to the trend in steel prices and to shocks resulting from Russia’s control over the supply of gas. • The level of taxes, difficulties in ensuring application of the law, bureaucracy and, more generally, the lack of a political consensus on reforms have undermined the business climate.

RISK ASSESSMENT GDP growth remained strong in 2007, fuelled by dynamic consumption and investment that bolstered corporate solvency. Steel, consumer goods and building and public works remained the strongest sectors. The latter, in particular, should continue to benefit from the infrastructure modernisation notably undertaken in preparation for the European football championships Ukraine will host in 2012. Conversely, chemicals, textiles and electronics have suffered from rising energy costs and foreign competition. Economic activity should slow moderately in 2008 amid a possible price decline for metal – the country’s main export – and a further price increase for imported gas. The private sector could also feel the effects of the credit

tightening and stiffer conditions for borrowing abroad. Stoked in 2007 by rising food prices and pre-election spending, inflation will barely ease in 2008 due to the price increases for imported energy. Concurrently, deterioration of the terms of trade and continued growth of imports should result in a further widening of the external account deficit. This will increase somewhat the risk of an exchange rate correction with the private sector already carrying heavy debt denominated in foreign currencies. At this juncture, however, FDI continues to cover the entire deficit and has kept foreign exchange reserves at good levels. The political situation is still shaky. After the early elections late September 2007, the former allies of the ‘Orange Revolution’ re-

UKRAINE

formed a coalition in early December claiming a very slight majority and remaining riven by internal rivalries. Yulia Tymoshenko, elected with difficulty by parliament, regained the role of prime minister. The issue concerning the constitutional ambiguities on

the separation of powers remains very much alive in the run-up to the next presidential election end 2009. Relations with Russia, meanwhile, could remain chaotic, especially regarding the supply of energy.

1

MAIN ECONOMIC INDICATORS USD billions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

9.6 8.3 −0.2 23.7 23.2 0.5 2.9 5.8 47.5 11.7 2.8

12.1 12.3 −3.2 33.4 29.7 3.7 6.9 10.6 47.2 9.2 3.0

2.7 10.3 −1.8 35.0 36.2 −1.1 2.5 2.9 46.0 12.0 5.0

7.1 11.6 −0.7 38.9 44.1 −5.2 −1.6 −1.5 51.2 7.5 4.7

7.2 14.6 −1.7 46.7 54.3 −7.6 −4.1 −2.9 50.0 7.1 4.8

6.3 10.2 −1.1 50.2 60.6 −10.4 −7.0 −4.3 53.1 8.1 4.8

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■ Market overview Robust economic growth in the first half of 2007 built on the good performance achieved in 2006. The International Bank for Reconstruction and Development (IBRD) has increased its forecasts for 2007 from 5.5 to 6 per cent. Domestic consumption, stimulated by increased levels of income, is the principal growth driver, representing 60 per cent of GDP. Industrial output remains strong (up 11.8 per cent in the first six months of 2007 from 6.2 per cent in 2006), boosted by the metals sector. Inflation should reach 10 per cent in 2007, up from 9 per cent in 2006, due partly to price increases in utilities, but mainly to the rise in bread, sugar and potato prices in June 2007. The dollar-pegged national currency has been stable since the beginning of the year at UAH5.05 to the dollar. ■ Means of entry Ukraine has been holding talks to join GATT, and subsequently the WTO, since 1993. It is one of the few large-sized countries, along with Russia, that is still not a WTO member.

Over this 15-year period, it has harmonised its laws with WTO rules. It has adopted a customs code and a property law, established a system for intellectual property protection and made progress towards the harmonisation and standardisation of health and safety, and phytosanitary rules, as well as administrative practices. Negotiations are almost concluded and accession could take place within the next few months. The country, however, is facing opposition from both Krygyzstan and the EU. The dispute with Kyrgyzstan officially centres on the write-off of Soviet-era debt between the two countries. In reality, the dispute is of a political nature, with Russia backing the Kyrgyz veto so that it can delay Ukraine’s accession until its own. The dispute with the EU relates to trade. EU member states are unhappy with Ukraine’s export tax on some products, including scrap, which they see as an indirect subsidy to its producers. An agreement should be reached in the coming weeks. The EU wishes Ukraine to join the WTO quickly, as this would help lift remaining

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EUROPE AND THE CIS

obstacles to trade with EU firms and rein in the ‘raiders’ seeking, with the complicity of Ukranian magistrates, to despoil foreign companies of their investments. Moreover, so long as Ukraine is not in the WTO, talks on the free-trade section of a revamped neighbourhood agreement with the EU cannot begin. ■ Attitude towards foreign investors Whereas FDI accounted for only 2–3 per cent of GDP a few years ago, it represents 19 per cent of GDP today. In many ways 2006 and 2007 are the years that witnessed a shakeup in the old rankings. Growing investor awareness of Ukraine’s attractiveness, underpinned by the Orange Revolution and the

144

country’s situation on the threshold of Europe, has sharply boosted inflows. In 2004, Ukraine was the 80th largest recipient of FDI in the world; in 2007 it was 33rd. The rankings of FDI-providers also changed in 2007, with many new countries among the top investors. France, for instance, is the eighth largest foreign investor (US$935 million) today – compared with 2005 when it was the 21st biggest (US$83 million) – mainly on the back of heavy investment in the banking sector. Nevertheless, the business climate continues to be undermined by administrative obstacles (late VAT refunds, tax and customs difficulties, etc) and ‘raiders’ attempts to acquire control of both local and foreign-owned companies.

UKRAINE

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

40 12 12

1 Imports: 53% of GDP

Exports: 54% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

10000

20000

8000

15000

6000 10000 4000 5000

2000 0

0 Russia

Turkey

Italy

USA

Russia

Germany

Germany Poland

China Turkmenistan

IMPORTS by products ■ Agricultural raw materials and foodstuffs 9% ■ Fuels 30% ■ Ores and metals 4% ■ Chemicals 12% ■ Machinery and transport equipment 26% ■ Other 20%

EXPORTS by products ■ Agricultural raw materials and foodstuffs 14% ■ Fuels 10% ■ Chemicals 9% ■ Machinery and transport equipment 13% ■ Non-precious metals 43% ■ Other 11%

STANDARD OF LIVING / PURCHASING POWER Indicators

Ukraine

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

7,520 1,950 0.774 23 68 15 38

8,612 3,821 0.771 28 64 19 72

5,983 2,313 0.672 31 44 30 50

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EUROPE AND THE CIS

United Kingdom Population (million inhabitants): GDP (US$ million): Country @rating: Business climate rating:

146

60.8 2,395,500 A1 A1

STRENGTHS • The presence of many financial institutions has contributed to the City’s influence as Europe’s leading financial centre. • Strong growth potential, moderate taxes, procedural simplicity and access to the Anglo-Saxon world have attracted foreign capital. • High value-added sectors like pharmaceuticals, biotechnology, electronics and aeronautics are well positioned in the international arena. • Despite the increase in the working population fuelled by immigration, labour market flexibility and efficient employment agencies have stemmed any increase in unemployment. • Coverage of three-quarters of energy needs by national hydrocarbon production has kept the trade deficit from widening further.

WEAKNESSES • The inadequacy of public services in education, research and transport has undermined productivity. • Deterioration of public sector finances will not facilitate eliminating the imbalances in public services. • The surplus in the services and investment income balance has not nearly sufficed to offset the goods trade deficit. • Northern England, Wales and Scotland have been unable to bridge the gap with the Greater London region. • Differences in the level of activity prevailing in financial services, high technologies and property compared to traditional industries has complicated matters in adjusting economic policy.

RISK ASSESSMENT Despite a slowdown in the fourth quarter, economic growth remained strong in 2007. Households increased their spending encouraged by strong job creation notably in services (3/4 of GDP) and construction. Public spending remained dynamic with much ground to make up as regards public health, education and infrastructure, which has contributed to a continuing large public sector deficit. The British economy will be markedly less dynamic this year due mainly to sharp slowdown of both household consumption and investment. Households will be faced with a slower pace of job creation in the

public and financial spheres, which will not, however, result in increased unemployment, due to easing immigration. The slow growth of disposable income, attributable to persistent inflationary pressures and substantial wage moderation in both the public and private sectors, will be more difficult to offset through borrowing. Despite a reduction in the Bank of England’s key rate, credit will become both more expensive and less available with financial institutions, aware of the sharp increase in personal bankruptcies in 2007, exercising greater caution. A decline in housing prices would moreover hinder the mortgage equity withdrawals that currently

UNITED KINGDOM

represent 6 per cent of disposable income. In this context, residential construction could well decline particularly for assets intended for rental purposes – where profitability has deteriorated substantially – as well as for the high end affected by the reduction of the bonuses distributed in the financial sector of the City. Office construction will slow due to the slowdown in services. Ongoing preparations for the 2012 Olympic Games along with the continuing dynamism of school, hospital and road and rail infrastructure construction will only partly offset that trend. Only the performance of goods exports, despite the flagging dynamism of the US market (15 per cent of sales) and the decline of the dollar, should improve, thanks to the weakening of the pound sterling against the euro. That will not suffice, however, to reduce a very large trade deficit only partly offset by the recurrent surplus position of the services and investment income balance. In 2007, the Coface payment incident index remained satisfactory, bearing out the de-

cline in bankruptcies. Corporate profitability remained high with profits increasing 10 per cent. They could level off in 2008, albeit at a good level, amid a decline in economic activity. Although that will have little effect on large companies in view of their low-debt positions and good cash flow, smaller companies with limited access to the financial market and that rely on adjustable-rate loans in consequence will experience difficulties to varying degrees. The housing and home furnishings (manufacturing and retailing sector) should suffer from the decline in residential investment, even if that can be partly offset by orders from the public sector or related to preparations for the Olympics. Agricultural-product users and processors (breeders, cheese-makers, biscuit-makers, etc) will enjoy varying degrees of latitude to pass on the rising cost of those products in sales prices to their buyers. That may prove difficult when dealing with mass distribution where a context of sluggish consumption will exacerbate competition. Financial sector subcontracting will also present higher risk.

1

MAIN ECONOMIC INDICATORS %

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth Consumption (var.) Investment (var.) Inﬂation Unemployment Short-term interest rate Public sector balance (%GDP) Public sector debt (%GDP) Exports (var.) Imports (var.) Current account balance (%GDP)

2.7 2.9 -2.2 1.4 5.0 3.7 -3.3 42.0 1.2 1.8 -1.3

3.3 3.4 4.9 1.3 4.7 4.6 -3.3 40.4 4.9 6.6 -1.6

1.9 1.4 1.3 2.0 4.8 4.7 -3.3 42.1 8.2 7.1 -2.5

2.8 2.1 -4.0 2.3 5.5 4.8 -2.7 43.0 10.3 9.8 -3.2

3.1 3.1 6.0 2.3 5.4 5.9 -2.7 44.0 -4.1 -3.0 -3.0

2.0 1.9 2.0 2.2 5.6 5.2 -3.1 45.0 4.1 3.0 -3.0

e = estimate, f = forecast

MAIN ECONOMIC SECTORS ■ Distribution Intense competition continued in the sector in 2007, which nonetheless benefited from the growth of retail sales. Failures marked the CD, DVD and video games retail sector however (Music Zone, ChoicesUK). Supermarket chains have become increasingly

competitive in the non-food segment, and sales via the Internet have been developing. The increasing cost of credit and energy will affect growth in 2008. ■

Construction and public works The sector was subject to volatility in 2007. Housing prices were flat initially before eroding late in the year. Most large home

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EUROPE AND THE CIS

builders have reported declining sales and negative expectations for 2008. Rising interest rates and the liquidity crisis experienced by Northern Rock shook up the market. Public housing construction, a government priority, will guarantee a degree of activity. Outside the residential segment, activity will remain buoyant, thanks to work linked to the 2012 Olympic Games and to still-substantial spending on infrastructure, schools and hospitals. ■ Automotive Sales have remained flat, which contributed to the manufacturer TVR’s failure early last year. The factories of US and European carmakers have suffered from the Japanese competition. Ford’s plans to sell its Jaguar and Land Rover subsidiaries augur further restructuring in the sector. Placed under Chapter XI bankruptcy law in the United States, American first-tier parts manufacturers have successfully restructured several of their operations to the United Kingdom. Conversely, the margins of second- and thirdtier parts manufacturers have suffered from increasing raw material costs and competition from outside Europe. Those offering both innovative products and technical expertise have the chances for success. ■ IT Turnover has continued to grow, especially for computers, up 20 per ent. Due to intense competition, however, margins have been shrinking with several companies reporting losses. The increased cost of credit and the strength of the pound against the dollar have not made things easier. No improvement is likely.

148

■ Wood The sector experienced a revival in the past two years, thanks especially to rising prices for soft wood. A shortage of basic soft wood has, however, hampered manufacturers of fences and sheds for the retail market. The news has been mixed for other processors. Furniture manufacturers have to significantly cut back on production this year with retailers turning their purchasing increasingly towards Eastern Europe. Economy and

raw material price trends will have a decisive effect on the sector outlook. ■

Agriculture In 2007, as in 2006, the sector suffered from poor weather conditions, outbreaks of foot and mouth or blue-tongue diseases and the avian flu menace. The increases in staple commodities prices, which virtually doubled for wheat, barley, colza oil and dairy products, were a pleasant surprise. Hopefully, activities that are intensive users of dairy products, oils, grain, etc, like breeders, meat processors, cheese-makers and biscuit-makers for example, will be able to absorb then pass on the higher prices to their clientele. PAYMENT AND COLLECTION PRACTICES

■

Payment Although cheques are widely used as a method of payment, they do not provide real security as non-payment of cheques is not a criminal offence (cheques do not have to be covered when issued). The drawer of a cheque may stop payment at any time. Cheques can be presented for cashing a second time under the RDPR option (Refer to Drawer Please Represent). The bill of exchange, while rare in commercial transactions, is used in special cases. If a foreign bill remains unpaid at maturity, it must be protested. The open-account system, which makes it possible to reduce costs, especially in case of phased sales, can only work effectively after the co-contracting party establish mutual trust and confidence. Centralized accounting helps reduce costs and cashing times. Bank transfers are regularly used for domestic and international payments, especially via the SWIFT electronic network used extensively by major British banks for speedy and secure processing. Leading British companies also use two other highly automated inter-bank transfer systems – Bankers’ Automated Clearing Services (BACS) and Clearing House Automated Payment Systems (CHAPS).

■

Debt collection Debt collection agencies or solicitors handle the recovery of overdue payments, which

UNITED KINGDOM

Alternative Dispute Resolution). Devices for speeding up proceedings include the creation of three separate legal tracks – small claims track, fast track and multi-track – according to the claim amount at stake, the streamlining of the supporting document-submission and evidence-disclosure system and establishment of a hearing schedule by the court at the outset of proceedings. Judgements are enforced either through conventional methods (service of a writ of execution by bailiff, attachment of debtor assets with subsequent auction) or more directly for claims exceeding GBP750 formally serving a statutory demand for payment by the creditor. Then, after expiry of a 21-day period and in the absence of payment, transaction, or provision of a payment guarantee, the creditor may file a winding-up petition with the court. To elicit a speedier reaction or payment by debtors, the statutory demand procedure may be used in some cases to collect uncontested claims directly without obtaining a prior ruling.

1

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300

250

WORLD United Kingdom

200

150

100

50

0

Ju ne D 93 ec Ju -93 ne D 94 ec Ju -94 ne D 95 ec Ju -95 ne D 96 ec Ju -96 ne D 97 ec Ju -97 ne D 98 ec Ju -98 ne D 99 ec Ju -99 ne D 00 ec Ju -00 ne D 01 ec Ju -01 ne D 02 ec Ju -02 ne D 03 ec Ju -03 ne D 04 ec Ju -04 ne D 05 ec Ju -05 ne D 06 ec Ju -06 ne D 07 ec -0 7

begins with the service of formal notice reminding the debtor of his contractual obligations, increased by past-due interest. Under the ‘Late Payment of Commercial Debts (Interest) Act 1998’, small companies are entitled – from 1 November 1998 – to demand default interest from large companies, both public and private. This law, introduced in successive stages with the last stage coming into effect on 7 August 2002, now permits all commercial companies to bill interest in cases of late payment. Save as otherwise provided between the parties, the applicable rate of interest is the Bank of England’s base rate (dealing rate) plus eight percentage points. A creditor initiates the legal collection process by lodging a ‘claim form’ with the competent legal authority, accompanied by the supporting documents. Summary judgements, speedier rulings obtained during ordinary proceedings, are more difficult to obtain by the claimant on claims contested by the defendant. The reform of the judicial process (or the Lord Woolf reform), which saw the introduction of new ‘Civil Procedure Rules’ with effect from 26 April 1999, is considered by lawyers to be a major breakthrough in dealing with disputed claims. The new rules of procedure have gradually cut litigation time, while parties can seek ways of coming to a settlement either directly or through mediation according to the alternative method for settling disputes (ADR:

149

EUROPE AND THE CIS

Uzbekistan Population (million inhabitants) GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

150

26.5 17,178 D Very high risk D

STRENGTHS • Uzbekistan’s external financial situation has benefited from the high prices of raw materials, mainly gold and natural gas. • The country has run substantial trade surpluses and maintained moderate external debt ratios. • Central Asia’s most populous country and located at the heart of the region, Uzbekistan has the potential to attract foreign investors.

WEAKNESSES • The economy is dependent on price trends for raw materials. • A clientelistic power structure and extensive corruption have engendered poor governance. • The hardening of the regime since the May 2005 riots could ultimately heighten tensions in a context of social discontent. • The discontent could foster the rise of Islamic fundamentalism.

RISK ASSESSMENT The 9.1 per cent growth achieved in 2007 was the highest since independence in 1991. Although statistical data from Uzbekistan should always be taken with a grain of salt, the very favourable external environment lends credibility to this estimate. The increase in value and volume of gas exports to Russia and the strong growth of car industry sales have been driving the economy with high gold prices and transfers from expatriates in Russia also making a contribution. Despite good weather, however, cotton production in 2007 remained considerably below its pre-independence level. It now represents only 20 per cent of exports against over 50 per cent in 1991. In a still

very favourable international environment GDP growth should remain above 7 per cent in 2008. Uzbekistan’s political situation and business environment remain its main weaknesses. The incumbent President Islam Karimov, in power since independence, won a sweeping re-election on 23 December 2007 lacking opposition. His succession has remained completely uncertain, which constitutes a source of concern considering the high concentration of power. The risk of new waves of violence like the spring 2005 riots in Andijan remains appreciable. Above all, continual interference by the state in trade, the internal affairs of companies and the banking system constitute an obstacle to the country’s development.

UZBEKISTAN

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

4.2 7.7 0.1 3,240 2,405 835 881 8.7 42.0 19.2 6.2

7.7 15.5 0.6 4,263 3,061 1,202 1,214 10.2 36.2 15.7 6.4

7.0 18.8 1.3 4,757 3,310 1,447 1,950 14.4 30.4 12.4 8.2

7.2 14.2 0.4 5,690 3,770 1,920 2,767 17.2 24.5 10.0 11.7

9.1 12 −0.6 6,580 4,570 2,010 3,045 16.2 20.6 8.4 13.2

7.2 12 −0.6 7,230 5,320 1,910 3,085 15.4 18.2 6.9 14.9

1

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■ Market overview Uzbekistan signed Article 8 of the IMF charter on 15 October 2003, at the same time as declaring its currency freely convertible. It has since made slow and steady changes to its trade legislation but has fallen short of full market liberalisation. The economy is still largely managed by the government with a view to achieving self-reliance through protection of the domestic market and import substitution. Uzbekistan trades with 148 countries across the world and has a trade surplus with 48 of them. The volume of ordinary trade is rising steadily, especially with Russia, Turkey, Kazakhstan and even Iran. Among its main trading partners, only South Korea and Germany export more to Uzbekistan than they import from it. To ensure timely debt servicing, the government has limited the sovereign guarantee facility to so-called ‘priority’ schemes defined solely by the cabinet. It is possible to arrange multilateral funding through international lending institutions like the World Bank, EBRD and ADB, which are ready to assist with projects that help open market access and develop the private sector. ■ Means of entry Market access is the focus of regulatory and legislative reforms whose implementation is proving laborious. Imports of consumer and

capital goods continue to be restricted by measures (tariff and non-tariff barriers) to protect the domestic market in line with government policy. As the government has become extremely cautious about the pace of liberalisation and the size of the country’s debt, access to the Uzbek market remains difficult, especially for small- and mediumsized firms, due to the high costs of market penetration. Large companies can, however, find business opportunities if they arrange appropriate project finance. The Uzbek Chamber of Commerce, set up in 2004, is actively involved in facilitating relations between Uzbek and foreign firms. Its task is that of limiting all too frequent state intervention, but progress to date has been very slow. ■

Attitude towards foreign investors Uzbek legislation offers investors safeguards against discrimination, nationalisation or expropriation and allows free repatriation of profits and capital. The only constraint on capital transfers is the lack of availability of foreign exchange. Red tape remains one of the biggest obstacles, but legislation on this issue is under review. The recommended means of payment remains the irrevocable and confirmed letter of credit. Uzbekistan has reached a phase in its privatisation programme where it needs FDI to kick-start economic growth. The latest

151

EUROPE AND THE CIS

privatisation programme for 2007–2011, which includes companies from strategic sectors, was published by presidential decree in July 2007. However, the majority of these companies have either filed for insolvency or exist only on paper. The rule in takeovers is to get investors to renew the candidate’s production apparatus in exchange for certain benefits. In strategic sectors, such as cotton and its derivatives, gold, energy and aeronautics, foreign shareholdings are subject to a 49 per cent ceiling, with the Uzbek government retaining a majority stake. ■ Foreign exchange regulations The currency has been freely convertible since 15 October 2003. However, the government manages currency flows with a great deal of caution. The exchange rate seems to have steadied and since 2006 is pegged to the US dollar within a fluctuation band of ±2 per cent. The main problem facing firms

152

doing business or making an investment is the shortage of foreign exchange. Payments in hard currency are no longer restricted by the currency’s lack of convertibility but by the shortage of foreign exchange at customers’ banks. The lack of immediate availability of hard currency and the slowness of the decision-making process in large public-sector companies or government departments mean that it can take up to six months to obtain foreign exchange. In light of such delays, there is a risk of revision of prices of international contracts. Consequently, it is advisable to take out exchange risk cover. The sector of independent private banks is still in the process of being restructured and is gradually opening up. The country’s two largest commercial banks – National Bank of Uzbekistan (NBU) and Asaka Bank – are state-owned and account for 75 per cent of total banking assets.

UZBEKISTAN

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

39 12 18

1 Imports: 30% of GDP

Exports: 40% of GDP

MAIN DESTINATIONS OF EXPORTS

MAIN ORIGINS OF IMPORTS

Mn USD

Mn USD

1200

1200

1000

1000

800

800

600

600

400

400

200

200

0

0 Russia

Poland

China

Turkey Kazakhstan

Russia

South Korea

China Kazakhstan Germany

IMPORTS by products ■ Machinery and equipment 48% ■ Foodstuffs 8% ■ Energetic products 3% ■ Chemicals 12% ■ Other 29%

EXPORTS by products ■ Gold 28% ■ Cotton 22% ■ Energy 13% ■ Foodstuffs 13% ■ Chemicals 6% ■ Machinery and transport equipment 9% ■ Other manufactured goods 10%

STANDARD OF LIVING / PURCHASING POWER Indicators

Uzbekistan

Regional average CIS

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

2,250 610 0.696 30 37 33 n/a

8,612 3,821 0.771 28 64 19 72

5,938 2,313 0.672 31 44 30 50

153

The Americas 2 Outlook for 2008: The Americas

156

Argentina Bolivia Brazil Canada Chile Colombia Costa Rica Cuba Dominican Republic Ecuador El Salvador Guatemala Haiti Honduras Jamaica Mexico Nicaragua Panama Paraguay Peru United States Uruguay Venezuela

163 167 171 175 178 182 186 187 191 193 197 199 203 205 207 208 212 214 216 220 224 228 232

OUTLOOK FOR 2008

OUTLOOK FOR 2008

The Americas Pierre Paganelli and Christine Altuzarra Country Risk and Economic Studies Department, Coface

NORTH AMERICA ■

An economic slowdown that will affect many sectors

The incidents should be concentrated in sectors sensitive to household consumption trends. Scale of sectoral risk: North America

Highest risk D

Economic growth and credit risk

C– C C+

(%)Economic growth Payment incident index

7%

300

4%

250 4.5%

4.2%

4.4%

B+ Telecommunications (equipment manufacturers)

3.6%

3%

2.5%

2%

A–

150

2.9% 2.1% 1.7%

1.6% 0.8%

A

100

A+

Telecommunications (operators) / Paper / Mass distribution Mechanical engineering/Pharmaceuticals / Chemicals

Electronic components / Steel

Lowest risk

50 0

0%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 (e) (f)

156

B

200 3.7%

3.1%

1%

B– IT industry / Building & public works

6% 5%

Car industry / Textiles-Clothing

Air transport

In the United States (rated A1), the growth slowdown in 2007 did not undermine corporate solvency with companies continuing to post record profits. The deceleration will gain momentum in 2008 albeit mitigated by steady export performance. With households deep in debt, their default rate will continue to rise amid a reverse wealth effect associated with the decline of property values and tighter conditions surrounding mortgage loans. Exports, meanwhile, will benefit from the dollar depreciation and the demand dynamic in emerging regions. Corporate profits should decelerate. Despite the very satisfactory levels of debt and cash flow ratios posted by companies, a credit crunch will affect them. Although payment incidents will increase in 2008, the deterioration should nonetheless remain moderate overall.

Coface has downgraded or negative watchlisted the ratings of several sectors. This was the case for construction (rating downgraded again in 2007, to B−), and activities that depend on it should suffer from the property market downturn and the weakening of nonresidential construction notwithstanding the good performance in the public works segment. Weaker consumption will affect mass distribution (A− rating negative watchlisted) with Wal-Mart continuing to underperform in 2007. The negative watchlisting of the chemical industry’s A− rating is attributable to the poor performance in car manufacturing and the downturn in property construction. Sales in the paper industry (A− rating removed from positive watchlist) declined in the 2007 first half. Default probability has remained high in other sectors. The market share of American carmakers (rated C) will thus continue to shrink to the benefit of their Asian competi-

OUTLOOK FOR 2008

growth achieved by regional countries thus continues to lag far behind the near 7.0 per cent average growth registered for all emerging countries. Latin America has nonetheless withstood the repercussions of the international financial turbulence relatively well, and domestic demand will generally continue to drive the economy. Household consumption should generate two-thirds of GDP growth underpinned, albeit to a lesser extent than in 2007, by increases in public spending and the expansion of credit in most large economies as well as by the continued high inflow of expatriate remittances especially in Mexico, Central America and the Caribbean area. Investment should continue to make a significant contribution, particularly in Brazil and Mexico. Despite continuing large needs in Asia, however, world demand for raw materials could weaken slightly and affect the expansion of a continent still heavily dependent on commodity exports.

10 9 8 7 6 5 4 3 2 1

LATIN AMERICA

GDP Growth should remain lower than the emerging country average (%) 8 7 6 5 4 3 2 1 0 2001 2002 2003 Latin America

2004 2005 2006 2007 2008 Emerging Countries

In Latin America, GDP growth should slow moderately in 2008, up about 4.2 per cent after up 4.8 per cent in 2007, in an international environment marked by the economic slowdown in the United States. This overall

2007 (e)

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m bi

a

a nt in

ru

-

Pe

An economic slowdown shadowing the weaker growth in the United States, with the contribution of domestic demand remaining crucial

Ar ge

■

2

Economic growth trend for main countries in Latin America (% of GDP)

Co lo

tion. Continuing moreover to contend with severe financial difficulties, they will be weakened by the expected household consumption slowdown and the increasing cost of inputs. The automotive industry crisis will continue to undermine the solvency of car parts manufacturers (also rated C). Textilesclothing (rated C) will suffer from the increasing preference of households for imported goods. The level of risk in air transport (rated C+), after easing early 2007 with airlines emerging from red ink, increased amid rising fuel costs. Default probability in pharmaceuticals (rated A−) has conversely remained low despite the negative impact on growth of the competition from generics and the expiry of many patents. The computer industry (rated B−), electronic components (rated A), along with telecommunication equipment manufacturers and operators (rated, respectively, B+ and A−) will continue to benefit from strong household demand despite the expected slowdown. Demand from emerging countries and high prices for metals will benefit steel (rated A).

2008 (f)

The main Latin American economies fall into three disparate groups. Economic expansion will remain relatively strong in Peru (up 7.0 per cent) spurred by relatively robust domestic and external demand, Argentina (up 6 per cent) with domestic demand stimulated by still relatively accommodating economic policy and in Venezuela (up 5.5 per cent) despite a slowdown attributable to flat oil production. Growth will be not quite as strong in Chile (4.6 per cent) driven mainly by consumption and public investment or Brazil (4.6 per cent) with public and private investment playing a preponderant role. GDP growth will be weaker, however, in Mexico (up 2.9 per cent) due to the North American economic slowdown and in Ecuador (up 2.6 per cent) amid the weaker growth of private consumption and a decline in corporate investment.

157

OUTLOOK FOR 2008

Many obstacles have kept the region from achieving Asian-style growth rates: more unequal income distribution than in regions with comparable development, poor quality education, and excessive informal employment, a public sector debt burden impeding spending on modernisation, and a deficient institutional framework and business environment. These structural weaknesses notably reflect the insufficient contribution of investment to GDP (about 20 per cent for the region), too small in itself and in comparison to a contribution in all other emerging regions of about 28 per cent). ■

Shrinkage of current account surpluses that thus far has not prevented improvement in the external ﬁnancial situation Contraction of the current account surplus (% of GDP)

6% 4% 2% 0% -2% -4% 2001 2002 2003 2004 2005 2006 2007 2008 Latin America Emerging Countries

158

After generating current account surpluses for five straight years, Latin America should see it decline sharply this year and its current account remain just in balance with the growth of imports (11.5 per cent) likely to be nearly twice that of exports (6.0 per cent) in the main Latin American countries. The small improvement in the terms of trade with immigrant transfers levelling off, due notably to the North American slowdown, will not suffice to offset this gap. The increase in exports should thus be very moderate in the major ore-producing countries like Chile (copper) or Peru (or, copper, zinc). The main oil-producing countries in the region – Colombia, Ecuador, Mexico and Venezuela – should, however, continue to benefit from high prices. Mexico, Brazil and, to a lesser extent, Argentina (benefiting moreover from an undervalued

peso), with more diversified exports, have been less vulnerable on this score. Traditional industrial sectors, like textiles or clothing, are still experiencing difficulties meeting Asian competition. This has also been the case for certain Central American export subcontracting industries. The succession of current account surpluses from 2003 to 2007 made it possible to build up foreign exchange reserves, which reached a record US$400 billion end 2007 but should only grow moderately this year up to about US$450 billion. These reserves will nonetheless constitute an appreciable safety net in case of an exogenous shock. In this context, the foreign debt reduction process has taken root in most Latin American countries, with more difficult financing conditions expected in international markets this year. FDI should in any case constitute the main source of external financing. At the overall regional level, the percentage ratio of average foreign debt to GDP should come to about 23 per cent in 2008, a figure below the overall 27 per cent average for emerging countries. The ratio for Brazil will be about 16 per cent and for Mexico 18 per cent. Among the major regional countries, only Argentina’s debt-to-GDP ratio will remain high (44 per cent), not withstanding a marked reduction of foreign debt in the wake of the restructuring undertaken in June 2005. ■

The increased need for ﬁne tuning of monetary and ﬁscal policy …

The resurgence of inflationary pressures has increased the need for suitable interventions by monetary authorities, whose effective policies facilitated keeping inflation under control in 2007. Price rises are attributable at once to the increase in world prices for raw materials and food products and the highproduction capacity utilisation rate prevailing in the region. Government officials will, however, have to make a difficult choice between attempting to counter either the upsurge of inflation or an excessive slowdown of GDP growth. Although inflation should remain limited by historic Latin American standards, the rate should nonetheless average about 6.0 per cent in 2008 against 5.4 per cent last year. There are, however, two

OUTLOOK FOR 2008

exceptional cases worth noting: in Argentina where despite price controls inflation should reach 13 per cent reflecting economic overheating and bottlenecks, and in Venezuela where the expected inflationary upsurge of nearly 20 per cent, again despite price controls, is attributable to expansionary economic policies coupled with insufficient production capacity. Continuation of tight fiscal policies will make it possible to stabilise the average regional fiscal deficit at slightly below 1 per cent of GDP in 2008 despite less buoyant international economic conditions and the resulting slower growth of fiscal revenues. A few countries will even continue to run surpluses. Chile should thus run a surplus representing about 3 per cent of GDP underpinned by strict policy. The continuing surplus enjoyed by Argentina (near 1 per cent) will reflect continued high GDP growth and levies on exports of staple commodities. In Mexico, partial tax-system reform should facilitate reducing the fiscal deficit to a level representing a negative 1 per cent GDP. Although Brazil’s fiscal deficit should also ease (down 1.8 per cent of GDP) this result will mainly be attributable to excessively high taxes and not to better management of public spending. Despite its oil wealth, Venezuela should show a fiscal deficit of nearly 1 per cent of GDP attributable to a degree of fiscal laxity.

… and, despite a decline in public debt ratios, a need for further public ﬁnancial reform

■

Still high GDP/public debt ratios, notably in Argentina and Brazil, with Chile being the exception. ( %) 2007 (e) 2008 (f) 70 60 50 40

emerging-country ratio will come to 41 per cent of GDP. With the notable exception of Chile, Latin American countries will thus remain handicapped by their public sector debt burden. In Brazil, a gross ratio of 64 per cent of GDP is expected in 2008; although public debt remains vulnerable to domestic interest rate trends with its average maturity too short, the proportion denominated in foreign currencies has been replaced by bonds denominated in the local currency. In Argentina, despite a decline, the public debt level will still be high at 56 per cent of GDP with the improvement in public sector finances attributable more to relatively favourable economic conditions than structural adjustments. In general, however, the current trend in Latin America has been towards improvement in the structure of public sector debt. Via more active management, most countries have been reducing the proportion of shortterm, variable rate and foreign currencydenominated debt and putting greater emphasis on domestic sources of financing, a process facilitated by improvement in macroeconomic fundamentals. As a result, the large countries in the region will be unlikely to experience major financing difficulties in 2008, despite the risk of a liquidity shortage existing at the world level. Nonetheless, to establish greater macroeconomic stability and reduce poverty rate constituting a source of political and social tensions additional public sector financial reforms will be necessary, particularly, widening the tax revenue base notably by reducing the informal economy’s size, increasing the flexibility of public spending that comprises a high proportion of mandatory and pre-allocated spending and developing conditional-assistance social programmes like Chile’s Solidario, Brazil’s Bolsa Familia and Mexico’s Oportunidades.

2

30

■

20 10

ile

ela

Ch

ru Ve

ne

zu

Pe

ico M

ex

r

a

do ua Ec

a

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Co

az Br

in nt ge Ar

Am tin La

Em

er

gi

ng

co

un

er

tri

ica

es

-

The average public debt ratio in Latin America should continue to decline to a level representing 50 per cent of GDP while the overall

Consolidated democratic systems in a business environment with room for improvement

Latin America’s democratic systems have grown stronger in recent years. There has been notable progress, particularly with the holding of free elections and the decline of the political role played by the army. But

159

OUTLOOK FOR 2008

there are still problems notably due to institutional deficiencies and especially, despite the progress made, a still-high poverty rate afflicting 38 per cent of the population in 2006, and a greater degree of inequality than in regions with comparable development. Those social factors and greater transparency were responsible for the victories of left-wing candidates in several countries, except Colombia and Mexico, in the many presidential elections held in 2006 and 2007. This political trend has nonetheless taken very different forms ranging from pragmatic and moderate in several cases – Brazil, Chile,

Peru and Uruguay – especially with the newly elected presidents having to come to terms with coalition government, to radical in others (Bolivia, Ecuador and Venezuela) while the situation in Argentina seems to lie between the two extremes. The electoral outcome in certain Andean countries, meanwhile – Bolivia, Ecuador and Peru – unleashed an upsurge of demands relating to native Indian identity, control of natural resources and the sharing of wealth that could spur tensions and have a deterrent effect on investment, particularly from abroad.

Business climate ratings: Latin America

D C B A4 A3 A2

C a U ni na da te d St at es C Ch os il ta e R ic a Br az M il ex Pa ico na m a U ru gu Ar a ge y nt i C ol na om bi D a om P in e r ic an u R ep Bo . li Ec via ua G ua dor te m N ic ala ar a Pa gua ra Ve gua ne y zu el a C ub a H ai ti

A1

160

There moreover continues to be substantial room for improvement as regards the business environment, a weakness epitomised by the poor ratings of almost all Latin American countries on that score with the notable exception of Chile (rated A2) and, to a lesser extent, of Costa Rica (rated A3). Rated A4, Brazil’s strengths include the ready availability of business information, regulatory quality acceptable to business and a satisfactory legal environment for collection purposes, but deficient infrastructure remains its main weakness. In Mexico (rated A4), the business environment needs improvement with political and social obstacles delaying progress on reforms concerning infrastructure (energy, telecommunications), educa-

tion, labour law and the judicial system while collection procedure are, moreover, not entirely satisfactory. In Argentina (rated B), although the business environment has been shaky with the legal and regulatory framework not sufficiently stable, the business information situation is acceptable as are creditor protection and collection procedures. As regards these last points, the same holds true for Peru (rated B) where the business environment is undermined by the limited effectiveness of public officials, corruption and deficient infrastructure. In Venezuela (rated C), the business environment is marked by relative unpredictability, government interventionism and extensive corruption undermining confidence in business

OUTLOOK FOR 2008

circles with collection procedures are moreover not very satisfactory. ■

Corporate ﬁnancial health and payment behaviour should remain generally satisfactory Economic growth and credit risk

7%

300 6.0%

6%

250

5.4%

5.4%

4.9%

5%

4.5%

4.2%

4.0%

200

4% 150 3%

2.3%

2.0%

100

2% 1% 0.2%

0.2%

50

0.5%

0%

0

1997

1998

1999

Economic growth

2000

2001

2002

2003

2004

2005

2006

2007 (e)

2008 (f)

Payment incidents index

In a less favourable context and despite more moderate regional growth, the financial health of Latin American companies should generally remain satisfactory. The financial solidity of major companies has improved in recent years with profits rising and financing problems easing. Smaller companies will, however, be more vulnerable in case of a credit crunch. Payment experience should thus remain generally satisfactory even if certain sectors will continue to be faced with particular difficulties, like textiles undermined by Asian competition or agriculture still vulnerable to weather conditions. In Chile, the mining and paper industries, construction, food, retail and financial services have been the most dynamic sectors with the Coface payment experience on companies remaining generally very satisfactory. In Mexico, payment experience has remained satisfactory with the most dynamic sectors including construction, retailing and, to a lesser degree, the automotive industry. The difficulties experienced in the dairy industry or textiles are the result of particular problems or a lack of competitiveness. In Brazil, payment experience has been satisfactory in growth sectors, oleaginous production, the sugar industry, mineral extraction, construction, steel, aviation and, to a lesser extent, the automotive industry. Certain sectors may, however, be faced with par-

ticular difficulties like pharmaceutical product distribution, and fertilisers, or with foreign competition, like the clothing and shoe industries, which has affected their payment behaviour. In Colombia, companies tend meet their payment obligations on time. Construction will remain the most dynamic sector followed by retailing, oil and mineral extraction, telecommunications and services. In Argentina, the financial health of private companies continues to improve, particularly in the automotive industry, construction, communications, tourism and agriculture. The weakest sectors include food due to price controls and export restrictions, oil refining due to a lack of investment and public services (water, electricity, gas, transport) due to regulated prices. In general, payment experience on private companies has been relatively satisfactory. In Venezuela, certain sectors should suffer from more restrictive import policy (automotive industry, alcohol, tobacco, maintenance services and technical assistance), and there have been recurrent payment delays resulting from bureaucratic slowness linked to the foreign exchange mechanism managed by the CADIVI Exchange Administration Board. ■

2

@rating trends

The average level of risk has declined slightly in the region but significant differences have persisted between countries. Chile’s A2 rating remains unchanged with the country benefiting from tight macroeconomic management, remarkable political stability and a quality business environment. Mexico is still rated A3 based on good economic and financial fundamentals in conjunction with satisfactory payment experience. Brazil has kept its A4 ratings with its economic and financial stability and its enhanced capacity to cope with the volatility of international financial markets constituting an improved business environment. Colombia continues to be rated A4 reflecting the continuation of orthodox economic policy and satisfactory corporate payment behaviour notwithstanding the insecurity problems. Coface has upgraded

161

OUTLOOK FOR 2008

Costa Rica’s B rating to A4 based on a brighter economic and financial outlook in the wake of the approval late 2007 of the free trade agreement between Central America and the United States. Costa Rica moreover benefits from stable political institutions and a satisfactory business environment. Peru continues to be rated B with the continuing improvement in its economic and financial situation not sufficing to offset its vulnerability to exogenous

162

shocks and the business environment remaining difficult. Argentina has kept its C rating with improved conditions and a brighter economic outlook clouded by interventionist economic policy and an uncertain business environment. Venezuela has also kept its C rating due to the questionable use of its oil wealth, a lack of economic diversification and an unpredictable framework for doing business.

ARGENTINA

Argentina Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

39.1 214,058 C Very high risk B

2 STRENGTHS • Endowed with abundant natural, energy, mineral and agricultural resources, Argentina has benefited from the strong world demand and high prices for raw materials. • The undervalued local currency has benefited domestic production and export competitiveness. • The country’s education level and human development indicators have been substantially above the Latin American average. • The work force is skilled and adaptable.

WEAKNESSES • The economy continues to be partially dependent on raw materials and to suffer from insufficient investment particularly in the energy sector and infrastructure. • Despite the restructuring of its bond debt on favourable terms in June 2005 and early IMF repayment in January 2006, foreign debt is still high. • Sustained improvement in public finances will depend on implementation of genuinely tight fiscal policy. • Good performance by the economy will require an improved business environment and a steadier legal framework. • Social tensions and inequality have persisted.

RISK ASSESSMENT The repercussions of the 2007 international financial turmoil on the real economy should remain limited. Growth will be more moderate in 2008 although still driven by domestic demand spurred by still relatively accommodating economic policy. Still benefiting from strong world demand for commodities and from an undervalued peso, exports should allow Argentina to run a current account surplus again and substantially increase foreign exchange reserves. With foreign debt declining after its partial cancellation in 2005 and early IMF repayment in 2006, the relevant ratios should continue to improve. Argentina will, however, have to normalise its relations with foreign creditors, which could happen in the wake of Cristina Kirchner’s election as pres-

ident in October 2007. Although a fiscal surplus is also expected in 2008, lasting improvement in public finances will depend on adoption of truly tight fiscal policy that the new administration could decide to implement gradually. The disquieting increase in inflation despite price controls and index adjustments reflects economic overheating and bottlenecks. Argentina has particularly suffered from a lack of investment, especially in the energy and transport sectors, undermined by a shaky business environment and interventionist economic policy. That context notwithstanding, the financial health of private companies has continued to improve, particularly in the car industry, construction, communications and tourism, as well as in an agricultural sector

163

THE AMERICAS

buoyed by a record harvest. The shakiest sectors include food, due to price control and export restrictions, oil refining, due to insufficient investment, utilities (water, electricity, gas, transportation) because of regulated

prices and tobacco, which is suffering from a drop in demand. In total, the Coface payment experience on private companies has been relatively satisfactory.

MAIN ECONOMIC INDICATORS (USD billions or %)

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (period-end rate) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

8.8 3.7 1.1 29.9 13.1 16.8 8.2 6.3 127.2 73.9 5.7

9.0 6.1 3.7 34.6 21.3 13.3 3.4 2.2 111.8 52.6 5.9

9.2 12.3 2.4 40.4 27.3 13.1 6.0 3.2 72.5 28.6 7.5

8.5 9.8 1.8 46.5 32.6 13.9 8.1 3.7 59.1 21.7 7.5

8.0 16.0 1.2 52.0 39.1 12.9 7.3 2.7 50.2 20.1 9.3

6.0 13.0 0.9 54.9 42.9 12.0 5.3 1.7 43.7 19.7 10.1

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET

164

■ Means of entry Argentina is a member of Mercosur, whose founding treaty enshrines the principle of free movement of goods within the area. Mercosur comprises its four founding members: Brazil, Argentina, Uruguay and Paraguay. Venezuela was included in November 2005, but its membership has not yet been ratified by all the parliaments (Brazil and Paraguay have still to decide). The common external tariff ranges from 0 to 35 per cent (average 13 per cent). Intra-Mercosur trade is duty-exempt for 90 per cent of the products on the unweighted list. The general treaty provides for sizeable special regimes (cars, IT, telecommunications, sensitive products) and exceptional regimes (Manaus and Tierra del Fuego special customs areas). Imports are liable to 21 per cent standard rate VAT (CIF + customs duties), which can vary according to the product and service, a 0.5 per cent statistical tax, as well as ad hoc indirect duties on certain goods (cigarettes, wines and spirits, luxury goods, vehicles). Products such as shoes, textiles and toys are

subject to ad hoc regulatory restrictions (import licences). Since 2002, exports are liable to taxes ranging from 5 to 25 per cent – oil and gas have higher rates – and constitute a highly lucrative source of tax revenue (2.3 per cent of GDP in 2004 and 2005). ■

Attitude towards foreign investors Decree 1853/93 defines the framework for foreign investment and enshrines the principle of equal treatment of domestic and foreign investors as well as free repatriation of capital and profits. Foreigners may invest – on the same terms as local investors – in virtually every branch of the economy without seeking prior approval. However, the legal system is unstable and the state of economic emergency, in force since 2002, has been renewed. The most vulnerable companies are public service contractors and providers (33 international firms are seeking arbitration at the World Bank, despite a stay of proceedings for around 10 of them). However, firms that are based in the country and know its strengths and weaknesses are prospering from the boom. Real opportunities exist in Argentina, especially in mining and agri-foods and related downstream activities.

ne D 93 ec Ju -93 ne D 94 ec Ju -94 ne D 95 ec Ju -95 ne D 96 ec Ju -96 ne D 97 ec Ju -97 ne D 98 ec Ju -98 ne D 99 ec Ju -99 ne D 00 ec Ju -00 ne D 01 ec Ju -01 ne D 02 ec Ju -02 ne D 03 ec Ju -03 ne D 04 ec Ju -04 ne D 05 ec Ju -05 ne D 06 ec Ju -06 ne D 07 ec -0 7

Ju

ARGENTINA

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995)

800

700

WORLD Argentina

600

500

400

2

300

200

100

0

165

THE AMERICAS

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

51 10 18 Imports: 19% of GDP

Exports: 25% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

15000

8000 7000 6000 5000 4000 3000 2000 1000 0

12000 9000 6000 3000 0 Brazil

Chile

USA

China

Spain

Brazil

USA

China

Germany

France

IMPORTS by products ■ Intermediate goods 37% ■ Capital goods 26% ■ Consumer goods 12% ■ Fuels 5% ■ Other 20%

EXPORTS by products ■ Oil seeds and cereals 31% ■ Foodstuffs 12% ■ Petroleum 12% ■ Chemicals and plastics 8% ■ Transport equipment 10% ■ Metals 5% ■ Textiles 4% ■ Other 18%

STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

166

Argentina

Regional average

Emerging country average

15,390 5,150 0.863 38 90 26 96

8,916 4,803 0.789 42 78 30 92

5,983 2,313 0.672 31 44 30 50

BOLIVIA

Bolivia Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

9.3 11,163 D Very high risk C

2 STRENGTHS • Bolivia is endowed with abundant hydrocarbon resources, notably the continent’s largest gas reserves after Venezuela’s, and substantial mineral and agricultural wealth. • The country belongs to the ACN, its association with Mercosur has facilitated exports to two large neighbouring countries, Brazil and Argentina, and it has sought to normalise relations with another neighbour, Chile. • Bolivia benefited from concessional treatment of its foreign debt granted by public creditors and relief extended by multilateral financial institutions, under the HIPC and MDRI programmes.

WEAKNESSES • Bolivia has suffered from its landlocked position, ethnic and regional cleavages and social indicators among the lowest in Latin America. • Exports rest on a limited number of commodities (natural gas, oil, zinc, silver, soybeans), with coca cultivation remaining a major problem. • The banking sector’s extensive dollarisation continues to be a source of weakness. • The political, social and business climates have been very poor. • Implementation of President Morales’ radical programme will be unlikely to ease either the tensions in the country or the risks of separatism in the eastern plains of Santa Cruz, Tarija, Beni and Pando, rich in gas reserves and agricultural resources.

RISK ASSESSMENT After an economic slowdown in 2007 attributable to bad weather conditions for farm production and bottlenecks in the hydrocarbon and mining sectors, the economy should only manage weak growth in 2008. Domestic demand will be the main economic engine, underpinned by household consumption, an investment recovery and expansionary fiscal policy. The strong inflation of 2007, stoked by the disruptive effects of the floods and by high world grain prices, should ease only slightly this year. After the gas sector nationalisation late 2006, the government is now planning to nationalise the mines and telecommunications.

Without foreign assistance, however, Bolivia could experience difficulties with management. In the export market, strong demand from its main trading partner Brazil will offset the United States slowdown. Imports will grow, meanwhile, with increased public spending on infrastructure and the revival of private investment in hydrocarbons and mining spurring capital goods purchases abroad. Although running very large external account surpluses and thus building up large foreign exchange reserves, Bolivia has remained financially weak even after cancellation of part of its foreign debt. Relations with international financial institutions have been strained, affected by the policy options

167

THE AMERICAS

taken by the government. Further extension beyond February 2008 of the preferential access of Bolivian products to the US market under the Andean Trade Promotion and Drug Eradication Act will depend on compromises on coca cultivation and investment protection. At the initiative of the indigenist President Evo Morales, the Constituent Assembly

adopted, end 2007, a new constitution that notably stipulates autonomy for the Indians and the possibility of a second presidential term. The constitutional charter is subject to approval by referendum in 2008, but in the absence of a consensus, the political and social unrest could intensify. In this context, there remains a risk of scission by eastern provinces led by the opposition.

MAIN ECONOMIC INDICATORS USD billions or %

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (period end rate) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

2.8 3.3 -7.9 1.6 1.6 0.0 0.1 1.0 70.0 15.5 4.8

3.9 4.6 -5.6 2.1 1.8 0.3 0.3 3.8 69.2 14.9 5.0

4.1 4.8 –2.3 2.8 2.3 0.5 0.6 6.5 65.9 12.7 5.8

4.6 4.9 4.6 3.9 2.7 1.2 1.4 12.3 41.3 9.0 9.5

3.8 11.0 1.0 4.4 3.3 1.1 1.5 11.8 37.3 7.6 11.0

4.0 9.0 1.0 4.9 3.6 1.3 1.5 10.8 34.3 6.8 12.5

e = estimate, f = forecast

168

CONDITIONS OF ACCESS TO THE MARKET ■ Market overview A small landlocked state surrounded by powerful neighbours, Bolivia attached great importance in the 1990s to an open border policy and trade integration with the other countries of the region. It applies de facto 10 per cent flat-rate ad valorem customs duty on all imports from non-ACN countries, excluding some capital goods which are liable to a reduced rate of duty. Foreign direct investment has fallen since 2000, due partly to the completion of the investment programme involving capitalised companies but mostly to the resurgence of social conflict and the economic policy pursued since December 2005. Unskilled Bolivian labour is plentiful and cheap. Wages can be fairly high for positions of responsibility. Employment of foreign staff is, in principle, limited to 15 per cent of a company’s workforce. ■ Means of entry Farm, crop and animal products require health certificates which comply with the

standards laid down by the ACN and agreed by Bolivia. The National agency, Senasag, is responsible for administering all importrelated health standards. All imports are subject to random checks by Bolivian customs. However, the growth in parallel markets is causing concern among legal traders. Documentary credit is the most widely used means of payment for both cash and deferred settlements. Delivery against payment is also used, but is far less widespread. Where business relations are well established, payments are usually made by bank transfer. Defaults by local companies are fairly frequent. Against this background, it is highly advisable to use irrevocable and confirmed documentary credit if there is any doubt whatsoever about the buyer’s creditworthiness. ■

Attitude towards foreign investors While foreign investment has been granted the same terms as investment by Bolivian nationals, in actual fact there has been an increase in the number of complaints against

BOLIVIA

local businesses. The election in late 2005 of President Evo Morales has been followed by the oil and gas nationalisation decree of 1 May 2006 and the announcement of agrarian reform and land redistribution. These events have served as a deterrent to foreign investment. The national development plan 2006– 2010 aims to pull back from the neoliberal policies followed for some 20 years and to restore the State as the motor of economic activity, especially in strategic sectors such as oil and gas, water supply and treatment, telecommunications, power, rail transport,

etc. In 2007, Bolivia pulled out from ICSID[, of which it has been a member since 1995. It has also signalled its intention, not followed by action for the time being, to re-negotiate the bilateral investment promotion and protection agreements concluded with several countries, including France. ■

Foreign exchange regulations Bolivia is a highly dollarised country, with over 70 per cent of bank deposits denominated in dollars at end 2006. There are no restrictions on the purchase, sale and transfer of foreign exchange.

2

169

THE AMERICAS

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

51 11 11 Imports: 33% of GDP

Exports: 36% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

1500

800 700 600 500 400 300 200 100 0

1200 900 600 300 0 Brazil

USA

Argentina Colombia

Japan

Brazil

Argentina

Chile

USA

Peru

IMPORTS by products ■ Chemicals 19% ■ Machinery and electrical equipment 22% ■ Vehicles 11% ■ Foodstuffs 10% ■ Fuels 10% ■ Plastics 6% ■ Other 22%

EXPORTS by products ■ Natural gas 45% ■ Petroleum 9% ■ Zinc 15% ■ Other ores 9% ■ Foodstuffs 9% ■ Soya 5% ■ Other 9%

STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

170

Bolivia

Regional average

Emerging country average

2,890 1,100 0.692 47 64 38 23

8,916 4,803 0.789 42 78 30 92

5,983 2,313 0.672 31 44 30 50

BRAZIL

Brazil Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

188.7 1,067,962 A4 Quite low risk A4

2 STRENGTHS • Brazil boasts abundant and varied natural resources and a relatively diversified economy. • Manufactured products constitute a growing proportion of production and exports. • The country has increased its economic and financial stability and its capacity to withstand international financial market volatility. • The policy of preserving fundamental macroeconomic equilibrium should stay on track. • Brazil’s domestic market potential and favourable labour costs have tended to enhance its attractiveness to foreign investors.

WEAKNESSES • Public debt has remained high and exposed to domestic interest rate trends, with its maturity being still too short. • The structural reforms needed in education, social security, job market and tax and regulatory systems have come against substantial political roadblocks and lack of official commitment. • A lack of investment has resulted in deficiencies in energy, rail, road and port infrastructure, with public/private partnerships not yet really effective. • Brazil is still relatively vulnerable to a downturn in raw material prices.

RISK ASSESSMENT With domestic demand remaining the economic engine, growth should remain strong in 2008 and almost reach the 5-per cent target set out in the government’s January 2007 growth acceleration programme. Although Brazil has demonstrated notable capacity to withstand international financial market volatility, the emergence of inflationary pressures has prompted the Central Bank to put further reductions of still-high interest rates on hold. Export performance, the appreciation of the real notwithstanding, should allow the country to maintain trade and current account surpluses and cause a sharp reduction in external financing needs, entirely covered by foreign direct investment. Moreover, Bra-

zil’s external vulnerability should continue to decline sharply in conjunction with a marked improvement in external debt ratios, with the country’s record level of foreign exchange reserves constituting a very solid safety net. Although the structure of public domestic debt has continued to improve, total public debt is still too high at 64 per cent of GDP in gross terms and 45 per cent in net in 2007. This has notably tended to delay infrastructure modernisation. Progress on the structural reforms needed meanwhile to foster more sustainable growth is likely to remain slow due to the parliamentary coalition’s lack of homogeneity and to a lack of political commitment. The reforms will nonetheless

171

THE AMERICAS

be a major challenge during President Lula da Silva’s second term. In this relatively favourable context, corporate solvency has been generally improving, particularly in buoyant sectors like oleaginous production, the sugar industry, mineral extraction, construction, steel, aeronautics and, to a lesser degree, the car industry. The Coface payment experience

has been satisfactory. Certain sectors, however, like pharmaceutical product and fertilizer distribution, may have to contend with particular difficulties while others, like clothing and shoes, have been facing foreign competition heightened by the real’s strength with their payment behaviour suffering in consequence.

MAIN ECONOMIC INDICATORS USD billions or %

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (period-end rate) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

1.2 10.4 -4.6 73.1 48.3 24.8 4.2 0.8 42.7 68.1 6.9

5.7 7.6 -2.4 96.5 62.8 33.6 11.7 1.8 33.2 48.2 6.1

2.9 5.7 -3.0 118.3 73.6 44.7 14.0 1.6 21.3 39.5 5.1

3.7 3.1 -3.0 137.5 91.4 46.1 13.3 1.2 18.7 30.8 6.7

5.2 4.2 -2.3 155.1 112.4 42.6 11.5 0.9 16.3 20.5 12.4

4.6 4.1 -1.8 165.5 129.6 35.9 4.3 0.3 15.8 20.0 13.0

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■ Market overview The current minimum monthly wage is BRL 380 (about €150). Employer social security and compulsory benefit contributions amount to about 50 per cent of the gross wage. Pension and tax reforms could result in reduced contributions for export sectors principally.

172

■ Means of entry The average rate of customs duty is approximately 10.7 per cent and the top rate 35 per cent. The country is bound by Mercosur’s Common External Tariff, which is subject to numerous exceptions. Brazil maintains a number of non-tariff barriers to imports, including import licences, customs valuations and inspections and prior product registration. The most widely used means of payment are down payments, pre-payments, cash against documents, acceptance bills and irrevocable letters of credit confirmed by a

Brazilian or foreign bank. Restrictions are in force on the employment of foreigners. There are two types of work permit – permanent and temporary – both of which are awarded on a fairly restricted basis. People applying for a permanent work permit must be prepared to invest US$50,000. ■

Attitude towards foreign investors Foreign investors have to register with the Central Bank and declare the amount, origin and purpose of the investment. All companies and individuals not domiciled in Brazil who hold or wish to acquire property in the country must register at Cadastro Nacional de Pessoas Jurı´dicas (CNPJ – companies registry) or at Cadastro de Pessoa Fisica (CPF – natural persons registry). Foreign investment is banned in certain sectors. Foreign shareholdings in financial institutions are subject to government approval. Foreigners may set up a wholly owned subsidiary free from legal restrictions of any kind. However, they must hold a permanent

BRAZIL

visa to be appointed director of a Brazilian subsidiary. As investors, they must be represented by a lawyer in Brazil. Overseas transfers (capital repatriation, reinvestment, profit and dividend repatriation) are authorised, provided the capital is registered. Apart from requiring Central Bank’s permission, such transfers have to be handled by financial

institutions trading on the currency market. Profit and dividend transfers are not taxed. ■ Foreign exchange regulations The flexible exchange rate system of 1999 has been maintained. The Central Bank intervenes only to ensure liquidity in the market, not to change rates. Its sole aim is to control inflation.

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995)

2

300

250

WORLD Brazil

200

150

100

50

Ju

ne D 93 ec Ju -93 ne D 94 ec Ju -94 ne D 95 ec Ju -95 ne D 96 ec Ju -96 ne D 97 ec Ju -97 ne D 98 ec Ju -98 ne D 99 ec Ju -99 ne D 00 ec Ju -00 ne D 01 ec Ju -01 ne D 02 ec Ju -02 ne D 03 ec Ju -03 ne D 04 ec Ju -04 ne D 05 ec Ju -05 ne D 06 ec Ju -06 ne D 07 ec -0 7

0

173

THE AMERICAS

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

50 18 19 Imports: 12% of GDP

Exports: 17% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

25000

15000

20000

12000

15000

9000

10000

6000

5000

3000 0

0 USA

Argentina

China Netherlands Germany

USA

Argentina China

Germany Nigeria

IMPORTS by products ■ Machinery and electrical equipment 26% ■ Petroleum and by-products 17% ■ Chemicals 16% ■ Transport equipment 11% ■ Foodstuffs 5% ■ Ores and metals 7% ■ Other 19%

EXPORTS by products ■ Foodstuffs 26% ■ Transport equipment 15% ■ Metallurgic goods 11% ■ Fuels 8% ■ Oil seeds and oleaginous fruits 8% ■ Ores 7% ■ Chemicals 3% ■ Other 23%

STANDARD OF LIVING / PURCHASING POWER

174

Indicators

Brazil

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

8,800 4,730 0.792 45 84 28 105

8,916 4,803 0.789 42 78 30 92

5,983 2,313 0.672 31 44 30 50

CANADA

Canada Population (million inhabitants): GDP (US$ million): Country @rating: Business climate rating:

32.9 1,271,600 A1 A1

2

RISK ASSESSMENT In 2007, the Canadian economy essentially averted the slowdown developing in the United States. Wage and job growth provided solid support for household consumption. Both residential and non-residential construction continued to trend up, representing 25 per cent of GDP growth. The Canadian dollar appreciation undercut, however, the increase in export revenues associated with the soaring prices for raw materials – oil, coking coal, electricity, grain and metals – and also undermined the prices and the volumes of traditional exports to the United States, which absorbs the highest proportion of them by far. The economy should remain relatively firm in 2008. Consumption will benefit again from a bright job picture, especially in the public sector, and from further reductions of direct and indirect taxes facilitated by the public sector financial surplus and continued debt reduction. Taking advantage of new, generally more favourable amortisation rules, companies will increase their investments in commercial and office premises. Public institutions will maintain a high level of spending on infrastructure, health and education. A tightening of credit will undermine residential construction (40 per cent of building and public works activity). Export volumes have been contending with the weaker demand for construction in the United States.

Corporate financial health is still generally good as evidenced by the good Coface payment incident index for Canada and the continued decline of bankruptcies. Beyond this general economic assessment differences emerge between regions and sectors. A dichotomy will notably persist between the Western provinces underpinned by raw materials and the Central provinces (Quebec, Ontario) very dependent on a manufacturing industry suffering from both unfavourable exchange rates and competition from emerging countries. While the aviation industry and facilities for energy production, mine operation, construction and agriculture have outperformed, other sectors have fared less well. Car industry parts manufacturers, who do 90 per cent of their business with the three major North American carmakers, have suffered from the decline in local production and the reduction in the number of Canadian parts contained in vehicles. Tourism has suffered from the decline in the number of visitors from the United States. Retailers located near the southern border have felt the effects of cross-border purchasing by Canadians. The wood industry has been contending with the weaker demand for construction in the United States. The paper industry has to continue restructuring due to the decline in newsprint consumption, continuing competitive pressures and rising costs.

175

THE AMERICAS

MAIN ECONOMIC INDICATORS Percentage

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Consumption (var.) Investment (var.) Inﬂation Unemployment Short-term interest Public sector balance (%GDP) Public sector debt (%GDP) Exports (var.) Imports (var.) Current account balance (%GDP)

1.8 3.0 6.1 2.8 7.6 3.0 -0.4 76.5 -2.4 3.8 1.2

3.2 3.3 6.1 1.8 7.2 2.3 0.5 72.1 5.0 8.1 2.2

3.0 3.9 7.1 2.2 6.8 2.9 1.6 70.8 2.1 7.1 2.3

2.8 4.2 9.9 2.0 6.3 4.2 0.9 65.0 0.7 5.0 1.6

2.5 3.9 4.8 2.2 6.0 4.6 0.8 60.0 1.7 5.0 1.7

2.2 3.2 6.5 1.9 6.0 4.3 0.8 57.0 2.5 6.5 1.0

e = estimate, f = forecast

PAYMENT AND COLLECTION PRACTICES A heritage of Canada’s colonial past, its dual legal system comprises that used by 9 of the 10 provinces making up the Federal state, which is inspired by British ‘common law’ and that used by Quebec whose legal traditions are based on the codified principles of the Napoleonic code. Lower Canada’s civil code, dating to 1 January 1866, was completely revised and implemented on 1 January 1994 as the Quebec Civil Code. Under the British North America Act of 29 March 1867, Canada was the first British colony to exercise executive and legislative powers as a federal state. The Confederation of Canada came into effect as a dominion on 1 July 1867.

176

■ Payment A single law governs bills of exchange, promissory notes and cheques throughout Canada, however this law is frequently interpreted according to common law precedents in the nine provinces or according to the civil code in Quebec. As such, sellers are well advised to accept such payment methods unless where long-term commercial relations, based on mutual trust, have been established with buyers. Centralised accounts, which greatly simplify the settlement process by centralising settlement procedures between locally based buyers and sellers, are also used within Canada. SWIFT bank transfers are the most commonly used payment method for interna-

tional transactions. The majority of Canadian banks are connected to the SWIFT network, offering a rapid, reliable and costeffective means of payment, notwithstanding the fact that payment is dependent upon the client being in good faith insofar as only the issuer takes the decision to order payment. A real time electronic fund transfer system in operation since February 1999 – the Large Value Transfer System, or LVTS – facilitates electronic transfers of Canadian dollars countrywide and can also handle the Canadian portion of international operations. The letter of credit (L/C) is also frequently used. ■

Debt collection Canada’s Constitution Act of 1867, last amended in 1982, divides judicial authority between the federal and provincial Governments. Thus, each province is responsible for administering justice, organising provincial courts and enacting the rules of civil proceedings in its territory. Though the names of courts vary between provinces, the same legal system applies throughout the country, bar Quebec. Within each province, provincial courts hear most disputes of all kinds concerning small claims, and superior courts hear large claims – for example, the Quebec superior court hears civil and commercial disputes exceeding CAD 70,000 and jury trials of criminal cases. Canadian superior courts comprise two distinct divisions: a court of first instance and a court of appeal.

CANADA

At federal level, the Supreme Court of Canada, in Ottawa, and only with ‘leave’ of the Court itself (leave is granted if the case raises an important question of law), hears appeals against decisions handed down by the provincial appeal courts, or by the Canadian Federal Court (stating in appeal division), which has special jurisdiction in matters concerning maritime law, immigration, customs and excise, intellectual property, disputes between provinces and so on. The right of final recourse before the Privy Council, in London, was abolished in 1949. The collection process begins with the issuance of a final notice, or ‘seven-day letter’, reminding the debtor of his obligation to pay together with any contractually agreed interest penalties. Ordinary legal action – even if the vocabulary used to describe it may vary within the country – proceeds in three phases: first, the ‘writ of summons’ whereby the plaintiff files his claim against the defendant with the court, then the ‘examination for discovery’, which outlines the claim against the defendant and takes into account the evidence to be submitted by each party to the court and, finally, the ‘trial proper’ during which the judge hears the adverse parties and their respective witnesses, who

are subject to examination and cross-examination by their respective legal counsels, to clarify the facts of the case before making a ruling. In most cases, except when the judge decides otherwise, each party is required to bear the full cost of the fees of his own attorney whatever the outcome of the proceedings. As for court costs, the rule stipulates that the winning party may demand payment by the losing party based on a statement of expenses duly approved by the court clerk. The Quebec civil code reform, in effect since 1 January 2003, is intended to speed up and foster, by devolving a broader role on the court, smoother court proceedings, by, for example, instituting a standard ‘originating petition’ (requeˆte introductive d’instance), introducing a 180-day time limit by which the proceedings must be scheduled for ‘investigation and hearings’ (pour enqueˆte et audition), delivering a judgement on the content within a timeframe of six months after the case was heard and encouraging the parties to submit to a conciliation stage during legal proceedings, with the judge presiding over an ‘amicable settlement conference’ (confe´rence de re`glement a` l’amiable).

2

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300

250

WORLD Canada

200

150

100

50

Ju ne D 93 ec Ju -93 ne D 94 ec Ju -94 ne D 95 ec Ju -95 ne D 96 ec Ju -96 ne D 97 ec Ju -97 ne D 98 ec Ju -98 ne D 99 ec Ju -99 ne D 00 ec Ju -00 ne D 01 ec Ju -01 ne D 02 ec Ju -02 ne D 03 ec Ju -03 ne D 04 ec Ju -04 ne D 05 ec Ju -05 ne D 06 ec Ju -06 ne D 07 ec -0 7

0

177

THE AMERICAS

Chile

178

Population (million inhabitants): GDP (US$ million):

16.5 145,841

Country @rating: Medium-term rating: Business climate rating:

A2 Low risk A2

STRENGTHS • The world’s leading copper producer, Chile is endowed with abundant mining, agricultural, piscicultural (notably salmon) and forestry resources, as well as comparative advantages in those areas. • The country has benefited from economic expansion for the past 20 years, coupled with a relative consensus on the orthodox economic policy pursued. • The growing number of free-trade agreements has facilitated geographic and sectoral diversification of exports. • Political stability, quality institutions and infrastructure and a solid financial system have fostered foreign investment in the country and its development as a regional platform.

WEAKNESSES • The economy remains too dependent on copper exports (half total sales abroad) and low added-value sectors. • To meet its energy needs, the country remains dependent on foreign sources, particularly Argentine gas, pending the production start up of a liquefied natural gas facility in 2009–2010. • The income gap – still among the world’s highest due especially to disparities in the education system – has been a source of social tensions.

RISK ASSESSMENT Amid the world economic slowdown, the Chilean economy should grow at a more moderate rate this year. A good employment picture will continue to buoy household consumption growth, albeit at a slower pace. Public consumption and investment should moreover increase, with government officials leveraging the windfall from high copper prices to accentuate social spending and infrastructure modernisation. New copper and cellulose production capacity will also make a contribution. High food and energy prices compounded by the firmness of private consumption have, however, generated inflationary pressures that resulted in a tightening of monetary policy. Strict application in recent years of a fiscal surplus rule has facilitated reducing public

debt down to 5 per cent of GDP, with two stabilisation and investment funds set up in 2007 to improve management of the resulting surpluses. Furthermore, although sales of copper continue to dominate foreign trade, sales of other products like salmon, wood pulp and wood have been booming. The dynamism of Asian demand will give them further impetus notably under free-trade agreements concluded with China late 2006 and Japan a year later. The country is, however, still very dependent on imports of Argentine gas with uncertainty clouding its supply. External accounts will nonetheless continue to show large surpluses despite profit repatriation by foreign companies, while foreign debt ratios, essentially attributable to private borrowing, have continued to improve.

CHILE

In office since March 2006 and a member of the centre-left coalition in power since 1990, President Michelle Bachelet’s popularity has been in decline due notably to problems with the capital’s new public transportation system, Transantiago. The President moreover has to contend with many political and social challenges. The pace of reform, particularly of the education, health and pension systems, could lag in the run-up

to municipal elections late this year and the presidential election end 2009. In this context, the mining and paper industries, construction, food, distribution and financial services have outperformed. The Coface payment experience on companies has been very satisfactory and their solvency has remained good, except for weaknesses in a few sectors like textiles and clothing industry.

2

MAIN ECONOMIC INDICATORS USD billions or %

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (period end rate) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

3.3 1.1 -0.4 21.7 17.9 3.7 -0.8 -1.1 58.8 13.9 6.4

6.2 2.4 2.2 32.5 22.9 9.6 2.1 2.2 45.7 9.6 4.9

5.7 3.7 4.7 41.3 30.5 10.8 1.3 1.1 37.8 13.8 4.0

4.0 2.6 7.7 58.1 35.9 22.2 5.3 3.6 32.6 14.6 3.4

5.4 5.9 5.0 67.4 41.5 25.8 7.4 4.4 28.5 10.7 2.8

4.6 4.0 3.0 70.2 47.8 22.4 5.7 3.0 26.0 6.7 2.6

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■ Market overview The Chilean market is secure and stable. The political and economic situation, good infrastructure and very few changes in laws and regulations create a business-friendly environment, especially for small- and medium-sized companies. Chile has limited tariff protection and pursues unilateral measures to cut import duties, backed by bilateral and regional trade agreements. Since 1 January 2003, the uniform rate of customs duty for all products is 6 per cent. Moreover, following ratification by Chile’s parliament of the free-trade agreement with the European Union, the trade provisions of which have been in force since 1 February 2003, duties on 99.8 per cent of industrial goods have been abolished. ■ Means of entry Non-tariff barriers are few and far between. A number of regulations on foodstuffs, sim-

ilar at times to non-tariff barriers, are in place (type approval and sampling procedures). Compared with the other countries of the region, Chile offers fairly adequate intellectual property protection. A new industrial property act (No. 19.996) was published in March 2005. It supplements the 1991 act and enables Chile to bring its domestic legislation into line with WTO TRIPS) agreements. Backed by the implementing decrees of 1 December 2005, this ground-breaking law will provide better intellectual and industrial property protection, though there is room for improvement in pharmaceuticals. ■

Attitude towards foreign investors There is equal treatment for foreign and local investors, tie-ups with local companies being optional. Foreign investment status, within the meaning of Decree-Law 600, applies to deals in excess of US$5 million. Capital inflows below this figure, but above US$10,000, must be declared to the Central

179

THE AMERICAS

Bank, although the regulations have been relaxed. The one-year lock-in period for capital having entered the country after 2000 has been abolished and the compulsory reserve requirement (Encaje) scrapped. The utilities’ privatisation and concession programme continues to offer foreign investors start-up opportunities, even though most of the lucrative concessions have already been awarded. Corporation tax is 17 per cent. Moreover, some regions benefit from investment incentives (VAT exemption, etc) under regional development aid programmes. Labour legislation is not burdensome in terms of social security contributions, despite the introduction of unemployment benefits in 2002 and the increase in severance pay under the recently revised labour code. Employer

social security contributions are extremely low and limited to industrial accident protection. Since 2002, the government has been looking to provide incentives for foreign start ups in the country. One such initiative is the investment hub act adopted in 2002 that aims to turn Chile into a regional investment hub. Provided they meet a number of strict criteria, foreign companies investing from Chile in neighbouring countries are exempt from tax on profits generated outside. ■

Foreign exchange regulations The Central Bank abandoned the peso’s crawling peg in September 1999. The exchange rate is now determined by the market alone, with the monetary authorities intervening only on an exceptional basis. All customary means of payment are used.

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300

WORLD Chile 250

200

150

100

50

Ju

ne D 93 ec Ju -93 ne D 94 ec Ju -94 ne D 95 ec Ju -95 ne D 96 ec Ju -96 ne D 97 ec Ju -97 ne D 98 ec Ju -98 ne D 99 ec Ju -99 ne D 00 ec Ju -00 ne D 01 ec Ju -01 ne D 02 ec Ju -02 ne D 03 ec Ju -03 ne D 04 ec Ju -04 ne D 05 ec Ju -05 ne D 06 ec Ju -06 ne D 07 ec -0 7

0

180

CHILE

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

43 9 17 Imports: 34% of GDP

Exports: 42% of GDP

2 MAIN DESTINATIONS OF EXPORTS

MAIN ORIGINS OF IMPORTS

10000

6000

8000

5000 4000

6000

3000 4000

2000

2000

1000

0

0 USA

Japan

China

South Netherlands Korea

USA

Argentina Brazil

China

Peru

IMPORTS by products ■ Foodstuffs and agricultural raw materials 7% ■ Fuels 22% ■ Ores and metals 4% ■ Chemicals 12% ■ Machinery and transport equipment 36% ■ Other manufactured goods 20%

EXPORTS by products ■ Copper 56% ■ Foodstuffs (excluding fruits and fish) 10% ■ Fishing products 6% ■ Chemicals 5% ■ Fresh fruit 4% ■ Cellulose and paper 3% ■ Other 17%

STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

Chile

Regional average

Emerging country average

11,270 6,980 0.859 45 88 25 141

8,916 4,803 0.789 42 78 30 92

5,983 2,313 0.672 31 44 30 50

181

THE AMERICAS

Colombia Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

182

45.6 135,836

A4 Moderately high risk B

STRENGTHS • Colombia boasts great natural wealth, particularly agricultural and mining resources. • The country has diversified its exports in the ATPDEA framework – the Andean Trade Promotion and Drug Eradication Act – to become the leading Andean Community manufacturing power. • The government has pursued a policy of consolidating public finances, gradually reducing inflation and strengthening the financial sector. • Colombia has benefited from substantial American military aid to eradicate drug production and smuggling and combat the guerrilla movement, and that aid could be partially re-directed to civil development programmes.

WEAKNESSES • The security situation is still a problem due to the presence of Latin America’s largest guerrilla movement, the Fuerzas Armadas Revolucionarias de Colombia (FARC) and the climate of violence linked to drug smuggling. • The poverty afflicting half the population, a large wage gap and the wide gulf between urban and rural areas have undermined the country’s cohesiveness. • To improve the public finance situation, tax reforms remain necessary especially to endow public spending with greater flexibility and broaden the VAT base. • The banking sector continues to be weakened by its exposure to sovereign risk.

RISK ASSESSMENT GDP growth should remain relatively strong, driven by private consumption and investment, with the inflationary pressures stoked by firm domestic demand and high-production capacity utilisation prompting a tightening of monetary policy. While external accounts may have deteriorated, exports are increasingly diversified, coal production has been rising and oil production is expected to improve, as the opening for sale to the private sector of 20 per cent of the shares in Ecopetrol should allow the state-owned company to increase its investments. Foreign direct investment inflows should cover half the country’s growing financing needs with borrowing in international financial markets covering

the rest albeit at less favourable conditions due to the turmoil. Debt ratios, although still high compared to exports, have nonetheless been improving. The government led by conservative President Alvaro Uribe, re-elected in May 2006, has pursued orthodox economic policy. Progress on tax reforms has, however, met with stiff resistance from the presidential coalition in parliament although they remain necessary to reduce the fiscal deficit and a still-high public debt that represented nearly 50 per cent of GDP in 2007 but whose structure and profile have, however, tended to improve. The political and social situation is still difficult due notably to the continuing high

COLOMBIA

level of insecurity despite the weakening of the FARC guerrilla movement. Revelations of ties between members of the Uribe administration and paramilitary groups have not only shaken the parliamentary majority, they have delayed ratification by the United States Congress of the free-trade agreement intended to re-

place ATPDEA whose validity has been extended. Corporate solvency, meanwhile, should remain satisfactory with companies meeting their payment obligations on time. Construction will remain the most dynamic sector, followed by retailing, oil and mineral extraction, telecommunications and services.

MAIN ECONOMIC INDICATORS USD billions or %

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (period-end %) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

3.9 6.5 -4.7 13.8 13.3 0.6 -1.0 -1.2 47.9 41.5 6.3

4.9 5.5 -4.3 17.2 15.9 1.3 -0.9 -1.0 40.2 25.0 6.5

4.7 4.9 -4.8 21.7 20.1 1.6 -1.9 -1.5 31.3 25.2 5.7

6.8 4.5 -4.1 25.2 24.9 0.3 -3.1 -2.3 29.4 19.7 5.4

6.5 5.3 -3.4 28.4 30.8 -2.4 -5.1 -3.0 24.6 18.2 5.2

5.5 4.4 -4.0 29.8 34.3 -4.5 -6.8 -3.8 25.2 17.1 5.1

2

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■ Market overview President Uribe’s second term has been marked by a revival in investment, strong GDP growth and a widening of the trade deficit on the back of rising imports. It should be noted, however, that the bulk of imports consists of capital goods which contribute to the modernisation of the country’s production facilities. ■ Means of entry The few barriers to trade that remain arise mainly from the legal uncertainty created by frequent parliamentary changes, as well as the plethora of government bodies and players. This is especially true of taxation, where a new reform, the third in as many years, has been passed by Congress. This law simplifies VAT and income tax by widening the tax base and reducing the number of tax brackets. To provide visibility for companies in a changing legal context, Congress has passed

a law offering a stable legal framework for both foreign and domestic investment. Under the new law, an investor who has entered into a legal stability agreement with the Colombian government containing a vital stability clause will be entitled to compensation if that clause is amended. In the opinion of the constitutional court, however, the new tax provisions apply to investments under contract, with compensation claims by companies being settled through arbitration or the courts. ■

Attitude towards foreign investors All sectors of the economy are open to foreign investment, except for defence and the processing of toxic, hazardous or radioactive waste not produced in the country. Investment in financial services, oil and gas and mining is subject to prior government approval.

■

Foreign exchange regulations The country has a floating exchange rate since 1999.

183

184 ne

ne

ne

ne

ne

ne

ne

ne

ne

ne

-0 5 -0 6 D ec -0 Ju 6 ne -0 7 D ec -0 7

Ju

05

-0 4

04

-0 3

D ec

Ju

D ec

Ju

03

-0 2

D ec

Ju

02

-0 1

01

-0 0

00

-9 9

99

250

D ec

Ju

98 -9 8

D ec

Ju

97 -9 7

D ec

Ju

D ec

Ju

D ec

Ju

D ec

Ju

THE AMERICAS

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995)

300

WORLD Colombia

200

150

100

50

0

COLOMBIA

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

50 16 16 Imports: 21% of GDP

Exports: 22% of GDP

2 MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

8000 7000 6000 5000 4000 3000 2000 1000 0

10000 8000 6000 4000 2000 0 USA

Venezuela Ecuador

Peru

Mexico

USA

Mexico

Brazil

China Venezuela

IMPORTS by products ■ Machinery and transport equipment 40% ■ Chemicals 21% ■ Foodstuffs 9% ■ Manufactured goods 23% ■ Other 8%

EXPORTS by products ■ Oil and oil products 25% ■ Coal 12% ■ Coffee, tea, spices 6% ■ Machinery and transport equipment 6% ■ Iron and steel 5% ■ Plastics and plastics by-products 5% ■ Food items (excluding coffee, tea, spices) 11%

■ Other 30%

STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

Colombia

Regional average

Emerging country average

7,620 2,740 0.790 47 73 31 41

8,916 4,803 0.789 42 78 30 92

5,983 2,313 0.672 31 44 30 50

185

THE AMERICAS

Costa Rica Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

4.4 22,14 A4 Quite low risk A3

RISK ASSESSMENT The country’s economic and financial outlook has improved with the approval end 2007 in Costa Rica of DR-CAFTA, the free-trade agreement between the Central American countries and the United States. Foreign investors, already attracted by the country’s stable political institutions, good social indicators and a satisfactory business environment, should benefit from the liberalisation of the electricity, telecommunications and insurance sectors. Growth should remain relatively strong amid strong consumption and investment. A persistent fiscal deficit is attributable to the narrowness of the tax base and the rigidity of public spending, while the still-pending fiscal reform would contribute to reducing the public debt burden (45 per cent of GDP in 2007 and half denominated in foreign currencies). Although external accounts

ought to benefit from the good performance of technological-product exports and tourism revenues, they have suffered from the extent of oil purchases and profit repatriation by multinationals, with the net result of a substantial current account deficit. The influx of foreign direct investment should, however, largely cover external financing needs. Foreign debt ratios will moreover remain moderate and the adoption of a more flexible foreign exchange system will allow the Central Bank to exercise better control over inflation. Although the banking system is still weakened by extensive dollarisation, oversight and performance have improved. Although Centre-right President Oscar Arias, in office since May 2006, does not enjoy majority support in the unicameral congress, positive fallout from the free-trade agreement approval might allow him to go forward with certain reforms.

MAIN ECONOMIC INDICATORS

186

USD billions or %

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (average annual rate) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

6.4 9.4 -3.1 6.2 7.3 -1.1 -5.0 30.9 9.0 2.3

4.3 12.3 -2.5 6.4 7.8 -1.4 -4.3 30.1 8.6 2.4

5.9 13.8 -1.6 7.1 9.2 -2.1 -4.9 30.6 5.3 2.5

8.2 11.5 -1.1 8.2 10.8 -2.6 -4.8 28.5 6.5 2.9

5.9 9.2 -1.0 9.2 11.8 -2.6 -5.0 26.7 5.2 3.4

4.8 8.0 -0.7 9.9 12.3 -2.4 -4.6 24.9 3.9 3.8

e = estimate, f = forecast

CUBA

Cuba Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

11.3 3,295 D Very high risk D

2 STRENGTHS • Cuba boasts great natural wealth including mining resources (mainly nickel and cobalt), agriculture (sugar, tobacco) and fishing (rock lobster). • A developed tourist sector constitutes an important source of foreign currency. • Compared to other regional countries the education level of the workforce is satisfactory, as are the social indicators.

WEAKNESSES • The country has been vulnerable to external shocks due to its dependence on raw materials with volatile prices, tourism and oil imports. • Cuba has limited access to external financing due to amount of debt in arrears. • The de-dollarisation initiated end 2004 with the creation of two currencies has increased the distortions within that centralised economy. • How succession to President Fidel Castro and the embargo imposed by the United States play out constitute major factors of uncertainty.

RISK ASSESSMENT By ‘temporarily’ delegating the presidency to his younger brother Raul end July 2006, Fidel Castro triggered a succession process that could lead to a more pragmatic approach to economic policy. Investment, along with household spending, will drive more moderate growth in 2008. Construction and infrastructure should expand, while agriculture should experience a recovery. Although continuation of the American sanctions will hamper the economy, the upcoming presidential election in the United States in November 2008 could open a window of opportunity for greater flexibility on that score. Economic management could be the subject of gradual adjustments, particularly of prices and exchange rates, to improve the

efficiency of the economic apparatus and raise living standards. The growth of tax receipts and contributions by state-owned companies will facilitate keeping a lid on the fiscal deficit. Although the international financial turmoil has relatively limited impact on external accounts, foreign trade remains structurally in deficit due to the high volumes of imported capital goods and food, mainly from China, and oil from Venezuela. Revenues derived from services, tourism, and transfers by exiles have, however, made it possible to limit a current account deficit, financed notably by foreign direct investment inflows. With Cuba only able to obtain shortterm external financing and then only to a limited extent, its debt ratios (excluding Russian debt) should continue to decline.

187

THE AMERICAS

MAIN ECONOMIC INDICATORS USD billions or %

2002

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (period-end rate) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP)* Debt service (%Exports) Foreign exchange reserves (in months of imports)

1.5 7.0 -3.2 1.4 4.1 -2.7 -0.7 -2.3 38.4 15.9 1.2

2.9 -1.0 -3.3 1.7 4.6 -2.9 -0.3 -1.1 37.8 37.1 1.3

4.3 2.9 -4.2 2.2 5.6 -3.4 -0.3 -1.0 43.0 29.5 3.9

8.6 3.7 -4.5 2.0 7.5 -5.5 -0.3 -0.9 40.1 27.7 4.0

11.1 5.7 -3.8 2.8 9.4 -6.7 0.1 0.2 37.8 21.9 3.7

7.0 4.8 -3.2 3.3 10.9 -7.6 -0.7 -1.6 36.0 20.3 3.3

5.4 4.0 -3.0 3.6 11.7 -8.1 -1.0 -2.0 35.0 20.7 3.2

e = estimate, f = forecast, *ex Russian debt

CONDITIONS OF ACCESS TO THE MARKET

188

■ Means of entry Cuba is one of the founding members of the WTO. It maintains trade relations with every country in the world, except the United States, which has imposed a trade embargo against it for the last 40 years. The extraterritorial provisions of the Helms-Burton Act create legal uncertainty, even though Title III of the act was suspended by the US government in 1996. Since late 2001, the United States allows sales of foodstuffs and pharmaceuticals and is now the island’s biggest food supplier. The country’s import regulations are very restrictive, with the Cuban State exercising tight controls (licensing, import boards by product and sector, etc) and determining priority sectors. The rates of customs duty are generally quite favourable. The country has significant payment problems, which vary greatly from one creditor to another. As Cuba is not eligible for funding from international institutions such as the World Bank and the IMF on account of the US veto and has run up debt arrears with some of its partners, it must raise private short-term loans (12–24 months) with high rates against real securities or find new partners for long-term loans. Such partners remain wary due to the country’s selective default policy. The preferred means of payment for foreign trade is irrevocable

documentary credit confirmed by a leading bank. Exchange controls, in force since July 2003, require Cuban firms and agencies to seek central bank approval for foreign trade payments. This measure was tightened in January 2005 through the introduction of a single foreign currency account held with the Cuban Central Bank, where all income in convertible currency earned by Cuban undertakings is deposited. All import applications are now vetted by an approvals committee chaired by the Cuban Central Bank. ■

Attitude towards foreign investors Cuba has encouraged foreign investment only for the last 12 years and has concluded bilateral investment promotion and protection agreements with 53 countries, including France. Sectors that have attracted foreign direct investment include tourism, basic industry, energy, telecommunications, agrifoods and banking. In general, training, health care and services are closed to foreigners. Foreign investment is regulated by strict procedures requiring compliance with technology transfer, capital contribution and export development criteria. The volume of FDI in Cuba is fairly small and barely amounts to $5.5 billion since the opening up of the country’s market. There has recently been a surge of interest from Canada and Venezuela (nickel, oil). The government reserves the right to grant, renew or refuse

CUBA

licences to foreign entities (representations, branches, mixed enterprises, economic associations, etc). The tax system does not discriminate against foreign investors and is one of several incentives. Activity in the free zones has declined sharply. Labour, supplied by the government after complex formalities, is on the whole skilled. Employees get only a fraction of the invoiced amount from the government and lack motivation if they are not paid a bonus directly. ■ Foreign exchange regulations Year 2004 marked the end of the dollar’s circulation in the Cuban economy for all cash payments. There are two currencies in Cuba: the CUC (Cuban peso convertible only in Cuba worth US$1.08) and the CUP (domestic peso with a value of CUP 24 to the CUC). Food staples, essential goods and public services (urban transport, water, gas,

electricity, telephone) are heavily subsidised by the state and denominated in CUPs. All other available goods are payable in CUCs. A 10 per cent surcharge is levied by banks on exchange transactions involving the US dollar. This charge is not applied to the other freely convertible currencies recognised by the Cuban government (euro, Swiss franc, sterling, Canadian dollar). Exchange rates for other currencies are calculated by reference to their movements against the US dollar. The government is planning several revaluations of the CUP against the CUC with a view to unifying the two currencies eventually. However, this is inconceivable for the next two–three years at least. In summary, CUC 1 is worth US$1.08 and CUP 24. The rate for the euro is calculated as follows: €1 = $/€ daily rate × 0.9259 (CUC/US$).

2

189

THE AMERICAS

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

54 18 10 Imports: 22% of GDP

Exports: 22% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

2500

800 700 600 500 400 300 200 100 0

2000 1500 1000 500 0 Netherlands Canada Venezuela China

Spain

Venezuela China

Spain

Canada

Italy

IMPORTS by products ■ Machinery and equipment 33% ■ Fuels 24% ■ Foodstuffs 14% ■ Chemicals 7% ■ Other 22%

EXPORTS by products ■ Nickel 47% ■ Foodstuffs (excluding sugar and tobacco) 14% ■ Tobacco 9% ■ Sugar 8% ■ Medicines 5% ■ Chemicals 8% ■ Other 10%

STANDARD OF LIVING / PURCHASING POWER

190

Indicators

Cuba

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

10,070 3,660 0.826 n/a 76 19 33

8,916 4,803 0.789 42 78 30 92

5,983 2,313 0.672 31 44 30 50

DOMINICAN REPUBLIC

Dominican Republic Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

9.6 30,581

B Moderately high risk B

2 RISK ASSESSMENT After the catch-up process in recent years resulting from the bank crisis of 2003, economic growth should be less brisk in 2008 due notably to the economic slowdown in the United States, the country’s number one trading partner. Domestic demand should nonetheless be the main growth engine. With the high price of oil and the reconstruction needed to repair the damage done by the hurricanes late last year, maintaining prudent monetary and fiscal policy will not be a simple matter. It will, however, have to stay within the framework of the confirmation agreement renewed with the IMF early this year. There has been notable, albeit precarious, improvement in public finances with the public debt declining in relation to GDP, down to 40 per cent in 2007. The real challenge will be to persevere with the fiscal consolidation during an electoral period as this year. The country has benefited, meanwhile, from the high nickel prices along with large revenues from tourism and expatriate remittances. The coming into force in 2007 of the DR-CAFTA, the free-trade agreement between the Dominican Republic, Central America and the United States should give rise to additional inflows of foreign direct investment. After the rescheduling granted by the Paris Club public creditors and the

London Club private creditors in 2005, foreign debt ratios have continued to improve, thanks to strong growth. The country’s other recent achievements moreover include financial system consolidation, the strengthening of bank regulation and oversight and the central bank recapitalisation, which should bolster its independence and credibility. The country remains nonetheless dependent on oil imports that weigh on external accounts despite the preferential accords concluded with Venezuela. Textile and shoe exports from customs-free zones have suffered meanwhile from Chinese competition. In a turbulent international environment, relying on short-term financing to cover part of the current account deficit will be more costly. And cumbersome bureaucracy and widespread corruption highlight the public sector’s ineffectiveness. Progress has been made, however, in distributing electricity, with reducing fraud, and renegotiating longterm contracts. In this context, most of the population has not benefited from the fruits of the economic expansion, which has heightened social tensions and in some ways the level of insecurity. Reforms thus remain necessary but making progress will be difficult in the run-up to the presidential election mid-2008, which should result in the re-election of the incumbent Leonel Fernandez (of the centre-left PLD – Partido de la Liberacio´n Dominicana).

191

THE AMERICAS

MAIN ECONOMIC INDICATORS USD billions or %

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (average annual rate) Consolidated public balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

0.5 27.5 -8.7 5.4 7.6 -2.2 5.1 36.0 12.0 0.3

1.2 51.4 -7.6 5.9 7.9 -2.0 4.7 44.5 11.0 1.0

9.5 4.2 -3.1 6.1 9.9 -3.7 -1.4 34.8 10.6 1.9

10.7 7.6 -3.5 6.4 11.2 -4.8 -2.2 34.7 12.9 2.0

8.0 6.0 -1.0 7.1 12.3 -5.3 -3.0 31.3 11.5 2.3

4.6 6.7 -1.3 7.3 13.0 -5.7 -4.0 28.8 11.4 2.2

e = estimate, f = forecast

192

ECUADOR

Ecuador Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

13.4 40,800 C High risk C

2 STRENGTHS • Ecuador boasts extensive resources – mining, gas and especially oil – with completion of the trans-Andean pipeline supposed to facilitate increased production and exports. • World-leading exporter of bananas and shrimps, the country is also endowed with rich fishing areas especially for tuna. • The economy’s dollarisation has notably contributed to limiting inflation and capital flight. • Rising wages and easier access to credit have spurred household consumption.

WEAKNESSES • Insufficiently diversified, the economy has been vulnerable to fluctuations in raw materials prices, particularly for oil. • Chronic political instability has not facilitated economic and financial consolidation and has hampered progress on reforms. • A lack of infrastructure and skilled labour compounded by a poor institutional and legal environment has deterred local and foreign investors. • Ecuador suffers from a chronic shortage of foreign exchange reserves, a shortcoming nonetheless mitigated by the dollarisation. • Regional disparities, marked inequality and social tensions have undermined the cohesiveness of this multiethnic country.

RISK ASSESSMENT The anti-liberal left-wing President Rafael Correa began his four-year term in January 2007. The election victory of his Acuerdo Pais movement late September 2007 led to the institution of a Constituent Assembly with early general elections likely in 2008. Despite public spending buoyed by higher oil revenues, economic growth should be limited due to a smaller rise in private consumption attributable to a decline in expatriate transfers and bank credit, along with a reduction in corporate investment amid the current political and economic uncertainties. The profit sharing with international oil companies was revised again in favour of the

State in October 2007 and the country rejoined OPEC end 2007. The oil wealth should contribute to an increase in social spending but without jeopardising the fiscal surplus for the time being. There is nonetheless still uncertainty as to Ecuador’s intention to fully honour its obligations in connection with foreign debt, even if officials seem aware of the negative impact of any unjustified restructuring. The suspension of negotiations on a free-trade agreement with the United States, the country’s main trading partner, will affect its exports and its trade, and current account surpluses should shrink. And unless the Andean Trade Promotion and Drug-Eradication Act (ATPDEA) is extended beyond March 2008, Ecuador will lose its

193

THE AMERICAS

preferential access to the North American market. In this troubled context, the macroeconomic improvement achieved in recent years

could be in jeopardy from 2009. In a period of international financial turmoil, that prospect could trigger a crisis of confidence in financial markets.

MAIN ECONOMIC INDICATORS USD billions or %

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (period-end rate) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

3.6 6.2 1.6 6.4 6.4 0.1 -0.4 -1.5 58.4 21.3 1.0

8.0 1.9 2.1 8.0 7.7 0.3 -0.5 -1.6 52.1 17.7 1.1

6.0 3.1 0.7 10.5 9.7 0.8 0.3 0.9 47.2 18.6 1.5

3.9 2.9 3.3 13.2 11.4 1.8 1.5 3.8 41.8 13.4 1.1

2.4 2.7 2.6 13.6 12.6 1.0 0.7 1.7 41.2 13.2 2.2

2.6 2.6 1.6 14.2 13.6 0.6 0.3 0.7 40.5 21.3 2.4

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET

194

■ Means of entry Ecuador is a founding member of the Andean Community of Nations (ACN) and, in principle, follows WTO rules since accession in 1996. While trade with its ’full’ ACN partners – Colombia and Bolivia – has been fully exempt from customs duties since 1994, it continues to be hampered by a host of ad hoc tariff and non-tariff barriers. The customs nomenclature used by Ecuador is that initially set out in decision 381 of the Cartagena agreement (Junta del Acuerdo de Cartagena) known as NANDINA (Common Nomenclature of the Member Countries of the Cartagena Agreement), replaced in December 2003 by decision 570 of the ACN, and published in the Official Journal as Executive Decree 693 of 9 December 2005. This nomenclature simplifies the identification and classification of goods, foreign trade statistics and other ACN trade policy measures concerning the import and export of goods. Ecuador’s tariff levels are based on technical criteria such as degree of transforma-

tion. Duties for agricultural products are 15 and 20 per cent, those for semi-finished products 10 per cent, while raw materials, factors of production and capital goods are liable to customs duty that is currently as high as 30 per cent for certain capital goods. For vehicles, the level of duty is 35 per cent on cars, 10 per cent on trucks and 3 per cent on completely knocked down (CKD) kits. The ACN countries (Colombia, Ecuador, Peru, Bolivia) adopted a common external tariff (AEC or Arancel Externo Comun) in February 1995, which is no longer in effect (since September 2007). Since December 2003, a foreign trade information system (SICE) is in operation. This system enables import documents and customs declarations to be submitted electronically. Nonetheless, import procedures remain lengthy. Ecuador runs a somewhat complex system of controls, prohibitions, authorisations and permits. Moreover, frequent changes in legislation create a high degree of legal insecurity. Acting through the foreign trade and investment board (COMEXI), Ecuador has adopted resolutions 182

ECUADOR

and 183 on banned products and prior licensing, respectively. ■ Attitude towards foreign investors In theory, non-discrimination between domestic and foreign investors is more or less the norm, except in so-called strategic sectors (ban on property ownership along the borders). In practice, however, this liberalism is undermined by a highly complex legal and

judicial system that breeds uncertainty. The high concentration of political, economic and financial power can also distort application of the law. ■

Foreign exchange regulations The use of the US dollar as the official currency provides a certain degree of monetary stability.

2

195

THE AMERICAS

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

50 8 18 Imports: 32% of GDP

Exports: 31% of GDP

MAIN DESTINATIONS OF EXPORTS

MAIN ORIGINS OF IMPORTS

Mn USD

Mn USD

8000 7000 6000 5000 4000 3000 2000 1000 0

3000 2500 2000 1500 1000 500 0 USA

Peru Columbia

Chile

Russia

USA

Colombia Venezuela Brazil

China

IMPORTS by products ■ Raw materials 31% ■ Capital goods 25% ■ Consumer goods 23% ■ Fuels 20% ■ Other 1%

EXPORTS by products ■ Fuels 59% ■ Fruits 10% ■ Fishing products 6% ■ Canned fish 5% ■ Flowers 3% ■ Other 17%

STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

196

Ecuador

Regional average

Emerging country average

4,400 2,840 0.765 42 63 32 56

8,916 4,803 0.789 42 78 30 92

5,983 2,313 0.672 31 44 30 50

EL SALVADOR

El Salvador Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

7.0 18,306

B Moderately high risk B

2 RISK ASSESSMENT GDP growth will suffer a downturn mainly attributable to the economic slowdown in the United States, upon which the country remains very dependant, notably as a market for nearly 60 per cent of its exports. In that dollarised economy, domestic demand will remain the growth engine, with increased public spending in the run-up to general elections early 2009 supposed to offset the slower growth of private consumption, attributable to the deceleration of transfers from expatriates in the United States. Although the construction sector will be less dynamic in this context, agriculture, commerce, transport and services will remain relatively buoyant. Having suffered from Asian competition after the Multifibre Agreement expired, the maquiladoras – assembly units in the textile sector – undertook restructuring that has begun to pay off. The tight fiscal policy pursued by the government in liaison with the IMF has allowed it to reduce the fiscal deficit and relatively high public debt, representing an estimated 41 per cent of GDP in 2007. The trade deficit, meanwhile, will continue to widen with imports spurred by strong domes-

tic demand, oil purchases and buying abroad associated with the country’s integration into DR/CAFTA, the free-trade area agreed between Central America and the United States. The volume of expatriates’ remittances and the development of tourism will only make possible a slight reduction in the large current account deficit and, with foreign direct investment only expected to cover half the substantial external financing needs, borrowing at less favourable conditions will be necessary to cover the balance. The foreign debt burden should, however, decline somewhat and the banking system has grown stronger particularly since the acquisition in 2007 of the three major local banks by Bancolombiano, Citibank and HSBC. President Antonio Saca has remained relatively popular but, lacking a parliamentary majority, his right-wing party, Arena, has had to enter into alliances. That situation has not facilitated progress on reforms, particularly of the pension and education systems, which would contribute to easing the poverty afflicting one-third of the population and thereby to easing the level of insecurity, linked particularly to the existence of maras, very violent youth gangs.

197

THE AMERICAS

MAIN ECONOMIC INDICATORS USD billions or %

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

1.7 2.5 -3.6 3.2 5.4 -2.3 -4.7 57.2 13.1 3.9

1.5 5.4 -3.0 3.3 6.0 -2.7 -4.0 56.1 20.1 3.6

2.8 4.3 -3.0 3.4 6.4 -3.0 -4.7 53.4 13.4 3.1

4.2 4.9 -2.9 3.6 7.3 -3.7 -4.6 51.7 16.1 3.0

3.4 4.2 -2.2 3.9 7.9 -4.0 -5.8 50.6 15.6 3.2

3.0 4.0 -1.9 4.3 8.5 -4.2 -5.5 49.1 15.3 3.1

e = estimate, f = forecast

198

GUATEMALA

Guatemala Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

12.9 35,290

B Moderately high risk C

2 STRENGTHS • Implementation since July 2006 of DR/ CAFTA the Central American free-trade agreement with the United States opens up new opportunities for Guatemala and should attract more foreign direct investment. • The government has pursued prudent economic policy and public debt has remained at manageable levels, under 20 per cent of GDP. • External debt ratios have been moderate with foreign exchange reserves remaining at satisfactory levels. • The country has great tourist potential.

WEAKNESSES • The country is very vulnerable to natural disasters. • Exports, with nearly half going to the United States, have been too concentrated on traditional agricultural products – coffee, bananas and sugar – and thus exposed to fluctuations in their prices. • Ethnic, social and geographic cleavages run deep with poverty affecting half the population and the country remaining very inegalitarian. • Although representing 60 per cent of the total population the Indians remain marginalised, despite commitments made in the 1996 peace treaty on their behalf. • Marked by the repercussions of 30 years of civil war, the country has suffered from deficient infrastructure and great insecurity.

RISK ASSESSMENT Growth should slow slightly due in 2008 amid the economic slowdown in the United States, the country’s number one trading partner. Economic activity will be driven by private investment, spurred by the DR/ CAFTA free-trade agreement, household consumption – despite slower growth of transfers from expatriates in the United States – and public spending. Restrictive monetary policy will not suffice to significantly reduce the inflationary pressures generated by high oil and food prices.

The government of the new centre-left President Alvaro Colom, in office since January 2008, should pursue policy focused on maintaining macroeconomic stability in liaison with the IMF. The main fiscal policy objective is still to increase revenues (that now represent only 10 per cent of GDP) and reduce both the weight of the informal economy and tax evasion, to free up funds for essential social spending. A foreign trade imbalance will persist due to the high volume of imports of consumer and capital goods and of refined oil, even with exports

199

THE AMERICAS

benefiting from the relatively high prices for farm products that will result in a marked widening of the current account deficit despite the extent of expatriate remittances. Foreign investment inflows will, however, only cover one-quarter of external financing needs, and it will be more difficult to turn to international markets for the balance due to the turmoil currently affecting them.

Like his predecessor, President Colom will have limited room for manoeuvre with his party – Unidad Nacional de la Esperanza – lacking a parliamentary majority, which will not facilitate progress on a range of reforms concerning agriculture, the legal system and security.

MAIN ECONOMIC INDICATORS USD billions or %

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (period-end rate) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

2.2 5.9 −2.4 3.1 6.7 −3.7 −1.0 −4.2 25.0 8.3 4.3

2.6 9.2 −1.0 3.4 7.8 −4.4 −1.2 −4.5 33.0 8.5 4.6

3.2 8.6 −1.0 3.7 8.8 −5.1 −1.4 −4.4 32.6 9.0 4.4

5.0 5.8 −1.4 4.0 9.9 −5.9 −1.6 −4.4 33.0 12.1 4.2

5.6 7.2 −1.7 4.3 10.8 −6.5 −1.7 −4.5 34.6 12.5 4.1

4.9 6.3 −1.6 4.9 11.7 −6.9 −2.1 −5.2 35.4 13.0 4.0

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET

200

■ Means of entry The trade policy of Guatemala, a WTO member since 1995, is based on genuine market liberalisation. This is reflected in the average rate of customs duty which, in the last 20 years, has fallen from 27 to 5.5 per cent. The country gives all its trading partners most favoured nation (MFN) treatment. Custom duties (0, 5, 10, 15, 20 and 40 per cent) are set by the Central American import duty code, itself based on the harmonised system (HS) for the designation and codification of goods. The highest duties are levied on a handful of sensitive products (the rate for rum, for instance, is 40 per cent). There are no import licences. Imported products are liable to domestic taxes. Twelve per cent VAT is charged on the CIF value of goods. Products such as alcoholic beverages and vehicles are liable to additional taxes. Foodstuffs must be enrolled on the health register at the Ministry of agriculture, animal husbandry and food. There is no pre-shipment

inspection requirement, but a label must be displayed on each package stating the product’s name, sell-by date, composition, nutritional value and the importer’s name, address and health registration number. Labelling can be done at home or abroad. Alcoholic drinks must carry a health warning. The main problems reported by importers are congestion at ports and lack of transparency in customs clearance procedures. Letters of credit are the most widely used means of payment. Transfers are usually carried out in a timely manner. ■

Attitude towards foreign investors The legal system is based on the 1985 constitution, which guarantees the right to private property and the right to engage in a commercial activity. There is, however, one exception to this rule: foreign ownership of land next to a river, sea or border is forbidden. Expropriation is banned under the constitution, except where it is in the national interest, in which case prior compensation is

GUATEMALA

payable. The non-discrimination principle (MFN clause) and equal treatment with nationals are enshrined in law. There is no prior approval or registration requirement and formalities for foreigners are broadly similar to those for local investors. There are no restrictions on investment, except in sectors deemed strategic (eg road freight). The 1998 foreign investment act aims to encourage and facilitate new business startups, while strengthening previous legislation. Like other Central American countries witnessing a boom in assembly operations (maquila), Guatemala grants tax benefits to foreign investors under Decree 65–89 of the Free Zone Act and Decree 29–89 governing assembly operations. These include exemption from customs duties and VAT for raw materials and equipment needed to manufacture products intended for export, as well as 10-year exemption from corporation tax. The legal system offers identical safeguards to foreign and national investors, but opaque administrative procedures often place foreigners at a disadvantage. Guatemala has signed and ratified the UN convention on the recognition and enforcement of arbitral awards and joined ICSID in 1996. The foreign investment act allows international arbitration in disputes arising in connection with investments covered by the Overseas Private Investment Corporation (OPIC) and MIGA. The country’s attractiveness has been boosted by the entry into force, on 1 July 2006, of a free-trade agreement with the United States and the opening of talks, in October 2007, on an association agreement

with the European Union. To promote the establishment of foreign businesses, the investment promotion and facilitation agency, Invest in Guatemala has been reactivated. Six priority sectors have been identified: call centres and services outsourcing, tourism, agri-foods, clothing, light industry and forestry. A plan designed to strengthen the country’s competitiveness (Agenda Nacional de Competividad 2005–2015) has been launched. This initiative’s initial results are promising. According to the Economic Commission for Latin America and the Caribbean (ECLAC), FDI inflows into Guatemala climbed from US$208 million in 2005 to US$325 million in 2006, an increase of 66.8 per cent. The country is ranked 75 on the World Competitiveness League Table, published by the World Economic Forum in September 2006. Moreover, a World Bank report Doing Business in 2007 – how to reform has rated Guatemala among the top 10 reformers of business legislation.

2

■

Foreign exchange regulations There are no restrictions on capital, dividend and currency transfers. Exchange controls were abolished in 2001. The so-called ‘Free Currency Trading’ Act has legalised the circulation of the US dollar within the economy and allows people to open dollardenominated accounts and make all types of payment in that currency. Some banks allow accounts to be held in euros. There are no restrictions on the transfer of investment capital and locally generated profits.

201

THE AMERICAS

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

69 5 15 Imports: 30% of GDP

Exports: 16% of GDP

MAIN DESTINATIONS OF EXPORTS

MAIN ORIGINS OF IMPORTS

Mn USD

Mn USD

3500

4000 3500 3000 2500 2000 1500 1000 500 0

3000 2500 2000 1500 1000 500 0 USA

El Mexico Nicaragua Costa Salvador Rica

USA

Mexico

China

El Salvador

South Korea

IMPORTS by products ■ Foodstuffs 11% ■ Chemicals 16% ■ Capital goods 25% ■ Fuels 20% ■ Construction materials 3% ■ Other 25%

EXPORTS by products ■ Coffee, tea, spices 16% ■ Sugar 7% ■ Oil 6% ■ Bananas 5% ■ Fuels 9% ■ Chemicals 11% ■ Manufactured goods 43% ■ Other 3%

STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

202

Guatemala

Regional average

Emerging country average

4,800 2,640 0.673 43 47 43 19

8,916 4,803 0.789 42 78 30 92

5,983 2,313 0.672 31 44 30 50

HAITI

Haiti Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

8.6 4,961 D Very high risk D

2 RISK ASSESSMENT Prudent macroeconomic management, international assistance and a modest agricultural-sector recovery should foster somewhat stronger growth in a country vulnerable to natural disasters. Still-high oil prices will, moreover, continue to stoke inflation, while the policy of subsidising energy prices has been weighing on public sector finances. Government officials have nonetheless maintained a policy of fiscal and monetary stabilisation under the three-year programme signed with the IMF late 2006. The programme also includes reforms intended to increase tax revenues and social spending, privatise the telecommunications and electricity sectors in particular, reduce corruption and improve corporate governance and the business environment. The external accounts situation remains very shaky with Haiti’s modest exports vulnerable to exogenous shocks, while its heavy dependence on imports has exacerbated the trade deficit, notwithstanding the preferential terms extended by Venezuela

for oil. Despite the volume of emigrant remittances, the current account deficit will continue to grow and, to finance it, Haiti has to rely on international financial aid on which it has become very dependent. The poorest Latin American country, Haiti has been deemed eligible for foreign debt relief, and the country could reach the completion point under the HIPC programme reserved for highly indebted poor countries by end 2008. President Rene Preval has received strong support from the international community, but with his party, L’Espoir, not having a majority, he has been dependent on a government coalition. This has complicated matters in making any progress in resolving the problems that Haiti continues to face: restoration of basic services and infrastructure, severe deterioration of the economic and social situation and the resulting climate of violence. However, the more assertive role played by Minustah, the United Nations stabilisation mission, broadened to include development assistance, has resulted in improved security and control over the country’s sea and land borders.

203

THE AMERICAS

MAIN ECONOMIC INDICATORS USD millions or %

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (period-end rate) Public sector balance (%GDP)(*) Exports Imports Trade balance Current account balance Current account balance (%GDP)(*) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

0.4 37.8 −3.6 330 1,116 −785 −180 −6.1 47.2 4.5 1.3

−2.6 21.7 −3.7 373 1,183 −810 −159 −4.5 40.0 3.6 1.6

1.8 14.8 −4.1 459 1,309 −850 −214 −5.0 32.2 3.4 1.5

2.3 12.4 −4.4 494 1,548 −1,054 −380 −7.6 30.2 3.3 1.9

3.2 8.1 −6.0 559 1,837 −1,278 −646 −10.7 25.3 5.1 2.5

3.7 7.7 −6.1 658 2,100 −1,442 −817 −11.8 23.8 3.1 2.7

*ex grants, e = estimate, f = forecast

204

HONDURAS

Honduras Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

7.4 9,235 C High risk C

2 RISK ASSESSMENT GDP growth is expected to slow slightly due primarily to the economic slowdown in the United States, the country’s main trading partner. Household consumption, underpinned by transfers from expatriates, will nonetheless continue to drive the economy while inflation, stoked by high prices for food products and imported oil, will ease only slightly. With macroeconomic stability yet to be achieved, economic policy will remain focused on the objectives agreed with the IMF under a three-year development programme even after its expiry in 2007. Moreover in 2006, the country benefited from cancellation of part of its foreign debt under the HIPC programme for highly indebted poor countries. The fiscal deficit has been growing, however, due to the inflexibility of public spending and the approach of the presidential election in 2009. The trade deficit should widen even more. Sales of Arabica coffee and bananas – the main exports – remain exposed to fluctuations in world prices and the textile

production of the maquiladoras assembly units have come against intense competition. Imports have moreover far exceeded exports due especially to the cost of oil. The volume of expatriate remittances should, however, somewhat limit a current account deficit of which two-thirds is covered by bilateral or multilateral aid and the balance by foreign direct investment, attracted by Honduras’ membership since 2006 in the DR-CAFTA free-trade area between Central America and the United States and the prospect of other agreements of that type. At mid-term, the administration of President Manuel Zelaya of the Liberal Party has achieved little, lacking a parliamentary majority. With two-thirds of the population living below the poverty line, however, improvement in education and health remains crucial. Much remains to be done on reducing insecurity and corruption, as well as modernising infrastructure in transport notably with an interocean route, energy with the restructuring of state-owned company Empresa Nacional de Energia Electrica (ENEE), and telecommunications.

205

THE AMERICAS

MAIN ECONOMIC INDICATORS USD billions or %

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (period-end rate) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

3.5 6.8 −6.0 1.4 3.0 −1.7 −4.0 81.9 15.3 4.5

4.7 9.2 −3.4 1.6 3.7 −2.1 −5.9 84.9 9.9 4.9

4.1 7.7 −2.7 1.8 4.2 −2.4 −0.4 65.6 10.2 5.3

6.0 5.3 −1.3 2.0 5.0 −3.1 −2.0 46.0 8.0 5.3

5.8 7.0 −2.8 2.3 6.3 −4.0 −4.8 42.9 5.6 4.6

5.0 6.5 −2.9 2.5 7.1 −4.5 −4.0 40.1 5.1 4.3

e = estimate, f = forecast

206

JAMAICA

Jamaica Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

2.7 10,533 C High risk B

2 RISK ASSESSMENT The winner in the early legislative elections of September 2007 was the Jamaica Labour Party, which had been in the opposition for 18 years. The new Prime Minister Bruce Golding will nonetheless be unlikely to make fundamental changes in economic policy, with the focus remaining on growth and jobs – to reduce poverty and the resulting high level of insecurity – and the fight against corruption. In the aftermath of hurricane Dean of August 2007 and its negative impact on farming, mining and tourism, growth should recover only moderately due to the slowdown in the North American economy, on which Jamaica depends for a quarter of its exports, as well as for tourism and expatriate transfers. The economy will be driven mainly by investment intended for reconstruction, with inflation remaining high and undermining the island’s competitiveness.

Also as a result of hurricane Dean, the structural external account deficit will widen a little more. Imports, inflated by purchases of capital goods and oil (with this essential item representing one-quarter of the total), will be likely to far outstrip exports due to the weak growth of aluminium, bauxite and sugar sales. Compounding those negative trends, tourism revenues and expatriate remittances are expected to decline. Foreign direct investment inflows will, moreover, only cover a third of the resulting large external financing needs, with the balance covered by short-term financing likely to be more difficult to obtain and more costly in a context of financial turmoil. The main fiscal policy objective will meanwhile still be to reduce imposing public debt representing about 120 per cent of GDP and 40 per cent of which is owed abroad. Servicing that debt alone absorbs nearly half of public spending.

MAIN ECONOMIC INDICATORS USD billions or %

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (average annual rate) Public sector balance (%GDP)* Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

2.0 12.9 −9.7 1.5 3.3 −1.8 −6.9 67.0 14.4 3.3

0.4 13.2 −8.6 1.6 3.7 −2.1 −7.2 71.5 17.6 3.8

2.0 11.4 −4.8 1.8 4.5 −2.7 −11.5 63.4 18.0 3.9

2.5 8.6 −5.3 2.1 5.0 −2.9 −11.3 72.1 14.0 3.8

1.5 7.1 −4.3 2.3 5.5 −3.3 −12.7 69.7 17.4 3.4

2.7 8.0 −3.5 2.4 6.0 −3.6 −13.0 69.4 18.5 3.3

*ﬁscal year ending 31 March, e = estimate, f = forecast

207

THE AMERICAS

Mexico

208

Population (million inhabitants): GDP (US$ million):

104.2 839,182

Country @rating: Medium-term rating: Business climate rating:

A3 Low risk A4

STRENGTHS • Mexico has become a manufacturing power especially by leveraging its membership in the North American Free Trade Agreement (NAFTA). • The country has enjoyed good macroeconomic stability. • By keeping internal and external deficits under control and limiting foreign debt, the country has reassured international investors. • The situation in the banking sector has been satisfactory. • Mexico has benefited from a young and growing working population.

WEAKNESSES • Mexico has suffered from the excessive proportion of its exports flowing to the United States and from problems in meeting competition, particularly from China. • Public finances continue to depend on oil revenues, the September 2007 tax reform notwithstanding. • Political and social obstacles have delayed progress on essential structural reforms (energy, telecommunications, education, labour law, justice). • A lack of investment and skilled labour has hampered the transition to higher value-added production. • There is still extensive social inequality and poverty, and the business environment could stand improvement.

RISK ASSESSMENT Even with the economy still mainly driven by domestic demand, growth should remain moderate in 2008 due notably to the economic slowdown in the United States on which Mexico continues to depend as an outlet for its exports. Inflationary pressures, mainly attributable to the increase in food and energy prices, should remain under control, thanks to a tightening of monetary policy. The international financial turmoil should have limited impact on a relatively diversified economy with reasonably solid foundations. Public finances should continue to improve, even if they remain dependent on oil revenues, with already moderate external debt ratios easing further. Amid a decline in

oil production, less dynamic exports to the United States and a slowdown of emigrant worker remittances, the external account deficit will widen. Foreign direct investment should nonetheless cover half of Mexico’s financing needs, with short-term debt remaining moderate. Stronger growth – especially desirable in view of demographic growth – would nonetheless require increased investment and modernisation of the entire economy. Staterun energy companies have performed poorly. The level of skills in the labour force will have to rise in order to move production upmarket. Reforms have come up against stiff social and political resistance, however, with President Calderon’s National Action

MEXICO

Party (PAN) conservative party lacking a parliamentary majority. The adoption of partial pension and tax reforms at the president’s initiative in 2007 was nonetheless an encouraging step forward. In that context, the Coface payment experience has remained satisfactory. Sectors

linked to construction, retailing and, to a lesser degree, the car industry have been the most dynamic. The few rough patches encountered in the dairy industry and textiles are the result of particular problems or difficulties experienced in meeting foreign competition.

MAIN ECONOMIC INDICATORS USD billions or %

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (average annual rate) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

1.4 4.5 −3.2 164.8 170.5 −5.8 −8.8 −1.4 25.6 16.6 3.5

4.2 4.7 −2.0 188.0 196.8 −8.8 −6.7 −1.0 24.3 18.9 3.3

3.0 4.0 −1.4 214.2 221.8 −7.6 −4.9 −0.6 22.6 12.0 3.4

4.8 3.6 −1.3 250.0 256.1 −6.1 −1.9 −0.2 20.1 9.0 3.1

2.8 3.8 −1.2 260.3 274.4 −14.1 −11.3 −1.3 19.2 8.7 2.9

2.9 4.0 −1.0 275.0 295.4 −20.4 −19.1 −2.0 18.5 7.3 2.8

2

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■ Means of entry Since the entry into force of the NAFTA agreement, Mexico offers incentives to foreign companies looking to gain a strategic foothold on the American continent. These include gradual elimination of tariff barriers, industrial property protection and free movement of capital. Mexico is tied through freetrade agreements with 44 countries. The most recent, signed with Japan in September 2004, makes Mexico the only country in the world to have free-trade agreements with the EU, the United States and Japan. The free-trade agreement with the EU, in force since 1 July 2000, makes it easier for EU countries to win back market share and step up investment, both of which have declined under the impact of NAFTA and competition from Asian products. Tariffs on industrial goods were dismantled on 1 January 2007. Government-licensed independent inspection companies are responsible for checking product compliance with Mexican Official Standards (NOM) and issuing certificates of

conformity. The services of these companies are widely used but fairly expensive. The most common invoicing currency is the US dollar. Settlements are made within 30– 45 days, which is fairly quick considering the high rates of interest and shortage of credit. Documentary credit is the safest means of payment for export firms but remains expensive for the Mexican buyer. ■

Attitude towards foreign investors The economy today is wide open to foreign investment, although a number of strategic sectors are closed and remain the preserve of Mexican companies. Foreigners may invest in these sectors only through a ‘neutral investment’ scheme, ie without decision-making powers. Foreign investment in open sectors above a certain threshold (currently €140 million) is subject to the approval of the National Commission on Foreign Investment. Below this threshold, foreigners may acquire 100% of a Mexican firm without seeking the Commission’s approval. Since 1999, there is no capital ceiling on foreign investment in commercial and merchant banks.

209

ne D 93 ec Ju -93 ne D 94 ec Ju -94 ne D 95 ec Ju -95 ne D 96 ec Ju -96 ne D 97 ec Ju -97 ne D 98 ec Ju -98 ne D 99 ec Ju -99 ne D 00 ec Ju -00 ne D 01 ec Ju -01 ne D 02 ec Ju -02 ne D 03 ec Ju -03 ne D 04 ec Ju -04 ne D 05 ec Ju -05 ne D 06 ec Ju -06 ne D 07 ec -0 7

Ju

THE AMERICAS

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995)

500

450

400

210 WORLD Mexico

350

300

250

200

150

100

50

0

MEXICO

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

52 9 17 Imports: 32% of GDP

Exports: 30% of GDP

2 MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

150000

200000

120000

150000

90000 100000 60000 50000

30000 0

0 USA

Canada

Spain

Germany

Japan

USA

Japan

China

South Korea

Germany

IMPORTS by products ■ Vehicles and machinery 25% ■ Electrical equipment 22% ■ Chemicals 11% ■ Plastics 6% ■ Foodstuffs 6% ■ Fuels 6% ■ Other manufactured goods 18% ■ Other 6%

EXPORTS by products ■ Vehicles and machinery 29% ■ Electrical equipment 25% ■ Oil 15% ■ Other manufactured goods 4% ■ Agricultural raw materials 3% ■ Other 24%

STANDARD OF LIVING / PURCHASING POWER Indicators

Mexico

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

11,410 7,870 0.821 39 76 31 136

8,916 4,803 0.789 42 78 30 92

5,983 2,313 0.672 31 44 30 50

211

THE AMERICAS

Nicaragua Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

5.2 5,369 D Very high risk C

RISK ASSESSMENT GDP growth should be slightly higher in 2008 spurred by resilient domestic demand and a modest contribution by foreign trade, while the conclusion of a new three-year agreement with the IMF late 2007 should facilitate restoring a semblance of confidence among investors and bilateral and multilateral lenders. High prices, particularly for oil, will meanwhile continue to stoke inflation. With his left-wing Sandinista Front Party lacking a majority in parliament, President Daniel Ortega, in office since January 2007, has been led to adopt a pragmatic approach essentially maintaining his predecessor’s prudent economic policy. This orientation has been reinforced with the new IMF agreement focused on restructuring the electricity sector, going forward with the reforms of public finances and social security, and improving the business environment. Membership in the DR-CAFTA, Central American free-trade agreement with the United States since April 2006, has spurred exports of both farm products – coffee and sugar – and manufactured products, partic-

212

ularly textiles from maquiladora assembly units in customs-free zones, and enhanced Nicaragua’s attractiveness to North American investors. The country’s excessive dependency on imports, especially capital goods and oil, has resulted in a structural trade deficit. With the slowdown of expatriate remittances and despite official donations, the current account deficit will thus reach a very high level. The country depends on concessional loans to cover most of its external financing needs, with foreign direct investment covering under a third of the total. Foreign debt and the debt service have nonetheless sharply declined, thanks to relief granted under the HIPC and MDRI programmes, while public debt eased to 60 per cent of GDP in 2007 and the financial system was strengthened. Nicaragua has nonetheless remained the poorest Latin American country, behind Haiti, with its exposure to natural disasters constituting an additional element of vulnerability. In this context, the crucial sectors for the country’s development include energy, water treatment, port infrastructure, agriculture, assembly industries and tourism.

NICARAGUA

MAIN ECONOMIC INDICATORS USD billions or %

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (period-end rate) Public sector balance (%GDP)* Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

2.3 6.5 −7.7 1.1 2.0 −1.0 −18.1 166.7 18.5 2.3

5.1 9.3 −6.5 1.4 2.5 −1.1 −12.6 115.3 14.6 2.7

3.1 9.6 −5.1 1.7 3.0 −1.3 −14.9 110.3 3.6 2.5

3.7 9.5 −4.2 2.0 3.4 −1.4 −15.8 86.0 4.1 2.8

2.9 10.0 −5.8 2.2 3.7 −1.6 −15.8 55.0 4.2 2.6

3.0 8.5 −6.4 2.5 4.2 −1.7 −16.3 52.5 4.2 2.7

2

*ex grants, e = estimate, f = forecast

213

THE AMERICAS

Panama Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

3.3 17,097 A4 Quite low risk A4

RISK ASSESSMENT Present and future economic expansion is especially linked to the many benefits expected from the broadening of the Panama Canal, with China now the waterway’s second largest user after the United States. The work began mid-2007 and will last eight years, at a cost estimated at over 5 billion dollars. Growth will remain high in 2008, not only because of that large project but also thanks to household consumption and public spending, as well as private investment in the financial sector and building construction. While dollarisation of the economy has contributed to macroeconomic stability, prudent management of public finances will remain necessary to keep the fiscal deficit under control and limit the foreseeable increase in public debt linked to the Canal enlargement work. Government officials have nonetheless been managing the foreign debt proactively to improve its profile and reduce the still-high ratio to GDP. The capital goods purchases necessitated by the ongoing work on the Canal will exacerbate a struc-

214

tural external account deficit, already affected by oil imports and by profit repatriation by foreign companies. Planned ratification of a free-trade agreement with the United States, Panama’s number one trading partner, has raised hopes for future development of exports. In any case, financing needs will be entirely covered by the influx of foreign direct investment attracted by a relatively good business environment. Recent mergers and acquisitions by foreign banks targeting local banking institutions have, moreover, strengthened the banking sector. The government headed by President Martin Torrijos has kept a parliamentary majority, which should be conducive to implementation of measures to reduce the poverty afflicting 40 per cent of the population. Progress on reforms to improve the legal system and combat corruption will also be essential. Panama’s attractiveness is also linked to completion of other major projects, notably a gas pipeline from Colombia and an oil refinery (with the participation of Qatar Petroleum), intended to secure the energy supply.

PANAMA

MAIN ECONOMIC INDICATORS USD billions or %

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (average annual rate) Public sector balance (%GDP) Exports* Imports* Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

4.2 0.5 -4.8 0.8 2.9 -2.1 -4.5 63.7 16.9 2.2

7.5 0.2 -4.9 0.9 3.3 -2.4 -7.5 63.4 15.0 1.2

6.9 3.2 -3.2 1.0 3.8 -2.8 -5.0 60.6 17.9 2.0

8.7 2.5 0.5 1.0 4.4 -3.3 -2.2 57.3 7.2 2.1

9.0 5.4 -0.5 1.1 5.3 -4.2 -5.5 52.6 9.6 2.4

8.8 4.6 -0.4 1.2 6.5 -5.4 -8.0 48.5 11.7 2.4

2

*ex Colon customs free area, e = estimate, f = forecast

215

THE AMERICAS

Paraguay Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

216

6.0 9,110 C High risk C

STRENGTHS • Paraguay boasts extensive hydroelectricity resources and rich agricultural potential. • The country enjoys the backing of international financial institutions. • Public and external debt ratios have improved considerably. • The democratic system has been consolidated for some years.

WEAKNESSES • The country has suffered from its landlocked position – which has also made it a transit hub for illicit drugs – and from the size of the informal economy. • The economy remains very vulnerable to various shocks: changes in the weather, fluctuations in world prices for agricultural and oil products, economic trends in Argentina and Brazil. • The restructuring of a bloated and inefficient public sector has been lagging, and the banking sector is still very weak. • Weak institutions, governance problems, extensive corruption and the slow pace of structural reforms have undermined the business environment. • The degree of inequality, poverty and insecurity is still high.

RISK ASSESSMENT The economic growth should slow, albeit still underpinned by modest household consumption growth, benefiting from expatriate remittances, by increased public spending in the run-up to general elections in April this year and by investment in telecommunications and biofuels. High agricultural and oil prices, compounded by expansionary fiscal policy, will stoke inflationary pressures.

Exports should increase amid relatively firm foreign demand and high soybean, cotton and meat prices. They will grow less, however, than oil and capital goods imports needed for investments. The trade deficit will nonetheless level off. The extent of hydroelectricity sales and expatriate transfers should, moreover, facilitate keeping the current account near equilibrium. The presidential election in April this year should result in a duel between the favourite,

PARAGUAY

the former Bishop Fernando Lugo (from the left-wing Patriotic Alliance for Change and former Commander in Chief Lino Oviedo (Citizens Union for Ethics), thus bringing to a close 60 years of domination by the Colorado Party. Whoever wins, the prudent economic policy pursued under the agreed IMF programme that will expire in August this year, should not be in jeopardy. With the likely

absence of a parliamentary majority, however, progress on structural reforms should continue to be as laborious as it has been in the past. The country will be unable to consolidate its macroeconomic situation, however, without a complete restructuring of state-owned companies and the banking sector, especially state-owned banks, whose financial situation has been precarious.

2

MAIN ECONOMIC INDICATORS USD billions or %

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (period end rate) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

3.8 9.3 0.0 2.2 2.4 -0.3 0.1 2.1 57.7 15.9 4.6

4.1 2.8 1.8 2.9 3.1 -0.2 0.1 2.0 49.4 12.2 4.2

2.9 9.9 0.9 3.3 3.8 -0.5 0.0 0.1 44.7 11.3 3.8

4.3 12.5 0.4 4.8 5.8 -1.0 -0.2 -2.1 37.2 8.7 3.8

4.5 8.8 -0.1 6.7 7.5 -0.9 0.05 -0.5 35.1 6.4 3.5

3.9 7.8 -0.5 7.5 8.4 -0.9 0.04 -0.4 36.6 5.7 3.4

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■ Market overview According to official figures, Paraguay is one of the poorest countries in Latin America, characterised by a high incidence of informal economic activity. Exogenous factors remain the main drivers of the economy. Paraguay is enjoying a boom in farm exports and sells electricity produced by the large two-nation hydropower stations on the borders with Argentina and Brazil. Imports are only partially intended to satisfy domestic demand. The bulk of imported goods, increasingly from China, are re-exported either officially or smuggled into neighbouring countries, in particular Brazil. ■ Means of entry Paraguay is a member of Mercosur, whose founding treaty enshrines the principle of free movement of goods within the area. Mercosur comprises its four founding members: Brazil, Argentina, Uruguay and Paraguay. Venezuela was included in November

2005, but its membership has not yet been ratified by all the parliaments (Brazil and Paraguay have still to decide). The common external tariff ranges from 0 to 35 per cent (average 13 per cent). IntraMercosur trade is duty-exempt for 90 per cent of products specified on the unweighted list. The general treaty provides for sizeable special regimes (cars, IT, telecommunications, sensitive products) and exceptional regimes (special customs areas sited in Brazil and Argentina). The basic rate of VAT is 10 per cent and the minimum rate 5 per cent. Fifteen years after the establishment of Mercosur, Paraguay believes that, except for tariff reductions, it has not seen any improvement in the free movement of goods for the ‘small countries’ on account of multiple nontariff barriers, lack of harmonisation of technical standards and health and plant health requirements. ■

Attitude towards foreign investors Foreign investment legislation is fairly liberal. In general, there are restrictions on

217

THE AMERICAS

foreign and private investment in government monopoly sectors such as fixed telephony, drinking water supply and purification, electricity, cement manufacture and crude oil imports. The country allows recourse to international arbitration for the settlement of disputes between foreign investors and the State.

218

Paraguay is legally unstable. Foreign direct investment inflows into the country are unsteady due to poor governance and lack of legal security. ■

Foreign exchange regulations There are no exchange controls. The most widely used currency is the US dollar.

PARAGUAY

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

49 6 14 Imports: 54% of GDP

Exports: 47% of GDP

2 MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

500

1500

400

1200

300

900

200

600

100

300

0

0 Uruguay

Brazil

Russia

Argentina

Chile

China

Brazil Argentina Japan

USA

IMPORTS by products ■ Agricultural raw materials 8% ■ Fuels 15% ■ Chemicals 15% ■ Machinery and transport equipment 36% ■ Other manufactured goods 24% ■ Other 2%

EXPORTS by products ■ Oil, seeds and oleaginous fruits 32% ■ Meat 22% ■ Cereals 11% ■ Foodstuffs 7% ■ Other 28%

STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

Paraguay

Regional average

Emerging country average

5,070 1,400 0.757 46 59 38 75

8,916 4,803 0.789 42 78 30 92

5,983 2,313 0.672 31 44 30 50

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THE AMERICAS

Peru Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

220

28.4 93,269

B Moderately high risk B

STRENGTHS • Endowed with abundant mineral wealth (copper, gold and zinc), Peru has benefited from the high raw material prices. • It also boasts substantial energy, agricultural and fishing resources and exceptional cultural heritage. • Peru has pursued prudent fiscal and monetary policies. • Foreign debt ratios have been improving, thanks to sound public finance management and to the growth of both GDP and exports. • Foreign exchange reserves are currently at comfortable levels.

WEAKNESSES • Peru continues to be vulnerable to exogenous shocks, such as world raw material price downturns, adverse weather conditions. • Dualism continues to mark the economy with an ethnic cleavage echoing the sharp contrast between a relatively modern sector in the coastal plains and mining areas and an inland subsistence sector. • The poverty afflicting more than half the population has been a source of political and social instability, epitomised by the rise of indigenist populism in the Andean regions. • The banking system’s extensive dollarisation could jeopardise its stability in case of a crisis of confidence.

RISK ASSESSMENT Peru’s economic growth should remain among Latin America’s highest in 2008, despite a slight slowdown due to more moderate external demand growth. Peru has thus been enjoying its longest period of economic expansion in the past 30 years. The international financial turmoil should have limited impact, with growth resting on relatively solid foundations and domestic demand constituting the main economic driver.

President Alan Garcia’s administration, engaged in a reform programme in liaison with the IMF, has to pursue prudent fiscal policy with public debt ratios continuing to improve sharply. Peru’s external situation has also improved, with debt ratios approaching those of the best regional risks. The new early repayment to the Paris Club end 2007, after the one made in 2005, has contributed to reducing the foreign debt burden and keeping the corresponding debt service at

PERU

moderate levels. Good raw material export performance and a free-trade agreement coming into force with the United States augur well for a continued slight external account surplus, with foreign direct investment expected to completely cover the country’s financing needs. Moreover, the comfortable level of foreign exchange reserves will substantially mitigate liquidity crisis risk. The proportion of public and foreign debt denominated in foreign currencies and the extent of banking system’s dollarisation have nonetheless remained high. The economy continues, moreover, to be excessively de-

pendent on world raw material prices, which has impeded its diversification, and infrastructure shortcomings have hampered Peru’s development. The pace of development has also suffered from the extensive poverty and inequality, heightening social and political tensions and from the difficult business environment. The Coface corporate payment experience has been relatively satisfactory, with the mineral and gas sectors the most dynamic along with the construction sector in the wake of the August 2007 earthquake, unlike the textiles and clothing industry affected by foreign competition and the local currency appreciation.

2

MAIN ECONOMIC INDICATORS USD billions or % Economic growth (%) Inﬂation (average annual rate) [Query: “average annual rate” inserted as per the source ﬁle. Please check.] Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

2003

2004

2005

2006

2007(e)

2008(f)

3.8 2.5

5.2 3.5

6.7 1.5

7.6 1.1

8.0 2.1

7.0 2.0

−1.7 9.1 8.3 0.8 −0.9 −1.5 48.5 26.4 8.8

−1.0 12.8 9.8 3.0 0.0 0.0 44.8 22.2 8.8

−0.3 17.3 12.1 5.3 1.1 1.4 36.1 30.1 8.1

2.1 23.8 14.9 8.9 2.5 2.6 30.3 12.4 7.7

0.0 26.2 18.2 8.0 1.7 1.6 26.4 13.1 8.4

-0.5 27.8 21.9 5.9 0.5 0.5 24.5 14.2 8.0

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■ Market overview The Camisea gas field, which supplies natural gas to Lima and to a condensate processing plant in Pisco, will fuel a gas liquefaction plant to the South of Lima in 2010–2011, as well as a petrochemicals complex in the south of the country, a feasibility study of which is under way. The country’s mining sector is among the world’s five largest producers of copper, zinc, silver, gold and molybdenum. Construction is booming on the back of a vast programme of social housing and investment from Peruvian expatriates. The construction sector’s medium-term prospects will be fur-

ther boosted by the award of road-building concessions. Textiles, clothing, farm products and foodstuffs benefit from the generalised system of preferences (Andean Trade Promotion and Drug Eradication Act, ATPDEA) granted by the United States to four Andean countries. This arrangement will be made permanent under a free-trade agreement with the United States. While the transformation of fishery products is being encouraged, fish meal remains the sector’s leading export. The generalised scheme of preferences (GSP+), in force until 2015 with the European Union, is still under-utilised. It provides for access to the European market of 7,200 products at zero-rated duty. In due

221

THE AMERICAS

export, etc. Foreign investment is not subject to approval. Investors seeking the benefit of legal stability agreements must first register with the Peruvian investment promotion agency, Proinversion, although there is no time limit for doing so. Peru has signed the founding charter of MIGA, as well as the original act of the International Centre for Settlement of Investment Disputes (ICSID). It has also ratified the New York Convention on the Recognition and Enforcement of Arbitral Awards. It has dual taxation agreements with three countries (Sweden, Canada and Chile) and has signed a draft agreement with France which could come into force in 2008 after ratification by the Peruvian parliament. There is no difficulty in obtaining a work or residence permit in connection with an investment.

course, it will be replaced by an EU/ACN association agreement whose trade component is the subject of recently started talks. ■ Means of entry Farm, crop and animal products require health certificates which comply with the standards laid down by the Andean Community of Nations and agreed by Peru. The National agencies, Senasa and Digesa, are responsible for administering all health standards relating to imports. Most international means of payment are widely used. There are four rates of customs duty: 0, 5,10 and 20 per cent. The average applied rate is 7.97 per cent. ■ Attitude towards foreign investors Peru’s legislation offers foreign investors a number of safeguards, including equal rights with domestic investors, the option of signing legal stability agreements, unrestricted transfer of profits, dividends and capital, freedom of enterprise, freedom to import and

■

Foreign exchange regulations Peru has a floating, but managed, exchange rate in what is still a highly dollarised economy.

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 500 450

WORLD Peru

400 350 300 250 200 150 100 50

222

7

7

-0 ec

-0 ne

Ju

D

6

6

-0 ec

D

5

-0

-0

ne

ec D

Ju

4

05

Ju

ne

-0

04

ec D

-0 3

ne

ec D

Ju

2

03

-0 ec

ne Ju

D

1

02

-0

ne

ec D

Ju

0

01 ne

Ju

D

ec

-0

00

9 -9

ne

ec D

Ju

8

99 ne

Ju

D

ec

-9

98

-9

ne Ju

ec D

Ju

ne

97

7

0

PERU

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

55 8 16 Imports: 19% of GDP

Exports: 25% of GDP

2 MAIN DESTINATIONS OF EXPORTS

MAIN ORIGINS OF IMPORTS

Mn USD

Mn USD

6000

3000

5000

2500

4000

2000

3000

1500

2000

1000

1000

500

0

0 USA

China

Canada

Chile

Japan

USA

Brazil

Ecuador

China

Chile

IMPORTS by products ■ Foodstuffs 11% ■ Fuels 20% ■ Chemicals 16% ■ Machinery and transport equipment 28% ■ Other manufactured goods 22% ■ Other 3%

EXPORTS by products ■ Copper 25% ■ Gold 17% ■ Zinc 8% ■ Fuels 8% ■ Fishing products 6% ■ Foodstuffs 5% ■ Other 31%

STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

Peru

Regional average

Emerging country average

6,080 2,920 0.767 41 73 32 98

8,916 4,803 0.789 42 78 30 92

5,983 2,313 0.672 31 44 30 50

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THE AMERICAS

United States Population (million inhabitants): GDP (US$ million): Country @rating: Business climate rating:

224

300 13,201,819 A1 A1

STRENGTHS • A huge market that attract investors and companies. • The Federal Reserve Bank’s monetary policy takes growth and employment into account, as well as inflation. • The reactivity and flexibility demonstrated by companies rests on a labour force with high sectoral and geographic mobility and on the flexibility of labour legislation. • The quality of higher education and universities and the size of the new technologies sector have kept R&D at a high level and fostered innovation.

WEAKNESSES • The low domestic savings rate has been a major causal factor of the continuing current account deficit. • The economy is highly dependent on stock market prices and interest rates. • The decline of traditional manufacturing has also contributed to the current account deficit. • With the country’s very large energy needs major investments will be essential in adjusting to environmental constraints. • Demographic pressures have brought to light the shortcomings of the health and pension financing systems.

RISK ASSESSMENT The growth slowdown was less severe than expected in 2007 with the effects of the residential construction downturn thus far only partially spreading to household consumption and other economic sectors. Very good export performance limited the amplitude of the slowdown. The growth slowdown will be more severe in 2008 although still mitigated by the strong export performance. The adjustment process will continue in residential construction at least until the third quarter. Households, already carrying heavy debt representing 135 per cent of their disposable income will be subject to a reverse wealth effect associated with the depreciation of their property wealth and will have to contend with stiffer conditions for refinancing their mortgage

loans with their default rate continuing to trend up in consequence. A tighter job market and rising unemployment will tend moreover to erode their confidence with the effects of those unfavourable trends amplified by slower growth of their disposable income and high petrol prices at the pump. They will significantly reduce their consumption – 70 per cent of GDP – with many crucial economic sectors affected in consequence. Corporate investment will be generally less dynamic again this year. That will particularly concern investment in structures that will have to be postponed in the absence of conditions for access to credit. Buoyed, however, by a relatively low rate of indebtedness (43 per cent of GDP) and ample cash flow (88 per cent), companies will continue their equipment purchases despite erosion of their rate

UNITED STATES

of profit (9.3 per cent of GDP). Exports (12 per cent of GDP) will continue their outstanding performance, thereby offsetting the weakness of domestic demand. Companies will continue to capitalise on both favourable exchange rates and the still-buoyant dynamic in emerging regions, particularly China and the Middle East. Imports, meanwhile, will decelerate, and the federal budget deficit should widen further. Corporate payment behaviour has remained generally good at this juncture with solvency very satisfactory, a situation re-

flected by a Coface payment incident index currently near the world average. That has particularly been the case for very exportoriented companies, which have been enjoying two-digit profit growth. Companies focusing on the domestic market have been in more dire straits with some sectors already faced with tense financial situations that a credit crunch will only exacerbate: residential construction, the car industry, homerelated retailing and services to private individuals, along with the textile-clothing and hifi-TV-video sectors.

2

MAIN ECONOMIC INDICATORS %

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth Consumption (var.) Investment (var.) Inﬂation Unemployment Short-term interest rate Public sector balance (%GDP) Public sector debt (%GDP) Exports (var.) Imports (var.) Current account balance (%GDP)

2.5 2.8 1.0 2.3 6.0 1.2 -3.5 62.8 1.3 4.1 -4.8

3.6 3.6 5.8 2.7 5.5 1.6 -3.6 62.3 9.7 11.3 -5.9

3.1 3.2 7.1 3.4 5.5 3.5 -2.6 62.6 6.9 5.9 -6.4

2.9 3.1 6.6 3.2 4.6 5.2 -1.9 62.1 8.4 5.9 -6.1

2.1 2.9 4.7 2.7 4.6 4.5 -1.2 60.2 7.4 2.5 -5.4

1.7 1.3 3.2 2.5 5.2 4.2 -1.4 61.6 8.5 1.8 -4.8

e = estimate, f = forecast

MAIN ECONOMIC SECTORS ■ Construction In the first nine months of 2007, new housing starts declined 21 per cent. The market downturn affected three of the largest builders: Pulte Homes, Centex Homes and Ryland Homes have been underperforming, and Neumann Homes has announced its intention to seek Chapter 11 bankruptcy protection. The deterioration should continue in 2008, in a context of slowing domestic demand. ■ Retail The consumption slowdown this year should affect the sector to varying degrees. Highend department stores will be relatively unaffected. Conversely, those targeting middle- or low-income clientele will fare less well. Wal-Mart should continue to underper-

form and Gap will struggle to turn the corner, the other clothing sector chains will hold up relatively well. Chains specialised in the home and leisure area will suffer, and more so than supermarket food retailing. The good performance of neighbourhood shops and drugstores should continue. ■

Automotive industry Passenger car sales will sag in 2008 and the market share of the Big Three should continue to erode. The competitive advantages made possible by the agreements concluded, with the United Auto Workers should only begin to make a difference in 2010. The competition, particularly from Asian carmakers, will thus remain intense in coming months while the Americans continue reorganising and restructuring, perfectinghybrid cars and adapting them to regulatory limits

225

THE AMERICAS

on CO2 emissions at a total estimated cost of US$100 billion, or US$1,400 per vehicle. ■ Steel Activity was buoyant in 2007, driven by strong demand from emerging regions and high metal prices. It should weaken this year, however, affected by the growing sluggishness of the automotive industry and residential construction. The good performance of public infrastructure investment should, however, allow the sector to achieve 4 per cent growth. Domestic production will partly substitute for imports confronted with both unfavourable exchange rates and protective measures against Chinese products. The American market will, nonetheless continue to attract foreign investors by virtue of its size and the local presence of raw materials. ■ Paper While benefiting exports the weak dollar has increased the supply cost to American manufacturers of wood pulp – dominated by the Canadians and Scandinavians. Producers of pulp or even of paper for hygienic, housekeeping or technical purposes, less sensitive to economic downturns should remain more profitable than producers of newsprint or printing and writing paper. Paper and cardboard processors – like manufacturers of paper and packaging articles – subject to direct pressure from mass distribution will present a higher level of risk. ■ Chemicals and plastics The profitability of sector companies although affected by the downturn of property investment and the reform of the car market will remain satisfactory, thanks to rising sales prices and the shutdown of certain facilities. Local players will moreover benefit from the favourable impact of the dollar’s decline on exports and from slower price increases for gas (the sector’s primary source of raw material) than for oil.

PAYMENT AND COLLECTION PRACTICES

226

■ Payment Exporters should pay close attention to sales contract clauses on the respective obligations

of the parties and determine payment terms best suited to the context, particularly where credit payment obligations are involved. In that regard, cheques and bills of exchange are very basic payment devices that do not allow creditors to bring actions for recovery in respect of ‘exchange law’ (droit cambiaire) as is possible in other signatory countries of the 1930 and 1931 Geneva Conventions on uniform legal treatment of bills of exchange and cheques. Cheques are widely used but, as they are not required to be covered at their issue, offer relatively limited guarantees. Account holders may stop payment on a cheque by submitting a written request to the bank within 14 days of the cheque’s issue. Moreover, in the event of default, payees must still provide proof of claim. ‘Certified checks’ offer greater security to suppliers since the bank certifying the cheque thereby confirms the presence of sufficient funds in the account and makes a commitment to pay it. Although more difficult to obtain and thus less commonplace, ‘cashiers checks’ cheques drawn directly on a bank’s own account provide complete security as they constitute a direct undertaking to pay from the bank. Bills of exchange and promissory notes are less commonly used and offer no specific proof of debt. The open account system is only justified after a continuing business relationship has been established. Tranfers are used frequently especially via the SWIFT electronic network – operated by the Society for Worldwide Interbank Financial Telecommunication – to which most American banks are connected and which provides speedy and low-cost processing of international payments. SWIFT transfers are particularly suitable where trust exists between the contracting parties since the seller is dependent on the buyer acting in good faith and effectively initiating the transfer order. For large amounts, major American companies also use two other highly automated interbank transfer systems – the Clearing House Interbank Payments System (CHIPS), operated by private financial institutions, and the Fedwire Funds Service System, operated by the Federal Reserve.

UNITED STATES

The ’discovery phase’ can last several months, even years, and entail high costs due to each adversary’s insistence on constantly providing pertinent evidence (argued by each party) and involve various means – like examinations, requests to provide supporting documents, the testimony of witnesses and reports by detectives – before submitting them for court approval during the final phase of the proceedings. Another feature of the American procedural system is that litigants may request a civil or criminal case to be heard by a jury (usually made up of 12 ordinary citizens not familiar with legal aspects – ‘twelve good men and true’ according to the popular definition of ’jury’) whose task is to deliver a verdict based overall on the facts of the case and the evidence produced during the proceedings. In civil cases, the jury determines whether the demand is justified and also determines the penalty to impose on the offender. In criminal cases, the jury decides on the defendant’s guilt but the judge decides the punishment. For especially complex, lengthy or expensive litigation, as in the case of insolvency actions, courts have been known to allow creditors to hold the professionals (eg auditors) counselling the defaulting party liable, where such advisors have demonstrably acted improperly.

2

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300

250

WORLD United States

200

150

100

50

0

Ju ne D 93 ec Ju -93 ne D 94 ec Ju -94 ne D 95 ec Ju -95 ne D 96 ec Ju -96 ne D 97 ec Ju -97 ne D 98 ec Ju -98 ne D 99 ec Ju -99 ne D 00 ec Ju -00 ne D 01 ec Ju -01 ne D 02 ec Ju -02 ne D 03 ec Ju -03 ne D 04 ec Ju -04 ne D 05 ec Ju -05 ne D 06 ec Ju -06 ne D 07 ec -0 7

■ Debt collection Since the American legal system is complex and, especially as regards lawyers’ fees, costly, it is advisable to negotiate and settle out of court with customers wherever possible or else to hire a collection agency. The parties can also resort to arbitration or Alternative Dispute Resolution (ADR), a relatively informal mediation system, which makes it possible to avoid costly and lengthy ordinary court procedures. The judicial system comprises two basic types of court: the federal district courts with at least one such court in each state and the circuit or county courts under the jurisdiction of each state. The Federal Rules of Civil Procedure promulgated by the Supreme Court and regularly amended govern the various phases of civil procedure at the federal level while each state has its own rules of civil procedure. The vast majority of proceedings are heard by state courts, which apply state and federal law to disputes falling within their jurisdictions (ie legal actions concerning persons domiciled or resident in the state). Federal courts, on the other hand, rule on disputes involving state governments, cases involving interpretations of the constitution or federal treaties and claims above US$75,000 between citizens of different American states or between an American citizen and a foreign national or foreign state body or, in some cases, between plaintiffs and defendants from foreign countries. A key feature of the American judicial system is the pre-trial ‘discovery’ phase whereby each party, before the main hearing, may demand evidence and testimonies relating to the dispute from the adversary before the court hears the case. During the trial itself, judges give plaintiffs and their lawyers considerable leeway to produce pertinent documents at any time and conduct the trial in general (adversarial procedure).

227

THE AMERICAS

Uruguay Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

228

3.3 19,308

B Moderately high risk A4

STRENGTHS • Endowed with abundant agricultural, forestry and livestock-breeding resources, Uruguay has leveraged membership in Mercosur. • There has been notable improvement in the macroeconomic situation, which moreover enabled the country to fully repay the IMF ahead of schedule late 2006. • Government officials have taken pains to combine progress on reforms concerning health, education, the public sector and labour relations with tangible social progress. • The country’s assets include a stable democratic system, relatively good social indicators and an improved business environment.

WEAKNESSES • Uruguay’s domestic market is small and its exports, predominantly agricultural, lack diversification. • Inadequate savings and investment rates have undercut the country’s growth potential. • Public and external debt has remained large despite improvement in its structure. • The banking system continues to be vulnerable due mainly to extensive dollarisation.

RISK ASSESSMENT GDP growth should remain relatively robust in 2008, driven by household consumption in a context of rising wages and by investment in agriculture, transport and industry, especially with construction of a second cellulose factory. High oil and food prices compounded by firm domestic demand have, however, generated inflationary pressures likely to prompt adoption of more restrictive monetary policy and a tightening of credit.

Exports will continue to benefit from demand for farm and meat products from Uruguay’s main trading partners, the United States, Brazil and Argentina, as well as from the launch of cellulose and paper sales. Imports will also grow with the country remaining heavily dependent on oil purchases (representing almost one quarter of total imports) and the cellulose factory continuing to need purchases of capital goods abroad. Overall, a moderate external account

URUGUAY

deficit is expected with Uruguay’s financing needs covered by foreign direct investment. Although no longer tied to an IMF programme, the left coalition government led by President T. Vazquez has pursued prudent economic policy, notably focused on maintaining a balanced budget. The objective is to ease the burden of both public debt, denominated mainly in US dollars and representing about 60 per cent of GDP, and foreign debt, whose maturity has, however, been extended. Although the banking system has improved its performance, meanwhile, it nonetheless remains exposed to possible

repercussions of international financial turmoil and to a bloated public sector. Reforms are moreover pending in several areas: the civil service, public sector, bankruptcy law and labour relations, intended to make the economy more competitive. Government officials have sought to combine those reforms with the emphasis on social spending, and implemented a new health system early 2008. Differences between the government coalition’s pragmatic and radical wings could, however, delay the change process.

2

MAIN ECONOMIC INDICATORS USD billions or %

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (period end rate) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

2.2 10.2 -3.2 2.3 2.1 0.2 -0.1 -0.5 118.3 52.6 7.2

11.8 7.6 -2.2 3.1 3.0 0.2 0.0 0.3 96.7 41.1 6.4

6.6 4.9 -0.7 3.8 3.8 0.0 0.0 0.0 75.3 52.1 7.2

7.0 6.4 -0.6 4.4 4.9 -0.5 -0.4 -2.3 66.3 44.2 5.3

7.2 8.1 -0.1 5.2 5.4 -0.2 -0.1 -0.5 61.6 16.6 5.7

5.0 6.8 0.0 5.9 6.0 -0.1 -0.2 -0.6 55.2 15.1 5.8

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■ Market overview Economic activity is essentially driven by external factors, on the back of strong global demand for foodstuffs exported by Uruguay. Growth has benefited all sectors of the economy, with the exception of financial services.

■ Means of entry Uruguay is a member of Mercosur, whose founding treaty enshrines the principle of free movement of goods within the area. Mercosur comprises its four founding members: Brazil, Argentina, Uruguay and Paraguay. Venezuela was included in November 2005, but its membership has not yet been

ratified by all the parliaments (Brazil and Paraguay have still to decide). The common external tariff ranges from 0 to 35 per cent (average 13 per cent). IntraMercosur trade is duty-exempt for 90 per cent of the products specified on the unweighted list. The general treaty provides for sizeable special regimes (cars, IT, telecommunications, sugar, sensitive products) and exceptional regimes (special customs areas – Manaus and Tierra del Fuego – sited in Brazil and Argentina). Following tax reforms, in force since July 2007, the basic rate of VAT has been lowered from 23 to 22 per cent and the minimum rate from 14 to 10 per cent. On the other hand, several tax exemptions have been abolished. The tax base has been widened to include

229

THE AMERICAS

230

cigarettes, fruit and vegetables and financial services, and the rate of duty set at 22 per cent. Health care and public transport are charged a 10 per cent levy.

ad hoc tax breaks. Activity in these zones is mainly focused on logistics and support services. Botnia free zone is home to the paper cellulose industry.

■ Attitude towards foreign investors Foreign investment is unrestricted and not subject to a declaration. All sectors are open to foreign investment, except for oil refining, fixed telephony and electricity supply. The Foreign Investment Act 1998 offers important financial incentives, including exemption from tax and customs duties. Since 1987, the country has a free-zone regime offering

■

Foreign exchange regulations There are no restrictions on currency inflows or outflows. The dollar is the de facto benchmark currency, with a high proportion of loans and deposits denominated in dollars. The peso has been freely floating since July 2002. There are no exchange controls for import payments. No authorisation is required for capital and profit transfers.

URUGUAY

OPPORTUNITY SCOPE

BRAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

58 9 10 Imports: 28% of GDP

Exports: 30% of GDP

2 MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

600

1200

500

1000

400

800

300

600

200

400

100

200

0

0 Brazil

USA

Argentina China Germany

Brazil

Argentina

USA

Paraguay

China

IMPORTS by products ■ Oil and oil by-products 23% ■ Chemicals 19% ■ Machinery and equipment 11% ■ Electrical equipment 8% ■ Transport equipment 7% ■ Plastics 7% ■ Foodstuffs 5% ■ Other 20%

EXPORTS by products ■ Meat 26% ■ Leather and hide products 8% ■ Foodstuffs 7% ■ Cereals 6% ■ Wool 5% ■ Rice 5% ■ Manufactured goods 21% ■ Other 23%

STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

Uruguay

Regional average

Emerging country average

11,150 5,310 0.851 34 92 24 125

8,916 4,803 0.789 42 78 30 92

5,983 2,313 0.672 31 44 30 50

231

THE AMERICAS

Venezuela Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

232

27.0 181,862 C High risk C

STRENGTHS • Venezuela boasts extensive oil, gas and mining resources, with considerable reserves particularly heavy oil in the Orinoco River basin. • The oil-export revenues give the country the means to extend its regional political influence particularly in the Caribbean area and within Mercosur. • For energy-dependence and geographicproximity reasons, the United States is still the main market for Venezuelan oil products, political discord notwithstanding. • The external financial position has been relatively good.

WEAKNESSES • The economy continues to be highly dependent on a hydrocarbon sector that generates 90 per cent of exports and over half of fiscal revenues. • Opaque management and discretionary use of oil revenues have cast a pall over the economic outlook. • A lack of investment has limited the state-owned oil company Petroleos de Venezuela S.A.’s (PDVSA) production capacity, with a portion of its revenues allocated to social programmes. • State interventionism and extensive corruption have undermined confidence in business circles and deterred private investment, impeding the economic diversification needed to achieve more balanced growth.

RISK ASSESSMENT The oil wealth should help keep economic growth relatively strong, even if it has been in steep decline due to flat hydrocarbon production and deterioration of the business climate. The priority given to redistribution of oil export revenues to the detriment of productive investment will nonetheless jeopardise the sustainability of growth. And the increase in quasi-fiscal spending, via the national development fund, Fondo de Desar-

rollo Nacional (FONDEN) or the state-owned oil company, Petroleos de Venezuela S.A. (PDVSA), will ultimately expose the country to difficult-to-make adjustments in case of a sustained decline in oil prices. Expansionary fiscal and monetary policy, in conjunction with high-production capacity utilisation, has generated strong inflationary pressures despite price controls. Although a downward exchange rate adjustment could occur due to the inflation differential between

VENEZUELA

Venezuela and its main trading partners, government officials have sought to defer action in that regard. The windfall associated with still-high oil prices this year nonetheless indicates that an already relatively strong external financial position will be maintained, with moderate debt ratios. However, the large current account surplus should shrink a bit more amid stagnating oil production and booming consumer-goods imports, and financing needs have been growing. The government has tapped nearly half of foreign exchange reserves on behalf of FONDEN, and capital flight has continued despite exchange controls. The ‘21st century socialism’ advocated by President Chavez since his re-election late 2006 has resulted in increasing government

intervention in the economy, nationalisations and an increase in barriers to private initiative. Nevertheless, the rejection by referendum late 2007 of the constitutional reform sought by the president represented his first electoral setback in nine years and dispelled his aura of invincibility. In a business climate marked by relative unpredictability, some sectors are affected by a more restrictive imports policy (cars, alcohol, tobacco, maintenance services, technical assistance), and recurring payment delays have been observed due to administrative red tape associated with the exchange rate mechanism managed by the Comisio´n de Administracio´n de Divisas (CADIVI) – foreign currency commission but without resulting in real difficulties thus far.

2

MAIN ECONOMIC INDICATORS USD billions or %

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (average annual rate) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

-7.8 31.1 0.2 27.2 10.7 16.5 11.5 13.7 48.5 13.3 10.2

18.3 21.7 2.5 38.7 17.3 21.4 13.8 12.3 38.8 9.0 7.6

10.3 16.0 4.1 55.5 23.7 31.8 25.5 17.8 31.7 8.1 8.2

10.3 13.7 -1.5 65.2 32.2 33.0 27.2 15.0 24.3 5.8 7.9

8.3 18.1 -0.5 69.5 46.6 22.9 17.2 7.4 22.7 6.6 6.0

5.5 19.8 -0.8 76.6 56.7 20.0 15.2 5.2 19.3 5.6 6.0

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET

constantly keep up with the changes and bear the costs associated with compliance.

■ Market overview In its customs nomenclature the country distinguishes between so-called ’priority’ goods and other goods whose import is subject to the issue of a national non-production or insufficient production certificates. As the Venezuelan nomenclature is still at an embryonic stage, numerous tariff codes are missing from both the ‘priority goods’ and other goods lists. The regulations are not only intricate; they are frequently chopped and changed thereby forcing companies to

■

Means of entry Apart from exchange controls, various tariff measures remain in place, including price controls on foodstuffs, cement and waste treatment. Some prices have remained at 2003 levels, whereas aggregate inflation between 2003 and end 2007 has overshot 100 per cent. Non-tariff measures include widespread discretionary licensing of importers (in particular for basic foods), a reduction in the number of licence awards, stringent health

233

THE AMERICAS

restrictions, compulsory product labelling with mention of origin and discrimination against imported products, complemented by special treatment under foreign exchange rules for some South American products traded within the framework of Latin American Integration Association (LAIA). In the field of government procurement, preferential measures are applied in favour of local companies that show a domestic added value of over 20 per cent. This device is tantamount to knocking 20 per cent off the value of a local bid before comparing it with foreign bids. ■ Attitude towards foreign investors The constitution grants foreign and domestic investors equal rights and duties. However, the retaking of economic control by the government and the public-sector and the

desire to develop ‘industrialising schemes’ seems to work in favour of local operators rather than foreign private partners. The deepening of ‘21st-century socialism’ through a root and branch review of the constitution risks reinforcing this trend. Intellectual property protection is a cause for concern, especially for textiles and pharmaceuticals. The reform of the constitution is raising doubts about trademark and patent protection, despite government assurances to the private sector. ■

Foreign exchange regulations Both exchange and price controls have been in force since February 2003. It can take several months to obtain foreign exchange from the exchange control authority (CADIVI), especially for repatriating capital, dividends and technical assistance.

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 500 450 400

WORLD Venezuela

350 300 250 200 150 100 50

Ju

ne D 93 ec Ju -93 ne D 94 ec Ju -94 ne D 95 ec Ju -95 ne D 96 ec Ju -96 ne D 97 ec Ju -97 ne D 98 ec Ju -98 ne D 99 ec Ju -99 ne D 00 ec Ju -00 ne D 01 ec Ju -01 ne D 02 ec Ju -02 ne D 03 ec Ju -03 ne D 04 ec Ju -04 ne D 05 ec Ju -05 ne D 06 ec Ju -06 ne D 07 ec -0 7

0

234

VENEZUELA

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

39 9 18 Imports: 21% of GDP

Exports: 41% of GDP

2 MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

10000

35000 30000

8000

25000 20000

6000

15000

4000

10000

2000

5000 0

0 USA Netherlands Antilles

China

Spain

Colombia

USA

Colombia Brazil

Mexico

China

IMPORTS by products ■ Raw materials and intermediate goods 42% ■ Capital goods 31% ■ Consumer goods 23% ■ Other 4%

EXPORTS by products ■ Oil and gas 90% ■ Iron and steel 4% ■ Other 6%

STANDARD OF LIVING/PURCHASING POWER Indicators

Venezuela

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

7,440 6,070 0.784 35 93 31 82

8,916 4,803 0.789 42 78 30 92

5,983 2,313 0.672 31 44 30 50

235

Asia Outlook for 2008: Asia

238

Afghanistan Australia Bangladesh Cambodia China Hong Kong India Indonesia Japan Laos Malaysia Mongolia Myanmar Nepal New Zealand Pakistan Papua New Guinea Philippines Singapore South Korea Sri Lanka Taiwan Thailand Vietnam

245 246 249 253 255 259 263 267 271 275 277 281 283 285 286 289 293 295 299 303 307 310 314 318

3

OUTLOOK FOR 2008

OUTLOOK FOR 2008

Asia Christine Altuzarra, Constance Boublil, and Olivier Oechslin Economic Studies and Country Risk Department, Coface

JAPAN ■

Good corporate health overall, but disparate underlying situations

Economic growth was less buoyant in 2007 despite stronger household consumption. Exports slowed and investment stalled. Economic activity in Asia will continue to drive exports in 2008, partly offsetting the American demand slowdown and yen appreciation. Faced with the rising cost of energy and certain raw materials, corporate investment and hiring policies will remain prudent. Despite the shortage of skilled labour, wage growth will be limited, which will undermine household consumption. There will be little upward price movement, raising the spectre of deflation risk. Corporate earnings growth should thus be slower. Major export-oriented manufacturers will remain in good financial health while smaller companies operating mainly in the domestic market and the services sector will tend to experience difficulties. The automotive industry, chemicals, steel, mechanical engineering and paper sectors − rated ’A’ in Japan – present

low risk. Export intensive, they will continue to benefit from the still strong demand in Asia, despite erosion of their price competitiveness. These sectors should thus suffer only moderately from the world demand slowdown. Mass distribution (rated A-) will continue to restructure amid the continuing struggle of domestic consumption to rebound. Completely resolving the problems in the construction sector (rated B-) posed by the tightening of anti-seismic standards will be a slow process, which will continue to affect lead times for new housing starts. Public works will continue to suffer from the reduction in government and local community investment. Sectors presenting higher risk, including textiles (rated B) and clothing (rated C-), the IT industry (rated B-), electronic components, network equipment and mobile telephony manufacturers (rated B+) will be subject to intense regional and local competition with their margins squeezed in consequence; air transport (rated B-) will have to contend with stiffer competition with Japanese airports opening up more to international airlines.

Scale of sectoral risk: Japan

Economic growth and credit risk 7% 6% 5% 4% 3% 2% 1% 0% -1% -2% -3%

D

250

C– C

200 2.9%

2.7% 1.9%

1.4% 0.2%

2.2%

1.9%

C+

150 1.7%

0.3%

B–

100 B

50 B+

-50 -2.0%

A–

-100 1999

2000 2001

Economic growth (%) Payment incident index

2002

2003

2004

2005

2006 2007 (e)

2008 (f)

IT industry / Air transport Building & public works

Textiles

0

-0.1%

1998

238

Highest risk

300

Pharmaceuticals/ Electronic components Telecommunications (equipment manufacturers)

Mass retail

A Mechanical engineering / Paper / Car industry / Steel / Chemicals

A+

Telecommunications (operators)

Lowest risk

Clothing

OUTLOOK FOR 2008

EMERGING ASIA ■

Withstanding the American slowdown

The economic slowdown triggered in the United States by the subprime mortgage crisis should only have a moderate effect on emerging Asia. Economic growth remained strong in 2007 reaching 8.3 per cent and that buoyant trend should continue in 2008, at 8.2 per cent. Excellent performance by China and India, which represent 55 per cent of emerging Asia’s GDP, strongly influence the bright outlook for the region. Excluding those two giant countries, regional growth was 5.7 per cent in 2007 and should be 5.6 per cent in 2008. Even under the most pessimistic growth hypotheses moreover, a one-point decline in American GDP would result in an estimated 0.4 points loss of GDP growth for Asia excluding China. And the Chinese economy is even less sensitive – a one-point loss in GDP growth by the United States would only cost China 0.2 points. Emerging Asia’s resilience is attributable to several factors. Above all, the increasing influence of domestic demand on the growth dynamic now enables Asian countries to hold up better when their exports slow down. The contribution of domestic demand to regional growth is now greater than that of net exports. Last year, private consumption thus generated 3.0 points of growth, investment 2.4 points and net exports only 0.6 points of growth. China seems particularly solid with its high rate of investment constituting a veritable engine of growth. In 2007, private consumption thus generated 3.0 points of Chinese growth, investment 4.7 points and net exports 3.0 points. Only two economies (Taiwan and South Korea) have shown weaknesses, albeit modest, in their domestic dynamic. The great financial solidity of most regional countries moreover provides protection against a crisis of confidence. Asian countries have accumulated foreign exchange reserves – thanks especially to adoption of managed floatingexchange rate regimes – that represent 11

months of imports on average for the Asia region and 7.1 months of imports for the region excluding China. An American slowdown compounded by a crisis of confidence could, however, have localised impact on weaker countries in the region. The difficulties could develop through three channels. Trade represents one possible channel: a decline in exports to industrialised countries, the United States in particular, would affect emerging Asia whose exports represent 55 per cent of GDP compared to a 28.5 per cent world average. Singapore and Hong Kong would particularly suffer with their exports representing, respectively, 197 and 163 per cent of GDP. The intra-zone trade often cited as proof of the decoupling between Asia and the United States needs to be put in perspective. The proportion of intra-regional trade has certainly increased, growing from 26 per cent in 1985 to 37 per cent in 2006 while the proportion of trade with the United States declined from 23 to 18 per cent in the same period. Half intra-regional trade involves merchandise intended for re-export to industrialised countries. Including that indirect trade, industrialised countries provide a market for 61 per cent of Asian exports. The second channel is financial: a greater aversion to risk could undermine countries dependent on foreign capital. With most regional countries underpinned by large current account surpluses and foreign exchange reserves, the risks associated with this channel are limited. The third potential channel concerns confidence: An American recession would be most likely to shake confidence. Such a scenario could propagate shock waves notably undermining Chinese domestic demand and possibly triggering a dynamic, bringing investment to a virtual halt. The likelihood of a crisis with major bankruptcies would then be an appreciable risk. Economic performance in the region is largely dependent on developments in the Chinese economy, which has recently given disquieting signs of overheating and overcapacity, espe-

3

239

OUTLOOK FOR 2008

cially in steel, the automotive industry, distribution and property. The economic policy and administrative measures taken by the government are intended to achieve greater control over growth and especially investment to ensure a soft landing. Although not the most likely scenario, a hard landing nonetheless remains a significant risk with growth currently running out of control. Such a scenario could have major consequences in the region with a growing proportion of intra-regional trade involving China, which moreover invests massively in other Asian countries.

6

External debt ratios lower than emerging country average (%) (debt/export of goods and services)

100%

4

50%

2 0 2001 2002 2003 2004 2005 2006 2007 2008 Asia

Emerging Countries

With a much more self-centred economy than other Asian countries, India’s economic health should have little dependence on the economy of either the United States or China. Similarly, with its limited imports, India cannot yet stand in for those two countries as the world locomotive. Domestic demand remains the main growth engine with private sector investment accelerating and consumption remaining strong. The tightening of monetary policy in response to inflationary pressures and the moderate deterioration of external accounts could result in a slight slowdown. GDP growth (%) 12 11 10 9 8 7 6 5 4 3 2 1 0

2007

m Pa kis t Ph an ilip in es Si ng ap or e In do ne sia M al ay s H on i a gK So on ut g h Ko re a Ta iw a Th n ai la nd

di a

na

In

Vi et

As ia Ch in a

2008 f

gin g er

External overindebtedness constitutes an undeniably limited risk Debt ratios continue to improve in emerging Asia with the region’s debt representing 20 per cent of GDP compared to 28 per cent on average for all emerging countries. The ratio of debt service to foreign currency earnings is also low, about 4.6 per cent for emerging Asia against 9.1 per cent for all emerging countries. Asian countries thus generally enjoy excellent external financial health.

150%

8

Em

Persistent risks despite the ﬁnancial solidity

GDP growth higher than emerging country average (%)

10

240

■

0% 2001 2002 2003 2004 2005 2006 2007 2008 Asia

Emerging Countries

Foreign exchange reserves have reached record levels – 11 months of imports in 2007 against 9.5 on average for all emerging countries. This masks, however, disparities in liquidity terms with the reserves of Vietnam, Indonesia, the Philippines and above all Pakistan and Bangladesh remaining low and exchange rate risk remaining appreciable in consequence. There have been new developments on the use of currency reserves. The Singaporean holding company, Temasek, which invests in Asia on the government’s behalf and especially the September 2007 launch of the Chinese sovereign fund, China Investment Corporation, can serve as examples. China, underpinned by its extensive reserves, is in the process of becoming a major capital exporter with Chinese direct investment abroad increasing from just US$200 million in 2003 to US$26 billion in 2007. Managing US$200 billion tapped from the currency reserves, China Investment Corp should continue to contribute to the increase in Chinese outgoing FDI.

OUTLOOK FOR 2008

Currency reserves in months of imports 20 18

2007 e

16

2008 f

14 12 10 8 6 4 2

Ko ng

H on g

ta n etn am Vi

Pa kis

Th ail an d In do ne sia Ph ilip in es

sia

Ko re a

So ut h

In di a

ala y

M

Ch in a Ta iw an

0

The large aggregate current account surplus for emerging Asia obscures disparate financial situations across the region Comfortable current account surplus (% of GDP)

7% 6% 5% 4% 3% 2% 1% 0%

2001 2002 2003 2004 2005 2006 2007 2008 Asia

Emerging Countries

The ASEAN countries, South Korea and Mainland China have run large current account surpluses. The truly remarkable Chinese surplus increased again in 2007. Concerned by that rapid growth, Chinese officials have taken fiscal measures intended to limit exports. They will only have a marginal impact, however, and the current account surplus will remain large due to the geographic and sectoral diversification of Chinese exports. The Chinese textile/clothing sector has notably remained very competitive, thanks to the low-cost labour even if its contribution to exports has been decreasing, down from 32 per cent in 1990 to 15 per cent in 2006. The contribution of the electronics, machine tool and transport sectors has moreover been growing and now represents 55 per cent of Chinese exports. And the moderate yuan appreciation – up 5 per cent against the dollar in 2007 and up 7 per cent expected in 2008 – will be unlikely

to jeopardise China’s price competitiveness. Massive production transfers to Continental China have enabled regional economies specialised in high-value-added products, like electronics, to stay competitive. Technology transfers are not, however, exempt from risk and could even ultimately exacerbate competition. To deal with that problem, Taiwan, Singapore, South Korea, Malaysia and Thailand continue to invest in R&D, promote services and develop their infrastructure. South Asian economies, conversely, have been running current account deficits, moderately so in India (a negative 1.3 per cent of GDP in 2007/2008 and 1.1 per cent expected in 2008/2009), more severely in Sri Lanka (nearly 4.0 per cent in 2007 and 2008) and especially in Pakistan (over 5.5˚per˚cent of GDP for the same two years). Exports and especially transfers from workers abroad, mainly in the Gulf region, have remained dynamic, but the oil bill has affected those countries with their great dependency on hydrocarbon imports. The capacity to withstand competition from China in textiles varies by country. Satisfactory in India and Sri Lanka, which have been able to find niche markets, it has been weaker in Pakistan and especially Bangladesh, which suffers from its poor business environment and political uncertainties. In India, exports are much more diversified with the other sectors (metallurgy, the automotive industry, pharmaceuticals and the IT industry) driving goods and services exports. The large current account surpluses in most emerging Asian countries have resulted in an excess of liquidity in the stock, property and credit markets. Risks of speculative bubbles will thus bear watching in emerging Asia. In China, with the Central Bank only ’sterilising’ half the money created, the resulting surplus liquidity ends up in the stock market. The Shanghai stock market index (that concerns domestic investors) more than quadrupled in 2007, after increasing 130 per cent in 2006. The price earnings ratio (PER) – the ratio between the average share price and the previous year’s average profits – reached 65 on the Shanghai stock market compartment A, meaning that the value of

3

241

OUTLOOK FOR 2008

the companies is 65 times larger than the profits they made the previous year. The price earnings ratios in India and Indonesia – above 23 – were also high at the end of 2007, signifying the formation of speculative bubbles. The bursting of a speculative bubble will nonetheless not have the same significance if the bull market preceding the crash is caused by massive inflows of portfolio investment as opposed to an abundance of local savings. In China, domestic savings were mainly responsible for driving up the indices. A sudden stock market collapse could result in a negative wealth effect and a decline in demand from households with access to those markets. The overall impact on growth should be limited there. In India and Indonesia, however, as well as in the Philippines, the bursting of a bubble would give rise to capital flight with major repercussions on exchange rates and thus on inflation and economic activity. Price earning ratio at 22 October 2007

China B

65

China A

30.1

Indonesia

24

India

23.3

Russia

20.4

Brazil

17.2

Pakistan

14.5

Thailand

14.2

Philippines

14.1

South Korea

13.6 5

■

242

15

25

35

45

55

65

Disparities on governance

The political stability in emerging Asia and the predictability of economic policies constitute majors assets and have been partly responsible for the high investment rates. Occasional upsurges of tensions along with political gridlock in certain countries nonetheless also characterised 2007. Although relations between North and South Korea have been improving, prospects for the conclusion of a peace treaty remains unlikely. The Taiwan question, meanwhile, continues to be a potential source of tensions especially with Beijing playing the opposition off

against a weakened president. In Thailand, the capacity of the government formed after the December 2006 elections to implement viable economic policies remains uncertain in view of the dissension within the coalition and the rules facilitating no-confidence votes included in the new Constitution. The end of 2007 was moreover marked by the uprising of monks in Myanmar seeking both changes in the social sphere and political liberties. Growing inequality in China has given rise to considerable civil unrest triggered by requisitions of farmland. In Pakistan, 2007 was a year of severe political turmoil, with the proclamation of a state of emergency on 6 October and the assassination of Benazir Bhutto at the end of December. The year 2008 should be another troubled one. In Bangladesh, although the establishment of a state of emergency in January 2007 and postponement of elections until end 2008 at the earliest freed the country from gridlock, the challenge for officials now is to restore democratic institutions without prompting renewed violence. In Sri Lanka, the war is dragging on in the north of the island but without affecting the rest of the country thus far. As regards governance, great diversity characterises the Asian continent as reflected by the new Coface business climate rating system: Japan and Singapore are rated A1 with Taiwan, Hong Kong and South Korea close behind due to poorer performance on debt collection, financial information and the institutional environment. The situation remains respectable in Malaysia and Thailand rated A3. India is rated A4, with a satisfactory legal system compensating for a complex regulatory framework for business that is not always fair to companies. In China and the Philippines, rated B, the business climate suffers from a high level of corruption and a severe lack of transparency in financial information that hampers risk assessment. In Sri Lanka, the business environment has been relatively satisfactory despite serious infrastructure deficiencies. The situation is relatively poor, however, in Indonesia, Pakistan, Vietnam and Mongolia, rated C due to serious deficiencies in the transparency of financial information and in debt collection

OUTLOOK FOR 2008

Business climate rating: Asia D C B A4 A3 A2

Au

st ra

lia J Si apa ng n ap or e Ko H r on ea g Ko n Ta g iw M an al ay Th sia ai la nd In di a Ph Chi n ili pp a Sr ines iL a In nka do n M esia on g Pa olia kis ta Vi n e Ba tn ng am la Ca des m h bo di a La M os ya nm Pa pu ar a N N ew epa Gu l in ea

A1

procedures and to extensive corruption. In Bangladesh, Papua New Guinea, Myanmar, Cambodia and Laos (rated D), the business environment suffers from major governance shortcomings that tend to deter investors. In many countries moreover intertwined business and political worlds continue to mark the investment climate.

3

perfumery and cosmetics, as well as in electronics, a sector also vulnerable in Taiwan where corporate margins have been shrinking. The Taiwanese electronics sector could moreover suffer from the American demand slowdown.

Economic growth and credit risk

9.3%

9%

8.8%

8.5% 8.7% 8.5%

8.0%

7.9% 7.9%

8%

7.2% 6.5%

7%

200

4.8%

5% 4%

300 250

7.1% 6.5%

6.1%

6%

150

3.1%

100

3% 2%

50

1% 0%

■

2008 (f)

2006

2007 (e)

2005

2004

2003

2002

2001

2000

1999

1998

1997

0 1996

In a context of economic dynamism and financial stability, non-payment continues to be very limited. In India, Indonesia, the Philippines, Vietnam and even in Thailand, companies have strengthened their financial situations and demonstrated good payment behaviour despite sometimes deficient corporate governance. In China, Malaysia, South Korea and Taiwan, however, certain localised sectors have suffered in the face of more intense competition. In China, the Coface payment experience attests to a lengthening of payment times, notably in the private sector focusing on the domestic market, where the producers are very numerous and the sectors suffer from overcapacity. The prospect of a moderate slowdown could lead to an increase in credit risk. In South Korea, the Coface payment incident index reflects deterioration in the construction and wholesaling sectors. In Malaysia, payment incidents also increased somewhat in chemicals,

Payment incident index 10%

1995

A good payment incident index for Asian companies

1994

■

Economic growth (%)

Country @rating trends

The level of risk in emerging Asia has been stable and well below the overall average for emerging countries. Singapore and Hong Kong are still rated A1. South Korea remains in A2 despite the difficulties experienced by smaller non-manufacturing companies. Malaysia’s rating is also A2 reflecting the good economic conditions it enjoys and its robust financial health. Although China continues to be rated A3, the lengthening payment times in the country will bear watching. Indian companies (A3) remain solid. Vietnam, Indonesia and the

243

OUTLOOK FOR 2008

Philippines are still rated B. Despite the strong growth in these three countries, they are still rated B due to governance deficiencies. The country @rating for Thailand dropped from A2 to A3 due to deterioration in the political situation and the business climate since September 2006 coup. Measures to control volatile capital taken late 2006, revision of shareholder rules for joint ventures and promotion of a self-sufficiency concept have severely eroded the image of a country traditionally hospitable to foreign investors. Despite adoption of a new constitution, furthermore, and the installation of a government after the December 2007 elections, uncertainties over the government’s capacity to implement stable and viable economic policy continue to mark the situation in Thailand. Taiwan (rated A1) has been negative watchlisted since December 2006. Deterio-

ration of corporate financial health notably in the electronics sector and the likely impact of the American slowdown on the Island’s exports underlie the decision to maintain the watchlist status at a level of risk that nonetheless remains very low. The country @rating for Bangladesh fell from B to C in view of the economic repercussions of tropical cyclone Sidr in November last year and especially the hard times faced by a textiles sector that generates 75 per cent of total exports. These difficulties are largely attributable to the recurrent civil unrest, a relatively poor business environment and the political uncertainties that affect investments. Conversely, the lifting of Sri Lanka’s negative watchlist status reflects the fact that the conflict in the northern part of the island has not affected the rest of the country, which has benefited from a dynamic textiles sector.

COUNTRY @RATING RANKING FOR THE REGION’S PRINCIPAL ECONOMIES

Hong Kong Japan Singapore Taiwan South Korea Malaysia China India Thailand Indonesia Philippines Sri Lanka Vietnam Bangladesh Pakistan

244

January 2002 A2 A2 A2 A2 A2 A2➘ A3 A4 A3 C A4 B C B D

January 2003 A2 A2 A2 A2 A2 A2 A3 A4 A3 C A4 B B B D

January 2004 A2➚ A2➚ A1 A1 A2 A2 A3 A4 A3 C➚ A4 B B B D➚

January 2005 A1 A1 A1 A1 A2 A2 A3 A3 A2 B A4➘ B B B C

January 2006 A1 A1 A1 A1 A2 A2 A3 A3 A2 B B➚ B➘ B B C

January 2007 A1 A1 A1 A1➘ A2 A2 A3 A3 A2➘ B B B➘ B B C

January 2008 A1 A1 A1 A1➘ A2 A2 A3 A3 A3 B B B B C C

AFGHANISTAN

Afghanistan Population (million inhabitants) GDP (US$ million) Country @rating: Medium-term rating: Business climate rating:

31.1 8,339 D Very high risk D

RISK ASSESSMENT The economy grew 13 per cent in 2007–2008 according to IMF estimates, against 7.5 per cent in 2006–2007, thanks to better weather conditions after a lack of rain affected harvests a year earlier. The growth rate should drop back to around 10 per cent in coming years. Investment in the construction sector supported by foreign aid continues to underpin the economy. Private consumption has also been growing at a significant rate partly spurred by the large revenues connected with illegal opium poppy cultivation. It is estimated that opium production was up 37 per cent in 2007 after increasing 49 per cent in 2006 and now represents the equivalent of half of GDP, with Afghanistan producing 90 per cent of the total world supply. The trafficking breeds widespread

corruption and increases the power of certain local potentates. The central government has thus experienced difficulties in asserting its authority in some provincial areas. Even more troubling, NATO forces are still unable to retake Taliban-controlled areas with military victory appearing unlikely in the near term. The current political situation marked by severe tensions between the president, the lower chamber and the regions should persist in 2008 and early 2009. Leadership of the country after the presidential elections scheduled for 2009 remains, however, a major uncertainty with the incumbent President Hamid Karzai, although legally qualified to run again, having already announced that he would not seek another term.

3

MAIN ECONOMIC INDICATORS USD millions (*) Economic growth (%) Inﬂation (period-end %)[Query: Amended as per the source ﬁle. Please check.] Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

2003/4

2004/5

2005/6

2006/7

2007/8(e)

2008/9(f)

15.7 10.3

8.0 14.9

14.0 9.4

7.5 4.8

13.0 6.0

8.4 5.0

–3.0 1,894 3,786 –1,892 –51.0 10.9 4 3.1

–1.2 1,643 3,873 –2,230 –44.9 162.2 3.9 4.1

0.9 1,795 4,317 –2,522 –41.9 37.5 3.8 4.5

–2.7 1,923 5,096 –3,173 –44.5 14.6 1.1 5.0

–2.6 2,060 5,324 –3,264 –40.7 13.2 0.5 5.1

–2.0 2,172 5,550 –3,378 –36.5 12.9 0.4 5.2

*Financial year starting 1 April, = ex grants, e = estimate, f = forecast

245

ASIA

Australia Population (million inhabitants): GDP (US$ million): Country @rating: Business climate rating:

20.6 782,100 A1 A1

RISK ASSESSMENT Economic growth was strong in 2007, driven by buoyant domestic consumption. Household disposable income increased and companies pursued their investment programmes, mostly in the mining sector. This sector’s good sales performance abroad offset the weaker sales performance of farm products. The sharp import rebound contributed to widening the current account deficit. Domestic demand will continue to underpin growth in 2008. The job market will remain buoyant with unemployment levelling off, which will put upward pressure not only on wages but also inflation, exacerbated moreover by the prices of energy and food products. The inflationary pressures will prompt the central bank to maintain its tight monetary policy. Rising interest rates in conjunction with more difficult conditions of access to credit will thus squeeze property investment by households already deeply in debt (161 per cent of disposable income). But they will continue to benefit from income tax reductions that will mitigate the pressure on their purchasing power. Strong world demand for iron ore driven by emerging Asian countries will allow sector companies to

246

continue investing despite the tighter credit conditions. They will remain dynamic on exports meanwhile notwithstanding the Australian dollar appreciation. The drought still ravaging the eastern part of the country will moreover continue to limit farm product sales abroad. Imports will rise sharply again, further widening the current account deficit. Spending announced by the new government, especially on health, education and port infrastructure, should have little effect on the fiscal surplus with the economy continuing to generate ample tax revenues. Although companies will continue to make good profits, this overall performance masks the disparity between the mining and manufacturing sectors with rising labour costs, higher interest rates, and the Australian dollar appreciation squeezing manufacturer margins. Companies connected with the residential construction, retail and wholesale sectors will bear particularly close watching. Leisure sectors could suffer from a tourism slowdown. The buoyant economic conditions have at this juncture resulted in a decline in bankruptcies, a trend consistent with the good Coface payment incident index for Australia below the world average.

AUSTRALIA

MAIN ECONOMIC INDICATORS %

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth Consumption (var.) Investment (var.) Inﬂation Unemployment Short-term interest rate Public sector balance (%GDP) Public sector debt (%GDP) Exports (var.) Imports (var.) Current account balance (%GDP)

3.1 3.5 9.1 2.8 5.9 4.8 1.3 18.7 −1.2 11.1 −5.5

3.7 5.7 7.6 2.4 5.4 5.2 1.0 17.3 4.3 14.9 −6.1

2.9 2.9 7.8 2.7 5.1 5.4 1.2 16.8 2.4 8.5 −5.7

2.7 3.0 8.6 3.5 4.8 5.9 1.2 16.1 3.3 7.5 −5.4

4.1 4.0 12.7 2.4 4.4 6.7 1.3 15 3.4 10.4 −6.0

3.5 3.0 6.7 2.9 4.4 7.4 1.2 13.8 4.9 7.4 −6.4

e = estimate, f = forecast

PAYMENT AND COLLECTION PRACTICES As a former colony of the British crown, Australia’s legal system and legal precepts are broadly inspired by British ‘common law’ and the British court system. On 1 January 1901, the six British colonies formed the dominion of Australia as an independent federated union within the Commonwealth. ■ Payments Bills of exchange and promissory notes are not widely used in Australia and are considered, above all, to authenticate the existence of a claim. Cheques, defined as ‘bills of exchange drawn on a bank and payable on presentation’, are commonly used for domestic and even international transactions. SWIFT bank transfers are the most commonly used payment method for international transactions. The majority of Australian banks are connected to the SWIFT electronic network, offering a rapid, reliable and cost-effective means of payment. The Australian dollar, along with the main foreign currencies, is now also part of the Continuous Linked Settlement System (CLS), a highly automated interbank transfer system for processing international trade settlements. Moreover, the handling of payments via the client bank’s Internet site is becoming increasingly commonplace. ■ Debt collection The collection process starts with service of an order to pay via a registered ‘seven-day

letter’, reminding the client of his obligation to pay the amount due plus any contractually agreed interest penalties or lacking such a penalty clause, interest at the legal rate applicable in each state. Absent payment by the debtor company and if the creditor’s claim is due for payment, uncontested, and over AUD2,000 (or after a ruling has been made), the creditor may issue a summons demanding payment within 21 days. Unless the debtor settles the claim within the required timeframe, the creditor may lodge a petition for winding up of the debtor’s company, considered insolvent (statutory demand under section 459E of the Corporations Act 2001). Under ordinary proceedings, once a statement of claim (summons) has been filed and where debtors have no grounds on which to dispute claims, creditors may solicit a fasttrack procedure enabling them to obtain an executory order by issuing the debtor with an ‘application for summary judgement’. This petition must be accompanied by an affidavit (a sworn statement by the plaintiff attesting to the claim’s validity) along with supporting documents authenticating the unpaid claim. For more complex or disputed claims, creditors must instigate standard civil proceedings, an arduous, often lengthy process lasting up to two years given the fact that court systems vary from one state to the next. During the preliminary phase, the proceedings are written insofar as the court

3

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ASIA

examines the case documents attesting to the parties’ respective claims. During the subsequent ‘discovery phase’, the parties’ lawyers may request their adversaries to submit any proof or witness testimony that is relevant to the matter and duly examine the case documents thus submitted. Before handing down its judgement, the court examines the case and holds an adversarial hearing of the witnesses who may be cross-examined by the parties’ lawyers. Local Courts or Magistrates Courts (depending on the state) hear minor disputes involving amounts ranging from a minimum A$40,000 in the State of South Australia up to a maximum A$100,000 in the States of Victoria or Northern Territory. Beyond these various thresholds, disputes involving financial claims up to A$750,000 in New South Wales, A$500,000 in Western Australia or A$250,000 in Queensland, for example, are heard either by the County Court or District Court, depending on the state. Claims equal to those threshold amounts or greater are heard by the Supreme Court of each state. Since January 2007, the State of Victoria grants the County Court the jurisdiction to hear disputes irrespective of size of claims involved. As a general rule, appeals lodged against Supreme Court decisions, where a prior

ruling in appeal instance has been handed down by a panel of judges, are heard by the High Court of Australia, in Canberra, which may decide, only with ‘leave’ of the court itself, to examine cases of clear legal merit. The right of final recourse before the Privy Council, in London, was abolished 3 March 1986 (Australia Act 1986). Lastly, though the Australian legal system does not have commercial courts per se, in certain states, such as New South Wales, commercial sections of the district or supreme courts offer fast-track proceedings for commercial disputes. Since 1 February 1977, Federal courts have been created alongside the state courts and established in each state capital. The federal courts have wide powers to hear civil and commercial cases (like company law, winding up proceedings) as well as fiscal or maritime matters, intellectual property, consumer law and so on. In certain cases, the jurisdictional boundaries between state and federal courts may be indistinct and this may lead to conflicts depending on the merits of each case. Arbitration and Alternative Dispute Resolution (ADR) procedures may also be used to resolve disputes more rapidly and obtain out-ofcourt settlements, often at a lower cost than through the ordinary adversarial procedure.

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300

250

WORLD Australia

200

150

100

50

Ju n

248

e D 93 ec Ju -93 ne D 94 ec Ju -94 ne D 95 ec Ju -95 ne D 96 ec Ju -96 ne D 97 ec Ju -97 ne D 98 ec Ju -98 ne D 99 ec Ju -99 ne D 00 ec Ju -00 ne D 01 ec Ju -01 ne D 02 ec Ju -02 ne D 03 ec Ju -03 ne D 04 ec Ju -04 ne D 05 ec Ju -05 ne D 06 ec Ju -06 ne D 07 ec -0 7

0

BANGLADESH

Bangladesh Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

144.3 61,961 C High risk D

STRENGTHS • The clothing manufacturing sector has contributed to the country’s development since the early nineties. • Transfers from emigrant workers, employed mainly in the Gulf region, and international aid, allow the country to compensate for the trade imbalance. • The country has moderate foreign debt.

WEAKNESSES • Bangladesh is very vulnerable to natural catastrophes. • The economy is very sensitive to how world competition develops in the textiles sector. • The business climate has major shortcomings. • A lack of infrastructure (particularly electricity) has impeded growth. • The fiscal deficit remains large.

RISK ASSESSMENT In the fiscal year 2006–2007 starting 1 July, economic growth, the disturbances linked to electoral-period instability and the institution of a state of emergency early last year had little effect on GDP growth, up 6.5 per cent. Beyond the human toll, the cyclone in November 2007 should, however, have a significant impact on economic growth in 2007–2008, which should drop below 6 per cent due to the damage done in the main rice production region. In conjunction with rising prices for farm products, the inflationary pressures resulting from the cyclone should affect household consumption. Grain imports, reconstruction spending and higher subsidies of petrol prices should, moreover, undermine public finances. The difficulties faced in recent months by textiles, a sector that generates 75 per cent of exports, compound the effects of the

natural catastrophe. Recurrent social unrest, a severe lack of infrastructure and skilled labour, along with a relatively difficult business environment for private companies explain why some foreign buyers have sought alternative sources of supply. The sector nonetheless continues to enjoy assets that bolster its competitiveness, notably a lowcost, hard working labour force. Political uncertainties have also contributed to the low investment rate. Instituting a state of emergency in January 2007 and postponing the elections to end 2008 at the earliest undeniably enabled the country to overcome the political gridlock. The challenge for government officials now is to restore democratic institutions without triggering a resumption of violence, particularly between the two traditional parties, the Bangladesh Nationalist Party and the Awami League.

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MAIN ECONOMIC INDICATORS USD billions(*)

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

6.3 5.7 −3.6 7.1 9.5 −2.4 0.1 0.2 37.1 5.9 2.42

6.0 9.2 −3.5 8.2 11.2 −3.0 −0.3 −0.5 32.5 5.2 2.20

6.6 7.0 −4.0 9.3 12.5 −3.2 −0.2 −0.3 32.2 5.2 2.13

6.5 6.8 −4.5 11.6 14.4 −2.9 1.2 1.8 31.2 5.0 3.03

5.8 8.9 −3.8 11.7 16.0 −4.3 0.8 1.1 28.5 5.0 3.18

6.2 8.2 −4.2 11.9 17.5 −5.6 0.3 0.4 25.4 5.1 3.73

*ﬁscal year starting 1 July of current calendar year, e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■ Market overview A vibrant private sector operating in a liberal economic system is ensuring diversification of the country’s economic base and the development of new sectors of activity. The emergence of a middle class with rising purchasing power and changing consumer habits in this country of 150 million inhabitants offers real opportunities for import growth.

250

■ Means of entry Bangladesh’s import conditions are set out in the Import Policy Order (IPO) whose latest version covers the 2007–2009 period. This document defines general import rules, conditions for opening letters of credit, special regulations for products intended for human consumption and special import regimes (temporary, free zones, inputs for exportorientated firms, etc). Products on the restricted list have been cut from 131 to 20 (in accordance with the HS code), compared with IPO 2003–2006. Import formalities have been largely simplified. There are three tiers of customs and import duty. The maximum rate of customs duty is 25 per cent, following reductions of 15 and 10 per cent in the previous top rate. Supplementary duty at rates of 20 and 60 per cent is levied on a limited number of products in order either to protect sensitive local industries or to discourage imports. For wines and

spirits, the supplementary duty is 350 per cent. VAT is levied at the standard rate of 15 per cent. Two standard rate taxes – Advanced Income Tax and Advanced Rate VAT (3 per cent and 1.5 per cent, respectively) – apply to the pre-tax price of products. These taxes are partially deducted at source from corporation tax and VAT collected by companies. Many product groups are exempt from taxes and duties, including foodstuffs, live animals and some commodities and chemicals. ■

Attitude towards foreign investors FDI inflows into Bangladesh have more than doubled in the last three years. Despite the opening up of some sectors (eg telecommunications) and efforts to attract more FDI, complex formalities and the failure to reach decisions on important investment proposals could affect investor confidence. Various laws and regulations govern domestic and foreign investment in the country. The Foreign Private Investment Act (1980) protects foreign investment against nationalisation or expropriation and guarantees free repatriation of capital and dividends. There is no discrimination in favour of domestic investors. A special system of free zones Export Processing Zones (EPZs) offers incentives to export-led domestic and foreign investment. Free-zone investment enjoys 10-year tax exemption and reduced taxation for a further

BANGLADESH

five years, duty-free admission for imported machinery and commodities and accelerated asset depreciation. Investments may be wholly owned by a foreign entity and dividends may be fully repatriated. In 2007, 80 per cent of investment in EPZs was foreign owned. The free zones have seen sharp growth in the last five years, with investment up 12 per cent on a year-on-year basis to US $150 million in 2007. ■ Intellectual property Bangladesh is a member of WIPO and a signatory to the WTO TRIPS agreement. As a least developed country (LDC), it enjoys an exemption period until 2016 to put in place patent protection legislation, especially for

pharmaceuticals. The reality on the ground is somewhat different in that it is difficult to enforce laws and regulations as the judicial process is slow, ineffective and rarely results in an outcome. While Bangladesh does not appear to produce counterfeit goods, such goods are openly sold on the domestic market. Counterfeiting is particularly prevalent in the audiovisual, software and consumer goods sectors. The main trading partners – the EU and the United States – believe that the situation in regard to intellectual property protection is getting worse as a result of inadequate resources to tackle counterfeiting.

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OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

62 7 20 Imports: 23% of GDP

Exports: 17% of GDP

MAIN DESTINATIONS OF EXPORTS

MAIN ORIGINS OF IMPORTS

Mn USD

Mn USD

3500

3500

3000

3000

2500

2500

2000

2000

1500

1500

1000

1000

500

500

0

0 USA

Germany

UK

France Belgium

China

India

Kuwait Singapore

Japan

IMPORTS by products ■ Textiles 27% ■ Capital goods 18% ■ Oil and oil products 14% ■ Cereals and dairy products 5% ■ Other food items 14% ■ Chemicals 11% ■ Others 12%

EXPORTS by products ■ Clothes 82% ■ Fish and shrimps 5% ■ Jutes 3% ■ Leather and hide products 2% ■ Other 8%

STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population % Percentage uner 15 years old Number of computers per 1,000 inhabitants

252

Bangladesh

Regional average

Emerging country average

2,340 480 0.530 28 25 36 12

5,929 1,814 0.683 32 37 28 42

5,983 2,313 0.672 31 44 30 50

CAMBODIA

Cambodia Population (million inhabitants) GDP (US$ million) Country @rating: Medium-term rating: Business climate rating:

14.4 7,193 D Very high risk D

RISK ASSESSMENT Cambodia with 9.1 per cent growth in 2007 and 8.0 per cent expected in 2008 is among the fastest growing economies in Asia, after China. The growth drivers include the development of tourism, a construction boom and above all the remarkable performances of the textiles sector, which generates 80 per cent of exports. But the growth rests on shaky foundations. The staying power of companies in the textiles sector is attributable more to the safeguard measures imposed on China by the European Union and the United States than to the sector’s own competitiveness. The current overheating in the construction sector constitutes an additional source of vulnerability. Similarly, the good performance in the farm sector is more a reflection of favourable weather conditions than of progress on productivity. With agriculture representing 34 per cent of GDP and 70 per cent of the working population, Cambodia’s economic performances and the level of consumption are largely dependent on the

harvests. The continuing widespread poverty in the country only accentuates that vulnerability. The country is highly dependent on international financial backers. Official transfers have limited the fiscal deficit with concessional aid largely financing a substantial current account deficit. But donors have shown their displeasure at the country’s failure to make progress in combating corruption. International institutions have moreover rated the quality of governance in Cambodia harshly, which reflects the Coface business climate rating. The domestic political situation has been stable. After winning local elections in April 2007 with 60 per cent of the votes cast, the Cambodian People’s Party led by Prime Minister Hun Sen will surely win the upcoming legislative elections in July 2008. Tensions could develop during the legal proceedings against the Khmer Rouge with the principal leaders to stand trial starting in 2008 after many delays.

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MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

8.6 0.5 –6.0 2,087 2,668 –581 –10.8 39 1.1 3.1

10.0 5.6 –4.6 2,589 3,269 –680 –8.3 38 0.9 2.8

13.4 6.7 –3.4 2,910 3,928 –1,018 –9.5 34 0.8 2.6

10.8 2.8 –2.0 3,693 4,749 –1,056 –7.7 31 1.0 2.6

9.1 3.8 –3.1 4,313 5,526 –1,213 –8.6 29 1.2 2.9

8.0 3.8 –3.2 4,793 6,243 –1,450 –10.1 28 1.1 2.9

e = estimate, f = forecast

254

CHINA

China Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

1,311.8 2,668,071 A3 Low risk B

STRENGTHS • Industrial competitiveness and diversification has benefited China’s external accounts. • Foreign investment has facilitated a progressive move upmarket. • Infrastructure development, which has accelerated in the run-up to the 2008 Olympic Games in Beijing, will foster long-term growth. • A very high corporate saving rate has financed most investment. • The ascendancy of China on the international scene is a readily observable fact.

WEAKNESSES • Increasing inequality has stoked growing social tensions. • Overcapacity poses a threat in several industrial and commercial sectors. • Despite progress on prudential regulations and the arrival of foreign investors, Chinese banks are still weak amid strong growth of credit and uncertainty over the proportion of nonperforming loans. • Environmental problems constitute an obstacle to sustainable growth. • The Taiwanese question remains a major risk factor.

RISK ASSESSMENT Economic growth accelerated again in 2007 (up by 11.5 per cent) spurred by strong investment. Officials have been concerned about the overcapacity in the car, steel and construction industries, which could lead to tighter margins and financial difficulties, a risk already evidenced by a lengthening of payment times recorded by Coface. In view of the priority given to avoiding a catastrophic hard-landing scenario, monetary policy will remain strict, the moderate yuan appreciation will speed up slightly, and further administrative measures intended to cool off the economy appear likely. A gradual slowdown is therefore the most probable scenario. But even then, credit risk on companies continues to grow with the overcapacity suggesting that a shakeout will be unavoidable. Inflation accelerated in 2007 due mainly to rising food prices. The remedial

measures taken – eight increases in mandatory bank reserves and five interest rate hikes – had only a limited impact last year. Monetary policy will thus tighten further in 2008. Financially, despite the appreciable total amount of extra-budgetary commitments, sovereign risk has remained limited. Moreover, China’s external position is still very solid, with foreign exchange reserves at record levels. The surplus liquidity generated by the large current account surplus and the massive influx of capitals end up in the stock market, with the Shanghai stock market index more than doubling in 2007. The very high price earning ratios prevalent in China compared to those in other Asian stock markets are indicative of an emerging speculative bubble. Volatility risk has thus been very high.

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Politically, China remains stable with Hu Jintao re-elected as general secretary of the Chinese Communist Party. However, social tensions and inequalities between urban and rural areas represent serious risks. Nonetheless, in the short term, the government is

likely to hold them in check. Governance moreover still presents major deficiencies. Recent measures to combat corruption have yet to contribute to a significant improvement in the business climate.

MAIN ECONOMIC INDICATORS USD billions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of G&S imports)

10.0 3.2 -2.2 438.3 393.6 44.7 45.9 2.8 12.7 4.7 10.4

10.1 2.4 -1.3 593.4 534.4 59.0 68.7 3.6 12.8 3.1 11.7

10.4 1.6 -1.2 762.5 628.3 134.2 160.8 7.2 12.5 2.9 13.3

11.1 2.8 -0.7 969.7 751.9 217.7 249.9 9.4 12.2 2.3 14.4

11.5 5.1 -1.1 1222.0 901.0 321.0 380.0 11.3 10.6 1.8 15.6

11.0 3.5 -1.0 1470.0 1080.0 390.0 460.0 11.0 9.2 1.7 17.0

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■ Means of entry China has opened up its market considerably following WTO accession in 2001. Most nontariff barriers have been abolished. In the space of just four years, the average customs tariff has been lowered from 14 to 9.9 per cent. In 2004, the import–export sector was opened to all Chinese law companies, including foreign-held ones, and all remaining restrictions on retailing were lifted. Yet, market access continues to be impeded by all sorts of obstacles. Restrictive and often discriminatory health and technical standards remain in place for a number of imported products (foodstuffs, cosmetics, etc). A safety certification system (CCC) complicates and marks up the import of vehicles, electrical appliances and electronic goods.

256

■ Attitude towards foreign investors From the very outset in the 1990s, China has been tremendously successful in attracting FDI. From a quantitative standpoint, China received a massive US$69 billion of investment inflows in 2006, making it the fifth

largest recipient of FDI. From a qualitative standpoint, WTO accession has helped open up new sectors. While FDI remains prohibited in basic postal services, air traffic control and the media, sectors such as telecommunications, construction, town gas and water supply, tourism and finance have been opened up. Every FDI scheme is subject to government approval. The tier of government at which approval is required – municipal, provincial or central – is determined by the volume of investment. The preferred vehicle for FDI is the foreign investment enterprise (FIE) which is eligible for tax incentives. These, nevertheless, will be abolished under tax reforms that come into force in 2008, accompanied by a five-year transition period. The country has also seen a flurry of acquisitions (US$8 billion in 2005 alone, ie the same amount as that between 1999 and 2002). It should be noted that land is the property of the state and may be acquired only on leasehold (50 years for an industrial plant). In principle, FIEs must hire local labour, but they do employ foreigners on an exceptional basis. The statutory working

CHINA

week is 40 hours. Paid leave varies from 5 to 15 working days per year. China does not yet have a unified social welfare system. ■ Foreign exchange regulations The yuan is freely convertible only for ordinary business transactions. Foreign exchange regulations were eased in July 2005 and the currency re-valued by 2 per cent against the dollar. While the yuan’s peg

to the dollar has since been officially scrapped, the currency has appreciated by only 8.8 per cent due to the central bank’s firmly interventionist policies. At 5 November 2007, the exchange rate was RMB7.45 to the dollar. At the same time, the Chinese currency has depreciated by 7.2 per cent against the euro. The government, nevertheless, intends to pursue the yuan’s appreciation in a gradual and moderate manner.

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OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

28 11 33 Imports: 31% of GDP

Exports: 38% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

250000

120000

200000

100000 80000

150000

60000 100000

40000

50000

20000

0

0 USA Hong Kong Japan

South Germany Korea

Japan

South Korea

USA

Germany Malaysia

IMPORTS by products ■ Machinery and transport equipment 22% ■ Electrical machineries 22% ■ Chemicals 12% ■ Petroleum 11% ■ Ores and metals 8% ■ Foodstuffs and agricultural raw materials 7% ■ Other 18%

EXPORTS by products ■ Machinery and transport equipment 46% ■ Textiles and clothing 15% ■ Electrical machineries 11% ■ Chemicals 5% ■ Other manufactured products 16% ■ Other 8%

STANDARD OF LIVING / PURCHASING POWER

258

Indicators

China

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

7,740 2,010 0.768 35 40 21 41

5,929 1,814 0.683 32 37 28 42

5,983 2,313 0.672 31 44 30 50

HONG KONG

Hong Kong Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

7.0 189,798 A1 Very low risk A2

STRENGTHS • Hong Kong has benefited from China’s growth via an influx of tourists and strong demand for services that represent 92 per cent of the territory’s GDP. • The banking system is solid and very transparent. • Good governance and an efficient prudential regulatory system inherited from anglo-saxon law constitute major competitive advantages in Asia. • Hong Kong boasts quality infrastructure including the world’s second largest container port, a key aviation hub for Asia, and the world’s second largest cargo airport. • The ‘one country, two systems’ principle should endure considering the complementarity of the Chinese and Hong Kong economies.

WEAKNESSES • Increasingly integrated with Continental China, the economy is becoming vulnerable to economic reversals and Chinese policy changes. • Industry has completely been relocated to Continental China. • Mainland China has begun to compete with Hong Kong in services. • Almost half of fiscal revenues are linked to the property sector, which constitutes a source of vulnerability. • Despite growing inequality in the territory, introduction of a minimum wage or a redistribution system is unlikely. • Pressure exerted by segments of the population for democratisation of the territory has affected relations with Beijing.

RISK ASSESSMENT Economic growth has been slowing due to less dynamic foreign demand, particularly from the United States. Foreign trade should thus contribute only 0.2 points of growth in 2008 against 5.7 points in 2006. Several factors could, however, mitigate the impact of the American slowdown, including a household consumption recovery buoyed by the decline of interest rates, low unemployment and a wealth effect associated with rising stock market and property prices. In this context, the payment experience registered by Coface has been satisfactory. Only very sparse information may

be available, however, on the accounts of unlisted companies, which have no obligation to publish financial statements. But the debt collection possibilities available through an effective legal system compensate for that shortcoming. The trade deficit grew wider in 2007 under the combined effect of strong domestic demand and a goods export slowdown. And the deterioration should intensify in 2008. The current account surplus should thus also shrink in 2008. But it will remain at a good level, thanks to the growth of services exports. The Hong Kong dollar should remain pegged to the US dollar in 2008.

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The public sector balance should remain in surplus in 2008, thanks to the dynamism of domestic demand. Bolstered by those surpluses, the government should go forward with their infrastructure enhancement programme intended to allow Hong Kong to retain a dominant trade-transit position in Asia.

In the political arena, Donald Tsang has just won re-election to a third five-year term as chief executive. He will have to contend with various demonstrations by democrats seeking to institute direct universal suffrage. Any voting system reform would, however, necessitate assent from Beijing.

MAIN ECONOMIC INDICATORS USD billions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports).

3.2 -1.9 -3.3 224.7 230.4 -5.7 16.6 10.5 37.9 1.8 4.8

8.6 0.3 1.7 260.3 269.6 -9.3 15.8 9.5 41.2 2.1 4.2

7.5 1.4 1.0 289.5 297.2 -7.7 20.1 11.3 41.0 2.2 3.7

6.9 2.3 1.6 317.6 331.7 -14.1 20.5 10.8 38.4 2.3 3.4

6.1 3.1 1.9 353.3 371.3 -18.0 20.0 9.9 37.4 2.1 3.1

4.7 3.7 2.3 386.7 409.8 -23.1 13.7 6.3 37.4 1.9 2.9

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■

260

Means of entry Hong Kong has built its reputation on the effectiveness and transparency of its freetrade legislation and regulations. It is unquestionably the most open market in Asia and one of the most open in the world, even in the field of government procurement. Hong Kong’s new status as a Special Administrative Region following its return to China on 1 July 1997 has allowed it to keep its traditional economic and legal system. Hong Kong’s return has therefore not affected its openness to international trade. It has also remained a free port. There are no customs duties and indirect taxes are levied on only a small number of products, such as cigarettes, wines and spirits, fuel and cars. Non-tariff barriers are a rarity. A few foodstuffs require a health certificate. For most imports, the only requirement is an import declaration. In some cases, it is possible to make a monthly declaration, rather than one for each shipment. The territory’s standards are in line with or similar to international

standards. It is the second largest financial centre after Tokyo and boasts a highly internationalised banking sector. Trade is well regulated and all customary payment instruments are used. ■

Attitude towards foreign investors The territory’s free-trade principles, inherited from the British, are upheld by the government of the Administrative Region without interference from mainland China in the territory’s legal, financial and economic affairs. In keeping with its free market traditions, Hong Kong does not place any restrictions on the activities of foreign investors. There are no prior notification or approval formalities, but by the same token there are no government incentives or subsidies for foreign investors. On the ground, local monopolies have succeeded in driving out foreign competitors. In the absence of a competition law, the authorities only intervene when distortions damage consumer interests. The legal system is simple and company incorporation formalities rapid. Tax laws too are simple and tax rates fairly

HONG KONG

low. The marginal rate of income tax is 16 per cent since 1 April 2004, and corporation tax is 17.5 per cent since 1 April 2003. In addition, the Hong Kong government has announced additional tax reductions for the year 2007/2008: income tax is to be lowered to 15 per cent and corporation tax to 16.5 per cent. After a period of work permit restrictions, the rules have been relaxed since 15 May 2006 to allow dependants of work and investment permit holders to work and study without undergoing any formalities. The end

of the deflationary period since 2004 has been marked by a sharp rise in property prices and wages. Potential investors therefore face high start-up costs. ■

Foreign exchange regulations There are no exchange controls and the Hong Kong dollar is fully convertible. The currency is pegged to the US dollar within a band of HKD7.75–7.85 to the US dollar. This rate is guaranteed by a Currency Board System which automatically links Hong Kong’s foreign exchange reserves to the monetary base.

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300

250

3

WORLD Hong-Kong

200

150

100

50

Ju

ne D 93 ec Ju -93 ne D 94 ec Ju -94 ne D 95 ec Ju -95 ne D 96 ec Ju -96 ne D 97 ec Ju -97 ne D 98 ec Ju -98 ne D 99 ec Ju -99 ne D 00 ec Ju -00 ne D 01 ec Ju -01 ne D 02 ec Ju -02 ne D 03 ec Ju -03 ne D 04 ec Ju -04 ne D 05 ec Ju -05 ne D 06 ec Ju -06 ne D 07 ec -0 7

0

261

ASIA

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

20 3 7 Imports: 185% of GDP

Exports: 198% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

200000

150000 120000

150000

90000

100000 60000

50000

30000 0

0 China

USA

Japan Germany

UK

China

Japan Singapore

USA

Korea, Rep

IMPORTS by products ■ Raw materials and semi-manufactured

EXPORTS by products ■ Textiles and clothing 42% ■ Electronic goods 17% ■ Machinery 12% ■ Pearls and precious stones 6% ■ Plastics 4% ■ Other 19%

goods 35%

■ Capital goods 27% ■ Consumer goods 20% ■ Fuels 10% ■ Foodstuffs 8% ■ Other 1%

STANDARD OF LIVING / PURCHASING POWER

262

Indicators

Hong Kong

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

38,200 28,460 0.927 35 100 14 601

5,929 1,814 0.683 32 37 28 42

5,983 2,313 0.672 31 44 30 50

INDIA

India Population (million inhabitants) GDP (US$ million) Country @rating: Medium-term rating: Business climate rating:

1,109.8 906,267 A3 Quite low risk A4

STRENGTHS • Private Indian companies have been India’s main asset, benefiting from advantages in many sectors, both services (IT, outsourcing) and industry (pharmaceuticals, automotive, textiles and so on). • Economic growth has been balanced, driven at once by investment, exports and rapidly developing middle class consumption. • The substantial increase in the savings rate in recent years has facilitated the financing of corporate investment. • India has moderate foreign debt and comfortable foreign exchange reserves.

WEAKNESSES • Despite some real progress, the public sector financial situation continues to be India’s main weakness, with debt service draining a high proportion of fiscal revenues to the detriment of development spending. • There are thus major shortcomings in infrastructure, which constitute India’s main economic bottleneck. • The rapid rise of private company debt will bear watching. • Rural areas, which represent a majority of the electorate, have not benefited from current economic growth.

RISK ASSESSMENT India achieved a new record for growth, up 9.4 per cent, in the 2006–2007 fiscal year. Although a very moderate slowdown has developed since, the economy has nonetheless remained strong with 9 per cent growth still expected in 2008–2009 and over 8 per cent in 2008–2009. Both industry and services have been driving the growth. In these conditions, the Coface payment incident index has remained below the world average. It nonetheless continues to be very difficult to obtain financial information for mid-size companies or consolidated financial statements for groups. Signs of overheating – a moderate deterioration of external accounts and persistent inflation – bear watching. The influx of long

capital has, however, covered external financing needs. Economic growth will be sustainable since it rests on good fundamentals – high savings and investment rates and reasonable external debt ratios. The enormous infrastructure and education needs nonetheless continue to be veritable economic bottlenecks preventing growth from reaching optimal levels. But the public sector debt service burden, still representing over one-third of fiscal revenues, has impeded the necessary public investment. Forthcoming elections, which must take place by May 2009, could affect the pace of the reform programme, sponsored currently by a very disparate coalition of parties. The reform process seems nonetheless irreversible.

3

263

ASIA

MAIN ECONOMIC INDICATORS USD billions(*)[Query col. 7: Retained the header as per the source ﬁle. Please check.] Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

2003/4

2004/5

2005/6

2006/7(e)

2007/8(f)

2008/9(f)

8.5 4.8 −9.1 66.3 72.0 −5.7 14.1 2.3 21.2 13.2 12.4

7.5 5.3 −7.6 85.2 107.0 −21.8 −2.5 −0.4 20.0 8.2 10.5

9.0 3.9 −7.3 105.2 141.3 −36.1 −9.2 −1.1 18.4 8.0 8.5

9.4 6.5 −6.0 127.1 172.8 −45.7 −9.6 −1.1 19.6 5.1 9.1

9.0 4.8 −5.4 149.5 206.0 −56.6 −15.0 −1.3 18.0 5.2 9.3

8.5 4.0 −5.2 177.8 240.7 −62.9 −14.9 −1.1 17.1 5.4 9.0

*Financial year starting 1 April, e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET

264

■ Means of entry Customs duties in India remain steep and vary considerably between products. Duty on industrial goods is generally around 14.9 per cent, but peaks of 40 per cent or more are not rare. Cars, for example, are liable to 100 per cent duty. The average rate of duty on farm products is 56 per cent. However, duties on wine and spirits vary between 140 and 300 per cent, with each state setting their amount. The duty on consumer goods fluctuates between 15 and 37 per cent. On the other hand, some products considered essential to the country’s economic development benefit from reduced rates of duty (around 5 per cent). These include machinery and intermediate goods for the textiles industry and IT sector, some uncut gems, drinking water purification equipment for public-sector projects and non-ferrous raw materials. Under arrangements concluded with the WTO, India should lower customs duties over the next few years. But complex non-tariff barriers not only remain in place, but also have multiplied since the abolition of quantitative restrictions on 1 April 2001. Each shipment of imported foodstuffs is, in principle, subject to methodical inspection. Moreover, pre-packaged goods must mention the

maximum retail price (including local taxes and transport costs) on their label prior to shipment. Finally, numerous importers are placed at a disadvantage by the ad hoc duties levied on some goods under the technical certification rules of the Bureau of Indian Standards, as well as by the requirement to open a subsidiary or liaison office. ■

Attitude towards foreign investors In contrast to its post-independence policy of economic self-sufficiency, since 1991 India has opened up its economy to foreign investment mainly via the adoption of a ’negative list’ of sectors under which automatic FDI approval is the norm. Some obstacles survive. While a series of relaxation measures have seen the number of manufactured goods reserved for local small industry cut from 836 in 1989 to 114 today, various sectors are subject to ceilings on foreign shareholdings, with multi-brand retailing still closed to foreign investors. A foreign company already based in India via a joint venture may not open a subsidiary with another partner in the same sector without the written consent of its Indian partner. While in a recent move this rule has been relaxed for new agreements (provided it is specified therein by the parties), it continues to apply to existing agreements. Corporation tax for foreign law

INDIA

companies is 42.2 per cent, compared with 34 per cent for Indian companies. Indirect taxation remains both complex and opaque. Nevertheless, the reform programme continues apace under the present government, as under the previous one, with the focus primarily on higher ceilings for foreign investment in the few remaining sectors con-

cerned (eg opening of retail sector to single-brand international companies), the establishment of a foreign investment commission, greater transparency in approval procedures for foreign investment, adaptation of intellectual property legislation and greater capital account openness.

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 400

WORLD India

350

3

300 250 200 150 100 50

-0 5 ne -0 6 D ec -0 Ju 6 ne -0 7 D ec -0 7 Ju

D ec

05

-0 4

ne Ju

04

D ec

-0 3

ne Ju

D ec

03

-0 2

ne Ju

02

D ec

-0 1

ne Ju

D ec

01

-0 0

ne Ju

D ec

00

-9 9

ne Ju

D ec

99

-9 8

ne Ju

D ec

98

-9 7

ne Ju

D ec

Ju

ne

97

0

265

ASIA

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

48 9 27 Imports: 24% of GDP

Exports: 21% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

20000

25000 20000

15000

15000 10000 10000 5000

5000 0

0 USA

UAE

China Singapore Hong Kong

China

USA

Singapore Australia Belgium

IMPORTS by products ■ Oil and oil products 31% ■ Machinery 18% ■ Electronical equipment 9% ■ Gold and silver 8% ■ Chemicals 4% ■ Foodstuffs and agricultural raw materials 5% ■ Manufactured goods 16% ■ Other 9%

EXPORTS by products ■ Capital goods 22% ■ Oil products 15% ■ Textile and clothing 13% ■ Jewellery and precious stones 13% ■ Agricultural products and by-products 9% ■ Chemicals 12% ■ Other 16%

STANDARD OF LIVING / PURCHASING POWER

266

Indicators

India

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

3,800 820 0.611 31 29 32 16

5,929 1,814 0.683 32 37 28 42

5,983 2,313 0.672 31 44 30 50

INDONESIA

Indonesia Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

231.9 364,459

B Moderately high risk C

STRENGTHS • The banking sector has grown stronger. • Indonesia is endowed with extensive natural wealth including agricultural, energy and mining resources. • The country has demonstrated greater political stability. • Implementation of structural reforms, particularly labour market and tax reforms, has contributed to improving the climate of confidence and enhancing the country’s attractiveness. • The new investment law of March 2007 has clarified the rules regulating FDI and established a more transparent system for arbitration of disputes between residents and non-residents.

WEAKNESSES • The investment rate is still low due to institutional shortcomings and limited development of bank intermediation. • A lack of infrastructures causes bottlenecks and undermines Indonesia’s development. • A rigid labour market and a bloated bureaucracy hamper companies that lack flexibility. • Corruption and the lack of transparency remain major deficiencies in the business climate. • The unemployment and poverty rates remain high.

RISK ASSESSMENT Indonesia is currently in a strong growth phase – up 6.2 per cent in 2007 – thanks to buoyant domestic demand and dynamic exports, especially to China. With the rise of oil prices, however, inflationary pressures will increase this year. Monetary policy will thus tighten and slow the economy slightly in consequence. Growth will nonetheless remain buoyant, up 5.8 per cent. In this context, the Coface payment incident index remained below the world average in 2007. Corporate transparency nonetheless constitutes a persistent weakness, with company accounts rarely available and not very reliable when they are. Moreover, corruption problems remain serious and the legal system is still slow and costly.

The easing of sovereign risk is evidenced by the reduction of public sector debt from 98 per cent of GDP in 2000 to 36 per cent in 2007. Although growing, the fiscal deficit will remain at reasonable levels in 2008 below two per cent of GDP. The external position has also been improving. Indonesia repaid its debt to the IMF in full end 2006. An export slowdown, especially of gas and oil, and strong import growth spurred by the strong domestic demand could, however, cause the current account surplus to shrink in 2008. This decline notwithstanding, the influx FDI and portfolio investment should nonetheless enable the country to build up foreign exchange reserves, which should reach a level representing 5.4 months of imports in 2008, a respectable achievement

3

267

ASIA

albeit well below the 11-month Asian average. The banking sector has grown stronger meanwhile with profits higher and the proportion of non-performing loans in decline. State-owned banks of questionable solvency and risky lending policy are nonetheless still numerous. The political situation has improved mean-

while with peace restored in the former separatist province of Aceh. And President Yudhoyono is widely credited in Indonesia with effectively managing various shocks, natural catastrophes as well as attacks. His popularity has thus been high midway through his term in office with the next elections scheduled for 2009.

MAIN ECONOMIC INDICATORS USD billions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports).

4.9 5.1 -1.7 64.1 39.5 24.6 8.1 3.4 57.6 30.8 6.8

4.9 6.4 -1.0 70.8 50.6 20.2 1.6 0.6 53.3 26.2 5.2

5.7 17.1 -0.5 87.0 69.5 17.5 0.2 0.1 45.5 19.2 3.9

5.5 6.6 -0.9 103.5 73.9 29.6 9.9 2.7 35.5 17.4 4.5

6.2 6.5 -1.5 115.9 86.5 29.4 8.7 2.1 32.9 17.1 5.1

5.8 8.0 -1.7 129.5 98.5 31.0 8.8 1.9 30.1 13.7 5.4

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■ Means of entry Indonesia pursues a liberal trade policy and since the Marrakech agreement has gradually dismantled customs duties. Seventy-two per cent of tariff items are liable to 0–5 per cent duty. There are tariff peaks for imported cars, iron and steel, certain chemicals and wines and spirits. At the same time, Indonesia is gradually lifting non-tariff barriers on all items except priority products such as rice and sugar. However, a number of items, such as consumer goods, require a licence or certificate to be released on the market. Moves to liberalise trade in line with WTO commitments have been backed by measures to open trade further with the country’s ASEAN partners. AFTA aims to cut duties on manufactured goods to within a 0–5 per cent band.

268

■ Attitude towards foreign investors A new investment act introduced in March 2007 further opens the country to foreign in-

vestment. Badan Koordinasi Penanaman Modal (BKPM), the government investment promotion and coordination agency, has gained more powers by being directly attached to the president’s office. The government is keen to boost declining foreign investment after years of crisis. It regards FDI as vital for technology transfer and job creation. Indonesia has signed binding investment protection and safeguards agreements with 56 countries. The agreement with France is due to be renegotiated this year. The country’s economic situation does not allow it to grant extremely attractive tax incentives, except for companies operating in a limited number of priority free zones such as Batam Island facing Singapore. There is temporary tax relief for raw materials and primary machinery purchased by foreign manufacturing companies. Foreign investors may repatriate profits upon payment of local tax. Despite the initiatives announced by successive governments to simplify start-ups in Indonesia, the investment approval proce-

INDONESIA

dure adopted by BKPM remains long-winded and tedious. Projects in the banking, financial services and insurance sectors are overseen by the Ministry of Finance, whereas those in mining and oil and gas are the responsibility of the Ministry of Energy. The

negative list – which bars foreign investors from a limited number of sectors and activities or regulates access to sectors deemed sensitive by the government – was revised in July.

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300

250

WORLD Indonesia

200

3

150

100

50

Ju

ne D 93 ec Ju -93 ne D 94 ec Ju -94 ne D 95 ec Ju -95 ne D 96 ec Ju -96 ne D 97 ec Ju -97 ne D 98 ec Ju -98 ne D 99 ec Ju -99 ne D 00 ec Ju -00 ne D 01 ec Ju -01 ne D 02 ec Ju -02 ne D 03 ec Ju -03 ne D 04 ec Ju -04 ne D 05 ec Ju -05 ne D 06 ec Ju -06 ne D 07 ec -0 7

0

269

ASIA

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

50 6 17 Imports: 29% of GDP

Exports: 34% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

25000

12000

20000

10000 8000

15000

6000 10000

4000

5000

2000

0

0 Japan Singapore

USA

South Korea

China

Singapore

China

Japan

USA

Saudi Arabia

IMPORTS by products ■ Fuels 31% ■ Machinery 12% ■ Foodstuffs 8% ■ Chemicals 6% ■ Electrical and electronic equipment 5% ■ Iron and steel 5% ■ Agricultural raw materials 4% ■ Other 30%

EXPORTS by products ■ Fuels 27% ■ Natural gas 11% ■ Textiles and clothing 9% ■ Electrical and electronic equipment 7% ■ Animal and vegetable oils 6% ■ Rubber 6% ■ Ores 5% ■ Other 29%

STANDARD OF LIVING / PURCHASING POWER

270

Indicators

Indonesia

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

3,950 1,420 0.711 29 48 28 14

5,929 1,814 0.683 32 37 28 42

5,983 2,313 0.672 31 44 30 50

JAPAN

Japan Population (million inhabitants): GDP (US$ million): Country @rating: Business climate rating:

127.8 4,364,100 A1 A1

STRENGTHS • A marked geographic adjustment of exports has reduced Japan’s dependence on the United States. • The current transactions surplus rests on the competitiveness of export industries in the car industry and electronics. • Restructuring has allowed large banks and companies to consolidate their finances. • R&D spending constitutes a strategic component of corporate medium-term industrial policy.

WEAKNESSES • The rapid ageing of the population has made public finance consolidation a crucial priority. • Privileged ties between the political, civil service and entrepreneurial worlds have impeded reforms. • Social inequalities and regional disparities have tended to exacerbate household skittishness. • The proportion of irregular workers has undermined wage growth. • Small and medium-sized companies are concentrated mainly in the services sector where productivity gains have been limited.

RISK ASSESSMENT A slight rebound in household consumption notwithstanding, economic growth slowed in 2007 as did exports and corporate investment. The stiffening of anti-seismic standards severely disrupted the residential construction sector, delaying delivery of building and works permits. The economy will weaken further in 2008. The yen appreciation in conjunction with a more pronounced North American economic slowdown will continue to hamper, nonetheless, strong export growth. Companies will have difficulty remaining price competitive with the rising prices of energy and certain raw materials squeezing their margins. In this context, they will remain vigilant on investment policy and hiring. Despite the shortage of skilled labour, wages should thus register only moderate increases; which will

limit the growth of consumption (56 per cent of GDP). Problems linked to property investment will only be reabsorbed gradually. Households will cut back on spending as they contend with surging prices for energy and food products. Despite upward pressure on imported goods, consumer prices should only increase slightly with the risk of deflation continuing to overhang the Japanese economy. The fiscal deficit and public debt will remain at record levels with tax revenues likely to be flat amid the economic slowdown. Measures essential to improvement in public sector finances, including increases in VAT on consumption will likely be postponed again pending the next parliamentary elections in 2009. Japanese companies are generally in good financial health with a high rate of profit (about 11 per cent of GDP), high cash flow,

3

271

ASIA

and recourse to borrowing in steady decline as they continue to reduce nonetheless, still high debt (95 per cent of GDP). Reflecting that favourable situation, the Coface payment incident index has been below the world average. Companies should thus, not suffer from a credit crunch. These statistical data, particularly applicable to large manufacturing companies, tend to mask the reality faced by smaller companies, which have been

experiencing increasing difficulties particularly when located outside major metropolitan areas and operating exclusively in the domestic market. Bankruptcies, after declining the past four years have begun to increase again. Operators in a range of sectors will thus bear particularly close watching: construction, property, wholesaling, hotel-catering and consumer electronics.

MAIN ECONOMIC INDICATORS %

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth Consumption (var.) Investment (var.) Inﬂation Unemployment Short-term interest rate Public sector balance (%GDP) Public sector debt (%GDP) Exports (var.) Imports (var.) Current account balance (%GDP)

1.4 0.3 4.4 −1.6 5.3 0.0 −8.0 154.0 9.2 3.9 3.1

2.7 1.5 5.6 −1.1 4.7 0.0 −6.3 156.0 14 8.1 3.7

1.9 1.5 6.6 −1.3 4.4 0.0 −5.3 169.4 6.9 5.8 3.6

2.2 0.9 7.4 0.2 4.1 0.2 −4.6 176.3 9.6 4.5 3.9

1.9 1.6 2.2 0 3.8 0.7 −4 179.5 6.8 3.4 4.7

1.7 1.1 2.4 0.2 3.7 0.6 −4.2 182.4 5.2 4.5 4.8

e = estimate, f = forecast

MAIN ECONOMIC SECTORS ■ Car industry Passenger car production will remain strong this year despite erosion of domestic sales with consumers obliged to bear exorbitant costs linked to vehicle ownership. Exports (54 per cent of local production) will only suffer marginally from the demand slowdown in the United States and the yen appreciation. To mitigate exchange rate risk carmakers will continue to invest in Asia and Latin America. Toyota will remain far ahead of the pack in its home market with 46 per cent of production in 2008.

272

■ Steel Local production, although slowing slightly in 2008, will continue to enjoy a competitive advantage on the quality of products intended for shipbuilding and the car industry. The activity of Japanese companies will remain buoyant thanks to still strong regional growth, even with continuing stiff

competition abroad from producers in emerging regions. The marked slowdown of imports from China has strengthened the position of Japanese operators. ■

Construction Residential investment will remain in decline in 2008, with the delays in delivering building permits resulting from the stiffening of security standards only coming down progressively. Public works will continue to suffer from the deep spending cuts made by public institutions, which will particularly affect regional operators. Private non-residential construction will suffer from the prudence exercised by companies on investing.

■

Consumer electronics and home appliances Standardized production transfers to emerging Asia will continue. The fierce competition raging among a large number of players in the consumer electronics sector will push prices down even further. Only high valueadded products like plasma and liquid-crys-

JAPAN

tal screens and DVD players will achieve good growth. ■ Mass distribution Household consumption should show little growth in 2008, which will particularly weaken supermarkets and department stores: the Wal-Mart subsidiary Seiyu supermarkets will stay in the red while the concentration process will continue among department stores exemplified by the Front Retailing Group created by Daimaru and Matsuzakayu. Other players like Seven & I Holdings or, the number two, Aeon will diversify, notably by setting up financial structures capable of providing consumer credit services to customers.

PAYMENT AND COLLECTION PRACTICES ■ Payment Japan has ratified the International Conventions of June 1930 on Bills of Exchange and Promissory Notes and of March 1931 on Cheques. As a result, the validity of these instruments in Japan is subject to the same rules as in Europe. The bill of exchange (kawase tegata) and the much more widely used promissory note (yakusoku tegata), when unpaid, allow creditors to initiate debt recovery proceedings via a fast-track procedure, subject to certain conditions. Although, the fast-track procedure also applies to cheques (kogitte), their use is far less common for everyday transactions. Clearing houses (tegata kokanjo) play an important role in the collective processing of the money supply arising from these instruments. The penalties for payment default act as a powerful deterrent. A debtor, who fails twice in six months to honour a bill of exchange, promissory note or cheque collectable in Japan, is barred for a period of two years from undertaking business-related banking transactions (current account, loans) with financial establishments attached to the clearing house. In other words, the debtor is reduced to a de facto state of insolvency. These two measures normally result in the calling in of any bank loans granted to the

debtor. Bank transfers (furikomi) have developed greatly throughout the economy in recent decades thanks to widespread use of electronic systems in Japanese banking circles. Various highly automated inter-bank transfer systems are also available for local or international payments, like the Foreign Exchange Yen Clearing System (FXYCS, operated by the Tokyo Bankers Association) and the Bank of Japan Financial Network System (BOJ-NET) Funds Transfer System (operated by Bank of Japan). Payment made via the Internet site of the client’s bank is also increasingly common.

3

■

Debt collection In principle, to avoid certain disreputable practices employed in the past by specialised companies, only lawyers (bengoshi) may undertake debt collection. However, the law of 16 October 1998, which came into force on 1 February 1999, established the profession of “servicer” to foster debt securitisation and facilitate collection of non-performing loans (NPL debts) held by financial institutions. Servicers are debt collection companies licensed by the Ministry of Justice to provide collections services, but only for certain types of debt: bank loans, loans by designated institutions, loans contracted under leasing arrangements, credit card repayments and so on. Out-of-court settlement is always preferable and involves obtaining a signature from the debtor on a notarised deed that includes a forced-execution clause, which, in the event of continued default, is directly enforceable without requiring a prior court judgement. The standard practice is for the creditor to send debtor a registered letter with acknowledgement of receipt (naı¨yo shomeı¨), the content of which must be written in Japanese characters and certified by the post office. The effect of this letter is to set back the statute of limitation by six months (which is five years for commercial debts). If the debtor still fails to respond, the creditor must start legal action during that period to retain the benefit of interruption of the limitation period.

273

ASIA

Summary proceedings intended to allow creditors to obtain a ruling on payment (tokusoku tetsuzuki), applies to uncontested claims and effectively facilitates obtaining a court order to pay (shiharaı¨ meireı¨) from the judge within six months. Court fees, payable by the claimant in duty stamps, vary according to the size of the claim. If the debtor contests the order within two weeks of service of notice, the case is transferred to ordinary proceedings. Ordinary proceedings are brought before the ‘summary court’ (kan-i saibansho) for claims under JPY 1,400,000 and before the ‘district court’ (chiho saibansho) for claims above this amount. Those proceedings, consisting of written and oral submissions, can take from one to three years and generate significant legal costs. Court fees, payable in duty stamps, depend on the size of the claim. With the 1 January 1998 revision of the

civil procedure code undertaken to reduce the duration of legal procedures, the new amendment adopted on 1 April 2004 is notably intended to speed up submission of evidence to both the adverse party and judge during the preliminary examination phase. The importance attached to conciliation represents the chief characteristic of the Japanese legal system. Under a conciliation procedure (chotei) – conducted under court supervision – a panel of mediators usually comprises a judge and two assessors, attempts to resolve civil and commercial disputes amicably. While avoiding lengthy and costly legal proceedings, any transaction obtained through such conciliation becomes enforceable once approved by the court. Similarly, disputes can be resolved via arbitration (chusai), an approach well appreciated locally and not involving excessive formalism.

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300

250

WORLD Japan

200

150

100

50

Ju

ne D 93 ec Ju -93 ne D 94 ec Ju -94 ne D 95 ec Ju -95 ne D 96 ec Ju -96 ne D 97 ec Ju -97 ne D 98 ec Ju -98 ne D 99 ec Ju -99 ne D 00 ec Ju -00 ne D 01 ec Ju -01 ne D 02 ec Ju -02 ne D 03 ec Ju -03 ne D 04 ec Ju -04 ne D 05 ec Ju -05 ne D 06 ec Ju -06 ne D 07 ec -0 7

0

274

LAOS

Laos Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

5.8 3,404 D Very high risk D

RISK ASSESSMENT The strong growth posted in 2007 should stay on track in 2008 underpinned by development of the mining (copper and gold) and hydroelectricity sectors. The natural resources of that landlocked country are of particular interest to its dynamic neighbours: Vietnam, Thailand and China. Thanks to investments in infrastructure and the hydroelectricity sector with the building of the Nam Theun 2 Dam, the construction industry has outperformed. Poverty should continue to decline in this context. There are nonetheless persistent weaknesses. Services, particularly financial, and the manufacturing sector remain underdeveloped. Elimination in 2008 of the European safeguard measures, which had limited imports of Chinese textiles, could affect Laotian exports. The agricultural sector, which provides a livelihood for 80 per cent of the population, still lacks competitiveness. Sovereign risk, meanwhile, although still high has improved. The public sector deficit and public foreign debt declined in 2007. The

debt service ratio has, however, weighed on fiscal revenues, which have been flat. Implementation of tax reforms has been lagging as evidenced by the postponement of the application of VAT. The gradual reduction of customs duties resulting from the country’s membership in ASEAN and NAFTA could lead to further widening of the fiscal deficit. The current account deficit widened in 2007 due mainly to imports of construction materials and machinery for projects in the mining and hydroelectricity sectors. A substantial influx of foreign direct investment has partly covered the country’s financing needs. The still-low level of foreign exchange reserves has a destabilising effect on the exchange rate. The banking system remains underdeveloped and strained by non-performing loans. In the political arena, the country has enjoyed domestic stability and good relations with its neighbours. In governance terms, Laos has one of the poorest records in Asia while the economy’s increasing dependence on exports of natural resources has hampered its development and consolidation.

3

275

ASIA

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

6.1 15.5 –5.6 450 694 –244 –8.2 89.1 6.3 3.2

6.4 10.5 –3.4 500 977 –477 –14.3 83.2 7.1 3.0

7.1 7.2 –4.4 646 1,206 –560 –20.2 77.1 7.5 2.8

7.6 6.8 –3.7 996 1,384 –388 –13.3 69.0 3.7 3.6

7.1 4.0 –1.3 1,009 1,896 –887 –22.9 63.0 6.1 4.3

7.6 4.5 –0.6 1,198 2,113 –915 –21.1 56.9 6.5 4.5

e = estimate, f = forecast

276

MALAYSIA

Malaysia Population (million inhabitants) GDP (US$ million)

25.7 148,940

Country @rating: Medium-term rating: Business climate rating:

A2 Low risk A3

STRENGTHS • The country exports both manufactured products and raw materials such as oil and palm oil. • The services sector keeps growing and now generates two-thirds of GDP growth. • Malaysia boasts an effective education system and the infrastructure to support long-term growth. • Efforts made to promote training and technological development have fostered a more competitive economy. • Recent reforms have spurred development of the financial market and facilitated foreign direct investment. • Tax reforms have introduced investment incentives like income tax exemptions for dividends and income tax breaks for companies and home purchase.

WEAKNESSES • Since the economy is very open, it is vulnerable to world economic downturns. • With fiscal revenues heavily dependent on the gas and oil sector – 35 per cent of public sector revenues – a decline in prices or production would put public finances at risk. • Despite positive discrimination policy regional disparities persist to the detriment of the Malaysian majority. • Although in gradual decline the stock of bank credit granted to the private sector is still among the largest in Asia. • With labour costs twice those in China the Malaysian economy’s price competitiveness is being eroded.

RISK ASSESSMENT Economic growth should remain very strong in 2007, driven by dynamic private investment and especially by the strong growth of private consumption. In view of the slowdown expected in the United States, which provides a market for 20 per cent of Malaysian exports, growth could slow slightly in 2008. The upward trend will nonetheless continue, thanks to the diversification of the economy. Besides the electronics sector, which represents 53 per cent of exports, the retail trade, financial services, construction, tourism and a farm sector buoyed by high-raw material prices have supported the growth. As a result, the Coface payment experience has remained good and claim collection is effective. Un-

listed companies, however, only rarely publish financial statements. Malaysia enjoys a healthy financial situation underpinned by an ample current account surplus and high foreign exchange reserves. The banking sector continues moreover to grow stronger as evidenced by the decline of the proportion of non-performing loans. Public spending is still high, however, which has resulted in an appreciable fiscal deficit and public sector debt representing over 50 per cent of GDP. Sovereign risk has nonetheless been limited due to the abundance of domestic savings. With Prime Minister Abdullah Badawi’s the United Malays National Organisation (UMNO) party having won by a large major-

3

277

ASIA

ity in two by-elections, in January and April last year, he may decide to hold legislative elections before the initially scheduled date of April 2009 to take advantage of the opposition’s weakness and lack of cohesiveness. Despite the emergence of a coalition of 26 opposition groups and parties under the name Bersih, Malay for ‘clean’, the ability of opposition parties to compete with UMNO is

still limited due to the heterogeneity of their programmes. Only issues linked to governance unite them. To foster improvements in that area, they organise demonstrations, like the one in November and December 2007 in Kuala Lumpur, to protest against corruption and the lack of independent judicialauthority and to demand electoral reform before the general elections take place.

MAIN ECONOMIC INDICATORS USD billions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

5.8 1.0 –5.0 105.0 79.3 25.7 13.3 12.1 44.6 6.3 4.9

6.8 1.5 –4.1 126.6 99.1 27.5 14.8 11.9 42.3 4.6 6.0

5.0 3.0 –3.6 141.8 108.7 33.2 20.0 14.6 37.8 5.2 5.7

5.9 3.6 –3.3 160.8 124.0 36.8 25.5 16.3 33.8 4.5 6.0

6.0 2.1 –3.2 169.9 132.7 37.2 25.9 13.8 28.5 4.1 6.8

5.8 2.6 –3.1 187.6 150.5 37.1 26.1 12.5 26.3 2.3 7.3

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET

278

■ Means of entry A WTO member and signatory to the ASEAN free-trade agreement (AFTA), Malaysia pursues a free-trade policy. The average rate of customs duty for all goods is below 8 per cent and over 99 per cent of tariff lines bear 0–5 per cent duty. AFTA rules require duties for 99 per cent of tariff lines to be below 0.5 per cent in respect of imports from the five other founding members of ASEAN (Brunei, Philippines, Singapore, Indonesia and Thailand). Tariff peaks remain for cars, steel and alcoholic beverages. The Malaysian government regulates the import and export of certain goods (17 per cent of tariff lines) through automatic and non-automatic licensing. This procedure is not such a hindrance in practice, except in the automotive sector where high customs duties, excise duties, quotas and pre-import compulsory licensing serve to protect local manufacturers.

■

Attitude towards foreign investors The government has introduced tax incentives to encourage the establishment of foreign businesses (Pioneer Status, Investment Tax Allowance, Regional Distribution Centre Status, Operational Headquarters Status). Foreigners are allowed to wholly own manufacturing, high-tech or industrial service companies. Malaysia also runs an offshore financial site at Labuan in the east of the country and 14 tax- and duty-free zones. A positive discrimination policy aims to encourage greater participation by Bumiputras (mainly ethnic Malays who make up 60 per cent of the population) in the development of the local economy. This policy hampers foreign investment in the non-manufacturing services sector as well as in all commercial business with the state. Private-sector companies deemed non-Bumiputra (or insufficiently Bumiputra) can find it difficult to contract with public-sector enterprises.

MALAYSIA

■ Foreign exchange regulations On 21 July 2005, Malaysia abandoned its fixed exchange rate against the US dollar, in force since September 1998, in favour of controlled flotation. Currency transactions are subject to central bank approval, which can be obtained easily. Local currency borrowings to purchase foreign exchange, which

contributed to the speculative movements seen in 1997, continue to be tightly regulated. That is why the currency’s internationalisation (assets in Malaysian ringgits held outside Malaysia) is not on the agenda. This does not seem to affect business life in the country, which goes on regardless.

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300

WORLD Malaysia 250

200

3

150

100

50

Ju

ne D 93 ec Ju -93 ne D 94 ec Ju -94 ne D 95 ec Ju -95 ne D 96 ec Ju -96 ne D 97 ec Ju -97 ne D 98 ec Ju -98 ne D 99 ec Ju -99 ne D 00 ec Ju -00 ne D 01 ec Ju -01 ne D 02 ec Ju -02 ne D 03 ec Ju -03 ne D 04 ec Ju -04 ne D 05 ec Ju -05 ne D 06 ec Ju -06 ne D 07 ec -0 7

0

279

ASIA

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

22 7 10 Imports: 100% of GDP

Exports: 123% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

20000

35000 30000

15000

25000 20000

10000

15000 10000

5000

5000 0

0 USA

Singapore Japan

China Thailand

Japan

USA

Singapore China

Thailand

IMPORTS by products ■ Intermediate goods 70% ■ Capital goods 14% ■ Re-exports 7% ■ Consumer goods 6% ■ Dual-use goods 3% ■ Other 2%

EXPORTS by products ■ Electrical equipment 31% ■ Machinery 20% ■ Fuels 14% ■ Animal and vegetable oils and fats 4% ■ Rubber 3% ■ Other 28%

STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

280

Malaysia

Regional average

Emerging country average

11,300 5,490 0.805 38 67 32 197

5,929 1,814 0.683 32 37 28 42

5,983 2,313 0.672 31 44 30 50

MONGOLIA

Mongolia Population (million inhabitants) GDP (US$ million) Country @rating: Medium-term rating: Business climate rating:

2.6 2,689 C Very high risk C

RISK ASSESSMENT The strong growth achieved in 2007 should stay on track in 2008, driven mainly by rising gold and copper prices, whose sales represent 60 per cent of exports, mostly to China. Livestock breeding − employing 40 per cent of the population − also performed well. In those buoyant economic conditions, household income rose with that improvement benefiting the construction, financial services and retail sectors. There are nonetheless persistent weaknesses. The preponderant role the mining sector plays in the economy is not without risk, particularly if raw material prices begin to fall. And breeding is dependent on weather conditions while manufacturing sectors have suffered from a lack of competitiveness. The growing difficulties experienced by those sectors could have extensive social consequences in a country where 36 per cent of the population lives below the poverty line. Although declining, external debt ratios are still above the emerging country average.

Mongolia has been running a current account surplus since 2004 and building up foreign exchange reserves that nonetheless also lag behind the emerging country average. The country’s external position has benefited from foreign direct investment mainly in the mining sector and by multilateral aid. Public sector debt in relation to GDP was cut in half between 2003 and 2007. Expansionary fiscal policy contributed, however, to the emergence of a fiscal deficit in 2007, which could widen in 2008 in the run-up to general elections in June. In the political arena, divisions within the government coalition have hampered reform implementation. With governance shortcoming remaining the country’s Achilles’ heel, the climate of latent hostility in the country could moreover put off investors. After the demonstrations against benefits granted to foreign investors, for example, the government buckled under the pressure and instituted a new tax on mining profits.

3

281

ASIA

MAIN ECONOMIC INDICATORS USD billions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Public sector debt (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

6.1 4.7 –4.2 113 627 827 –200 –7.7 96.3 34.0 1.9

10.8 10.6 –2.1 93 872 1,021 –149 3.9 84.3 7.5 1.7

7.0 9.2 2.9 68.3 1,065 1,184 –119 4.0 63.3 2.9 2.4

8.4 7.0 9.0 53.6 1,529 1,489 40 1.5 50.4 2.1 3.7

7.0 5.0 –2.0 50.6 1,635 1,662 –27 2.0 47.9 2.4 4.7

7.0 5.0 –4.1 51.3 1,912 2,037 –125 2.0 46.5 2.1 4.3

e = estimate, f = forecast

282

MYANMAR

Myanmar Population (million inhabitants) GDP (US$ million) Country @rating: Medium-term rating: Business climate rating:

51.0 14,722 D Very high risk D

RISK ASSESSMENT Myanmar’s military regime stood up to a wave of protest in September 2007. With social demands on the cost of living after new increases in petrol and gas prices, political demands were also put forward including compliance with the roadmap for democracy formally accepted by the junta, dialogue with the opposition whose leader Aung San Suu Kyi remains under house arrest and respect for fundamental rights. Despite calls for negotiations, the State Peace and Development Council launched violent repressive measures that prompted the United States and Europe to impose tougher sanctions and Japan to suspend bilateral aid. China and Russia remained aloof, however, due to their close economic ties. The sanctions will thus have limited impact on the economy. The repercussions on the business climate will, however, be more severe with the political uncertainties compounding the concerns of foreign investors over the lack of transparency and frequent legislative changes. In this context, statistical data is not very reliable. While the military junta announced double-digit growth, the IMF estimated it at 5.5 per cent in 2007 with 4.0 per cent expected in 2008. The gas and oil sectors should

continue to drive the economy in view of the high demand from Myanmar’s dynamic, energy-consuming neighbours: Thailand, India and China. Still dominated by commodities, the economy remains weak in this respect. Agriculture, which represents 40 per cent of GDP, has not performed up to its potential due to administrative controls limiting harvests. Lacking competitiveness and hampered by import prohibitions in the United States, industry is underdeveloped. The extent of the informal economy and above all the unpredictability of the junta’s economic policy have clouded the outlook. Myanmar thus remains the Asian economy most affected by poverty as evidenced by social indicators that rank it lower than Laos or Cambodia. While the consolidation of external accounts certainly paved the way for a substantial increase in foreign exchange reserves, the public sector nonetheless continues to run a deficit entirely financed by money creation. Inflation has thus been out of control and has eroded purchasing power. Despite the consolidation of the banking sector undertaken after the crisis in 2003– 2004, intermediation remains very poor and prudential regulations underdeveloped.

3

283

ASIA

MAIN ECONOMIC INDICATORS USD millions Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports) e = estimate, f = forecast

284

2003/4

2004/5

2005/6

2006/7

2007/8(e)

2008/9(f)

13.8 8.0 –5.4 2,781 2,240 541 –1.0 69.6 12.2 4.2

13.6 7.7 –4.7 2,902 1,973 929 2.3 63.6 9.2 5.3

13.6 12.6 –3.3 3,531 1,984 1,547 3.9 61.6 9.9 6.2

12.7 38.7 –4.2 5,163 2,937 2,226 7.1 50.4 9.3 8.3

5.5 35 –3.8 5,833 3,478 2,355 7.0 48.3 6.3 11.6

4.0 20 –2.5 5,983 3,900 2,083 4.6 45.0 5.8 13.4

NEPAL

Nepal Population (million inhabitants) GDP (US$ million) Country @rating: Medium-term rating: Business climate rating:

27.7 8,051 D Very high risk D

RISK ASSESSMENT Economic growth remained sluggish in 2006– 2007, up 2.5 per cent, due to poor weather conditions that undermined rice production. Political uncertainties moreover affected non-farm activity with domestic demand only growing, thanks to transfers by expatriate workers. Private companies continue to suffer from a poor political and institutional environment and frequent electric power failures. Despite the restoration of democracy and the conclusion of a peace treaty intended to bring 10 years of civil war to a close, the

political situation is still precarious. According to the peace treaty, the Maoist rebels have to put their combatants and weapons under United Nations control but the process has been slow thus far. Achieving political normalisation will require election of a constituent assembly acceptable to everyone. With relatively healthy public sector finances, moderate debt and especially great tourist potential, the Nepalese economic outlook could ultimately improve. Political uncertainties and deficient infrastructure continue, however, to cloud this outlook.

3

MAIN ECONOMIC INDICATORS USD millions(*)

2003/4

2004/5

2005/6(f )

2006/7(e)

2007/8(f)

2008/9(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

4.7 4.0 –3 748 1,801 –1,053 0.8 47.4 6.0 7.9

3.1 4.5 –3.2 832 2,022 –1,190 –0.2 41.9 6.3 7.2

2.8 8.0 –3.8 850 2,372 –1,522 0.6 38.9 6.3 7.4

2.5 6.4 –3.6 892 2,653 –1,761 –1.5 36.2 6.3 7.1

4.0 6.5 –6.2 989 3,011 –2,022 –2.2 35.1 6.3 6.7

4.5 6.0 –5.0 1,106 3,342 –2,236 –2.7 33.7 6.3 6.4

*Financial year starting 15 July

e = estimate, f = forecast

285

ASIA

New Zealand Population (million inhabitants): GDP (US$ million): Country @rating: Business climate rating:

4.1 106,000 A1 A1

RISK ASSESSMENT Despite a second-half slowdown, a sharp growth rebound marked 2007 overall. Household consumption was driven by the strong growth of wages and farm incomes reflecting, respectively, a lack of available labour (with the emigration of young graduates) and soaring prices for dairy products. The dynamism of investment and prices in the residential property sector provided additional support. Companies, meanwhile, took advantage of the decline in prices for imported capital goods fostered by the strength of the New Zealand dollar to increase their investment programmes. Public institutions have been able to further increase their spending, thanks to their excellent financial health. Exports alone remained sluggish despite some progress associated with the start of exploitation of an oilfield and to dynamic demand from Australia, which provides a market for half of manufactured-product sales. The economic expansion should slow markedly in 2008, which should bring the growth rate to a level more consistent with available capacity and ease inflationary pressures: the restrictive monetary policy should finally have an effect despite fiscal policy that has remained accommodating in the run-up to elections late this year. The efforts of the central bank will benefit from the strong

286

dependence of New Zealand’s private sector on increasingly costly external financing. Residential investment will be undercut at once by the negative impact of high interest rates on households whose debt burden now represents 170 per cent of income and by the decline of the migratory balance (with increased departures to Australia and fewer arrivals). Consumption will suffer from rising food and energy prices, waning of the wealth effect and the decline in mortgage equity withdrawals. There are nonetheless a few noteworthy positive points: non-residential and infrastructure construction will continue to benefit from liberal public spending, the New Zealand dollar should weaken in the wake of the economic slowdown with imports easing and both traditional exports and tourist revenues growing in consequence. Although at a very low level, the bankruptcy rate has been increasing moderately since 2005 and the expected economic slowdown will be unlikely to reverse that trend. Certain companies, already contending with rising wage and raw material costs and with an overvalued and fluctuating local currency, will experience difficulties. The sectors most affected will include the cattle and sheep industry, horticulture (kiwis, apples, avocados) and furniture. The wood sector has moreover been suffering from the decline of residential construction in the United States.

NEW ZEALAND

MAIN ECONOMIC INDICATORS %

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth Consumption (var.) Investment (var.) Inﬂation Unemployment Short-term interest rate Public sector balance (%GDP) Public sector debt (%GDP) Exports (var.) Imports (var.) Current account balance (%GDP)

3.7 5.7 13.4 1.8 4.6 5.4 3.9 32.0 2.1 8.4 −4.5

4.2 6.4 15.9 2.3 3.9 6.1 3.6 29.0 5.9 16.6 −6.5

2.2 4.9 12.5 3.0 3.7 7.1 4.1 27.0 −0.5 6.2 −9.0

1.7 2.1 −2.6 2.6 3.7 7.6 7.3 23.0 1.9 −2.5 −8.7

3.0 4.2 4.2 2.8 3.4 8.6 5.4 22.0 2.5 7.3 −8.0

1.7 1.4 2.5 2.9 3.5 8.0 3.9 21.0 2.8 3.0 −7.0

e = estimate, f = forecast

PAYMENT AND COLLECTION PRACTICES As a former British colony in the 19th century, New Zealand’s legal code and precepts are largely inspired by British ‘common law’ and the British court system. New Zealand became a dominion within the Commonwealth on 26 September 1907. ■ Payments Bills of exchange or promissory notes are not frequently used for commercial transactions in New Zealand and mainly serve to authenticate the existence of claims. Although cheques are still used in everyday domestic transactions, payment by electronic bankcard has been developing rapidly. Wire transfers or SWIFT bank transfers are the most commonly used payment method for domestic and international transactions. Most of the country’s banks are connected to the SWIFT network, which offers a rapid, cost-efficient means of effecting payments. The New Zealand dollar, along with the main foreign currencies, is now also part of the Continuous Linked Settlement System (CLS), a highly automated interbank transfer system for processing international trade settlements. ■ Debt collection The collection process starts with the serving of final notice by recorded delivery, a ‘sevenday letter’ whereby the creditor notifies the debtor of his payment obligations including any contractual interest due. Without pay-

ment by the debtor company of an uncontested payable claim exceeding NZ$1,000 (or after obtaining a ruling), the creditor may summon the debtor to settle his debt within 15 days or face a winding up petition with his company considered insolvent (Statutory demand under section 289 of the Companies Act 1993). Under ordinary proceedings, once a statement of claim (summons) has been filed and where debtors have no grounds on which to dispute claims, creditors may solicit a fasttrack procedure enabling them to obtain an executory order by issuing the debtor with an ‘application for summary judgement’. This petition must be accompanied by an affidavit (a sworn statement by the plaintiff attesting to the claim’s existence) along with supporting documents authenticating the unpaid claim. For more complex or disputed claims, creditors must instigate standard civil proceedings, an arduous, often lengthy process lasting up to two years. Proceedings are heard by District Courts or, for claims exceeding NZ$200,000, by the High Court. Appeals against the decisions handed down by the Court of Appeal, located in Wellington, concerning claims for NZ$5,000 and more are lodged, since 1 January 2004, and after it has granted leave on the legal validity of the case to be submitted to it, with the recently established Supreme Court of New Zealand, also located in Wellington.

3

287

ASIA

Such recourse was previously sought via the Privy Council in London. A revision of the Judicature Act 1908 led to establishment of a list of commercial cases eligible for processing via a fast-track procedure, for example in the fields of insurance, banking and finance, disputes on intellectual property rights, merchandise transport, commercial contracts and merchandise import/ export. The High Court of Auckland implemented the first such ‘commercial list’ in April 1987. The High Court is also competent to hear insolvency proceedings and maritime disputes. During the preliminary phase, proceedings are written insofar as the Court examines

the case documents authenticating the parties’ respective claims. During the subsequent ‘discovery phase’, the parties’ lawyers may request their adversaries to submit any proof or witness testimony that is relevant to the case and duly examine the case documents thus submitted. Before handing down its judgement, the Court examines the case and holds an adversarial hearing of the witnesses who may be cross-examined by the parties’ lawyers. Arbitration or Alternative Dispute Resolution (ADR), a mediation procedure, may also be used to resolve disputes and obtain out-ofcourt settlements, often at a lower cost than through the ordinary adversarial procedure.

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300

WORLD New Zealand

250

200

150

100

50

288

7

D

ec

-0

7

6 Ju

ne

-0

-0

6

ec D

5

-0 ne

Ju

D

ec

-0

05

4 Ju

ne

-0

04

ec D

-0 3

ne

ec D

Ju

2

03

Ju

ne

-0

02

ec D

1

ne Ju

D

ec

-0

01

0 -0

ne

ec D

Ju

9

00 ne

Ju

D

ec

-9

99

8 -9

ne Ju

ec D

ne Ju

D

ec

-9

98

7

0

PAKISTAN

Pakistan Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

159.0 128,830 C High risk C

STRENGTHS • With its geopolitical importance, Pakistan enjoys the backing of the United States. • Transfers from expatriates working mainly in the Gulf constitute a significant and stable source of revenues denominated in foreign currencies. • The situation of public finances has improved markedly compared to the late 1990s. • As a cotton producer with a low-cost workforce, Pakistan enjoys a substantial comparative advantage in the textiles sector.

WEAKNESSES • The economy is very dependent on low value-added sectors (textiles, cotton) subject to intense competition from China. • Insufficient levels of investment and spending on education have hampered a move to higher value-added production. • Pakistan’s western half – the northwest border, Baluchistan – has partially escaped from Islamabad’s control. • A strong current of latent instability (ethnic and religious conflict, fundamentalists against traditional parties, the army’s role) cuts across the country’s very core.

RISK ASSESSMENT Pakistan’s growth performance was very good again, up 6.4 per cent, in the financial year ending 30 June 2007. Since 2003–2004, the economy has grown about 7 per cent a year. A good grain harvest resulted in increased farm production despite a decline in the cotton harvest. The manufacturing sector benefited from major investments in the textiles sector. Consumption, meanwhile, remained robust, buoyed by an emerging middle class and transfers from expatriate workers. The strong demand coupled with insufficient local supply in a context of high oil prices has resulted in large external imbalances. Economic growth will consequently be unlikely to continue at the current rate. The sharp rise of food and petrol prices should particularly affect household con-

sumption. Economic growth should thus ease to about 5.5 per cent this financial year and next. Political uncertainties should have an effect on growth. Pakistan has been caught up in a new phase of instability since the declaration of a state of emergency late 2007 and the murder of Benazir Bhutto. However, there seems to be little likelihood of a government takeover by radical Islamists or a breakout of civil war at the very core of the country’s economy (Pendjab, Sind). Even if the climate of instability will not be very conducive to strict economic policy, in the near term it should not significantly affect the factors underlying the growth (expatriate remittances, a rising middle class and textile sector competitiveness).

3

289

ASIA

MAIN ECONOMIC INDICATORS USD billions(*)

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

4.8 2.9 −2.7 11.9 12.0 −0.1 3.6 4.3 42.9 16.2 6.4

7.4 7.4 −1.7 13.3 16.7 −3.4 −0.8 −0.8 36.2 21.1 4.8

7.7 9.1 −3.8 15.4 21.8 −6.4 −3.7 −3.4 30.7 9.9 3.7

6.9 7.9 −4.2 17.0 26.7 −9.7 −6.8 −5.4 28.5 11.1 3.5

6.4 7.7 −4.2 20.3 31.1 −10.8 −6.9 −4.8 28.2 8.1 4.0

5.4 7.9 −4.8 23.1 37.5 −14.4 −10.1 −6.5 28.6 7.9 3.8

*ﬁscal year ending 30 June of current calendar year, e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET

290

■ Means of entry Market access is gradually being freed up. Customs duties in the industrial sector are trending downwards. The maximum rate of custom duty is 25 per cent ad valorem (CIF value), with some notable exceptions such as cars, which are subject to a separate system of taxation (50–90 per cent depending on the number of cylinders). The maximum rate of duty in the service sector is 10 per cent. As a rule, Pakistan follows the World Customs Organization’s harmonised international nomenclature and recommendations. Nevertheless, exporters are advised to remain vigilant about Pakistan customs’ interpretation of imported products. The practice of applying tariffs that place local importers at a disadvantage often results in disputes. Excise duty ranging from 5 to 15 per cent ad valorem and a maximum of 15 per cent on general sales tax apply to all goods and transactions on top of customs duty. Currently, excise duty is being phased out in favour of a broader sales tax. Flat-rate duty is applied on the quantity of imported intermediate goods. The Pakistani rupee is partially convertible as transfers above a certain amount are subject to documentation. Although the currency is in a floating system, its rate is to some extent administered by the central bank, which intervenes on the currency market to maintain a stable rupee

versus the dollar, ie between 60–61 rupees to the dollar. ■

Attitude towards foreign investors Foreign investment is governed by special legislation. The Pakistan government is extremely positive towards foreign investment, up sharply over the last few years to US $5.2 billion in 2006 (3.6 per cent of GDP). In order to attract more FDI, the government is striving to create an investment-friendly climate via liberalisation, deregulation and continued privatisations. But for some sensitive sectors, all economic sectors are open to FDI, including manufacturing, agriculture and services. Capital flows have been liberalised. There are no restrictions on 100 per cent ownership of local companies by foreign investors, except in the agricultural sector where there is a 60 per cent ceiling. Similarly, there is no requirement to tie up with a local partner, except in construction and public works projects which are subject to tight restrictions. The central bank allows foreign investors to repatriate capital, including royalties, profits, dividends and principal. There are also no restrictions on acquisitions in the secondary market, nor any discriminatory measures regarding taxation or dividend payouts. There is a minimum capital requirement of $0.15 million in services, $0.30 million in infrastructure and $0.30 million in the care sector. Corporation tax has been lowered to 35

PAKISTAN

per cent in line with the rate applicable to public-sector enterprises. As a result, banks and private-sector companies have seen their tax rates reduced by 3 and 2 per cent, respectively, in 2006 and 2007, compared with 2005 and 2006. Moreover, the Pakistan government has signed bilateral investment protection agreements and double taxation treaties with 47 and 52 countries, respectively.

It has ratified the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The previous mechanism for settling investment disputes made Pakistan unattractive to international investors. The country is also a signatory to the convention establishing the Multilateral Investment Guarantee Agency (MIGA – World Bank group).

3

291

ASIA

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

67 7 14 Imports: 20% of GDP

Exports: 15% of GDP

MAIN DESTINATIONS OF EXPORTS

MAIN ORIGINS OF IMPORTS

Mn USD

Mn USD

4000 3500 3000 2500 2000 1500 1000 500 0

5000 4000 3000 2000 1000 0 USA

UAE Afghanistan China

UK

China

Saudi Arabia

UAE

USA

Japan

IMPORTS by products ■ Unrefined petroleum 14% ■ Oil products 10% ■ Iron and steel 6% ■ Telecommunications equipment 5% ■ Electrical equipment 10% ■ Vehicles 6% ■ Foodstuffs and agricultural raw materials 14% ■ Chemicals 16% ■ Other 18%

EXPORTS by products ■ Textile 56% ■ Leather and shoes 6% ■ Foodstuffs 11% ■ Oil products 5% ■ Chemicals pharmaceutical products 3% ■ Other manufactured goods 9% ■ Other 10%

STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population % Percentage under 15 years old Number of computers per 1,000 inhabitants

292

Pakistan

Regional average

Emerging country average

2,500 770 0.539 26 35 38 n/a

5,929 1,814 0.683 32 37 28 42

5,983 2,313 0.672 31 44 30 50

PAPUA NEW GUINEA

Papua New Guinea Population (million inhabitants) GDP (US$ million) Country @rating: Medium-term rating: Business climate rating:

6.0 5,654

B Moderately high risk D

RISK ASSESSMENT Economic growth was strong in 2007, driven by robust exports, mainly of raw materials particularly gold, oil and copper, which represent 80 per cent of the total. The principal client has been Australia, with it providing a market for 41 per cent of Papuan sales abroad. A possible downturn of copper prices could, however, lead to a growth slowdown in 2008. The economy is moreover still shaky due to its excessive focus on ore and fuel with the performance of agriculture and manufacturing, especially textiles, remaining poor. A deficient network of infrastructure meanwhile has spawned bottlenecks that limit growth. And the business environment has not been very hospitable as evidenced by the recent overturning of the telephony licences of two foreign companies in favour of domestic operators. Increases in raw material prices in 2007 allowed the country to run a large current account surplus and slightly increase its foreign exchange reserves. Should prices fall

in 2008, however, the surplus could shrink although nonetheless remaining substantial. The fiscal surplus meanwhile declined in 2007 amid expansionary fiscal policy in the run-up to the 2007 summer elections. However, tight fiscal policy should resume in 2008 and facilitate maintaining a surplus. Sovereign risk should thus remain limited. Parliament re-elected Prime Minister Sir Michael Somare to a fourth term in August 2007. Economic policy should thus remain stable with little likelihood for privatisation of state-owned companies. The decision process will moreover remain slow and complex with the new government required to contend with a dissension-riven majority comprising no fewer than 13 parties. The country’s relations with Australia, its main trading partner, have been erratic and recurring tensions have jeopardised economic cooperation projects. The government has sought, meanwhile, to ease that dependency relationship and strengthen its economic and diplomatic ties with China.

3

293

ASIA

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

2.2 14.7 –1.8 2,201 1,187 1,013 4.5 70.7 16.2 4.3

2.9 2.2 0.0 2,555 1,459 1,095 2.2 53.5 12.7 5.5

3.4 1.7 4.1 3,300 1,500 1,800 3.8 38.4 9.9 5.3

2.6 2.9 6.4 4,100 2,000 2,100 5.2 33.6 8.3 8.3

5.2 4.8 2.1 4,600 2,300 2,300 8.1 35.1 7.0 8.7

4.5 2.9 2.4 4,800 2,400 2,400 4.4 33.7 7.1 8.6

e = estimate, f = forecast

294

PHILIPPINES

Philippines Population (million inhabitants) GDP (US$ million) Country @rating: Medium-term rating: Business climate rating:

89.5 116,931

B Moderately high risk B

STRENGTHS • The economy is highly specialised in electronics, with exports representing nearly 70 per cent of sales in the sector. • The country’s exports to East Asia continue to grow, representing 42 per cent of total exports in 2006 against 26 per cent in 1997. • The country has remained competitive particularly in Special Economic Zones (SEZs). • The skill levels, high productivity and adaptability of the workforce have been assets, especially for multinational companies. • Incoming expatriate-worker remittances have benefited external accounts and helped to mitigate the effects of political instability and external shocks on the economy.

WEAKNESSES • A low rate of investment, particularly from abroad, affected by the political instability and a business climate marked by corruption will limit the country’s growth potential. • Inequality and demographic growth have undermined economic performance. • The country has an exceptionally low savings rate for Asia, which has made it dependent on financial markets. • The lack of reforms and monitoring in the banking sector constitutes a weakness. • Insecurity – due particularly to the Islamist rebellion in the south of the archipelago – is something of a deterrent to foreign investment.

RISK ASSESSMENT Growth accelerated in 2007, driven by the sharp rise of exports and household consumption underpinned by expatriate worker transfers that represented 10 per cent of GDP in 2007 – a trend that should continue in 2008. An export slowdown is nonetheless expected in 2008 due to the peso appreciation and sagging American demand. In this context, the payment experience recorded by Coface has been good with companies showing real dynamism in services, telecommunications, the retail trade, construction and an electronics sector that continues to be the main economic driver. Corporate financial statements are, however, often not very reliable

with claim collection hampered by slow and costly legal procedures. The government’s financial situation is still shaky despite deficit reduction efforts in the public sector, with public sector debt still high – now representing over 70 per cent of GDP – and sensitive to interest rate risk. And the banking system remains too fragmented with the stock of non-performing loans still substantial. The external situation is solid, however, with the current account surplus remaining high, thanks to private transfers and the many call centres operating in the country. External debt ratios have moreover been coming down and foreign exchange reserves have been growing. A

3

295

ASIA

widening of the trade deficit in the wake of the rapid import growth expected in 2008 will bear watching. The political situation has been somewhat unstable. Although President Gloria Arroyo has fended off two attempts by the opposition to initiate impeachment proceeding and could be able to complete her full term in office, which will normally end in 2010, she has become increasingly dependent on military

support with the army attempting to stem the Islamist and communist rebellions in the south of the archipelago. The May 2007 parliamentary elections that proved favourable to the president’s Lakas Party took place, moreover, in a climate of violence and suspicions of electoral fraud. And even if the president has a good record of achievement on reforms, the country continues to suffer from serious deficiencies in governance terms.

MAIN ECONOMIC INDICATORS USD billions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

5.0 3.9 –4.9 35.3 41.2 –5.9 0.3 0.4 78.9 16.9 3.2

6.2 8.6 –4.2 38.8 44.5 –5.7 1.6 1.9 70.4 13.8 2.9

5.0 6.7 –3.0 40.3 48.0 –7.8 2.0 2.0 62.4 15.2 3.3

5.4 4.3 –1.9 46.2 53.1 –7.0 5.0 4.3 51.2 14.4 3.7

6.6 3.6 –1.3 49.5 57.2 –7.6 6.5 4.6 42.9 10.2 5.1

6.0 3.7 –0.4 52.9 64.3 –11.4 4.0 2.4 36.7 9.5 5.6

e= estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET

296

■ Market overview On the whole, the market is very open, with non-tariff barriers more than anything else limiting market access. Some imports are subject to stringent regulatory restrictions, including the award of certificates by an often inefficient administrative service in a country widely seen as corrupt (ranked 131 out of 179 on Transparency International’s 2007 index). Eight tariffs currently apply: 0, 1, 3, 5, 7, 10, 15 and 20 per cent (for sensitive products). According to the WTO, the average Most Favoured Nation (MFN) tariff fell from 9.7 per cent in 1999 to 7.8 per cent in 2005 and 6.3 per cent in 2006. Farm products have a higher tariff than non-agricultural goods (9.6 per cent against 5.8 per cent, respectively). Exceptional cases of protection remain in force and there are fairly high levels of tariff dispersion. Examples of high tariffs include animal products (21.3 per cent), sugar (16 per cent), clothing (14.9 per cent),

textiles (9.3 per cent) and transport equipment (8.6 per cent). High customs duties are at times doubled by swingeing excise duties on some goods (champagne, cigarettes, sparkling wine and certain makes of car). While a legal system is in place to strengthen intellectual property protection, its effectiveness is limited by the slowness of administrative procedures and the lack of resources available to judges to enforce legal decisions. For payments, the irrevocable and confirmed documentary letter of credit is recommended. ■

Attitude towards foreign investors The Foreign Investment Act 1991, amended in 1996 and again in 1998, has liberalised foreign investment regulations and helped boost its growth. Notwithstanding, overall investment has been paltry these last few years. Two restrictive sector lists impose phased ceilings on foreign shareholdings (20– 60 per cent). List A enumerates the sectors where foreign participation is restricted on constitutional or legal grounds (media, the

PHILIPPINES

liberal professions, utilisation of natural resources). List B concerns areas where foreign ownership is restricted in sectors such as security, defence, public health, gambling, activities that undermine morals and those that protect local SMEs. The banking sector is accorded special treatment. While foreign ownership of local banks was limited to 60 per cent until 2000, the General Banking Law of 2000 permits wholly foreignowned banks for a seven-year period until 2007. Land is reserved for Filipino citizens and 60 per cent locally held companies. Foreign investors may lease land to put up a production facility. All investment is subject to the approval of the Board of Investments and the Security and Exchange Commission, which is responsible for registering, regulating and supervising all foreign companies and joint ventures. A One Stop Action Centre run by the BOI disseminates practical information and facilitates administrative formalities. It is advisable to engage a local lawyer. Foreign investors interested in infrastructure development can avail themselves of the provisions of the Build-Operate-Transfer Act 1990 (amended in 1994). Tax incen-

tives are granted to investment in the development of underprivileged areas, exports and the mining sector. These include exemption from corporation tax, local taxes and customs duties on imported equipment, ad hoc tax rebates, accelerated depreciation and so on. In addition, there are several categories of special economic zones and taxand duty-free zones, including buildings for ICT companies in Great Manila. A review on rationalising these measures is under way. Under an investment protection agreement between France and the Philippines, in force since 13 June 1996, investors are provided safeguards against all expropriation and nationalisation measures. The agreement provides for the free transfer of funds and investments gains.

3

■

Foreign exchange regulations There are no exchange controls for ordinary transactions, but there are restrictions on capital transfers. Importers must document their request for foreign exchange. Local banks can, on the instruction of the central bank, ask their clients to provide evidence in support of their request for foreign currency. The exchange rate is floating.

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300

WORLD Philippines

250

200

150

100

50

D

e Ju n

ec

94 -9 Ju 4 ne 9 D 5 ec -9 Ju 5 ne 9 D 6 ec -9 Ju 6 ne 9 D 7 ec -9 Ju 7 ne 9 D 8 ec Ju 98 ne 9 D 9 ec -9 Ju 9 ne 0 D 0 ec Ju 00 ne 0 D 1 ec -0 Ju 1 ne 0 D 2 ec -0 Ju 2 ne 0 D 3 ec -0 Ju 3 ne 0 D 4 ec -0 Ju 4 ne 0 D 5 ec Ju 05 ne -0 D 6 ec Ju -06 ne -0 D 7 ec -0 7

0

297

ASIA

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

53 7 10 Imports: 52% of GDP

Exports: 47% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

15000

10000

12000

8000

9000

6000

6000

4000

3000

2000

0

0 China

USA

Japan

Singapore

Hong Kong

Japan

USA

China Singapore Saudi Arabia

IMPORTS by products ■ Electrical and electronic equipment 41% ■ Fuels 15% ■ Machinery 12% ■ Chemicals 8% ■ Foodstuffs 7% ■ Other 18%

EXPORTS by products ■ Electrical and electronic equipment 47% ■ Machinery 18% ■ Foodstuffs 6% ■ Vehicles 3% ■ Copper 3% ■ Clothing 3% ■ Other 20%

STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

298

Philippines

Regional average

Emerging country average

5,980 1,420 0.763 34 63 35 45

5,929 1,814 0.683 32 37 28 42

5,983 2,313 0.672 31 44 30 50

SINGAPORE

Singapore Population (million inhabitants) GDP (US$ million) Country @rating: Medium-term rating: Business climate rating:

4.4 132,158 A1 Very low risk A1

STRENGTHS • The country has been pursuing ambitious diversification strategy, especially to high value-added sectors like chemicals, pharmaceuticals and finance. • It is among the most advanced countries of Asia in quality competitiveness terms. • Singapore has become a major exporter of capital in Asia in many economic sectors – such as finance, telecommunications, transport – notably via the state-owned Temasek holding company. • The economy has benefited from the country’s political stability and excellent business climate.

WEAKNESSES • Skilled labour is in short supply in the sectors the country wishes to develop. • The ageing population could ultimately undermine economic performance. • Growing inequality and the emergence of long-term unemployment among the least skilled could generate social tensions. • The very open economy is vulnerable to a world economic downturn.

RISK ASSESSMENT Economic growth remained strong in 2007, thanks to good export performance and a sharp increase in consumption spurred by a bright employment picture, rising real wages and a positive wealth effect produced by rising property prices. A growth slowdown will nonetheless be likely in 2008 amid weaker demand growth in the United States, Singapore’s number two trading partner. The foreign trade contribution to growth will thus decline especially with exports representing 210 per cent of GDP. Economic performance will nonetheless remain satisfactory, thanks to the growing proportion of sales abroad going to Asia – now 60 per cent – and the diversification of the productive fabric. In this context, bankruptcies continue to decline, as reflected by the favourable

Coface payment incident index trend. Singapore moreover boasts the best governance in Asia, thanks to an effective legal system and a good level of financial transparency. The financial situation has remained robust as the equilibrium of public sector finances and the solidity of a banking system poised to adopt Basel II prudential standards attest. External accounts continue moreover to show large surpluses, thanks to good performance in a range of sectors including electronics, transport, construction, tourism and financial services. The decline expected in the current account surplus in 2008 should not jeopardise Singapore’s exceptional financial solidity. Underpinned by substantial fiscal reserves and a large majority in parliament, the People’s Action Party of Prime Minister Lee

3

299

ASIA

Hsien Loong has sought at once to make the city-state more attractive to foreign investors and to bolster the specialisation in high value-added sectors to meet the growing competition from low-cost Asian economies.

Besides reductions in corporate income tax and tax incentives for companies setting up operations in Singapore, the government continues to pursue its infrastructure and R&D investment policy.

MAIN ECONOMIC INDICATORS USD billions

2003

2004

2005

2006

2007(e)

2008(f )

Economic growth Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

3.1 0.5 −1.6 161.7 132.2 29.5 24.3 24.1 1.7 6.0

8.8 1.7 −1.1 201.0 168.1 32.9 24.5 22.0 1.4 5.6

6.6 0.5 −0.3 232.3 194.4 37.9 28.9 20.4 1.3 5.1

7.9 1.0 0.6 289.4 244.2 45.2 31.5 18.5 1.2 5.1

7.5 2 0.3 317.6 272.9 44.7 27.5 16.9 1.2 5.2

5.8 3.5 0.1 337.0 294.5 42.5 23.8 16.8 1.2 5.3

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■ Market overview Singapore is a fervent advocate of multilateral trade through international institutions (WTO) and regional bodies (ASEAN, APEC). However, conscious of the difficulties inherent in ASEAN, since 2001 the city-state has actively sought to establish bilateral agreements for most of its trade. As a result, it has free-trade agreements with New Zealand, Japan, EFTA, Australia, the United States, Jordan, India, South Korea, Panama and Peru. It has also been instrumental in initiating trade talks in 2007 towards a freetrade agreement between ASEAN and the European Union.

300

■ Means of entry Singapore’s exceptional openness to the outside world is one of the keys to its economic success. The country is a free port, with storage and warehousing playing a significant economic role. Regardless of the international economic situation, Singapore continues to pursue liberal trade and investment policies, without the slightest sign of inclination towards protectionism. Its trade policy is characterised by the near-total

absence of tariff protection measures, except for customs duties on some alcoholic beverages. Non-tariff barriers are rare. ■

Attitude towards foreign investors Singapore continues to keenly welcome foreign investment and offers a very open and well-planned economic and political environment. The government uses foreign direct investment to develop priority sectors (electronics, chemicals, biotechnology). The aim is to encourage the growth of high addedvalue activities and turn the island into a regional hub for foreign investors looking to do business in Asia. The Economic Development Board (EDB) is a key player in the development and promotion of investment in Singapore. However, the country is only partially open to foreign investment in sectors such as the media and legal and financial services. The government is starting to open them up but progress is slow. Plans to increase competition across the entire economy were given the green light in the Singapore Competition Act 2004. However, though the act has been in force since 1 January 2005, it has only been partially implemented.

SINGAPORE

■ Foreign exchange regulations The exchange rate is the key instrument of government monetary policy, which aims to maintain a flexible rate within an adjustable fluctuation band. Since April 2004, the policy

of the Monetary Authority of Singapore (MAS) is to marginally raise the Singapore dollar’s exchange rate against a basket of currencies of its main trading partners, the main component of which is the US dollar.

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300

250

WORLD Singapore

200

150

3

100

50

Ju

ne D 93 ec Ju -93 ne D 94 ec Ju -94 ne D 95 ec Ju -95 ne D 96 ec Ju -96 ne D 97 ec Ju -97 ne D 98 ec Ju -98 ne D 99 ec Ju -99 ne D 00 ec Ju -00 ne D 01 ec Ju -01 ne D 02 ec Ju -02 ne D 03 ec Ju -03 ne D 04 ec Ju -04 ne D 05 ec Ju -05 ne D 06 ec Ju -06 ne D 07 ec -0 7

0

301

ASIA

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

13 4 6 Imports: 213% of GDP

Exports: 243% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

40000 35000 30000 25000 20000 15000 10000 5000 0

35000 30000 25000 20000 15000 10000 5000 0 Malaysia

USA

Hong Kong

China Indonesia

Malaysia

USA

China

Japan

Indonesia

IMPORTS by products ■ Electrical equipment 34% ■ Fuels 19% ■ Machines 16% ■ Measuring equipment 3% ■ Aircraft, spacecraft 3% ■ Other 25%

EXPORTS by products ■ Electrical equipment 39% ■ Machinery 18% ■ Fuels 13% ■ Chemicals 5% ■ Other 25%

STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

302

Singapore

Regional average

Emerging country average

31,710 29,320 0.916 33 100 20 639

5,929 1,814 0.683 32 37 28 42

5,983 2,313 0.672 31 44 30 50

SOUTH KOREA

South Korea Population (million inhabitants): GDP (US$ million):

48.4 888,024

Country @rating: Medium-term rating: Business climate rating:

A2 Low risk A2

STRENGTHS • South Korea boasts a diversified industrial base, competitive in new technologies and the automotive industry. • In electronics, the country is the quality leader. • The degree of penetration of high technology in the domestic market is among the highest in the world, with the country ranked fourth in the world for its broadband Internet penetration rate. • An effective education system underpins a highly skilled labour force. • In terms of the number of patents held, South Korea ranks fourth in the world, after Japan, the United States and China, thanks particularly to high public R&D spending. • South Koreans have broadened the geographic scope of their investments with China, Vietnam, and India becoming preferred destinations.

WEAKNESSES • The won appreciation has considerably undermined the performance of low value-added companies. • South Korea is still a net beneficiary of FDI flows particularly in services, the main weakness of the South Korean economy. • The steel and textile sectors have suffered from Chinese competition. • As the fourth largest world oil importer, the country is very dependent on raw materials. • Households and small companies have been carrying too much debt. • The ageing of the population constitutes a risk for public sector finances. • The unpredictability of the North Korean regime has weighed on South Korea’s geopolitical environment.

RISK ASSESSMENT The economy grew at a still-respectable 4.8 per cent rate in 2007, driven by goods exports and household consumption, itself spurred by an increase in disposable income and a wealth effect caused by rising property and stock market prices. Buoyant foreign demand benefited electronics, the automotive industry and shipbuilding in 2007. The country should prove relatively insensitive to the slowdown in 2008 in the United States, which represents only 15 per cent of South Korean exports. In these conditions, the

Coface payment experience has generally been good. Large innovative companies continue to post high profits albeit eroded by the won appreciation. Small companies focusing on the domestic market have been weaker. Financially, sovereign risk has remained low. Despite the decline of the current account surplus in 2007 and the expected emergence of a deficit in 2008, foreign debt remains limited. Although South Korean banks are sound and profitable, the extent of household debt raises fears of new difficulties should interest rates increase sharply.

3

303

ASIA

The political tensions with North Korea seem to be easing. The presidents of the two Koreas – Roh Moo Hyun and Kim Jong-Il – have committed themselves to opening negotiations. Prospects for a peace treaty are nonetheless still uncertain: With the December 2007 presidential elections allowing M. Lee Myung-Bak of the opposition Grand National Party to succeed Roh Moo Hyun, a tougher policy toward Pyongyang could

emerge. In the domestic sphere, the new President, M. Lee Myung-Bak, and the future government resulting from the April 2008 legislative elections will be expected to undertake reforms as regards combating corruption and improving corporate transparency. Chaebol governance, characterised by family control and hereditary succession, remains a particularly large challenge.

MAIN ECONOMIC INDICATORS USD billions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports).

3.1 3.4 2.7 197.3 175.3 22.0 11.9 2.0 25.9 13.1 8.3

4.6 3.0 2.2 257.7 220.1 37.6 28.2 4.1 25.3 10.7 8.5

4.0 2.6 1.9 289.0 255.5 33.5 15.0 1.9 23.7 7.9 7.7

5.0 2.1 1.8 331.8 302.6 29.2 6.1 0.7 29.7 7.4 7.4

4.8 2.8 1.9 381.8 356.6 25.2 1.4 0.1 35.8 7.6 6.4

4.8 2.5 2.5 438.7 412.4 26.3 -3.4 -0.3 38.3 8.9 6.0

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■

304

Means of entry South Korea’s import regime is fairly open, with most obstacles to import having been lifted in the last few years. However, many tariff peaks remain, particularly in the agricultural sector. The weighted average rate of customs duty is 45.5 per cent for the primary sector and 7.5 per cent for the secondary sector. Despite the progress made by South Korea towards opening up its market, obstacles to trade remain, mainly in the form of nontariff barriers (different technical standards, tedious health inspections and tests, tough approval procedures). Intellectual property compliance in South Korea continues to cause concern as infringement is widespread. The government, however, is determined to strengthen compliance. Trademarks, for instance, are better protected today. The main problem remains weak pecuniary and penal

sanctions, as well as poor enforcement which fails to deter re-offending. Business relations with a Korean partner are not quite as difficult as they are made out to be. For ordinary business transactions, it is customary for the exporter to ask for partial or total payment before shipment. In any case, for small buyers the irrevocable letter of credit is recommended. ■

Attitude towards foreign investors Since joining the OECD in 1996, South Korea has pursued a highly proactive FDI promotion strategy and opened up almost all sectors to foreign investment. The few restrictions that remain are often also found in the legislation of other OECD countries (utilities, defence, agriculture). Between 1995 and 2000, FDI inflows increased eightfold to $15 billion. Inflows have since shrunk considerably, partly due to the drying up of opportunities created by the opening of the market following the crisis.

SOUTH KOREA

FDI since 2004 has settled around US$11 billion a year. South Korea offers foreign investors effective legal protection. It is party to 69 investment promotion and protection agreements and 60 bilateral tax treaties. These agreements guarantee investment protection, free capital transfers and nondiscrimination between foreigners and Korean nationals. The free-trade agreement concluded, but yet to be ratified, between South Korea and the United States, along with that under negotiation with the EU since 2007 should further open up the coun-

try’s economy, which is the 11th most powerful in the world. ■

Foreign exchange regulations The won’s exchange rate is determined by the currency market. Since January 2001, the currency has been freely transferable and all but fully convertible. The only restrictions still in force are an approval procedure for some transactions and the obligation on Korean residents to declare capital outflows in excess of US$10,000. The foreign exchange regime will be gradually but fully liberalised by 2011.

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995)

3

300

250

WORLD South Korea

200

150

100

50

Ju

ne D 93 ec Ju -93 ne D 94 ec Ju -94 ne D 95 ec Ju -95 ne D 96 ec Ju -96 ne D 97 ec Ju -97 ne D 98 ec Ju -98 ne D 99 ec Ju -99 ne D 00 ec Ju -00 ne D 01 ec Ju -01 ne D 02 ec Ju -02 ne D 03 ec Ju -03 ne D 04 ec Ju -04 ne D 05 ec Ju -05 ne D 06 ec Ju -06 ne D 07 ec -0 7

0

305

ASIA

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

38 10 21 Imports: 40% of GDP

Exports: 43% of GDP

MAIN DESTINATIONS OF EXPORTS

MAIN ORIGINS OF IMPORTS

Mn USD

Mn USD

100000

60000

80000

50000 40000

60000

30000 40000

20000

20000

10000

0

0 China

USA

Japan

Hong Germany Kong

Japan

EXPORTS by products ■ Electrical and electronic goods 28% ■ Machinery and equipment 13% ■ Chemicals 9% ■ Cars 9% ■ Ships, boats and floating structure 7% ■ Fuels 6% ■ Other 28%

China

USA

Saudi Arabia

UAE

IMPORTS by products ■ Electrical equipment 19% ■ Unrefined petroleum 18% ■ Machinery and equipment 11% ■ Semiconductors 9% ■ Ores and metals 7% ■ Foodstuffs and agricultural raw materials 6% ■ Divers 30%

STANDARD OF LIVING / PURCHASING POWER

306

Indicators

South Korea

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

23,800 17,690 0.912 23 81 19 545

5,929 1,814 0.683 32 37 28 42

5,983 2,313 0.672 31 44 30 50

SRI LANKA

Sri Lanka Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

19.8 26,967 B High risk B

STRENGTHS • Exports have been dynamic, thanks to the competitiveness of a textile sector moving upmarket and of certain farm products, especially tea, rice, coconut and rubber. • Sri Lanka boasts a satisfactory level of human development (education, a literacy rate exceeding 90 per cent, highlife expectancy) and quality governance. • Proximity to the rapidly expanding Indian market has been a major asset.

WEAKNESSES • The conflict between the army and the Tamil Tigers should drag on in the Island’s northern region with the current climate not propitious for resolving the conflict peacefully. • The economic still sorely lacks diversification, with the dependence on textiles alone constituting a major weakness. • The excessive debt service of high public debt has impeded the spending needed on infrastructure, the main growth bottleneck.

RISK ASSESSMENT Growth remained strong in 2007 driven by textile sector dynamism and the good performance of services. Expatriate worker transfers have also been spurring domestic demand. The investment inflows have continued due to the very good human development indicators, good governance, and the proximity to the Indian market. Tourism, the sector most affected by the continuing violence, only represents under 1 per cent of GDP. Those same positive factors should support growth in 2008 barring aggravation of the conflict in the island’s northern regions. With the conflict remaining highly localised, it does not seem to have affected the

economy at this juncture. The risk of terrorist action has been high across the entire island but the economic impact should be limited. A possible reduction in foreign aid could, however, undermine the coverage of financing needs, especially with a growing current account deficit and low foreign exchange reserves. The cost of the conflict has especially been inflating public sector debt. Although external debt ratios have been relatively moderate, public debt – largely domestic – has reached unsustainable levels with the public deficit remaining excessive. The volume of debt interest has impeded the allocation of the resources needed for infrastructures modernisation, essential in developing sustainable growth.

3

307

ASIA

MAIN ECONOMIC INDICATORS USD billions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

6.0 6.3 -8.0 5.1 6.0 -0.9 -0.4 57.0 7.5 3.1

5.4 7.6 -8.2 5.8 7.2 -1.4 -3.0 55.2 9.6 2.3

6.0 11.6 -8.7 6.3 8.0 -1.7 -3.4 48.5 5.3 2.8

7.4 13.7 -8.3 7.3 9.4 -2.1 -3.7 45.2 8.7 2.6

6.0 15.5 -8.0 8.3 10.6 -2.3 -3.6 43.4 7.4 2.4

6.1 8.2 -7.7 9.3 11.9 -2.6 -3.7 42.4 7.4 2.0

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■ Means of entry Having opened up some 70 per cent of its economy (thereby increasing its exposure to the changeable international economic situation), Sri Lanka welcomes foreign investment, seeing it as a key driver in the country’s move towards much-needed modernisation of its infrastructure and production systems. Its legislative environment and trade practices, based on the anglo-saxon model, make the island a fairly free and attractive market. Sri Lanka is ideally situated at the gateway to the Indian subcontinent, particularly since the ratification in 2000 of a free-trade agreement with India. It has simultaneously pursued closer regional integration, ratifying a free-trade agreement with Pakistan in 2005. Under the GSP+ scheme, Sri Lanka can export duty-free almost all its products to the European Union, subject to compliance with certain rules of origin. Numerous investment opportunities exist in the service sector (eg, telecommunications, hotels, restaurants), in industry (eg, textiles, agri-foods, rubber) and infrastructure (eg, ports, energy). However, poor public infrastructure can, at times, be a problem for investors, especially outside Colombo. ■ Attitude towards foreign investors Sri Lanka is open to foreign investment for which appropriate safeguard provisions exist

308

under the country’s liberal regulatory framework, legislative system and constitution. A non-discrimination principle ensures equality of treatment for domestic and foreign investors, although there is a 100 per cent surtax on property acquisitions by nonnationals. Generally, there is no local partnership requirement and only some sectors are reserved for local investors. A founding member of the MIGA, Sri Lanka provides safeguards against expropriation and noncommercial and political risk. It also has bilateral investment protection agreements with many countries. These offer investors protection against possible nationalisation and provide for full compensation, if necessary, free repatriation of profit and capital and arbitration via the ICSID. The Board of Investment (BOI) is responsible for promoting and monitoring investments. It offers much-needed assistance with a whole raft of administrative formalities relating to startup, as well as numerous tax incentives. However, the present system discriminates against SMEs and individuals by imposing an abnormally high minimum investment threshold. This discrimination is all the more glaring as the government appears to be stepping up support for investment in largescale projects to the detriment of smaller scale ones.

SRI LANKA

OPPORTUNITY SCOPE

BREAKDOWN IN DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

53 6 23 Imports: 46% of GDP

Exports: 34% of GDP

MAIN DESTINATIONS OF EXPORTS

MAIN ORIGINS OF IMPORTS

Mn USD

Mn USD

2500

2500

2000

2000

1500

1500

1000

1000

500

500

0

3

0 USA

UK

India

Belgium Germany

India

China Singap0re

Iran

Malaysia

IMPORTS by products ■ Oil 21% ■ Textiles 15% ■ Machinery and transport equipment 14% ■ Foodstuffs 12% ■ Construction materials 5% ■ Other consumer goods 10% ■ Other 24%

EXPORTS by products ■ Textiles and clothing 43% ■ Tea 12% ■ Other foodstuffs 10% ■ Machinery and transport equipment 5% ■ Diamonds and jewellery 4% ■ Oil 3% ■ Other 23%

STANDARD OF LIVING / PURCHASING POWER Indicators

Sri Lanka

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

5,010 1,300 0.755 33 15 24 27

5,929 1,814 0.683 32 37 28 42

5,983 2,313 0.672 31 44 30 50

309

ASIA

Taiwan

310

Population (million inhabitants) GDP (US$ million)

22.7 345,900

Country @rating: Medium-term rating: Business climate rating:

A1 Low risk A2

STRENGTHS • The world’s fourth largest producer of electronics, Taiwan is the leader for many products claiming 98.6 per cent of the world market for motherboards, 82.5 per cent for laptops and 70 per cent for LCD monitors. • Taiwanese companies are flexible and innovative. • The external financial situation is robust. • The government continues to foster R&D through public spending. • There is a consensus on democratic principles and practices.

WEAKNESSES • International trade is too focused on both Mainland China, which represents with Hong Kong a market for 42 per cent of Taiwan’s exports, and the United States, representing 15 per cent. • The massive relocations have undermined industrial employment while the services sector lacks competitiveness. • The level of infrastructure has lagged behind other advanced Asian economies. • Relations with Mainland China continue to be the main source of uncertainty.

RISK ASSESSMENT Growth slowed slightly in 2007 reflecting the slower growth in the United States, the Island’s main trading partner considering that about 70 per cent of Taiwanese exports to Mainland China are subsequently reexported to the United States. Foreign trade will cease being the main growth engine in 2008, with the domestic demand recovery making it possible to partially offset the reduced contribution of net exports. The electronics sector, responsible for 50 per cent of Taiwanese exports, achieved good performance, thanks to the Island’s specialisation in high value-added products with labour-intensive activities relocated to Mainland China. In this moderate-slowdown context, the payment experience recorded by Coface deteriorated with the margins of Taiwanese companies declining in 2007 for the third straight year.

The external financial situation remains robust with high foreign exchange reserves (the world’s fourth largest in value terms) and a substantial, though declining, current account surplus. The accumulation of fiscal deficits has, however, resulted in the buildup of substantial public sector debt, representing 50 per cent of GDP. The institution of greater discipline – especially via tax reform that puts pressure on companies – has been stalled by the quasi-systematic opposition of parliament. The banking system, meanwhile, has to carry on with its restructuring programme. In the run-up to legislative and presidential elections, in January and March 2008 respectively, the decision process on economic matters has been impeded by growing tensions between the Kuomintang and the People First Party, which have the majority in parliament, and President Chen ShuiBian’s Democratic Progressive Party. Weak-

TAIWAN

ened, moreover, by corruption scandals, President Chen has intensified his antiChinese rhetoric. This resurgence of tensions with Beijing could, nonetheless, ease if the opposition, believed to be more amenable to

dialogue, comes out with the majority in the forthcoming elections. The holding of those legislative and presidential elections in the first three months of 2008 could loosen up the current wait-and-see situation.

MAIN ECONOMIC INDICATORS USD billions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

3.5 −0.3 −3.5 150.6 125.7 24.9 29.4 9.6 20.5 2.6 15.5

6.2 1.6 −2.4 182.4 166.2 16.2 18.6 5.6 24.2 2.9 14.1

4.1 2.3 −1.7 198.5 180.6 17.9 16.0 4.5 24.7 3.4 13.6

4.7 0.6 0.2 223.8 200.4 23.4 24.5 6.8 25.1 3.3 12.7

4.3 1.1 −2.0 235.5 214.3 21.2 23.9 5.8 25.9 3.5 12.1

4.4 1.4 −2.0 254.4 236.9 17.5 19.4 4.3 25.5 3.3 11.2

3

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■ Market overview The Taiwanese market has no major barriers to the import of goods and services. For 10 years or so, the Taiwanese government has focused on widening market access and harmonising its regulations with international standards in order to pave the way for WTO accession. The country’s membership of the organisation since 1 January 2002 is an additional asset for foreign companies. Customs duties, already low by comparison with the other countries of the region prior to WTO-accession, have been further reduced. Rates for some 5,000 tariff lines will gradually be cut over a 10-year period from 2002 to 2011. The first reductions came into force on 1 January 2002.The average nominal tariff rate was cut from 8.3 per cent prior to accession to 7.2 per cent and then to 5.5 per cent in 2007. The biggest cuts concern farm products. Their average rate of duty was lowered from 20 to 16.3 per cent in 2002 and then to the target rate of 12.9 per cent in 2007. Tariffs have been eliminated for several product groups, including drugs and medical equipment, toys, furniture, agricul-

tural machinery, construction equipment, paper and steel. Tariff quotas are applied only to imported private vehicles – subject to an annual increase of 20 per cent until their abolition in 2011 – as well as some fishery and farm products, including fresh milk. Geographical restrictions are in place for over 2,000 listed products from China. Obstacles identified by foreign companies include: • non-tariff barriers in the form of disproportionate technical, environmental and safety standards for cars on top of 21.8 per cent duty (30 per cent outside quota); stringent health standards; laborious examination and inspection procedures for foodstuffs and excessive delays in issuing permits for releasing a product on the market and registering drugs on hospital lists. These barriers serve to protect sectors deemed sensitive by the government (for example, uncompetitively priced agriculture, automobile assembly, manufacture of generic drugs); • deficient business practices, especially in matters of public procurement (unfair terms, outrageous benefits for govern-

311

ASIA

ment customers) and intellectual property. While intellectual property law has undoubtedly been improved since 2002 in line with the TRIPS agreements, trademark infringement persists and sentences continue to be enforced randomly by the courts of first instance. The letter of credit is the most widely used means of payment in the country. To a lesser degree, bank transfers and SWIFT are also used for business settlements. However, instruments other than the letter of credit should be used with caution because of the difficulties in enforcing court rulings against defaulters. Taiwan is neither a member of the International Centre for Settlement of Investment Disputes (ICSID) nor a signatory to its 1966 convention or to the 1958 New York convention on commercial arbitration. As a result, it applies the principle of bilateral reciprocity, especially in matters of enforcement. On investment protection issues, the island is therefore poorly ranked on Business Monitor International’s 2006 league table, with the second lowest safeguard ratio among Asian countries (20 per cent against a regional average of 40 per cent), ahead only of China whose ratio is 4 per cent. WTOaccession has nevertheless contributed to the adoption of international commercial standards. The Financial Supervisory Commission (the country’s stock market regulator with legislative powers) has announced the application of Basel II prudential rules to Taiwanese law within five years.

modern banking and financial system, the absence of business reforms and restrictions on the employment of foreigners. Most foreign companies established on the island make do by opening representative offices or branches in order to be commercially active. Those involved in a heavier activity such as manufacturing operate via subsidiaries incorporated as capital companies having their own legal character and commercial capacity usually in the form of a joint venture with a local partner. Taiwan’s company law contains discriminatory provisions against foreign-held subsidiaries. These can, however, be waived by obtaining foreign investment approval from the Foreign Investment Commission (FIC) under the Ministry of Economic Affairs (MOEA). Approvals are difficult, even impossible, to obtain for protected sectors such as agrifoods, chemicals, pharmaceuticals,steelmaking and most services (media, post office, property, transport, leisure, utilities, etc). ■

Foreign exchange regulations The Taiwanese currency (new Taiwanese dollar, TWD) is not freely convertible and operates within a supervised floating exchange rate system. The Central Bank of China intervenes on the currency market, setting its central rate to reduce the currency’s appreciation, particularly against the US dollar and the yen, and so maintain the country’s international competitiveness. Taiwan’s foreign exchange regulations are fairly strict, although foreign investment approval procedures have been relaxed. PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995)

■

312

300

250

WORLD Taiwan

200

150

100

50

0

Ju ne D 93 ec Ju -93 ne D 94 ec Ju -94 ne D 95 ec Ju -95 ne D 96 ec Ju -96 ne D 97 ec Ju -97 ne D 98 ec Ju -98 ne D 99 ec Ju -99 ne D 00 ec Ju -00 ne D 01 ec Ju -01 ne D 02 ec Ju -02 ne D 03 ec Ju -03 ne D 04 ec Ju -04 ne D 05 ec Ju -05 ne D 06 ec Ju -06 ne D 07 ec -0 7

Attitude towards foreign investors Foreign companies encounter few administrative obstacles to establishment despite somewhat tedious formalities. Taiwan fares well in international rankings on the easeof-doing-business index, prepared by the World Bank, the World Economic Forum and the IMD World Competitiveness Yearbook. However, its position has been eroded over the last few years due to an insufficiently

TAIWAN

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

37 8 13 Imports: 55% of GDP

Exports: 61% of GDP

MAIN DESTINATIONS OF EXPORTS

MAIN ORIGINS OF IMPORTS

Mn USD

Mn USD

60000

50000

50000

40000

40000

3

30000

30000 20000

20000

10000

10000

0

0 Mainland China

Hong Kong

USA

Japan

Japan

Mainland China

USA

South Korea

IMPORTS by products ■ Machinery and electrical equipment 36% ■ Ores 19% ■ Metals 12% ■ Chemicals 11% ■ Precision instruments, clocks and

EXPORTS by products ■ Machinery and electrical equipment 50% ■ Metals 11% ■ Plastics and rubber 7% ■ Textiles and clothing 5% ■ Vehicles, ships, aircraft 3% ■ Other 24%

watches 6%

■ Other 15%

Indicators

Taiwan

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

31,770 16,088 n/a n/a n/a 19 664

5,929 1,814 0.683 32 37 28 42

5,983 2,313 0.672 31 44 30 50

313

ASIA

Thailand Population (million inhabitants) GDP (US$ million) Country @rating: Medium-term rating: Business climate rating:

314

64.7 206,247 A3 Quite low risk A3

STRENGTHS • The productive apparatus is diversified and efficient in agriculture (rice, rubber) as well as industry (food, the car industry, electronics). • Thai industry has moved upmarket with the high-technology sector now generating over 60 per cent of exports. • The country has been a regional hub with borders open to dynamic neighbours. • The banking sector’s weaknesses have been reduced with a decline in nonperforming loans, improved monitoring and adoption of international standards for risk management and transparency.

WEAKNESSES • Thailand’s foreign trade has suffered from Chinese competition sometimes offering the same product range in the same markets. • Investment is still too limited due notably to problems with access to financing faced by smaller companies. • Postponement of structural reforms (privatisation, investment in infrastructure and education) has kept economic bottlenecks in existence. • Persistent ties between the private sector and politicians continue to affect the business climate. • The Muslim rebel insurrection in the southeast has been a source of recurring tensions.

RISK ASSESSMENT Despite the September 2006 coup and the political uncertainties, Thailand managed to achieve respectable 4.2 per cent growth in 2007, driven by strong exports, particularly high technology and tourism. Low confidence levels and sluggish domestic demand nonetheless hurt companies financially in 2007, without, however, causing the Coface payment experience to deteriorate. The political normalisation process should foster a domestic demand recovery in 2008, thus offsetting the repercussions of the economic slowdown in the United States, Thailand’s number one client country. The government has adopted expansionary fiscal policy to stimulate growth. Public sector debt should nonetheless remain mod-

erate, expected to represent 37 per cent of GDP in 2008. Rapid export growth, meanwhile, has resulted in a large current account surplus and appreciable cash flow. The controls applied to capital movement and the changes in the rules on foreign shareholding have only had a marginal effect on the influx of investments, which should remain substantial. The increasing recourse by private players to debt denominated in foreign currencies has nonetheless generated default risk in a context marked by a lack of corporate transparency. The political situation is still uncertain despite the adoption of the new constitution by referendum in August 2007 and the holding of parliamentary elections in December 2007. The constitution lacks legitimacy

THAILAND

due to the high abstention rate. It has, moreover, increased the power of the military and bureaucrats at the expense of elected legislators. By facilitating no-confidence votes and impeachment proceedings, it has

set the stage for an unstable regime. In that framework, the new government’s capacity to implement coherent economic policies remains uncertain.

MAIN ECONOMIC INDICATORS USD billions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

7.1 1.8 0.4 78.1 66.9 11.2 4.8 3.3 38.0 9.6 5.3

6.3 2.9 0.1 94.9 84.1 10.8 2.8 1.7 32.9 7.6 5.0

4.5 5.8 0.1 109.2 106.0 3.2 −7.9 −4.5 31.2 5.4 4.2

5.1 3.5 0 127.9 114.3 13.7 1.7 0.8 28.2 5.3 5.0

4.5 3.0 −1.7 151.1 125.8 25.3 13.5 5.6 23.7 4.5 5.8

5.5 2.8 −1.4 169.5 144.8 24.7 10.3 3.8 20.8 4.0 5.9

3

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET A signatory to GATT in November 1982, Thailand became a WTO member on 1 January 1995. A founding member of ASEAN since 1967, the country is a fervent advocate for AFTA’s implementation within ASEAN, which provides for the complete dismantling of its customs duties by 2010. It has already slashed customs duties on goods traded with its ASEAN partners, excluding sensitive products, to below 5 per cent. Since 2001, Thailand’s trade policy has focused on promoting free trade with its main partners through regional, mainly bilateral, arrangements. It has signed a series of bilateral trade agreements: an early harvest scheme with China in 2002 and then in July 2005; with Bahrain in December 2002; an early harvest scheme with India in September 2003; with Australia in July 2004; with New Zealand in April 2005 and with Japan (in force since 1 November 2007). Thailand is due to start talks with the European Union in 2008 with a view to concluding a freetrade agreement. On the other hand, negotiations started with the United States in 2004 remain suspended.

■

Means of entry Thailand has gradually reduced import quotas under its WTO commitments, replacing them with tariff quotas and fairly high customs duties. Rates of duty for over one-third of tariff lines were cut in 2006 to 11 per cent in line with the overall simple average Most Favoured Nation (MFN) applied rate. The average rate of customs duty is currently 8.8 per cent for industrial goods and 25 per cent for foodstuffs. These average rates, however, veil relatively high levels of tariff protection, including tariff peaks for leading French exports, especially consumer goods such as foodstuffs, toiletries, cosmetics and cars. Market access in many sectors remains difficult and fairly restricted via high customs and excise duties (176 per cent for wines), as well as technical, regulatory and administrative non-tariff barriers (mandatory import licences for foodstuffs, cosmetics and drugs, sector restrictions on foreigners, limited protection of confidential data for pharmaceuticals, etc).

■

Attitude towards foreign investors For some 15 years, Thai economic growth has been driven by exports and FDI. Thai-

315

ASIA

316

tising). Foreigners can, however, obtain exemptions to engage in activities under categories two and three. A bill amending the Foreign Business Act was proposed in autumn 2006 with a view to including majority voting rights in the definition of a foreign company, over and above the 49 per cent foreign equity ownership ceiling. The bill’s reading in the national assembly (NLA) was suspended last August by the Ministry of Trade, following voting on an amendment that sought to add a third criterion, that of management control, for determining the foreign nature of an investment. These provisions not only appear to be incompatible with Thailand’s GATS commitments; they also detract from its attractiveness as an investment-friendly destination and encourage a wait-and-see attitude from new investors. The bill is still on the parliament’s agenda, but it is quite possible that its adoption will be postponed to 2008 and its provisions amended by the new government formed after the general elections on 23 December 2007. ■

Foreign exchange regulations From the onset of the Asian crisis on 2 July 1997, the baht has been floating against the dollar. Anxious to maintain the local currency’s stability, the central bank intervenes only on an ad hoc basis to cushion sharp fluctuations, and limit off-shore transactions, of the baht. The Thai currency appreciated by 14 per cent in 2006 and by a further 5 per cent since 1 January 2007. PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300

250

WORLD Thailand

200

150

100

50

0

Ju ne D 93 ec Ju -93 ne D 94 ec Ju -94 ne D 95 ec Ju -95 ne D 96 ec Ju -96 ne D 97 ec Ju -97 ne D 98 ec Ju -98 ne D 99 ec Ju -99 ne D 00 ec Ju -00 ne D 01 ec Ju -01 ne D 02 ec Ju -02 ne D 03 ec Ju -03 ne D 04 ec Ju -04 ne D 05 ec Ju -05 ne D 06 ec Ju -06 ne D 07 ec -0 7

land’s manifold comparative assets continue to attract investors: exceptional geographical situation, social stability, expanding and diversified industrial base, high-quality infrastructure, good transport links and a revamped legal system. Having long capitalised on the low cost of Thai labour as the main comparative advantage – one that is tending to erode in the face of competition from neighbouring countries like China and Vietnam – the government is now looking to attract high added-value activities and companies offering transfers of technology and know-how in an effort to meet the challenge posed by the Thai economy’s rise in the value chain due to the country’s emergence as an economic power. Using a mixture of tax incentives (exemption from corporation tax, duty-free admission for commodities and imported machinery) and fast-track procedures (visas, work permits, property acquisition), in late 2005 the Board of Investment (BOI) adopted a pro-active policy to attract foreign investment in six sectors: agriculture and foodstuffs, automotive, electricity production and electronics, alternative energies, high addedvalue services and biotechnology. The foreign investment regime (Foreign Business Act of 4 March 2000) nevertheless retains numerous restrictions aimed at preserving national interests via ceilings on foreign shareholdings in strategic sectors (25, 40 or 49 per cent equity ownership), and creates three business categories according to the level of foreign shareholding: activities from which foreigners are banned (for example, rice farming and fishing); activities closed to foreigners on grounds of national security or cultural identity (for example, arms trade, Thai handicrafts) and activities closed to foreign capital because the government does not consider that the country is ready to take on foreign competition (a long list of services such as telecommunications, banking and insurance, legal counselling, wholesale and retail, accounting and adver-

THAILAND

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

33 7 18 Imports: 75% of GDP

Exports: 74% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

20000

3

30000 25000

15000

20000

10000

15000 10000

5000

5000

0

0 USA

Japan

China

Singapore Hong Kong

Japan

China

USA

Malaysia

UAE

IMPORTS by products ■ Fuels 20% ■ Electrical and electronic equipment 20% ■ Machinery 14% ■ Chemicals 10% ■ Foodstuffs and agricultural raw materials 6% ■ Iron and steel 6% ■ Plastics 4% ■ Other 21%

EXPORTS by products ■ Electrical components and goods 19% ■ Machinery 16% ■ Foodstuffs 12% ■ Vehicles, accessories 8% ■ Chemicals 8% ■ Rubber 7% ■ Fuels 5% ■ Other 27%

STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

Thailand

Regional average

Emerging country average

9,140 2,990 0.784 33 32 24 58

5,929 1,814 0.683 32 37 28 42

5,983 2,313 0.672 31 44 30 50

317

ASIA

Vietnam Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

318

84.1 60,883

B Moderately high risk C

STRENGTHS • The economy benefits from skilled, lowcost labour that has attracted foreign investors. • The development strategy adopted, based on liberalising the economy and expanding the tertiary sector (tourism and financial services), seems to be bearing fruit. • Participation in ASEAN and admission to the WTO in January 2007 attest to Vietnam’s good diplomatic and economic relations with its main partners. • The poverty rate has declined from 58 per cent in 1990 to under 25 per cent by 2006. • The privatisation of state-owned banks, the opening up of the banking sector to foreign banks, and the project intended to strengthen the independence of the Central Bank augur well for the financial sector’s future development.

WEAKNESSES • Vietnam’s specialisation is still too focused on price competitiveness and low-end products. • The civil service and legal environment continues to lag far behind the major Asian economies. • Infrastructure (electricity, roads, railway system and ports) is either dilapidated or underdeveloped. • Public sector reform remains incomplete with the sector still representing 31 per cent of GDP and remaining less dynamic than the private sector. • Social and geographic inequality has increased, particularly between urban and rural areas.

RISK ASSESSMENT The economy should remain buoyant in 2008, driven by exports, strong consumption and a high investment rate, second in Asia after China. The risk of overheating is still present, however, with the strong 8-per cent inflation of 2007 likely to persist in 2008 due to the pressure exerted by demand on production capacity. In these very buoyant economic conditions, the Coface payment experience has been good. There has been noticeable improvement in the availability of information on companies. Nevertheless, the legal and regulatory systems are still deficient and

hardly capable of settling disputes between economic agents. Poor governance has remained Vietnam’s Achilles’ heel. Financially, the country should continue to run a current account deficit in 2008 amid strong import growth. But the capital flow surplus should grow further in 2008 and largely cover financing needs. The massive influx of FDI attracted by the skilled, lowcost labour and by Vietnam’s admission to the WTO will also facilitate raising the level of foreign exchange reserves, still relatively low compared to other Asian countries. The excess liquidity generated by the large incom-

VIETNAM

ing financial flows entails a risk of speculative bubbles developing in the credit and stock markets. The Ho Chi Minh City index has soared to spectacular heights. Volatility risk is thus high. Fiscal policy, meanwhile, has lacked transparency, while the cost of banking reform will inflate public sector debt. The cost of that reform could even grow with the

already high proportion of non-performing loans likely to increase due to acceleration of the credit expansion. Vietnam has been politically stable. The Communist Party continues to exercise complete control over political, economic and social matters in the country.

MAIN ECONOMIC INDICATORS USD billions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

7.3 2.9 -6.4 20.1 22.7 -2.6 -1.9 -4.9 34.3 6.8 2.4

7.8 9.7 -2.8 26.5 28.8 -2.3 -1.6 -3.4 33.6 5.5 2.2

8.4 8.8 -5.9 32.4 34.9 -2.4 -0.5 -0.9 32.2 5.2 2.5

8.2 6.6 -3.8 39.8 42.6 -2.8 -0.2 -0.3 30.2 4.8 2.8

8.3 8.0 -6.9 46.7 51.7 -5.1 -2.2 -3.2 30.8 5.0 4.0

8.2 7.3 -6.6 55.6 61.5 -6.0 -2.6 -3.2 30.2 5.2 4.0

3

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■

Means of entry Vietnam has been striving for several years to liberalise its trade. The first stage of this process was membership of AFTA in 1995 as part of the country’s regional commitments to ASEAN. Since 1 January 2006, it has been fully integrated into AFTA. Currently, 95 per cent of tariff lines in ASEAN are liable to 0– 5 per cent customs duty. Formal WTO-accession on 11 January 2007 too has helped substantially to open up market access. Under its terms, Vietnam is committed to cutting customs duty to below 15 per cent on 70 per cent of its industrial tariff lines. Tariff peaks of over 25 per cent apply to only 7 per cent of tariff lines. At the end of a maximum 12-year period, average customs duty on industrial goods will be 12.4 per cent, and on agricultural goods it will be lowered from its current level of 27 per cent to 21. Vietnam agreed to abolish all quantitative restrictions and export subsidies for agricultural products from the date of accession.

It also agreed to considerably open up market access in the service sector. What matters now is to monitor compliance with these commitments. For instance, grey areas remain in the regulations dealing with import and distribution rights. Delays have also been observed in the award of investment licences to the subsidiaries of foreign banks, not to mention the foot-dragging on the IPOs of telecommunication companies. ■

Attitude towards foreign investors Foreign investment in 2007 is expected to overtake a record US$16 billion (up more than 60 per cent on 2006), demonstrating increasing investor confidence in the Vietnamese economy. The bulk of the investment comes from Asian investors (67 per cent), with France remaining the leading Western investor (US$2.4 billion at 1 December 2007). Vietnam has adopted highly investorfriendly laws. The passing of a single-investment act based on the principle of non-discrimination between Vietnamese and foreign, private and public, investors was a precondition for WTO accession. Under this

319

ASIA

law, investments below US$18.7 million only have to be declared to the competent regional authority or, in the case of industrial areas, the management firm. On the other hand, projects above US$18.7 million or in a conditional sector are subject to an appraisal process. While the investment act 2005 offers new foreign investors revised – and better – terms of investment (through the establishment of private and public limited liability companies, for example), it does not extend the same terms and legal forms of company to the 6,000 or so firms established before its enactment. These firms are required to reregister. Moreover, responsibility for awarding investment licences has shifted from the Ministry of Planning and Investment to its regional units, which are not always familiar with the new procedures. This leads to

320

excessive delays in processing re-registration applications. As for the settlement of disputes, in addition to questions of due process and jurisdiction, there is no guarantee that court decisions will be properly enforced. In reality, national arbitration is scarce, and moves towards international arbitration have made little headway. ■

Foreign exchange regulations The currency regime is based on a fluctuation band with a dollar peg. However, the Bank of Vietnam intervenes on the currency market to limit the dong’s average annual depreciation to between 1 and 1.5 per cent. Vietnam completely liberalised its current account transactions on 5 January 2006, retroactive to 8 November 2005, and now complies with IMF article VIII (lifting of restrictions on international currency transactions and transfers).

VIETNAM

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

37 3 20 Imports: 76% of GDP

Exports: 72% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

10000

10000

8000

8000

6000

6000

4000

4000

2000

2000

0

3

0 USA

Japan

Australia

China Germany

China

Singapore Japan

South Korea

Thailand

IMPORTS by products ■ Machinery and transport equipment 17% ■ Chemicals 14% ■ Petroleum products 13% ■ Iron and steel 7% ■ Textiles 6% ■ Foodstuffs 6% ■ Other manufactured goods 32% ■ Other 6%

EXPORTS by products ■ Crude oil and coal 24% ■ Clothing 24% ■ Machinery and transport equipment 9% ■ Marine products (including frozen items) 8%

■ Agricultural raw materials (rice, coffee) 6% ■ Electronic components and goods 4% ■ Rubber 3% ■ Other 21%

STANDARD OF LIVING/PURCHASING POWER Indicators

Vietnam

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

3,300 690 0.709 29 26 30 13

5,929 1,814 0.683 32 37 28 42

5,983 2,313 0.672 31 44 30 50

321

The Middle East and North Africa Outlook for 2008: The Middle East and North Africa 324 Algeria Bahrain Egypt Iran Iraq Israel Jordan Kuwait Lebanon Libya Morocco Oman Palestinian Territories Qatar Saudi Arabia Syria Tunisia United Arab Emirates Yemen

331 335 339 343 347 349 353 357 361 365 369 373 376 378 382 386 390 394 397

4

OUTLOOK FOR 2008

OUTLOOK FOR 2008

North Africa and Near & Middle East Catherine Monteil Economic Studies and Country Risk Department, Coface

■

The oil wealth has beneﬁted the entire region, whose growth remains buoyant GDP growth close to emerging country average (%) 8

%

6 4 2

08

07

20

06

20

04

05

20

20

03

02

20

20

20

20

01

0

Emerging Countries Middle East excluding Turkey

324

Most of the region’s economies, generating 10.5 per cent of total emerging-country GDP, performed well in 2007 despite the geopolitical uncertainties. With barrel prices multiplied by 2.5 between 2003 and 2007, the oil wealth in producer countries – which represent 68 per cent of regional GDP – created a veritable investment dynamic also benefiting most non-producer countries in the region. The outlook remains bright for 2008 supported by the many investment projects under way in infrastructure, industry and property and a still buoyant environment with oil prices unlikely to decline in the foreseeable future. In oil-producing countries, the nonoil sector – driven by investment and household consumption – should continue to support growth. Despite progress on diversification, the economies remain very dependent on oil revenues. Oil sector performance should be generally better in 2008 than it was in 2007, with

downward production adjustments having been made last year notably by Saudi Arabia in its swing-producer role. With the prospect of slower world demand growth, however, affected by the American economic slowdown, a small increase in hydrocarbon production will continue to weigh on overall regional economic growth. There should nonetheless be exceptions: Qatar with the start-up of the gas pipeline to the Emirates, and to a lesser extent Libya, progressively restoring its production capacity, as well as Oman. With the high barrel prices, oil revenues have prompted, to various degrees, expansionary fiscal policies underpinning household consumption and spurring economic diversification. The non-oil sector should thus continue to grow strongly and underpin economic expansion. Gulf Cooperation Council, or GCC countries – Saudi Arabia, Bahrain, the United Arab Emirates, Kuwait, Oman and Qatar – are going forward with vast private and public sector investment programmes intended to develop the infrastructure, industry (the upstream and downstream oil and gas industries) and services (water, electricity, telecommunications, tourism, finance, health, education), underlying future economic development. Although construction has experienced an unprecedented boom, bottlenecks, a credit slowdown and rising costs could delay certain large projects. The growing stock of developed property in Dubai could result in a price correction, but a sudden market collapse seems unlikely at this juncture in view of the rapid population growth. In Algeria public sector investment planned under the Growth Consolidation Programme should continue

OUTLOOK FOR 2008

to underpin growth. Libya has also stimulated its economy through public spending. Iran’s political and financial isolation due to its positions on the nuclear issue has undermined the business climate and could continue to affect growth, which will remain supported by public spending. Booming domestic demand and the resulting bottlenecks along with the increasing cost of imported products attributable to rising prices for staple commodities and the weakness of the dollar, to which most regional currencies are pegged, have generated inflationary tensions that could linger on, particularly in Iran, the United Arab Emirates and Qatar. With the exception of Kuwait, which opted for a peg to a basket of currencies in May 2007, the dollar pegs of the other GCC country currencies have not been called into question thus far and they should remain in place in 2008. GDP growth rate for the region’s oil exporting countries (%) 14 12 2007e

10

2008f

8

nomic activity. In Yemen, the region’s poorest country, the recession gripping the oil sector should ease, and the progressive implementation of projects funded by international aid should spur growth. The ongoing political instability in Lebanon could continue to affect the economic activity. Although the US$7.6 billion promised in international aid should breathe new life into the economy, implementation of that aid will largely depend on an easing of the political situation and a return of institutions to normal functioning. Israel’s economy remains sensitive to a slowdown in American demand. Private demand, buoyed by easing unemployment, should consequently be the main growth engine. In Tunisia, growth should remain underpinned by dynamic investment in infrastructure, notably tourism, and the productive sector. Economic activity should also continue to benefit from a buoyant tourist sector and an exceptional services boom. Subject to favourable weather conditions, growth should rebound in Morocco, driven by transport and tourism infrastructure investments, textile exports and a rural consumption recovery.

4

6 4

GDP growth rate for non or low oil-producing countries (%)

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The economies of the other North African and Near and Middle Eastern countries will remain buoyant in 2008, generally benefiting from the oil boom. The most vulnerable among them, Lebanon and Yemen, have mobilised massive international aid which should stimulate growth. Egypt and Jordan should continue to achieve strong growth driven by domestic demand. They have benefited from the oil boom through investments by producer countries and remittances from emigrant workers. Liberal policy options have fostered a climate of confidence conducive to consumption and investment. In Syria, depletion of oil reserves has affected growth, and investment and household consumption, buoyed by remittances from emigrant workers and Iraqi refugees, should continue to support eco-

Large ﬁscal surpluses in most oil countries contrast with troublesome deﬁcits in non-oil regional countries

Oil-producing countries should continue to run large surpluses that vary in size over a relatively wide range, from 12 per cent of GDP on the low end (Algeria, Saudi Arabia and Qatar) to 30 per cent of GDP on the high end (UAE, Libya and Kuwait). Iran’s fiscal budget should, however, again be barely in balance as a result of a policy of broad redistribution of oil export revenues.

325

OUTLOOK FOR 2008

Lebanon, Egypt, Jordan, Syria and Yemen should continue to run large deficits, attributable to the public sector debt burden and the cost of subsidies, compounded by rising oil and staple commodity prices. In Lebanon in particular, the public debt burden has given rise to large fiscal deficits. Despite international aid, sovereign default risk is still very high particularly if the Lebanese pound devalues, interest rates rise or the country’s main source of financing – commercial banks – dries up. Syria and Yemen have struggled to establish new sources of revenue to replace dwindling oil revenues. In any case, a shaky social climate exacerbated by regional conflicts and poverty, and the risk of gains by Islamism complicate the task of overhauling public sector finances. In Israel a decline in revenues in 2008 due to the growth slowdown could result in a public deficit larger than in 2007. Non oil prooducing countries: public deﬁcit in % of GDP n

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A strong external position at the regional level masks the disparities between oil and non-oil countries. Very comfortable current account surplus (%)

20% 15% 10% 5% 0% 2001 2002 2003 2004 2005 2006 2007 2008

326

Middle East excluding Turkey Emerging Countries

External accounts of the wealthiest oil countries should continue to show solid surpluses in 2008 ranging from 20 to 50 per cent of GDP in most cases. Supposing still high barrel prices, the trade balances will remain largely in surplus, despite the rising cost of imports. These countries should consequently continue to consolidate already strong financial positions in view of their generally limited levels of debt and considerable official foreign exchange reserves or foreign assets. Iran’s surpluses have, however, been the smallest (under 10 per cent of GDP) due to production and refining capacity remaining limited as a result of years of embargo. Its foreign exchange reserves although reasonably large are modest compared to those of other regional oil-producing countries. The external financial position of nonoil or marginally oil-producing countries is more modest, but foreign investment, capital flows, and in some cases grants should, however, continue to cover their financing needs. In 2008, only Israel would be able to run a surplus (estimated at 3 per cent of GDP). Although Egypt’s traditional foreign currency earnings – oil/gas, Suez Canal, and remittances from emigrant workers – continue to trend up, the growth of imports concomitant with the economic expansion will continue to strain the current account. Syria and Yemen should be able to limit the deterioration of their current account deficits, thanks to high barrel prices and remittances from emigrant workers. For Lebanon and Jordan, both very dependent on imports, the increasing cost of oil and staple commodities should prevent them from significantly reducing deficits – estimated, respectively, at 12 and 18 per cent of GDP excluding grants – that will remain the largest in the region in relative terms. FDI should continue to largely cover Jordan’s financing needs. In an uncertain regional geopolitical environment, however, a worsening of the situation could undermine investor confidence. Lebanon’s external financial position remains precarious and vulnerable to a crisis of investor confidence, a high risk in view of the continuing political instability.

OUTLOOK FOR 2008

For North African non-oil countries, steady tourism revenues and expatriate remittances have offset widening trade deficits attributable to the growth of oil imports. Tunisia’s current account deficit should thus remain limited, while Morocco should continue to run a current account surplus.

140% 120% 100% 80% 60% 40% 20% 0%

External debt ratios below emerging country average (% of goods and services exports)

debt, around 100 per cent foreign currency earnings, debt-service remains manageable. With a policy of active debt management, Morocco has reduced its ratio of foreign debt to goods and services exports to below 50 per cent. The Kingdom as well as Egypt, Jordan, Syria and Yemen have all benefited from rescheduling, which reduced debt service to below 10 per cent of goods and services exports. ■

2001 2002 2003 2004 2005 2006 2007 2008 Middle East excluding Turkey Emerging Countries

Oil countries generally have limited foreign debt with debt ratios in relation to goods and services exports ranging from 10 to 40 per cent. Since Algeria repaid its public sector debt ahead of schedule in 2006, its ratio has been the lowest in the region, about 5 per cent. In the UAE conversely, private foreign debt has been growing rapidly and could reach 63 per cent of export revenues in 2008 up from just 32 per cent in 2005. Risk of overindebtedness has to be considered, however, in light of the country’s considerable financial holdings abroad, which put it in a net creditor position. Although Qatar’s foreign debt remains high in absolute terms, it has nonetheless declined in relation to the country’s growing foreign currency revenues. The debt is largely secured by long-term export contracts, and the ratio of debt service to foreign currency revenues remains a moderate 10 per cent. Most other countries have high foreign debt but Lebanon holds the record with a ratio of debt to goods and services exports that could remain near 180 per cent in 2008. International aid has allowed Lebanon to reduce debt service, which nonetheless remains high, representing 32 per cent of foreign currency revenues. Although Israel and Tunisia have comparably high

The major geopolitical hot spots concentrated in and around that part of the world although posing threats to regional equilibrium have thus far had only limited impact on the regional boom

Despite a relatively calm period, Iraq could remain in a state of chaos with the progressive withdrawal of foreign troops moreover initiating a new period of uncertainty. The country’s institutions are shaky, and the risks of civil war and partition remain high. In that context, the Kurdish minorities in neighbouring countries constitute a factor of regional destabilisation. Kurdistan is already experiencing heightened tensions with Turkey. Iran’s positions on the nuclear issue and its backing of terrorist movements have resulted in the country’s political and financial isolation. The assessment by United States intelligence services that Iran’s nuclear weapons programme was halted in 2003 eliminates at this juncture a scenario of destruction nuclear sites by the United States. The risks of Iran’s nuclear programme resulting in military weapons have nonetheless not disappeared; the likelihood of tensions easing with the international community thus remains remote. The Israeli–Lebanese conflict in summer 2006 has given way in Lebanon to political rivalries between pro- and anti-Syrian partisans. The climate of insecurity and resulting institutional gridlock has undermined economic activity with limited prospects for normalisation of the situation. The break between Fatah now withdrawn to the West Bank, and Hamas, confined to the Gaza Strip, has complicated the regional situation and reduced the chances for success of a

4

327

OUTLOOK FOR 2008

renewal of the peace process between the Palestinian Territories, Israel and Syria in the wake of the Annapolis conference. The Israeli–Palestinian conflict and the situation in Iraq remain at the heart of regional tensions. They exacerbate anti-Israeli and anti-American sentiment, which serves as a catalyst to the rise of radical Islamism and of opposition to regional governments that generally have good relations with the United States and its allies in the war against terrorism. This is notably true of the Gulf monarchies, Egypt, Jordan and Yemen, and, in North Africa, of Algeria and Morocco. These uncertainties have thus far not affected a regional boom still underpinned by oil prices. Although subsidies, improved infrastructure and social services have generally facilitated maintaining a relatively peaceful social climate, the situation has, however, impeded structural reforms that in many cases would make it possible to consolidate public finances. It has also undermined private investment, which has been underperforming. Morocco and Tunisia, meanwhile, continue to enjoy real political stability that provides the right framework for speeding up the pace of structural reforms. The frustration of young graduates who join the ranks of the unemployed in very high numbers has nonetheless significantly increased social risk. Despite the buoyant growth and the social reforms undertaken, efforts to reduce youth unemployment will remain a major near-term challenge. ■

328

Business environment quality varies widely in the region

The ratings of the countries in the region cover virtually the entire range from A2 for Israel to D for Iraq, Libya and Yemen. The relatively good A2 rating for the business climate in Israel is better than the country risk rating due to the high political risk. In many regional countries, the business environment is often undermined by legislation providing little protection to creditors. In many cases, moreover, the absence or the opacity of corporate financial information constitutes an additional risk. The business

climate ratings are thus not as good as the country risk ratings for wealthy oil countries enjoying very good economic and financial situations. The UAE, Kuwait and Qatar are rated A3 with generally good institutional frameworks especially as regards infrastructure quality and access to financing, although financial information is often deficient. Algeria and Saudi Arabia are rated B, notably reflecting deficiencies in the institutional environment in Algeria and debt collection difficulties in Saudi Arabia. Libya’s D rating reflects its particularly difficult business environment due to a labyrinthine bureaucracy, a still undeveloped legal system and the lack of corporate transparency. Some countries have identical ratings for their business climate and their country risk. This is true for Morocco and Tunisia, rated A4, Egypt rated B and Syria rated C. Morocco and Tunisia, in particular, have undertaken major reforms to improve the business environment, even if there are persistent weaknesses, especially concerning debt collection. In Egypt, efforts have been made to improve the business environment, especially as regards access to credit, but there are persistent governance weaknesses. The business climate ratings for Jordan A4 and Lebanon B are better than their respective country risk ratings affected by financial and political weaknesses. ■

The creditworthiness of regional companies has generally been good with limited payment default risk, except for Iran

The Coface payment incident index for regional companies has remained below the world average. The record has been good in Israel, although companies may, however, feel the effects of the American demand slowdown. The overall economic environment has remained buoyant for companies, benefiting from a very liquid market, relatively low interest rates, and a pervasive climate of dynamism. This has been particularly true for the Gulf monarchies, especially the UAE. As for Saudi companies, payment behaviour can sometimes be unpredictable

OUTLOOK FOR 2008

Business climate rating: Middle East & Northern Africa D C B A4 A3 A2

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while it has continued to improve for Egyptian companies. In Lebanon, despite the difficulties, companies have held up reasonably well as regards payment behaviour. In Algeria, Tunisia and Morocco, despite repeated payment delays, payments defaults have remained limited. In Iran, however, the bank boycott has paralysed corporate payments. Economic growth and credit risk

7%

5.6% 5.5% 4.9%

5% 4%

300

6.4%

6%

5.4% 4.9% 4.9%

250 200

3.7% 3.6% 2.7%

3% 2.0%

2.2%

2%

150 100

1%

50

0%

0 1997

1998

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 (e) (f)

Economic growth (%) Payment incident index

■

Country @rating trends

The regional risk level exceeds the overall emerging-country average. In this region of the world, geopolitical instability represents a high risk that undermines individual ratings, particularly for Iran, Saudi Arabia, Israel, Egypt, Jordan, Lebanon, Syria and Yemen.

The ratings have remained stable, except for Iran whose rating has been downgraded to D amid the growing tensions with the international community and the country’s increasing political and financial isolation which are undermining the business climate and apt to affect corporate payment behaviour. Tunisia’s A4 rating remains positive watchlisted with the country’s economic dynamism underpinned by far-reaching structural reforms that should ultimately result in greater diversification of the productive fabric. Conversely, Morocco’s A4 rating has been removed from positive watchlist status due to the economy’s increased vulnerability to weather conditions. Jordan’s B rating remains negative watchlisted due to the country’s continuing external and fiscal account imbalances and considerable vulnerability to a crisis of investor confidence if the political situation should deteriorate. Lebanon’s C rating remains negative watchlisted with the unstable political situation impeding a veritable economic recovery and the external and fiscal deficits remaining large. Despite the difficulties, however, companies have thus far held up well as regards payment behaviour.

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329

OUTLOOK FOR 2008

COUNTRY @RATING RANKING FOR THE REGION’S PRINCIPAL ECONOMIES

UAE Kuwait Qatar Bahrain Oman Saudi Arabia Libya Iran Iraq Algeria Morocco Tunisia Israel Egypt Jordan Lebanon Syria Yemen

330

January 2002 A2 A2 A2 A2➘ A2➘ A4 C C B A4 A4➘ A3➘ B B C C C

January 2003 A2 A2 A2 A2➘ A2 A4 C C D B A4 A4➘ A4 B B C C C

January 2004 A2 A2 A2 A3 A2 A4 C C D B➚ A4 A4 A4➘ B➘ B C C C

January 2005 A2 A2 A2 A3 A3 A4 C B D B➚ A4 A4 A4 B B C C C

January 2006 A2 A2 A2 A3 A3 A4 C B D A4 A4 A4 A4 B B C C C

January 2007 A2 A2 A2 A3 A3 A4 C B D A4 A4➚ A4➚ A4 B B➘ C➘ C C

January 2008 A2 A2 A2 A3 A3 A4 C D D A4 A4 A4➚ A4 B B➘ C➘ C C

ALGERIA

Algeria Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

33.3 114,727 A4 Quite low risk B

STRENGTHS • The country boasts substantial natural wealth and Europe provides it with an immense market. • The oil stabilisation fund, intended to allow the country to weather an oil market downturn, has contributed to financing the economic growth support programme. • The government achieved its debt reduction policy successfully. • The country is engaged in a reform and economic liberalisation process.

WEAKNESSES • The economy is very dependent on oil revenues. • Unprofitable, overstaffed state-owned companies continue to weigh on public sector finances. • High youth unemployment, although trending down, has been a source of social tensions and an impediment to certain reforms. • A lack of infrastructure and a deficient banking system, despite the reforms under way, have affected the business environment.

RISK ASSESSMENT The non-oil economy posted strong growth in 2007 estimated at 6 per cent underpinned by continued public investment under the economic growth support programme and buoyant household consumption, spurred by civil service wage increases. Construction, the automotive industry, pharmaceuticals and the food sector outperformed. However, an oil production slowdown reflecting the external demand trend undermined overall economic growth estimated at 4.8 per cent. The growth outlook for 2008 is bright with the economy’s growth rate expected to accelerate at 5.2 per cent. The planned increase in gas production will foster an oil sector recovery. In the non-oil sector, domestic demand (public investment and household consumption) will drive economic activity. An expansionary budget, rising wages and the increasing cost of imported products attributable to the dinar depreciation against the euro should con-

tinue to stoke inflationary pressures. Prudent monetary policy should, however, hold inflation to about 4 per cent. The country currently enjoys unprecedented financial health with very limited foreign debt and very ample foreign exchange reserves sheltering it from a liquidity crisis. With the prospect of continuing high oil prices, external and public accounts should continue to show large surpluses. Although companies have benefited from very buoyant economic conditions, progress on the structural reforms that could also benefit them, particularly those in the banking sector, has been lagging as exemplified by delays in the privatisation programme. Moreover, developments in the security situation will continue to bear watching. The business environment has occasional shortcomings (poor corporate transparency and red tape) and can be responsible for late payments and claim collection difficulties.

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331

THE MIDDLE EAST AND NORTH AFRICA

MAIN ECONOMIC INDICATORS USD billions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

6.9 2.6 4.9 24.5 13.4 11 7.7 11.4 34.7 14.7 19.1

5.2 3.6 5.3 32.2 18.0 14 10.1 11.9 25.9 15.0 18.9

5.3 1.6 13.7 46.3 19.9 26 21.5 20.9 16.8 10.5 21.9

2.7 2.2 14.5 54.6 21.4 33 28.3 24.5 4.2 20.6 27.3

4.8 4.6 13.0 63.3 26.1 37 31.6 24.6 3.6 2.3 31.4

5.2 4.3 12.2 69.9 31.7 38 32.0 23.3 3.1 2.2 34.5

e = estimate, f = forecast

332

CONDITIONS OF ACCESS TO THE MARKET Market overview Regulatory framework: The association agreement between Algeria and the EU, in effect since 1 September 2005, involves the immediate or gradual dismantling of tariff barriers for three lists of industrial products and the abolition of duties on certain intermediate goods and raw materials. Under the second and third phases of the agreement, which came into effect on 1 September 2007, duties on some finished goods will be phased out over a five-year period and tariffs on other finished goods, particularly those currently taxed at 30 per cent, will be gradually eliminated. Protocols between Algeria and the EU are in place for the gradual liberalisation of bilateral trade in agri-foodstuffs. Since 1 September 2005, annual tariff quotas are applied to some processed farm products on a ‘first-come first-served’ basis.The low capitalisation of many recently established Algerian companies and the lack of transparency of their balance sheets hamper the work of the few audit firms in the marketplace. While the services of recognised audit firms are still rarely used, their presence is likely to grow in coming years as the number of Algerian-based foreign companies multiplies. The most widely recommended means of payment is the documentary credit, or in its place the documentary bill, if the business relationship is sound and dependable.

■

Attitude towards foreign investors Algeria does not discriminate between local and foreign investment in manufacturing and services (development, capacity expansion, rehabilitation, privatisation-related buy-ins or buy-outs), or investments made in connection with the award of concessions and/or licences (Decree No. 01-03 of 20 August 2001). Identical tariff preferences and tax concessions to encourage investment are granted to locals and foreigners. Wholly foreign-held subsidiaries are permitted to operate in most sectors open to private investment, including financial services. The law guarantees repatriation of all investment capital and earnings. A certain number of sectors (telecommunications, sea and air transport, electricity and gas supply, mining) have been opened up to private investment. However, the oil and gas sector took a turn for the worse in 2006, with the abolition of the 2005 provisions granting more freedom to foreign companies. As a result, windfall tax has been reintroduced, along with the obligation to tie up with Sonatrach (the national operator) as the majority partner in all exploration, production and transportation projects. In general, ‘productive’ investment is welcome. Conversely, trade and retail are not open to foreign investment. Fee transfers relating to services and intangible investments (royalties, etc) continue to pose problems.

ALGERIA

■ Foreign exchange regulations The dinar is fully convertible for the payment of imported goods and services. However, local banks enforce strict exchange controls as they are required to furnish evidence of each transaction to the Central Bank. In 2007, the central bank simplified import procedures for services provided by foreignincorporated entities having won a contract in Algeria (Regulation No. 07-01 of 3 February 2007). The import of services is now subject to ex-post verification by the Bank of

Algeria similar to the procedure applied in respect of goods transactions, with the Algerian importer’s local bank responsible for examining the dossier. Similarly, since 2005, requests for dividend transfers, profit repatriation and transfer of income from asset disposals – permissible in proportion to the foreign investor’s share in the capital of an Algerian law company (Regulation No. 05-03 of 6 June 2005) – are examined and dealt with by the local bank.

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THE MIDDLE EAST AND NORTH AFRICA

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

27 10 24 Imports: 24% of GDP

Exports: 48% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

15000

6000

12000

5000 4000

9000

3000 6000

2000

3000

1000

0

0 USA

Italy

Spain

France

Canada

France

Italy

China Germany

Spain

IMPORTS by products ■ Industrial equipment 40% ■ Semi-finished goods 19% ■ Foodstuffs 17% ■ Consumer goods 15% ■ Raw materials 4% ■ Direct investments 4% ■ Other 2%

EXPORTS by products ■ Fuels 98% ■ Other 2%

STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

334

Algeria

Regional average

Emerging country average

6,900 3,030 0.728 27 63 30 11

7,746 4,167 0.716 27 59 32 92

5,983 2,313 0.672 31 44 30 50

BAHRAIN

Bahrain Population (inhabitants): GDP (US$ million):

739,620 12,914

Country @rating: Medium-term rating: Business climate rating:

A3 Low risk A3

STRENGTHS • As the leading financial centre in the region, Bahrain has nonetheless been contending with growing regional competition. • The economy is open and diversified (hydrocarbons, aluminium, financial services and tourism). • Government officials have pursued dynamic policy to foster investment. • Maintaining good relations with the United States, the Kingdom hosts the fifth fleet and the two countries have concluded a free-trade agreement.

WEAKNESSES • The decline of oil production is worrying, with the economy remaining very dependent on oil revenues and its industry energy intensive. • The disparities in living standards and institutional representation between the ruling Sunnite minority and the Shiite majority in the country have been recurring sources of tension. • Unemployment has remained high among the local population, with the Bahrainisation of jobs being a slow process in view of its potential effect on corporate competitiveness.

RISK ASSESSMENT A dynamic non-oil sector was the main economic driver in 2007, growing at a good clip (up an estimated 7 per cent), but nonetheless not as rapid as the expansion over the past two years, which was underpinned by the start-up of a fifth aluminium smelter by the state-owned Alba company. The sector benefited from a highly liquid economy and the regional boom spurred by high barrel prices, which fostered household consumption and public and private investment. The financial sector and construction continued to outperform. After their good performance in 2006, services associated with tourism continued to trend up. In the hydrocarbon sector, meanwhile, oil production stopped declining and a 5 per cent increase in gas production resulted in positive growth estimated at 0.5 per cent for the sector while the overall economy grew an estimated 6.3 per

cent last year. In a still-buoyant regional context, the 6-per cent economic growth should be maintained in 2008. In view of the investment dynamic in the region, financial services will remain buoyant as will construction, stimulated by the implementation of many industrial, property and infrastructure projects. The privatisation programme and the gradual liberalisation of public services have attracted foreign investment. Buoyed by the barrel prices, the external financial situation has been healthy with a liquidity crisis relatively unlikely. Despite the growth of imports fuelled by the stronger domestic demand and the rising cost of the products imported, especially oil, external accounts have shown large surpluses allowing the country to accumulate foreign assets. Thanks to the oil revenues, the government has enjoyed room to manoeuvre to develop infrastructure and in-

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THE MIDDLE EAST AND NORTH AFRICA

vest in the education and health sectors. Despite the regional geopolitical tensions and a shaky social climate, the business

climate has been good, underpinned by the opportunities available to investors and by the regional dynamic.

MAIN ECONOMIC INDICATORS USD billions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

7.2 1.6 1.8 6.7 5.3 1.4 0.2 2.1 54.0 6.4 2.0

5.6 2.4 3.4 7.6 6.1 1.5 0.4 3.6 47.9 5.9 1.8

7.8 2.6 7.6 10.1 7.6 2.5 1.6 11.7 41.3 3.7 1.6

7.5 2.1 4.9 11.7 8.6 3.1 1.9 12.6 37.0 3.2 1.7

6.3 3.3 2.4 13.1 9.6 3.5 2.2 13.7 34.8 2.8 1.9

6.0 3.1 4.8 14.3 10.4 3.9 2.6 14.8 32.7 5.3 1.9

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■

336

Market overview The Kingdom of Bahrain has a liberal trade policy designed to attract maximum FDI, diversify the country’s economy and reduce its dependence on hydrocarbons. As a founding member of the WTO, Bahrain has a long trading tradition and is regarded as one of the most open markets in the Gulf. It has proven this several times since 2001 through a series of measures to free up trade before its GCC neighbours. These include acquisition by foreign companies of a 100 per cent stake in a Bahraini company, introduction of anti-money laundering regulations and harmonisation of customs duties with the GCC common external tariff from 2003. The Central Bank of Bahrain is seen as a role model in matters of supervision and regulation and has been instrumental in transforming Bahrain into the region’s financial hub. Customs duties on imports from non-GCC countries are 5 per cent for all but 53 dutyfree products. Alcohol and cigarettes are liable to 125 and 100 per cent duty, respectively. Under the GCC free-trade agreement, any product with a 40 per cent GCC component is eligible for duty-free admission into member countries. The decree of 13 March

1998 allows foreign companies not to be bound to a sole agent and to choose their partner according to the project. The country remains the financial centre of the region, facilitating the establishment of banks, financial institutions and insurance companies by means of flexible regulations and attractive tax laws, overseen by the central bank. Bahrain is the first GCC state to sign and ratify, in 2006, a free-trade agreement with the United States. ■

Attitude towards foreign investors Bahrain offers foreign companies a highly attractive legal and tax environment. The provisions include no VAT, corporation tax or income tax; unrestricted fund transfers; up to 100 per cent foreign ownership of a Bahrain company in certain sectors (information and communication technologies, health care, tourism, training, services, manufacturing) and unrestricted acquisition of land by foreigners in some areas. Trade is encouraged by the free movement of persons (visa at airport) and exemption from customs duties on goods for re-export and material and machinery intended for manufacture. As well as these benefits, in 2001 the foreign investment-friendly Bahrain government set up an Economic Devel-

BAHRAIN

opment Board to facilitate and speed up administrative formalities. In co-operation with the Ministry of Trade and Industry, the Economic Development Board (EDB) has set in place a fast-track registration procedure

for companies. The government is studying ways of reforming the labour market in a bid to reduce unemployment, create a free market and eventually abolish job quotas for Bahraini nationals in some sectors.

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OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

23 9 13 Imports: 64% of GDP

Exports: 86% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

3500

800 700 600 500 400 300 200 100 0

3000 2500 2000 1500 1000 500 0 Saudi Arabia

USA

Japan

UAE

South Korea

Saudi Arabia

Japan

USA

UK

Germany

IMPORTS by products ■ Petrol 56% ■ Vehicles 7% ■ Machinery 6% ■ Chemicals 4% ■ Electrical equipment 4% ■ Other 23%

EXPORTS by products ■ Oil 79% ■ Aluminium 13% ■ Other 8%

STANDARD OF LIVING / PURCHASING POWER

338

Indicators

Bahrain

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

18,770 14,370 0.859 n/a 90 27 n/a

7,746 4,167 0.716 27 59 32 92

5,983 2,313 0.672 31 44 30 50

EGYPT

Egypt Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

75.4 107,484 B High risk B

STRENGTHS • The business climate has benefited from an active reform programme and a regional economic boom. • Egypt boasts diversified sources of foreign exchange (the Suez Canal, tourism, private transfers and oil and gas exports). • Foreign exchange reserves are high. • The country enjoys the political and financial support of Western countries.

WEAKNESSES • The interest on public debt and the cost of subsidies weighs on public finances limiting the capacity for infrastructure development. • The banking system is not yet capable of meeting the economy’s needs. • The tourism sector, whose revenues are of fundamental importance to the current account balance and economic growth, remains vulnerable to the terrorist menace.

RISK ASSESSMENT The economy grew strongly in 2007, driven by domestic demand. The government’s liberal approach since 2004 has fostered a climate of confidence conducive to consumption and investment. The economy has also benefited from the boom in the oil countries via their investments and emigrant worker remittances. In this context, the business environment is improving with the Coface payment incident index remaining below the world average. While the gas sector has continued to develop, manufacturing, construction, tourism and communications have achieved excellent performance. The outlook for 2008 is bright with growth likely to reach between 7.0 and 7.5 per cent.

The external financial situation remains healthy amid the good trend on foreign currency earnings and the increase in foreign direct investment fuelled by the privatisations. Debt service is low, and Egypt is continuing to build up foreign exchange reserves. However, the fiscal deficit and public sector debt remain a source of concern. Controlling public spending and reducing the debt necessitates a spending overhaul that will take time. Regional conflicts and poverty have strengthened Islamist opposition movements. In this context, social climate is tense and officials have exercised caution in pursuing reforms.

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MAIN ECONOMIC INDICATORS USD billions(1)

2003/4

2004/5

2005/6

2006/7(e)

2007/8(f)

2008/9(f)

4.1 16.6 -7.1 10.5 18.3 -7.8 2.5 3.2 37.9 9.5 7.4

4.5 4.7 -7.5 13.8 24.2 -10.4 1.9 2.1 32.2 8.1 7.4

6.8 7.2 -8.1 18.5 30.4 -12.0 0.4 0.3 27.5 8.2 6.9

7.1 8.5 -5.7 22.0 37.8 -15.8 1.0 0.8 24.2 5.2 7.3

7.3 7.9 -6.6 26.2 45.6 -19.4 0.6 0.4 20.2 5.0 7.4

7.4 8 -7.1 28.6 50.9 -22.3 -1.1 -0.6 17.1 6.2 7.4

Economic growth (%) Inﬂation (%) Public sector balance (%GDP)(2)(3) Exports Imports Trade balance Current account balance(3) Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports) tax year ending 30 June, e = estimate, f = forecast

(1)

general government,

(2)

(3)

ex grants

CONDITIONS OF ACCESS TO THE MARKET ■ Market overview Generally speaking, the Egyptian economy is opening up on the back of government initiatives giving top priority to modernising the economy and allowing in foreign competitors. As a result, imports have doubled in three years and continue to grow sharply, offering new opportunities to firms in the consumer and capital goods sectors. ■ Means of entry Wide ranging tariff reforms have lowered the weighted average rate to 6.9 per cent and simplified the tariff nomenclature. Egypt fully applies the WTO customs valuation agreement, even though the customs authorities still tend to revise declared amounts upwards in order to counter underinvoicing. There is an ever-decreasing number of obstacles restricting market access. In a limited number of cases, import bans are applied to all trading partners for reasons of economic or environmental necessity, health and safety (bird flu, hazardous waste). Harmonisation of Egyptian standards with European ones is under way and more than 3,000 standards have already been harmonised. Responsibility for overseeing standards compliance continues to be shared between

340

various ministries, departments and agencies in extremely technical fields (agriculture, health, energy, telecommunications). In all other fields, compliance supervision powers have been merged into the General Organisation for Import and Export Control (GOEIS), dependent on the ministry of trade and industry. Obstacles to market access crop up from time to time in the form of labelling and packaging standards and requirements, especially for foodstuffs. ■

Attitude towards foreign investors Promoting foreign investment is a clearly declared government priority. There are no restrictions on the transfer and repatriation of dividends and capital. A large privatisation programme is under way. Key local companies (in the banking, cement and retail sectors, for example) have already been sold off to foreign investors. As a result, FDI soared for the first time to 10 per cent of GDP in 2006/2007.

■

Foreign exchange regulations The Egyptian pound is freely convertible under a managed float which ensures a highly stable exchange rate parity versus the US dollar. For payments, the irrevocable and confirmed documentary letter of credit is strongly recommended and widely used.

ec -9 Ju 6 ne 97 D ec -9 Ju 7 ne 98 D ec -9 Ju 8 ne 99 D ec -9 Ju 9 ne 00 D ec -0 Ju 0 ne 01 D ec -0 Ju 1 ne 02 D ec -0 Ju 2 ne 03 D ec -0 Ju 3 ne 04 D ec -0 Ju 4 ne 05 D ec -0 Ju 5 ne -0 6 D ec -0 Ju 6 ne -0 7 D ec -0 7

D

EGYPT

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995)

300

250

WORLD Egypt

200

150

100

50

0

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THE MIDDLE EAST AND NORTH AFRICA

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

53 10 14 Imports: 33% of GDP

Exports: 31% of GDP

MAIN DESTINATIONS OF EXPORTS

MAIN ORIGINS OF IMPORTS

Mn USD

Mn USD

2500

5000

2000

4000

1500

3000

1000

2000

500

1000

0

0 Italy

USA

Spain

UK

France

USA

China Germany

Italy

Saudi Arabia

IMPORTS by products ■ Intermediate goods 25% ■ Capital equipment 24% ■ Consumer goods 11% ■ Crude oil 9% ■ Non-durable goods 8% ■ Chemicals 12% ■ Other 12%

EXPORTS by products ■ Petroleum products (including natural gas) 34%

■ Crude oil 16% ■ Foodstuffs 10% ■ Manufactured goods 9% ■ Raw materials 7% ■ Agricultural raw materials 7% ■ Textiles, clothing 3% ■ Other 15%

STANDARD OF LIVING / PURCHASING POWER

342

Indicators

Egypt

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

4,690 1,350 0.702 30 43 34 38

7,746 4,167 0.716 27 59 32 92

5,983 2,313 0.672 31 44 30 50

IRAN

Iran Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

69.2 222,889 D Very high risk C

STRENGTHS • Iran is the second largest producer in OPEC, and its gas reserves are the world’s largest after Russia. • It has moderate foreign debt.

WEAKNESSES • The positions taken by Iran on its nuclear programme have prompted the United Nations to retaliate with sanctions and have led to the country’s economic and financial isolation, undermining the business climate and jeopardising its economic development prospects. • Short-sighted management of oil revenues has increased the economy’s vulnerability to a downturn in barrel prices. • The public sector is predominant and efforts on reforms have stalled. • The World Bank’s governance indicators classify the country as high risk.

RISK ASSESSMENT Public spending should continue to drive the economy while stoking high inflation, which is undermining household consumption. Growing tensions with the international community over the nuclear issue and the sanctions levied by the United Nations and the United States will continue to sour the business climate and deter investment. Economic growth should thus be limited. The increasing reluctance of foreign banks with respect to Iran could ultimately affect corporate payments. The external financial situation presents no particular difficulty at this stage. Foreign exchange reserves should remain at comfortable levels, limiting liquidity crisis risk. Public accounts have, however, been giving cause for concern. Despite excellent oil mar-

ket conditions, the lack of a surplus evidences a policy of extensive redistribution of oil export revenues. Rationing measures on fuel, whose price has been heavily subsidised, should nonetheless facilitate better resource allocation. The expansionary budget has limited the capacity to save oil revenues and increased the economy’s vulnerability to a decline in barrel prices. The structural reforms, necessary to consolidate government finances, diversify the economy and attract foreign investment, have stalled with their prospects appearing compromised at this juncture amid the political uncertainties. The government’s economic and foreign policy options have been the subject of increasing criticism. Despite social measures, unrest has been exacerbated by soaring

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THE MIDDLE EAST AND NORTH AFRICA

prices, persistently high unemployment and petrol rationing. In this context, the ultraconservatives could emerge weakened from this

year’s parliamentary elections. But the uncertainties surrounding Iran’s nuclear programme constitute the main risk.

MAIN ECONOMIC INDICATORS USD billions Economic growth (%) Inﬂation (%) Public sector balance (%GDP)* Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service(%G&S exports) Foreign exchange reserves (in months of imports)

2003/4

2004/5

2005/6

2006/7(e)

2007/8(e)

2008/9(f)

6.9 15.6 1.3 34.0 29.6 4.4 0.8 0.6 13.5 7.9 7.5

4.8 15.2 1.7 43.9 38.2 5.7 1.4 0.9 15.9 7.5 8.0

5.4 12.1 5.5 60.0 41.0 19.0 14.0 7.4 14.3 4.9 10.2

5.0 14.6 -1.5 66.7 45.7 21.0 17.0 8.3 13.5 4.4 11.6

4.5 17.8 0.0 70.9 48.1 22.8 18.6 7.6 11.4 6.2 12.1

4.3 17.0 0.5 73.5 50.4 23.1 19.1 6.9 10.0 6.2 12.1

* including revenues allocated to the Oil Stabilisation Fund, e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■

344

Means of entry The political situation is tense due to the Iranian government’s rejection of European proposals – backed by Russia, China and the United States – and its refusal to meet its obligations under Security Council and IAEA resolutions. These tensions create political and commercial risk. It should be noted that Iran was sanctioned by UN Security Council resolutions 1737 and 1747 adopted on 23 December 2006 and 24 March 2007, respectively, by virtue of Article 41 of the UN Charter (measures ‘not involving the use of armed force’). The EU has adopted the instruments for implementing resolution 1737 (Common Position 2007/140/ CFSP of 27th February under Council Regulation (EC) No. 423/2007 of 19 April 2007), together with Common Position 2007/246/ CFSP of 23 April 2007, which amends Common Position 2007/140 to take account of resolution 1747. These EU regulations are available on www.diplomatie.gouv.fr/autorites-sanctions/, which also lists the French government departments responsible for their implementation. When adopting CP 2007/246 of 23 April 2007, the EU decided to provide a legal

framework for its policy, established since 1997, of not selling arms to Iran. The export to Iran of all materials on the EU’s military list is banned, including any technical or financial assistance relating thereto. The EU has also introduced a ban on travel visas for managers of Iran’s nuclear and ballistic missiles programmes. In addition, under Common Position 2007/ 246 and in application of paragraph 7 of resolution 1747, the EU sets forth new financial sanctions by calling on states and international financial institutions to end all new grants, financial assistance and concessional loans to the government of the Islamic Republic of Iran, except those designed to finance projects of a humanitarian nature or contributing to development. The EU has moreover widened measures, beyond the provisions of resolution 1747 (which mainly targets the Iranian stateowned bank Sepah), to freeze the assets of and prohibit financial transactions with any new persons and entities involved in Iran’s nuclear and ballistic missile programmes. At the moment, the sanctions are mainly focused on the country’s nuclear and ballistic missile programmes, as well as arms exports. The sanctions may be restricted in scope, but

IRAN

they are likely to affect some economic projects, especially those involving dual-use goods for nuclear and ballistic missile programmes (certain special purpose machine tools could, as a result, face an export ban) or any joint venture scheme with entities designated in resolution 1747 and related to these sectors. Extreme caution is called for in the circumstances. In an interview with the New York Times on 24 September 2007, the French president publicly expressed his views on the issue, pointing out that France was calling on its companies, especially in the energy sector, to hold back and advising them to ‘refrain from going to Iran’ in the current context.

In a communique´ issued on 11 October 2007, the Financial Action Task Force (FATF) expressed concern over the absence in Iran ‘of a comprehensive system for preventing money laundering and combating the financing of terrorism’, and called on financial institutions to apply tighter controls on their clients’ financial transactions from and to Iran. This communique´ was adopted on 19 October 2007 by the G7, which deemed it desirable that financial institutions take into account the risks posed by Iran. In general, the international financial community is exercising caution over its dealings with Iran.

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THE MIDDLE EAST AND NORTH AFRICA

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

35 9 25 Imports: 30% of GDP

Exports: 39% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

10000

6000

8000

5000 4000

6000

3000

4000

2000

2000

1000 0

0 Japan

China

Turkey

Italy

South Korea

Germany China

UAE

South Korea

France

IMPORTS by products ■ Raw materials and intermediate goods 47% ■ Capital equipment 17% ■ Petrol 8% ■ Consumer goods 8% ■ Other 20%

EXPORTS by products ■ Crude oil 72% ■ Refined petroleum products and natural gas 7%

■ Manufactured goods 6% ■ Agricultural raw materials 4% ■ Other 11%

STANDARD OF LIVING/PURCHASING POWER

346

Indicators

Iran

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

8,490 3,000 0.746 34 67 29 109

7,746 4,167 0.716 27 59 32 92

5,983 2,313 0.672 31 44 30 50

IRAQ

Iraq Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

28.7 49,516 D Very high risk D

RISK ASSESSMENT A still very difficult political and security situation continued to undermine the capacity for economic recovery and reconstruction in 2007 and resulted in slower growth estimated at 1.3 per cent. In a context of violence, population displacement and emigration of the most educated Iraqis, public sector investment and household consumption showed little dynamism while oil production stagnated. The Iraqi dinar appreciation, constrained public spending and tighter monetary policy contributed to limiting inflation which eased to 25 per cent in 2007. Price increases should continue to ease this year. An improved climate of security – perceptible late last year – could foster stronger growth in 2008, notably making it possible to accelerate public sector investment. It could also contribute to restoring consumer confidence. Oil prices should remain high and a 10 per cent increase in oil production seems achievable at this juncture. The political outlook has however remained uncertain and gradual withdrawal of foreign troops from Iraq could give rise to increased instability that would again affect economic activity. An

acceleration of FDI in this context will be relatively unlikely. The oil revenues underpinning government finances could prove insufficient to finance the public investment programme if production fails to increase fast enough. The fiscal deficit excluding donations was held to a negative 1.5 per cent of GDP in 2007. But an acceleration of the investment programme in 2008 coupled with a reduction in aid should give rise to a larger deficit estimated at 10.4 per cent of GDP excluding donations, which could be covered by financial holdings abroad. The external financial situation improved with the rising barrel prices resulting in ample export revenues. The country has accumulated foreign exchange reserves representing about nine months of imports. A slight current account deficit could re-appear this year amid strong import growth associated with the investments planned. Foreign debt relief expected in the Paris Club framework – with cancellation of up to 80 per cent of foreign debt followed by rescheduling from 2011 for the balance – should bring the corresponding ratios to sustainable levels from 2008.

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MAIN ECONOMIC INDICATORS USD billions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP)(1) Public sector balance(%GDP)(2) Exports Imports Trade balance Current account balance(1) Current account balance (%GDP)(1) Current account balance (%GDP)(2) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports).

−41.4 36.3 −42.0 n/a 9.3 7.3 2.0 1.3 10.8

46.5 31.4 −50.3 n/a 17.8 20.0 −2.2 −12.0 −46.7

1116.6 0 0

462.3 1.1 3.1

−0.7 31.6 −17.0 10.9 19.8 18.7 1.0 −9.6 −30.6 −2.7 352.1 1.1 4.8

6.2 64.8 −0.4 12 28.4 20.6 7.8 −1.6 −3.2 9.3 198.1 6.8 7.9

1.3 25.0 −1.4 1.5 34.1 26.5 7.7 −0.6 −1.0 2 162.0 1.2 9.1

7.1 12.0 −10.4 −8.4 36.3 34.6 1.7 −3.7 −5.2 −3.2 46.0 1.9 9.2

(1) = ex grants, (2) = inc grants, e = estimate, f = forecast

348

ISRAEL

Israel Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

7.0 140,300 A4 Quite low risk A2

STRENGTHS • With an open and diversified economy, Israel’s engagement in the OECD accession process enhances its capacity to attract FDI. • The country holds leadership positions in technologically advanced and intermediate high value-added products. • The workforce is highly skilled. • The country can count on the political and financial backing of the United States and the Diaspora.

WEAKNESSES • Although declining, public sector debt is still high. • The electoral scattering has resulted in shaky government coalitions that often complicate the drawing up of the budget. • Exports are dependent on economic conditions in the United States. • Failure to resolve the conflict with the Palestinians has fostered a climate of insecurity that weighs on the Israel’s economic potential.

RISK ASSESSMENT Barely affected by the Lebanese war in 2006, strong economic growth – estimated at 5.4 per cent – continued in 2007, driven by household consumption, private investment and foreign demand. Manufacturing industry production in the first nine months last year equalled the full-year output in 2006. The growth of high-and-medium-technology sectors was particularly strong, buoyed by increased investment and robust foreign demand. Business in the construction and tourism sectors (affected by the Lebanese war) recovered in the third quarter after a long period of weak growth. Unemployment continued to ease. Inflation remained limited with the shekel appreciation against the dollar mitigating the effects of rising oil prices. In 2008, private demand underpinned by the decline of unemployment will be the main growth engine. The export slowdown attributable to the shekel appreciation

against the dollar and the slowdown of American demand – already appreciable late last year – should affect the economy, which should nonetheless be up 4.4 per cent. The business climate has remained good with the Coface payment incident index remaining below the world average. The consolidation of government finances is well under way, but a decline in revenues this year due to the growth slowdown could result in a public deficit larger than in 2007. Despite deterioration of the current account balance, the external financial situation remains good, with the risk of a foreign exchange liquidity crisis manageable since the sources of external financing are relatively stable. The government coalition, meanwhile, remains weak and early parliamentary elections could take place before 2010. A change in governments would, however, be unlikely to jeopardise current economic policies.

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MAIN ECONOMIC INDICATORS USD billions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

1.5 0.7 -6.9 30.2 33.3 -3.1 1.4 1.2 62.5 15.6 6.1

4.8 -0.4 -4.9 36.7 39.4 -2.8 3.1 2.5 62.7 10.8 5.5

5.2 1.3 -3.1 40.1 43.9 -3.8 4.3 3.3 58.9 10.8 5.2

5.2 2.1 -1.8 43.7 47.0 -3.3 8.0 5.7 60.3 11.0 4.9

5.4 0.2 -1.0 48.6 53.1 -4.5 6.1 3.8 55.5 10.3 4.5

4.4 2.2 -2.4 52.1 57.0 -4.9 5.2 2.9 52.7 9.2 4.3

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■ Market overview Israel has a modern economy comparable with that of a West European country: organised and honest judiciary, transparent retail sector, open public tenders conducted transparently, efficient production apparatus and skilled manpower. With per capita GDP at an estimated €15,000, household purchasing power is similar to that in Southern Europe. Israel’s economy is already largely liberalised. Since 2005, the government has continued to pursue its policy of opening market access in many areas, including the privatisation of Leumi and Discount banks, postal services and refining companies. This has been accompanied by measures to improve transparency in the capital markets, reduce corporation tax and reform taxation by lifting obstacles to Israeli investment abroad. As a result, the Israeli market offers EU firms real opportunities in the form of ordinary business deals, direct investment and joint ventures across all sectors of the economy. ■ Means of entry Israel is one of the few countries in the world to have a free-trade agreement with both the EU and the United States. Similar agreements have been signed with Canada, Mexico and EFTA countries, while negotiations are under way with Mercosur. Except for some

350

farm products, goods covered by major freetrade agreements may be imported into Israel duty-free. However, some consumer goods are liable to sales tax. Moreover, foreign bidders are often subject to offsetting arrangements under the public tender act, amounting to at least 28 per cent of the tender’s total value. Also, regulations in respect of foreign workers have become more restrictive. ■

Attitude towards foreign investors Due to an ambitious infrastructure modernisation programme that is beyond the capacity of the local financial market, a number of measures are in place to encourage investment, whether local or foreign. Foreign investment is little regulated, except in protected sectors such as defence and some utilities (telegraphic and some mail distribution services). There are also restrictions in fixed telephony, wireless telecommunications and tourism. Commercial payments between Israel and the outside world are free from restrictions, as are the transfer and repatriation of profits, dividends and financial receivables, after payment of Israeli taxes. While Israel has no investment protection agreement with France, its adhesion to World Bank instruments and the OECD Declaration on International Investment and Multinational Enterprises provides adequate protection.

ec

ec

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3

05

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04

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03

Ju

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ec

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Ju

D

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Ju

ec

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ec

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99

250

D

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Ju

D

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97

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ISRAEL

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995)

300

WORLD Israel

200

150

100

50

0

4

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THE MIDDLE EAST AND NORTH AFRICA

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

39 19 13 Imports: 51% of GDP

Exports: 46% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

20000

6000 5000

15000

4000

10000

3000 2000

5000

1000

0

0 USA

Belgium

Hong Germany Kong

UK

USA

Belgium Germany Switzerland

UK

IMPORTS by products ■ Diamonds 21% ■ Fuels 17% ■ Transport equipment 16% ■ Machinery and equipment 12% ■ Chemicals 7% ■ Foodstuffs 6% ■ Other 22%

EXPORTS by products ■ Pearls and precious stones 38% ■ Advanced technology products 21% ■ Chemicals 17% ■ Foodstuffs 3% ■ Other 21%

STANDARD OF LIVING / PURCHASING POWER

352

Indicators

Israel

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

25,480 18,580 0.927 29 92 28 740

7,746 4,167 0.716 27 59 32 92

5,983 2,313 0.672 31 44 30 50

JORDAN

Jordan Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

5.6 14,176

B Moderately high risk A4

STRENGTHS • The customs-free areas attract foreign investment, and the free-trade agreement with the United States spurs exports. • The country has made a sustained effort to improve the business climate. • Remittances from expatriate workers, mainly employed in oil economies, have been a major source of foreign currency revenues. • The country enjoys the political and financial backing of the international community, which has, however, reduced the amount of aid provided.

WEAKNESSES • With increased spending on oil exacerbating financial imbalances, Jordan has remained dependent on international aid. • A substantial trade deficit and high foreign debt expose the economy to a crisis of tourist and investor confidence. • Regional geopolitical uncertainties tend to heighten social tensions in a population with mostly Palestinian origins. • Jordan’s natural resources are relatively limited (phosphate and potassium).

RISK ASSESSMENT Benefiting from the regional boom, the Jordanian economy grew strongly in 2007, up about 6 per cent with domestic demand still the main economic engine driven by steady emigrant worker remittances and private investment. Except for the mining sector and agriculture, most sectors performed well. Finance and insurance, services, construction, transport and communications achieved growth ranging from 8 to 11 per cent in the first half last year. In a still buoyant regional environment underpinned by high oil prices, the economy should sustain 6 per cent growth in 2008. Reductions in subsidies since 2006, rising oil prices and the increasing cost of food product imports have generated inflationary pressures that should persist in 2008. Although the banking system has been healthy, the rapid expansion of credit could undermine portfolio quality.

Despite the good trend on exports and on remittances from emigrant workers, a significant reduction in a still-excessive current account deficit will be unlikely with oil prices continuing to rise. Financing needs should, however, remain largely covered by FDI, particularly from Gulf countries. Investments have continued to trend up spurred by opportunities available in every sector and plans for privatisations. Investor confidence has nonetheless remained vulnerable to deterioration of the situation in an uncertain regional geopolitical environment. The public deficit, meanwhile, is estimated at 10 per cent of GDP with increased spending on oil resulting in higher-than-expected subsidies in 2007. Reduction of subsidies and obligatory spending in 2008 should facilitate reducing the deficit to 7 per cent of GDP. Despite the repeated deficits, active management of public debt has made it possible to gradually

4

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THE MIDDLE EAST AND NORTH AFRICA

reduce its nonetheless still high level, representing about 70 per cent of GDP. Highly vulnerable to regional instability, the Hashemite Kingdom enjoys the political and

financial backing of the Gulf countries and United States. Political stability should not be in jeopardy.

MAIN ECONOMIC INDICATORS USD billions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP)* Exports Imports Trade balance Current account balance (%GDP)(*) Current account balance (%GDP) Foreign debt (%GDP) Debt service ( %GS&T exports) Foreign exchange reserves (in months of imports)

4.2 1.6 -12.7 3.1 5.1 -2.0 -0.2 -2.2 121.2 12.7 8.0

8.4 3.4 -12.6 3.9 7.3 -3.4 -1.3 -11.6 106.9 11.0 6.0

7.2 3.5 -10.0 4.3 9.3 -5.0 -3.0 -23.6 94.8 9.2 4.7

6.4 6.3 -7.1 5.2 10.2 -5.0 -2.7 -19.2 87.7 8.2 5.5

6.0 5.7 -10.1 6.0 11.6 -5.6 -3.0 -18.9 78.1 7.7 5.2

6.0 6.0 -7.0 6.7 12.9 -6.1 -3.2 -18.0 69.2 6.4 4.6

* = ex grants, e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET

354

■ Means of entry The banking system is generally sound. Since the implementation of the new Banking Act in 2000, the bank of issue has further strengthened prudential measures (completed in June 2006), including higher bad debt provisions (60 days instead of 90) and greater bank capitalisation. Jordanian banks must henceforth comply with Basel II criteria. The minimum capital requirement is currently JOD100 million (US$141 million). Caution is called for when dealing with private Jordanian customers. While there are still very few bankruptcies, cases of late payment have been reported. Also, information on the creditworthiness of local firms remains scarce. For example, there is still no system for informing bankers in real time about the sector’s total commitments to small clients (no declaration requirement for amounts under JOD30,000, or US$42,300). Similarly, the banks have not been able to reach an understanding with the central bank on the establishment of a credit bureau. But strides are being made towards greater transparency. The central bank’s risk control unit is doing a better job of collating client

information provided by the banks, despite a two-month minimum waiting period for the information to be released. Given the fanciful nature of some declarations, exporters should check the credit history of potential customers and gather key information about them from local market sources so as to avoid unreasonable risk. ■

Attitude towards foreign investors The Jordanian government continues to pursue its privatisation policy. Following a first wave of privatisations (telecommunications, cement, banks and other services) between 1999 and 2002, the second wave (potash, fixed and mobile telephony, railways, airports, post office, electricity, oil), currently in progress, will draw new foreign operators. Total foreign investment in 2006 was US$3.12 billion, up more than 100 per cent over the previous year. Such investment has a stabilising and market-leading function. The rule is equality of treatment between foreign and local investors. As well as WTO membership and the implementation of freetrade agreements with the United States, the countries of the Agadir agreement, Israel and GAFTA (Arab League) and an association agreement with the European Union

JORDAN

(which includes since end-July the application of PanEuroMed cumulation rules), structural reforms to modernise the economy (Amman Stock Exchange, introduction of VAT, industrial and intellectual property protection, standards’ supervision by private international bodies, health checks by the Food and Drugs Administration) are helping to bring Jordan into line with Western

standards. The deteriorating regional political situation has, if anything, led Jordan to redouble efforts to attract foreign investors via sizeable tax benefits and preferential access to the United States and European markets. There is also a reciprocal investment promotion and protection agreement, plus a double taxation treaty, between Jordan and France.

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OPPORTUNITY SCOPE

BRAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

53 8 12 Imports: 93% of GDP

Exports: 52% of GDP

MAIN DESTINATIONS OF EXPORTS

MAIN ORIGINS OF IMPORTS

Mn USD

Mn USD

1500

3500 3000

1200

2500 900

2000

600

1500 1000

300

500

0

0 USA

Iraq

India

Saudi Arabia

Syria

Saudi Arabia

Germany China

USA

Italy

IMPORTS by products ■ Machinery, transport equipment 27% ■ Crude oil and petroleum products 23% ■ Manufactured goods 21% ■ Foodstuffs 12% ■ Other 16%

EXPORTS by products ■ Manufactured goods 35% ■ Chemicals 17% ■ Machinery and transport equipment 12% ■ Crude materials 10% ■ Foodstuffs 8% ■ Other 18%

STANDARD OF LIVING / PURCHASING POWER

356

Indicators

Jordan

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

6,210 2,660 0.760 31 82 37 56

7,746 4,167 0.716 27 59 32 92

5,983 2,313 0.672 31 44 30 50

KUWAIT

Kuwait Population (million inhabitants): GDP (US$ million):

2.6 102,090

Country @rating: Medium-term rating: Business climate rating:

A2 Low risk A3

STRENGTHS • Kuwait’s wealth rests on extensive reserves of oil and gas. • The fiscal surpluses systematically set aside as reserves provide the country with steady financial income. • Solid and well-supervised the banking system has been among the region’s best performers. • The Emirate has benefited from strategic alliances not only with the United States but also with France, the United Kingdom and Russia.

WEAKNESSES • Parliamentary opposition to reforms has impeded economic diversification. • Subsidies and administered prices have resulted in waste and deterred private investment. • The country has not attracted much FDI. • Statistics underlying economic indicators remain deficient, thereby complicating risk assessment.

RISK ASSESSMENT The economic and financial outlook remains bright and the business environment good. In 2008 as in 2007, public spending will drive the economy, underpinned by oil with the prospect of ever-higher barrel prices. The economy should continue to grow at a 5-per cent clip, with the non-hydrocarbon sector maintaining a strong rate (up between 6 and 6.5 per cent) and offsetting moderate growth of about 2 per cent in the oil sector including refineries. Financial services, trading, transport and telecommunications continue to trend up. Improvements in infrastructure and electricity production should be pursued. The construction sector has been the least dynamic in the region, with political discord delaying large development projects (urbanism communication and tourism). Buoyant domestic demand and rising rental costs have given rise to inflationary pressures, which have, however, remained limited – with 3.9 per cent inflation expected in 2008

– due to the generous subsidies on many products. Removal of the dinar from its dollar peg last May has helped limit imported inflation. The Emirate enjoys an enviable financial situation. In view of the high barrel prices the currency revaluation will be unlikely to significantly affect the public sector balance, which should continue to show a large surplus this year estimated at 32 per cent of GDP. External accounts have been comparably solid with a large trade surplus buoyed by oil exports supplemented by an invisible surplus resulting from investment income earned abroad whose strong growth has exceeded the deficits in services and transfers by a wide margin. The current account balance could represent about 50 per cent of GDP in 2008, and Kuwait will thus be able to continue to accumulate foreign assets. After several reshuffles carried out under pressure from parliament, the political scene could quieten down in 2008. Parliament’s

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quasi-systematic opposition to reforms could nonetheless still hamper growth and the country’s capacity to diversify. The nationalist currents in parliament have moreover

delayed ‘Project Kuwait’, which involves the development of heavy oils and requires technological assistance from major international companies.

MAIN ECONOMIC INDICATORS USD billions Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

2003/4*

2004/5

2005/6

2006/7(e)

2007/8(f)

2008/9(f)

13.4 0.9 16.3 21.8 9.9 11.9 9.4 19.7 25.6 4.2 4.7

6.2 1.1 22.1 30.1 11.7 18.4 18.2 30.6 20.4 3.2 4.4

6.1 4.1 37.3 46.9 14.2 32.7 34.1 40.7 19.7 1.5 4.0

5.4 3.0 34.8 58.6 14.3 44.3 51.0 50.0 25.1 1.7 5.1

5.1 4.5 33.0 63.1 18.3 44.9 54.2 48.8 27.9 1.9 8.2

4.9 3.9 32.5 70.2 20.0 50.2 62.8 51.5 27.9 1.8 9.4

* = ﬁscal year ending 31 March, e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET

358

■ Means of entry Kuwait is a free and open market, with one of the highest import to consumption ratios in the world (around 90 per cent). It applies customs duty at a standard rate of 5 per cent ad valorem in line with the decision by the six member countries of the Gulf Co-operation Council (GCC) to standardise their customs duties. Exemptions may be granted to specially designated projects. Per capita income is high and demand for capital and consumer goods disproportionately large for a country of this size. The lifting of the security threat from Iraq, swelling oil revenues and the arrival on the throne of a modernising emir have revived interest in large-scale projects with a multiplier effect on the economy. Kuwait, however, is a much coveted market demanding special knowledge and perseverance, backed by close contact with ordering customers. Companies exporting to Kuwait are not required to have a sole local partner and may sell directly to several Kuwaiti importers. While public procurement can be cumbersome and slow, there are no particular difficulties to be met with private sector players. Leading Kuwaiti busi-

nessmen are active well beyond the borders of the emirate. ■

Attitude towards foreign investors Since the implementation in 2003 of FDI Act No. 8/2001, the government has introduced 100 per cent foreign ownership of companies and 10-year tax exemption for foreigners. It has also drawn up a positive list of sectors open to FDI, with the exception of hydrocarbon exploration and production, which remain closed. Sectors that are open include light processing industries, tourism, hotels, leisure (foreigners may acquire real estate for their projects), culture, information, marketing, livestock breeding and farming, health care, banking (BNP Paribas was the first foreign bank authorised to operate in the country), investment management and securities brokering, insurance and information technology. At the same time, cuts in corporation tax for foreign companies from 55 to 15 per cent have been announced under the government’s tax reform programme. As part of its policy of openness, the government has undertaken or plans to undertake the privatisation of a number of State-owned entities. The privatisation of downstream oil activities (pet-

KUWAIT

rochemicals, petrol stations, tanker fleets) is a key priority, followed quickly by that of the national airline, the post office, fixed telephony and urban transport. As the

third-largest Gulf economy, Kuwait is a lucrative and solvent market, underpinned by robust growth, a buoyant economy and institutional stability.

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OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

22 12 15 Imports: 30% of GDP

Exports: 68% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

10000

2500

8000

2000

6000

1500

4000

1000

2000

500

0

0 Japan

South Singapore Korea

USA Netherlands

USA

Japan

Germany

Saudi Arabia

China

IMPORTS by products ■ Consumer goods 37% ■ Intermediate goods 28% ■ Capital goods 18% ■ Other 17%

EXPORTS by products ■ Crude oil 91% ■ Other 9%

STANDARD OF LIVING / PURCHASING POWER

360

Indicators

Kuwait

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

29,200 30,630 0.871 n/a 98 24 237

7,746 4,167 0.716 27 59 32 92

5,983 2,313 0.672 31 44 30 50

LEBANON

Lebanon Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

4.1 22,722 C Very high risk B

STRENGTHS • Western and Arab capital in conjunction with financial support from the Diaspora has allowed Lebanon to cushion the impact of economic and financial difficulties. • Although the banking sector is the backbone of the economy, it is nonetheless exposed to sovereign risk and dependent on depositor confidence.

WEAKNESSES • The country has been the epicentre of regional geopolitical tensions that exacerbate inter-community divisions. • The political instability has impeded implementation of reforms that could facilitate attracting foreign capital and reducing both internal and external deficits. • Public sector debt has been at a difficultto-sustain level.

RISK ASSESSMENT Lebanon is the theatre of regional geopolitical tensions that affect the economy and aggravate an already shaky financial situation. Despite these difficulties, however, companies have so far shown some resistance in terms of payment behaviour. In 2007, after two years of virtual stagnation, the political instability and climate of insecurity, exacerbated by the prospect of year-end presidential elections, stifled the economy’s capacity to rebound. This situation affected household consumption, investment and tourism. Economic growth, driven by construction,despite the slowdown of investment from Gulf countries, and by robust banking activity redeployed in regional countries, did not exceed 2 per cent. Unless tensions ease in 2008 the business climate will remain not very conducive to a strong recovery.

Despite international aid, which has allowed the country to meet its commitments, sovereign default risk is still very high with public sector debt at a level difficult to sustain, particularly if the Lebanese pound devalues, interest rates rise, or the country’s main source of financing – commercial banks – dries up. Although currently well capitalised, liquid and profitable, those banks are nonetheless still vulnerable due to their sovereign risk exposure. The external account situation, meanwhile, has remained precarious and vulnerable to a crisis of investor confidence. The US$7.6 billion in aid promised at the January 2007 Paris conference should breathe new life into the economy, but its implementation will largely depend on an easing of the political situation and a return of institutions to normal functioning.

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MAIN ECONOMIC INDICATORS USD billions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%GS&T exports) Foreign exchange reserves (in months of imports)

4.1 1.3 −13.3 1.7 6.5 −4.8 −2.8 −13.9 98.7 34.1 8.9

7.4 1.7 −8.7 2.1 8.5 −6.5 −3.4 −16.0 107.6 36.8 6.9

1.0 -0.7 −8.5 2.3 8.4 −6.1 −3.1 −14.2 106.6 46.2 7.0

0.0 5.6 −14.0 2.8 8.5 −5.8 −1.7 −7.4 115.5 35.7 7.9

2.0 3.5 −15.8 3.2 10.0 −6.8 −3.1 −13.0 118.1 32.0 6.9

3.5 2.5 −11.6 3.6 10.8 −7.1 −3.1 −12.0 121.5 31.9 7.3

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET

362

■ Market overview Despite renewed instability and the narrowness of the domestic market, Lebanon, with its highly enterprising businesspeople, offers comparative advantages over its closest neighbours. Moreover, the country is striving to create a more business-friendly environment. The war in July–August 2006 affected many sectors of the economy. But reconstruction funding and support from the Gulf countries should help boost FDI in residential and tourist property developments. In other sectors, the steady upturn in investment can reasonably be sustained in the short term only if the government manages to put an end to the political and institutional crisis. It is vital to implement the reforms drawn up at the international donors’ conference held in Paris in order to exploit what observers unanimously concur is the country’s immense growth potential. At the centre of the Eastern Mediterranean, Lebanon is a meeting point between Europe, Asia and Africa. It also offers access to some 300 million consumers, because of its geographical and cultural proximity to the Arab markets of the Middle East. It has successfully developed expertise in finance, the print and audiovisual media, advertising, consultancy, engineering, IT solutions and health care on a scale that has little in

common with the size of its domestic market. Franchising, retail and services are growing at a fast pace. Flagship sectors include readyto-wear clothing, luxury hotels, agri-foods and mass retailing. ■

Means of entry Lebanon stands out from its neighbours by virtue of a highly developed and reliable banking system – comprising some 58 banks – competently managed by the Bank of Lebanon, full convertibility of the dollarpegged local currency (and a dollarised deposit rate of 76.5 per cent in 2006) and the absence of restrictions on capital movements. In 2000, the rates of customs duty on imports were slashed to between 0 per cent and 70 per cent. The nominal tariff rate (ratio of customs revenues to the value of imports) has since continued to fall, down from 16.6 per cent in 2002 to 7.6 per cent in 2006. There are few non-tariff barriers. Such restrictions as exist mainly consist of an import ban on some 326 products or product categories, import licences and permits for 261 other product categories, and technical inspections conducted on the basis of changing specifications. Health regulations, though still based on vague legal principles, are fairly liberal and comply with the recommendations of leading international organisations. All means of payment are accepted, although the irrevocable and confirmed letter

LEBANON

of credit, denominated in euros or dollars, is the most widely used instrument. Late payment, especially of short-term contracts, is fairly rare. In the event of default, companies usually avoid litigation due to the instability of the legal system and the opacity of procedures. The problem of bad debt is often sorted out amicably. Disputes in connection with large contracts are best settled outside Lebanon through international arbitration, available since 2002 for government contracts as well. ■ Attitude towards foreign investors Lebanon has a modern legal system which protects the rights and assets of foreign investors and places few restrictions on them. In the absence of specific legislation, foreignheld companies are de facto subject to ordinary law in matters of trade, labour relations and taxation. At 15 per cent, standard corporation tax is among the lowest in the world. Foreign companies enjoy all the provisions of the country’s Investment Promotion Act, adopted in August 2001, which, among other things, empowers the government one-stop shop, IDAL (Investment De-

velopment Authority in Lebanon), to handle and facilitate their administrative formalities. Under this act, whose implementing decrees were passed in early 2003, all local and foreign businesspersons investing in designated underprivileged areas or key sectors (tourism, manufacturing, agri-foods, agriculture, telecommunications and information technology) are entitled, under certain conditions, to total or partial tax exemption according to the amount invested, the number of jobs created, the impact on the economy and the environment and the type of technology transferred. Lebanon is striving to create a business-friendly environment both through IDAL and through the adoption of new pro-business measures, such as those announced in spring 2007 (company incorporation formalities to be cut to a maximum of six days (against 46 days at present), halving administrative charges via free provision of standard documents, establishment of a one-stop shop at LibanPost offices). France and Lebanon signed a reciprocal investment protection and promotion agreement in 1996, which has been in effect since 1999.

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OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

62 11 14 Imports: 44% of GDP

Exports: 19% of GDP

MAIN DESTINATIONS OF EXPORTS

MAIN ORIGINS OF IMPORTS

Mn USD

Mn USD

800 700 600 500 400 300 200 100 0

1500 1200 900 600 300 0 Syria

UAE

Switzerland Saudi Arabia

Turkey

Syria

Italy

USA

France

Germany

IMPORTS by products ■ Mineral products (fuels included) 26% ■ Machinery and vehicles 20% ■ Foodstuffs 14% ■ Chemicals and plastics 13% ■ Metals 7% ■ Pearls and precious stones 5% ■ Textiles 5% ■ Other 9%

EXPORTS by products ■ Jewellery 24% ■ Machinery 15% ■ Metals 14% ■ Chemicals and plastics 11% ■ Manufactured goods 11% ■ Foodstuffs 8% ■ Mineral products (fuels included) 7% ■ Other 10%

STANDARD OF LIVING / PURCHASING POWER

364

Indicators

Lebanon

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

5,460 5,490 0.774 n/a 87 29 114

7,746 4,167 0.716 27 59 32 92

5,983 2,313 0.672 31 44 30 50

LIBYA

Libya Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

6.0 50,320 C High risk D

STRENGTHS • Normalisation of relations with the United States and Europe has opened up opportunities for foreign investment that the country needs. • The oil and gas reserves offer great development potential that should benefit the entire economy. • The start of banking system reform is a positive signal for investors. • Libya’s archaeological wealth and geographic location constitute assets in the development of tourism.

WEAKNESSES • With the government’s economic options still not very clear, reform has been slow to get started in a state-controlled economy lacking diversification. • A complex bureaucracy and a lack of infrastructure have impeded development of a private sector. • Economic indicators are often deficient and not very reliable. • The business climate suffers from a lack of corporate transparency and from institutional deficiencies.

RISK ASSESSMENT Libya is in solid financial health and should continue to run current account and fiscal surpluses in 2008, thanks to the high oil prices. With foreign debt remaining limited, foreign exchange reserves representing over 30 months of imports have sheltered the country from a liquidity crisis. Already strong economic growth accelerated in 2007 and should reach about 7 per cent up from slightly over 5 per cent a year earlier. Expanding 7.5 per cent the non-oil sector was the main economic engine, fuelled by public spending. Civil service wage increases spurred household consumption, while public sector investment spending contributed to the improvement in infrastructure and services. The estimated 4.8 per cent increase in hydrocarbon production is partly attributable to the progressive rehabilitation of old oil rigs that deteriorated

during the years of embargo. With the strong non-oil growth continuing in 2008, an 11 per cent increase in oil production capacity should spur overall economic growth, which could be near 9 per cent. Rising prices, especially for consumer goods but also for raw material and housing, generated inflationary pressures that could persist in 2008. Although the economy lacks diversification, the prospects for its development have improved with Libya no longer isolated politically or in trade terms on the international scene. Although the country has attracted foreign investment, it has remained concentrated in the oil sector and the construction of tourism infrastructure. As reflected by the Coface business-climate rating, the Libyan business environment is not very conducive due to institutional weaknesses, which can be responsible for late payments and collection difficulties.

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MAIN ECONOMIC INDICATORS USD billions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign currency reserves (in months of imports)

5.9 -2.1 14.8 14.5 7.2 7.3 5.0 21.0 23.3 4.6 19.8

5.0 -2.2 17.4 20.6 8.8 11.8 7.8 25.5 18.0 3.7 20.8

6.3 2.0 30.0 31.3 11.2 20.1 17.4 41.7 13.5 2.9 26.2

5.2 3.4 39.1 39.2 12.9 26.3 24.2 48.7 11.8 2.5 37.5

6.8 7.0 34.7 44.5 18.6 25.9 19.5 33.2 10.6 2.4 33.7

8.8 8.0 33.7 60.6 25.3 35.3 28.6 37.5 8.8 1.9 37.1

e= estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET

366

■ Market overview Foreign investment is encouraged by law No. 5, and its implementing decrees in the agricultural, services, manufacturing, health care and tourism sectors. The minimum capital requirement, under Decree 86 of April 2006, is LYD5 million (around €8 million). Where the local stake in a project is equal to or more than 50 per cent, this threshold is lowered to LYD2 million (about €3.2 million). Significant investment programmes are under way to improve transport infrastructure and equipment (air, land), expand telecommunications to 2.5 million fixed line and 3 million GSM subscribers, step up electricity production and generating capacity from 4,500MW today to 10,000MW by 2020, and develop oil and gas production and exploration with a view to increasing output to 3 million barrels daily by 2015. Other projects include large-scale river development (water supply), desalination (installation of 11 plants), the environment, radio and television (digitisation of equipment and training), expansion of the agri-foods industry, housing and health care. Libya offers a host of new business opportunities, despite a widespread system of state controls, characterised by cumbersome, slow and inconsistent administrative practices. To celebrate the 40th anniversary of the revolution in September 2009, almost $80 billion worth of infrastructure projects were initiated in 2007.

■

Means of entry Since early 2003, licences to import goods into the country have been lifted. However, each shipment must be accompanied by a certificate of origin. Libya switched its customs tariff to the simplified harmonised nomenclature in January 1998. An import ban is in place for 17 so-called ‘luxury’ or locally manufactured products (list available). Customs duties on imported goods were abolished on 1 August 2005 and replaced by 4 per cent ‘port services tax’ payable by Libyan importers on all but 85 products. Importers are also liable to 2 per cent production tax and 25 or 50 per cent consumption tax. Sales contracts are settled exclusively by irrevocable letter of credit, which can take up to six months to open. The law governing contracts with Libyan government agencies requires foreign suppliers to pay 2 per cent stamp duty on the total value of the contract (1 per cent for sub-contracting agreements). The Libyan market should only be approached by financially sound companies used to lengthy negotiations. Certain goods (vehicles, motorcycles, office equipment, electrical appliances, electronic equipment, roadworks and quarry equipment, farm machinery) may not be sold without entering into a representation agreement with a Libyan agent responsible for after sales service. SMEs can usefully engage in ordinary business not requiring funding. The Annual Tripoli International Trade Fair in

LIBYA

April is an excellent showcase for trade and business. ■ Foreign exchange regulations The country’s foreign exchange regulations, more flexible than in the past, are overseen

by the Exchange Control Department, an arm of the central bank. Since 16 June 2003, the Libyan government has successfully maintained a free exchange rate system on the currency market based on a single rate (€1 = LYD1.6).

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OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

26 10 7 Imports: 35% of GDP

Exports: 73% of GDP

MAIN DESTINATIONS OF EXPORTS

MAIN ORIGINS OF IMPORTS

Mn USD

Mn USD

6000

2000

5000

1500

4000

1000

3000 2000

500

1000 0

0 Germany

Italy

Spain

USA

France

Italy

Germany China

Tunisia

France

IMPORTS by products ■ Machinery and transport equipment 48% ■ Materials 21% ■ Foodstuffs 17% ■ Chemicals 6% ■ Other manufactured products 9%

EXPORTS by products ■ Fuels 97% ■ Other 3%

STANDARD OF LIVING / PURCHASING POWER

368

Indicators

Libya

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income n / a Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

8,550 7,380 0.798 n/a 85 30 n/a

7,746 4,167 0.716 27 59 32 92

5,983 2,313 0.672 31 44 30 50

MOROCCO

Morocco Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

30.5 57,307 A4 Quite low risk A4

STRENGTHS • The country enjoys significant assets including proximity to the European market, natural resources, vast tourist potential and political stability. • Its geographic location and the size of its market (31 million inhabitants) have made Morocco an ideal base for setting up industries seeking to conquer the North African market. • Specialisation in quality textile production has enabled the country to meet Chinese competition, which has intensified since the multifibre agreement expired in January 2005. • Morocco has been specialising in offshoring remote high value-added IT services. • Consolidation of the banking system has contributed to improving the business environment.

WEAKNESSES • Still underpinned by an agricultural sector representing 14 per cent of GDP and employing 40 per cent of the population, the Moroccan economy remains vulnerable to weather conditions. • Economic growth still does not suffice to meet the expectations of the population, with poverty and unemployment, particularly of youth, constituting sources of social tensions. • The unresolved West Sahara problem, which has affected relations with Algeria, has limited the benefits Morocco could derive from development of regional integration. • A tourist sector that generates revenues crucial to current account balance and economic growth remains vulnerable to the threat of terrorism.

RISK ASSESSMENT GDP growth slowed markedly in 2007 in the wake of a pour harvest season. Supposing better weather conditions growth should rebound to almost 6 per cent in 2008, driven by transport and tourism infrastructure investment, textile exports and a consumption recovery in rural areas. Inflation meanwhile should remain below 2.5 per cent, kept under control by the central bank’s restrictive monetary policy. A Coface payment incident index remaining near the world average reflects that bright outlook. This favourable context should facilitate a new overhaul of public finances without

jeopardising the ambitious investment programmes in transport, housing, health and education. Conversely, a trade balance undermined by the costs of energy and capital goods imports could widen further should the euro zone prove less dynamic than expected. Tourism revenues and expatriate remittances should make it possible to maintain a current account surplus, further reducing the foreign debt burden. Morocco’s limited financing needs and very ample foreign exchange reserves will limit the exposure to exchange-rate risk. In the September 2007 legislative elections, which were marked by a low turnout,

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against all expectations a party in the government coalition, Istiqlal, strengthened its position in the Chamber opposite the moderate Islamist Justice and Development Party, that had been favoured to win due to its campaign focus on combating poverty and unemployment. King Mohammed VI has

thus emerged with a stronger position. In this context, efforts on reforms focused on diversifying the economic fabric and improving the business environment should continue and the terrorist risk unlikely to jeopardise socio-political stability.

MAIN ECONOMIC INDICATORS USD billions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

6.1 1.2 -4.4 8.8 13.1 -4.3 3.2 31 20.8 9.7

5.2 1.5 -4.1 9.9 16.4 -6.5 1.7 27 15.8 9.3

2.4 1.0 -5.2 11.2 19.1 -7.9 2.4 25 13.6 8.1

8.0 3.3 -2.1 12.7 21.8 -9.1 3.4 23 11.2 9.0

2.5 2.5 -2.5 14.4 25.6 -11.2 1.8 22 10.0 9.1

5.9 2.0 -2.4 15.9 28.1 -12.2 1.5 20 8.8 9.0

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET

370

■ Means of entry But for a handful of import licences still in existence, almost all sectors of the Moroccan economy are open to foreign investment and imports, and there is no obligation to team up with a local partner. Morocco has already undertaken substantial tariff dismantling. The WTO bound rate is 41.3 per cent, the average applied rate is 24.5 per cent and the import-weighted average rate is 18.9 per cent. However, tariff peaks remain – up to 329 per cent for some farm products and up to 50 per cent for some industrial goods. European products benefit from tariff dismantling under the EU-Morocco association agreement. This agreement, which aims to establish a free-trade area by 2012, has already abolished import duties on half the industrial tariff lines. For the so-called sensitive industrial goods manufactured locally, tariffs will be gradually eliminated by 2012. Wide-ranging reforms over the last few years have helped improve the business climate. Numerous laws complying with international standards have been adopted. Key measures include new trade legislation

(1996), the establishment of commercial courts (1997), modernisation of company law (1997 and 2001), a new Customs Code (2000), competition and price legislation, an intellectual and industrial property protection law (2004 and 2006), a literary and artistic property law (in force since January 2001) and labour and insurance codes (2004). With regard to public−private relations, a delegated management law was passed in 2006, and government procurement legislation was revamped in 2007. ■ Attitude towards foreign investors The overall framework for foreign investment is set out in the Investment Charter. The charter contains a series of incentives designed to reduce investment costs. Onestop business start-up shops have also been established. They operate as regional investment centres, overseen by Walis (prefects). As a result of this measure, company incorporation formalities now only take around 10 days. The centres also provide investment advice. ■ Foreign exchange regulations The exchange rate system continues to be administered. The exchange rate is set by

MOROCCO

the Central Bank, Bank Al Maghrib, on the basis of a basket of currencies. The dirham is convertible for ordinary business transactions (imports and exports). A currency

convertibility system, set up in 1992, allows foreign investors to repatriate capital, profit and income.

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 350 300

WORLD Morocco

250 200 150 100 50

4

Ju

ne D 93 ec Ju -93 ne D 94 ec Ju -94 ne D 95 ec Ju -95 ne D 96 ec Ju -96 ne D 97 ec Ju -97 ne D 98 ec Ju -98 ne D 99 ec Ju -99 ne D 00 ec Ju -00 ne D 01 ec Ju -01 ne D 02 ec Ju -02 ne D 03 ec Ju -03 ne D 04 ec Ju -04 ne D 05 ec Ju -05 ne D 06 ec Ju -06 ne D 07 ec -0 7

0

371

THE MIDDLE EAST AND NORTH AFRICA

OPPORTUNITY SCOPE

DOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

41 16 18 Imports: 43% of GDP

Exports: 36% of GDP

MAIN DESTINATIONS OF EXPORTS

MAIN ORIGINS OF IMPORTS

Mn USD

Mn USD

3000

5000

2500

4000

2000

3000

1500 2000

1000

1000

500 0

0 France

Spain

UK

Italy

India

France

Spain

Saudi Arabia

China

Italy

IMPORTS by products ■ Consumer goods 22% ■ Semi-finished goods 24% ■ Capital goods 21% ■ Fuels 23% ■ Foodstuffs 9%

EXPORTS by products ■ Agricultural raw materials and foodstuffs 23% ■ Textiles 19% ■ Machinery and transport equipment 14% ■ Chemicals 13% ■ Ores and metals 9% ■ Fuels 5% ■ Other manufactured goods 17%

STANDARD OF LIVING/PURCHASING POWER

372

Indicators

Morocco

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

5,000 1,900 0.640 31 59 31 25

7,746 4,167 0.716 27 59 32 92

5,983 2,313 0.672 31 44 30 50

OMAN

Oman Population (million inhabitants) GDP (US$ million) Country @rating: Medium-term rating: Business climate rating:

2.6 35,666 A3 Low risk A4

STRENGTHS • Open and relatively diversified (development of the gas, manufacturing and tourism sectors), the economy constitutes a favourable environment for investment. • The free-trade agreement with the United States has spurred exports to that country. • An oil reserve fund is intended to constitute savings for future generations and cushion shocks should barrel prices decline. • The privatisation programme should create new opportunities for investors.

WEAKNESSES • The oil fields are mature, and costly investments will be necessary to restore production capacity. • Remaining dependent on oil revenues, the economy is vulnerable to sharp declines in barrel prices. • With the domestic workforce not sufficiently skilled, the country has been dependent on foreign labour whose cost has been rising. • Domestic unemployment remains high despite the GDP growth and the ’Omanisation’ of employment will take time.

RISK ASSESSMENT The economy has been dynamic, benefiting from liberal measures and good market liquidity buoyed by barrel prices. The non-oil sector has continued to grow at a rapid clip in 2007, estimated at 9 per cent, driven by investment, public spending and private consumption. Manufacturing, construction and services, especially wholesaling and retailing, still achieved excellent performance. The oil sector, conversely, suffered a further decline estimated at 1.8 per cent, with the solid growth of gas production (up 6.5 per cent in the first half) only partly offsetting the 5.4per-cent decline in crude production. Overall economic growth in 2007 is estimated at 6.5 per cent. In 2008, the start-up of manufacturing facilities and especially of additional oil and condensate production capacity should result in higher GDP growth, which could reach 9.3 per cent. The market liquidity and the increasing cost of construction prod-

ucts and materials heightened inflationary pressures, which have nonetheless remained under control via the continuation of subsidies. Although the banking sector is well capitalised and profitable, the rapid expansion of credit will bear watching. Despite increasing debt, the external financial situation remains healthy with Oman accumulating foreign assets. Higher oil prices and export volumes in 2008 should result in an increase in the trade surplus. Despite a larger invisibles deficit, resulting notably from the increase in service payments and transfers abroad by expatriate workers, the current account surplus could reach a level equivalent to 12 per cent of GDP. The oil revenues moreover give the government substantial room for manoeuvre to improve infrastructure and invest in the health and education sectors while still accumulating savings for future generations.

4

373

THE MIDDLE EAST AND NORTH AFRICA

Despite regional geopolitical tensions and the uncertainties over the succession to the Sultan, Oman’s political stability has been

reassuring to investors. In this context, the business environment has remained buoyant.

MAIN ECONOMIC INDICATORS USD billions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Ofﬁcial foreign exchange reserves (in months of imports)

2.0 −0.4 1.5 11.7 6.1 5.6 1.5 6.7 19.3 10.4 3.9

5.4 0.4 4.8 13.4 7.9 5.5 0.6 2.3 21.4 9.2 3.1

5.8 2.0 12.4 18.7 8.0 10.7 4.7 15.3 21.0 6.7 3.4

6.1 3.0 14.2 21.6 9.9 11.7 4.4 12.3 25.0 5.5 3.1

6.5 3.8 10.1 22.4 11.1 11.3 3.4 8.9 26.7 5.2 4.3

9.3 3.7 12.5 26.3 12.4 13.9 5.2 12.0 26.6 4.4 4.6

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■ Market overview While the Omani economy’s dependence on the hydrocarbon sector remains strong (about 50 per cent of GDP in 2006), it is falling due to the steady decline in oil production. The government is keen to increase private-sector participation in the economy via wider privatisation of stateowned enterprises and public services and will not be deflected from pursuing the Omanisation of jobs. Economic diversification and reducing unemployment constitute the major challenges facing the economy.

374

■ Means of entry For private contracts, exporters of consumer goods not demanding after-sales service are not required to be represented by a local agent. On the other hand, when bidding for international open tenders, foreign suppliers are strongly advised to have a local office or be represented by an Omani company, even though this is not a formal requirement. Standard customs duty for the majority of products is 5 per cent of the CIF value. Some goods are subject to prior licensing on grounds of health, religion or protection of local manufacture. There are no exchange controls and foreign currency is freely sold.

There are no restrictions on profit transfers, nor any impediments to the free movement of capital. ■

Attitude towards foreign investors Omani legislation tends to encourage foreign investment in industrial and infrastructure projects, especially in connection with the privatisation programme but maintains a number of sector restrictions. Foreigners can now acquire a stake in manufacturing, trading and service companies. Foreign companies looking to open a representative office in the Sultanate are not required to have a local sponsor, provided they have been registered for 10 consecutive years in the trade register of the country where their head office is based. The condition requiring a parent company to have three subsidiaries in three foreign countries was scrapped in 2005. Tax incentive schemes have also been introduced to reduce discrimination against foreign companies and encourage local companies to open their capital to foreigners. The recent conclusion of a free-trade agreement with the United States should lead to greater relaxation of local human resources regulations. The agreement’s implementation will speed up moves towards more investmentfriendly labour and company laws.

OMAN

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

31 16 13 Imports: 43% of GDP

Exports: 57% of GDP

MAIN DESTINATIONS OF EXPORTS

MAIN ORIGINS OF IMPORTS

Mn USD

Mn USD

6000

3000

5000

2500

4000

2000

3000

1500

2000

1000

1000

500

0

4

0 China

South Korea

Japan Thailand

South Africa

UAE

Japan

USA

Germany

India

IMPORTS by products ■ Machinery and transport equipment 49% ■ Manufactured goods 17% ■ Foodstuffs 9% ■ Iron and steel 7% ■ Fuels 4% ■ Other 15%

EXPORTS by products ■ Crude oil 64% ■ Other fuels 22% ■ Petroleum re-exports 9% ■ Other 5%

STANDARD OF LIVING/PURCHASING POWER Indicators

Oman

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

14,570 9,070 0.810 n/a 72 35 47

7,746 4,167 0.716 27 59 32 92

5,983 2,313 0.672 31 44 30 50

375

THE MIDDLE EAST AND NORTH AFRICA

Palestinian Territories Population (million inhabitants) GDP (US$ million)

3.7 4,059

RISK ASSESSMENT The economy of the Palestinian Territories has suffered in a complex political situation and remains dependent on transfusions of international aid. In the first half last year the situation remained marked by further deterioration of the economy and the pervasive climate of insecurity, verging on civil war in the Hamas-controlled Gaza Strip. The crisis of confidence vis-a`-vis the Palestinian Islamist Party and the new government that resulted from the March 2006 legislative elections prompted Israel to strengthen travel restrictions and to freeze taxes collected on behalf of the Palestinian Authority (transfers that represent some 2/3 of its resources). International aid was moreover largely suspended. The collapse of revenues squeezed public spending, particularly on civil service wages. The asphyxiation of the economy resulted in a recession estimated at 8 per cent in 2006. After Hamas took control in the Gaza Strip in June 2007, President Mahmoud Abbas withdrew to the West Bank, dissolved the

376

coalition government and formed a new government. The Gaza Strip remained isolated while the situation in the West Bank developed along more favourable lines with the lifting of the financial blockade restoring room for manoeuvre to revive the economy and ultimately resulting in renewed consumer confidence in an improved security environment. That favourable trend in the second half sufficed to stem the recession for all the territories. The brighter economic outlook will continue this year. The reforms implemented by the government of Salam Fayyad, especially as regards national accounts, are considered satisfactory by the IMF and will foster transparent management of the international aid mobilised end 2007 with donor countries promising US$7.4 billion to allow the territories to meet their current spending needs and rebuild infrastructure. The economic reconstruction will nonetheless remain subordinate to the easing of political tensions. Although the Annapolis Conference revived the peace process, a successful conclusion by end 2008 seems hardly likely.

PALESTINIAN TERRITORIES

MAIN ECONOMIC INDICATORS USD billions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Unemployment (%) Public sector balance (%GDP)(1) Public sector balance (%GDP)(2) G&S exports (%GDP) G&S imports (%GDP) Current account balance (%GDP)(1) Current account balance (%GDP)(2) Public sector debt

6.1 4.4 25.6 -14.6 -7.4 47.4 78.5 -31.1 -16.7 n/a

6.2 3 26.8 -14.1 -5.4 59 80.4 -21.4 -21.3 n/a

6 3.6 23.5 -17 -9 0.6 80.3 -79.7 -20.1 n/a

-8 3.6 23.6 -26.4 -9.7 0.7 79.1 -78.4 -8.6 n/a

0 1.5 22.4 -28.4 -9.6 0.8 79.7 -78.9 -9 n/a

3.5 3.2 23.1 -23.8 2.5 0.8 79.9 -79.1 -3.4 n/a

(1) = ex grants, (2) = inc grants, e = estimate, f = forecast

4

377

THE MIDDLE EAST AND NORTH AFRICA

Qatar

378

Population (inhabitants): GDP (US$ million):

827,533 52,720

Country @rating: Medium-term rating: Business climate rating:

A2 Low risk A3

STRENGTHS • The world’s third largest reserves of gas plus significant oil reserves offer considerable development potential with Qatar already the world leading exporter of liquefied natural gas. • Productive-fabric development and the high oil prices have spurred rapid economic growth with per capita income among the world’s highest. • Foreign debt is largely secured by longterm export contracts. • Besides the downstream oil and gas industries, the economy has been diversifying in many sectors (finance, education and tourism) with FDI and the development of smaller companies encouraged. • Diversification strategy based on investment abroad fosters the acquisition of know-how.

WEAKNESSES • With fiscal resources lacking diversification, the economy remains dependent on oil revenues. • The economic expansion has depended on increasingly costly foreign labour with local labour lacking the requisite skills. • The country has been vulnerable to deterioration of the regional geopolitical situation. • The statistics underlying economic indicators have remained deficient hampering the assessment of risks. • Weaknesses that have emerged in the North Field could increase gas extraction costs.

RISK ASSESSMENT The economy has been growing strongly, driven by investment and household consumption which have benefited from the high-income levels and rapid population growth. In 2007, an estimated 9.5 per cent increase in hydrocarbon production was mainly attributable to the 14 per cent growth achieved in gas production. Excluding hydrocarbons, growth slowed (up 7 per cent) after the rapid growth of about 10 per cent maintained for several years in the run-up to the Asian games held in 2006. Bottlenecks and rising costs particularly affected construction. Services, such as retailing and

financial services, have however remained buoyant. The overall growth rate came to an estimated 8.3 per cent. Growth should accelerate this year to reach 13 per cent driven by an expected 34 per cent increase in gas production attributable especially to the start up of the Dolphin gas pipeline to the United Arab Emirates. After peaking in 2006, inflationary pressures should remain strong amid high rental prices and the rising cost of imported products due partly to the weakening of the dollar. Although the banking system is well capitalised, the rapid growth of property loans and consumer credit will bear watching.

QATAR

The external financial situation has been healthy. Imports have been growing strongly in connection with investments under way and rising product costs. The high oil prices and the increase in the volume exported will nonetheless result in large surpluses especially this year. Gas exports should moreover equal those of oil. Although still high, the foreign debt burden has been declining. The country has attracted foreign investment

and accumulated financial holdings abroad. The public sector should continue to run large financial surpluses providing room for manoeuvre in carrying out industrial and infrastructure projects. Despite regional geopolitical uncertainties, the business climate has remained buoyant underpinned by domestic political stability.

MAIN ECONOMIC INDICATORS (USD billions)

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%GS&T exports) Foreign exchange reserves (in months of imports)

7.4 2.3 4.0 13.4 4.4 9.0 5.8 24.4 58.1 23.5 3.5

11.8 6.8 15.2 18.7 5.4 13.3 7.5 23.9 48.1 9.4 3.1

8.2 8.8 8.7 25.8 9.1 16.7 10.7 25.4 45.6 7.4 2.8

9.0 11.8 4.7 32.2 14.4 17.7 9.5 18.0 42.7 7.6 2.3

8.3 9.5 8.8 37.4 16.6 20.8 11.3 18.7 41.5 7.6 2.4

13.2 8.2 14.3 48.3 19.9 28.4 17.6 26.1 43.0 6.6 2.5

4

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■ Market overview The Qatari market is free and open to trade, except for imports of live cattle and bovine products of European origin (BSE outbreak). There is also free movement of goods between the six countries of the CCASG since the introduction of a customs union in January 2003. Imports into Qatar, however, are subject to rules of origin that vary according to country. Local sponsorship is required to distribute and market imported goods but not to bid for public tenders. Trademark and intellectual property protection legislation is relatively recent. A new implementing decree (law No. 18 of 2007) imposes three to five years imprisonment and fines ranging from €20,000 to €200,000. Qatar has been a signatory to the Geneva Convention (industrial property) and the Bern Convention (intellectual property) only since 5 July 2000. Consequently, the country still lacks essen-

tial human resources to enforce and implement this legislation on a systematic basis. ■

Means of entry Since 1 January 2003, all goods are liable to 5 per cent ad valorem duty under the GCC customs union, except products directly competing with local manufacture (steel: 20 per cent), products taxed on grounds of health (cigarettes: 100 per cent) or those banned by Islam (wines and spirits: 100 per cent). To encourage the construction sector, in August 2007 the government suspended customs duty on construction materials (steel, cement, gravel) for three years. Exporters should demand the irrevocable and confirmed letter of credit in transactions with local customers as it is the most widely used means of payment in Qatar. Public procurement contracts are paid for in cash.

■

Attitude towards foreign investors Regulations governing foreign investment were relaxed under a new law passed on 16

379

THE MIDDLE EAST AND NORTH AFRICA

October 2000. Subject to certain conditions to be defined on a case-by-case basis with the authorities, foreign investors can now own a 100 per cent stake in a company operating in the agricultural, manufacturing, health care, education, tourism and energy sectors. Approvals are handled by the Ministry of Economic Affairs and Trade and, for industrial projects, by the Ministry of Energy and Industry. The only precondition is that the foreign investment comply with the government’s development plans. Sectors falling outside the scope of this law are banking, insurance, property and retail. Foreigners investing in these sectors are required to have a majority Qatari partner with a minimum 51 per cent stake. The Qatar Financial Center set up in Doha on 1 May 2005 accepts foreign banks and financial services companies without a local partner, as well as service companies engaged in activities related to LNG transportation. Similarly, foreign research and development laboratories can operate out of Doha’s

380

Science and Technology Park under the free zone status awarded to it in September 2005. Foreign investors can acquire leaseholds for a maximum period of 50 years on a renewable basis but are barred from acquiring freehold property, except in the building complex under construction on the artificial island called Pearl Island, and in the new zones whose location is a hot topic of debate in the local community. Disputes between a foreign investor and a local party are subject to local or international arbitration. Foreigners are required to have a Qatari sponsor when applying for a residence permit linked to a work permit. Foreign access to the Doha Stock Exchange, inter alia via mutual funds, has been opened up following the government’s announcement in May 2004 to allow foreigners to own up to 25 per cent of listed companies. The Ministry of Economic Affairs and Trade grants wholly foreign-funded projects 10-year tax relief, together with exemption from customs duties on imported equipment, raw materials and semi-finished goods not available locally.

QATAR

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

15 9 31 Imports: 41% of GDP

Exports: 63% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

15000

2500

12000

2000

9000

1500

6000

1000

3000

500

4

0

0 Japan

South Singapore Thailand Korea

Spain

France

Japan

USA

Italy

Germany

IMPORTS by products ■ Machinery and transport equipment 49% ■ Manufactured goods 35% ■ Foodstuffs 6% ■ Other 10%

EXPORTS by products ■ Crude oil 58% ■ Liquified natural gas 31% ■ Petrochemicals 8% ■ Natural gas liquids 3% ■ Other 1%

STANDARD OF LIVING / PURCHASING POWER Indicators

Qatar

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

39,610 n/a 0.844 n/a 94 22 n/a

7,746 4,167 0.716 27 59 32 92

5,983 2,313 0.672 31 44 30 50

381

THE MIDDLE EAST AND NORTH AFRICA

Saudi Arabia Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

382

23.7 309,778 A4 Quite low risk B

STRENGTHS • By virtue of its extensive oil reserves, Saudi Arabia occupies a strategic position in the markets. • With this strategic position and its regional economic and political influence, the kingdom has enjoyed a privileged relationship with the United States. • Admitted to the WTO end 2005, the country has been opening up to foreign investment. • The financial situation is very solid. • The banking system is robust, well capitalised and profitable.

WEAKNESSES • The growth of oil sector production has been erratic, reflecting its role as adjustment variable for world demand and OPEC policy. • Conservatism has impeded political and economic liberalisation. • Rapid demographic growth and a poor education system have spawned high unemployment that poses a threat to the social climate. • Regional geopolitical instability has affected the investment environment.

RISK ASSESSMENT Adjustments of oil production to external demand contributed to the emergence of a new growth slowdown in 2007. The non-oil sector, meanwhile, continued to grow steadily at a high 6.5 per cent rate with high barrel prices generating the revenues spurring domestic demand and both public and private investment in major industrial and infrastructure projects. In 2008, while hydrocarbon production could register a small increase, investment and public spending will continue to drive the economy. But it could be less dynamic. A more difficult and expensive funding coupled with the rising cost of materials could lead to some projects being delayed. An estimated 5 per cent

growth recovery should nonetheless develop with the petrochemical, construction and transport sectors continuing to outperform. With companies making good profits, the Coface payment incident index has remained below the world average. The excellent conditions in the oil market since 2003 enabled the Kingdom to bolster its financial situation notably by accumulating financial assets and sharply reducing public sector debt. The economy has thus become less vulnerable to a decline in barrel prices. Since the country’s admission to the WTO end 2005, the investment environment has moreover improved. Investment continues to underperform, however, amid persistent weaknesses in governance terms.

SAUDI ARABIA

MAIN ECONOMIC INDICATORS USD billions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

7.7 0.6 4.5 93.2 33.9 59.4 28.0 13.0 11.6 4.0 3.7

5.3 0.3 11.4 126.0 41.1 85.0 51.9 20.7 11.1 3.2 3.9

6.1 0.7 18.0 181.5 54.5 127.0 91.0 29.4 10.9 2.6 3.1

4.3 2.3 21.4 209.2 60.7 148.5 94.8 27.1 12.9 2.7 2.6

3.1 3.7 15.4 212.1 72.8 139.3 78.9 21.7 14.9 2.8 2.3

5.0 3.9 13.5 233.4 84.5 148.9 82.6 21.2 15.8 2.7 2.1

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■

Market overview With domestic GDP accounting for 55 per cent of aggregate Gulf Co-operation Council (GCC) GDP and more than US$500 billion in infrastructure project commitments over the next few years, Saudi Arabia offers tremendous business opportunities. Saudi households spend the bulk of their income on non-durable goods. Consumer demand for such goods is fuelled by already abundant and ever-rising cash reserves. The Kingdom’s 24-million inhabitants and US$13,000-plus per capita GDP at end-2006 makes it one of the main markets in the Middle East. However, the ‘Saudiisation’ of jobs (the official target is an increase of 5 per cent each year) remains a problem as local manpower is inadequately trained to meet the various needs of business and the economy. Youth unemployment is rising (28 per cent among 20–24 year olds) as 200,000 young Saudis arrive on the job market each year. Spending on education and vocational training is, therefore, a budgetary priority, accounting for 25.5 per cent of overall government spending. ■ Means of entry Although member states of the GCC established a customs union on 1 January 2003, Saudi Arabia continues to levy differential duties on several products. Applied customs

duties are 0 per cent (basic foodstuffs), 5 per cent (80 per cent of imported goods), 12 per cent or 20 per cent (some locally produced goods), 25 per cent (various fruits and vegetables) and 100 per cent (milk, wheat, cigarettes and dates). Import bans apply on mostly religious grounds. WTO accession in December 2005 has led to a gradual reduction in differential duties and a review of some non-tariff barriers to trade, such as the principle of national preference in public tenders. Despite the announcement of measures to relax visa formalities, entry and residence requirements for foreigners remain restrictive (compulsory Saudi sponsor). The legal environment remains hazy, but intellectual property protection is improving. In general, government agencies are slow to pay (7–30 months), but defaults are rare.

4

■

Attitude towards foreign investors A new investment code was adopted in April 2000. Its key features include issue of licences within 30 days; establishment of a one-stop shop for processing applications Saudi Arabian General Investment Authority (SAGIA); freehold ownership of staff facilities and accommodation; self-sponsorship of foreign companies and access to concessional Saudi financing. However, because of the monopoly barring foreigners from directly holding shares in the country, foreign companies can operate only through Saudi law subsidiaries

383

THE MIDDLE EAST AND NORTH AFRICA

incorporated as private limited liability companies or branches. A negative list of sectors from which foreign investors are barred was drawn up in February 2001, but cut in 2003, 2005 and 2007 and accompanied by the lifting of restrictions on investment in the retail sector. The marginal rate of corporation tax for foreign companies has been lowered to 20 per cent. Losses can now be

carried forward over a limited number of years. A reciprocal investment protection and promotion agreement with France was concluded in June 2002 and came into force in March 2004. There is also a double taxation agreement between the two countries renewable every five years, the next time in 2008.

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300

WORLD Saudi Arabia

250

200

150

100

50

Ju

ne D 93 ec Ju -93 ne D 94 ec Ju -94 ne D 95 ec Ju -95 ne D 96 ec Ju -96 ne D 97 ec Ju -97 ne D 98 ec Ju -98 ne D 99 ec Ju -99 ne D 00 ec Ju -00 ne D 01 ec Ju -01 ne D 02 ec Ju -02 ne D 03 ec Ju -03 ne D 04 ec Ju -04 ne D 05 ec Ju -05 ne D 06 ec Ju -06 ne D 07 ec -0 7

0

384

SAUDI ARABIA

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

21 18 13 Imports: 26% of GDP

Exports: 61% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

10000

35000 30000

8000

25000 20000

6000

15000

4000

4

10000 2000

5000 0

0 Japan

USA

South Korea

China Singapore

USA

Germany China

Japan

UK

IMPORTS by products ■ Machinery and electrical equipment 26% ■ Transport equipment 19% ■ Metals 15% ■ Chemicals and plastics 13% ■ Foodstuffs 12% ■ Textiles, clothing 5% ■ Wood. paper, glass, jewellery 4% ■ Other 6%

EXPORTS by products ■ Crude oil 75% ■ Refined petroleum 15% ■ Petrochemicals 5% ■ Other 5%

STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

Saudi Arabia

Regional average

Emerging country average

16,620 12,510 0.777 n/a 81 37 354

7,746 4,167 0.716 27 59 32 92

5,983 2,313 0.672 31 44 30 50

385

THE MIDDLE EAST AND NORTH AFRICA

Syria Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

386

19.5 34,902 C Very high risk C

STRENGTHS • Implementation of measures intended to foster private investment has begun with projects offering opportunities to investors in many sectors. • The country has benefited from the good regional economic conditions and the petrodollars that have spurred investment. • The free-trade agreement signed in 2005 with the countries participating in the Gulf Cooperation Council has enhanced regional trade and investment. • Tourism has real development potential. • Debt ratios have become manageable since the settlement of arrears and the cancellation of debt granted by Russia.

WEAKNESSES • The rapid decline of oil production constitutes a threat to the economic and financial situation making it essential to speed up reforms. • Subsidy costs and unprofitable stateowned companies have strained public sector finances. • Although on the path of reform, a banking system still dominated by inefficient state-owned banks remains vulnerable with the liberalisation under way since 2004 not accompanied by a strengthening of prudential and oversight regulations. • Deficient statistical data hampers risk assessment.

RISK ASSESSMENT Despite the recession in the oil sector (down 7 per cent) the economy performed well in 2007, with near 4 per cent growth. The nonoil sector was the main economic engine albeit with growth – up 5.8 per cent – slower compared to the 6.5 per cent growth achieved in 2006, driven by a domestic demand rebound spurred by the influx of Iraqi refugees. The drivers in 2007 were household consumption and private investment, domestic and foreign – particularly from the Gulf countries, trending up in industry, tourism and transport. Drought affected agriculture however. The outlook for 2008 remains bright underpinned by projects under way and a still-buoyant regional economic environment. The necessary reductions in public spending could, however, affect non-oil sector

growth. A further decline in oil production (down 5 per cent) will keep economic growth under 4 per cent. Despite efforts made to improve the business climate, it continues to suffer from bureaucratic red tape, governance weaknesses and a lack of corporate transparency. The adoption of a new exchange rate system with the Syrian pegged to a currency basket instead of the dollar should help limit imported inflation. High oil prices and a good trend on non-oil exports should hold the current account deficit to 4.5 per cent of GDP in 2008. But the country still depends on stable foreign direct investment inflows to cover financing needs. The fiscal situation has remained nettlesome due to the decline of oil revenues. High oil prices have moreover resulted in unsus-

SYRIA

tainable subsidies estimated at 13.2 per cent of GDP in 2007. Consolidation of public sector finances will be essential to avoid a rapid increase in government debt. Regional geo-

political uncertainties and Syria’s political isolation will, however, hardly be conducive to a speed up of reforms that could increase social tensions.

MAIN ECONOMIC INDICATORS USD billions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

1.0 5.8 -2.6 7.1 6.4 0.8 0.2 0.8 94.2 17.9 6.0

3.1 4.4 -4.2 7.1 8.1 -1.0 -0.8 -3.3 86.4 16.4 5.2

3.3 7.2 -4.4 9.0 10.4 -1.4 -1.2 -4.1 34.8 6.4 5.2

4.4 10 -5.7 10.2 12.1 -1.8 -2.1 -6.1 28.0 4.1 5.0

3.9 7.0 -5.0 11.2 13.0 -1.8 -1.8 -4.8 27.8 4.9 4.5

3.7 7.0 -5.9 11.7 13.4 -1.6 -1.7 -4.5 27.6 5.4 4.2

4

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■ Means of entry Syria is committed to a policy of openness involving customs reform and gradual trade liberalisation. As a member of Greater Arab Free Trade Area (GAFTA), it has enjoyed full and free access to the Arab market since 1 January 2005, as well as free-trade agreements with Lebanon (1994) and Turkey (in effect since January 2007). An association agreement with the European Union, initialled on 19 October 2004, remains deadlocked due to political reasons, primarily over the situation in Lebanon. This agreement provides for the phasing out of customs duties over a 12-year period and the lifting of import bans. There are 10 rates of customs duty, ranging from 1 per cent for agricultural and industrial commodities to 50 per cent for upmarket goods, excluding cars which are taxed 60 per cent. The means of payment normally used is the confirmed letter of credit. Most private Syrian importers have funds with foreign banks. Since the opening of the banking market to private banks in 2004 and the easing of exchange controls, Syrian importers are encouraged to route their transactions

via local banks. Under the Patriot Act 2001, the United States has imposed an embargo against the Syrian Commercial Bank. The provisions of this act hamper transactions in US dollars, but euro-denominated transactions are carried out normally. In actual fact, exports to Syria are hardly affected. ■

Attitude towards foreign investors Law No. 10, which aims to encourage investment regardless of origin or nationality of funds, was replaced in January 2007 by Decree No. 8, which henceforth constitutes the legislative framework for investment. The main amendments provide for broader sector allowances (the private sector can now invest in new areas such as telecommunications and electricity), free transfer of profits and the establishment of a one-stop shop. Investment incentives no longer include tax exemption (under the previous law profits were tax-exempt for up to seven years), but other tax breaks on profits according to the type of company incorporated, its location and number of employees, all of which help to substantially reduce the rate of corporation tax. The maximum rate of taxation, which has already been lowered from 35 to 28 per cent, can be cut to 14 per cent where

387

THE MIDDLE EAST AND NORTH AFRICA

the enterprise is a private limited company offering 50 per cent of its shares to the public. This decree forms part of revamped tax legislation designed to establish a wider tax base with a reasonable and differentiated rate (cf Decree 51 of 17 October 2006). An ad hoc tourism investment law offers numerous tax incentives and authorises property ownership. There are also seven free zones in Syria – including one run jointly with Jordan – offering highly attractive tax exemptions. The main restrictions relate to trade with Israel or Israeli-held companies under Arab boycott legislation. Ad hoc laws for industrial areas and estates offer incentives for setting up industrial facilities. ■ Foreign exchange regulations As part of the reforms of the financial sector, the Syrian government has decided to peg

388

the Syrian pound (SYP) to Special Drawing Rights (SDRs) – and no longer to the US dollar – at a single fixed exchange rate. Currently, the SYP is holding up against the dollar, even reaching record levels below the 50 pound mark (48.7 at 10 October 2007, compared with the usual rate of 50–52 pounds). The Syrian pound, however, remains a non-convertible currency. Since the opening of private banks, foreign currency accounts are authorised, but there is a ceiling on transfers. Only foreign currency brought into the country may be transferred abroad. Since 2007, currency regulations have been liberalised, with nine bureaux de change allowed to open, only two of which are so far operational. Importers can easily buy foreign exchange through local banks. Unlawful moneychangers have all but disappeared.

SYRIA

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public conusmption Investment

50 10 14 Imports: 40% of GDP

Exports: 37% of GDP

MAIN DESTINATIONS OF EXPORTS

MAIN ORIGINS OF IMPORTS

Mn USD

Mn USD

3500

2500

3000

2000

2500 2000

1500

1500

1000

4

1000 500

500 0

0 Iraq

Germany Lebanon

Italy

Egypt

Saudi Arabia

China

Egypt

UAE

Italy

IMPORTS by products ■ Fuels 27% ■ Machinery and transport equipment 24% ■ Foodstuffs and agricultural raw

EXPORTS by products ■ Fuels 68% ■ Foodstuffs and agricultural raw materials 18%

■ Textiles, clothing 5% ■ Other 9%

materials 21%

■ Chemicals 14% ■ Iron and steel 8% ■ Plastics 6% ■ Other 1%

STANDARD OF LIVING / PURCHASING POWER Indicators

Syria

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

3,930 1,570 0.716 n/a 51 37 42

7,746 4,167 0.716 27 59 32 92

5,983 2,313 0.672 31 44 30 50

389

THE MIDDLE EAST AND NORTH AFRICA

Tunisia Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

390

10.1 30,298 A4 Quite low risk A4

STRENGTHS • The country enjoys substantial assets including proximity to the European market, vast tourist potential and political stability. • With its economic diversification and liberalisation policy, Tunisia has won the international community’s political and financial support and facilitated its access to international capital markets. • The partnership agreement with the European Union has spurred progressive upgrading of industry, infrastructure and the financial sector. • Access to education and a developed social security system have fostered a reduction in inequalities and the emergence of a dynamic middle class.

WEAKNESSES • Endowed with limited natural resources, Tunisia’s economic growth has been dependent on exogenous factors like European demand and weather conditions. • Tourism remains vulnerable to the terrorist threat. • An increasingly open economy and the end of the Multifibre Arrangement in 2005 impose continuing efforts to diversify and improve the competitiveness of industrial production. • The financial sector continues to suffer from a high rate of non-performing loans (19 per cent end 2007). • High unemployment – 14 per cent of the working population – mainly affects youth with 30 per cent of those between 15 and 25 unemployed.

RISK ASSESSMENT Growth remained strong in 2007, driven by buoyant household consumption and firm investment mainly in three sectors: building and public works, tourism and services (bank and financial back offices, offshoring). The economy should continue to benefit this year from gradual diversification of the productive fabric, particularly the rise of the mechanical engineering and electricity sectors, which has been gradually offsetting the textile sector’s loss of competitiveness. The bright outlook, underpinned by the government’s proactive industrial policy and a highly effective business climate, is reflected in the satisfactory level of corporate solvency. The

Coface payment incident index for Tunisia has thus been trending down for the past three years. The good economic conditions have facilitated public finance management. The fiscal deficit should thus remain below 3 per cent of GDP in 2008, higher subsidies of petrol prices notwithstanding. The trade balance, meanwhile, has suffered from the surge of hydrocarbon prices and from the competition in critical export sectors, moreover expected to intensify with the Tunisian market completely open to European products from January 2008. The current account deficit has nonetheless remained limited, thanks to the level of tourism revenues and net incom-

TUNISIA

ing private transfers. In this context FDI has largely covered moderate financing needs and the country’s foreign exchange reserves have been very ample. Although still high, the level of debt has thus continued to decline. The country enjoys great political stability. However, massive unemployment of young

graduates has stirred deep and widespread feelings of frustration. Despite the government’s commitment to stimulate the economy, underemployment of trained youth should remain a major problem.

MAIN ECONOMIC INDICATORS USD billions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%G&S exports) Foreign exchange reserves (in months of imports).

5.6 2.7 -3.4 8.0 10.3 -2.3 -2.9 83.7 11.0 2.7

6.0 3.6 -2.6 9.7 12.1 -2.4 -1.9 81.2 14.5 3.0

4.0 2.0 -3.0 10.5 12.5 -2.0 1.1 75.0 13.8 3.2

5.4 4.5 -2.8 11.5 14.0 -2.5 -2.3 70.0 17.3 4.5

6.0 3.0 -2.7 13.5 16.3 -2.8 -2.5 67.0 12.5 4.7

6.2 3.0 -2.6 14.5 17.7 -3.2 -2.8 63.0 11.3 4.7

4

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■

Means of entry Under the association agreement signed between Tunisia and the EU in 1995, no customs duty is to be levied on EU manufactured goods entering Tunisia with effect from 1 January 2008, except for agri-foodstuffs which are subject to only partial exemption. However, some non-tariff barriers will remain in place for sensitive products in the form of monopolies, import quotas and ad hoc taxes on imported goods like luxury articles and cars. Since 1996, Tunisia and the EU have granted each other preferential tariff quotas for a list of farm and fishery products, pending wider trade liberalisation. In matters of trade legislation freedom of commerce is the rule since 1994. Almost all imports of goods require nothing more than a simple invoice. However, despite some improvements such as the introduction of electronic procedures, customs clearance is still too lengthy compared to international standards, and delays continue to dog the roll-out of logistics and infrastructure. Products such as foodstuffs and consumer goods,

even where they comply with European standards, are not immune from, often comprehensive, health, phytosanitary or technical inspections of variable duration. Fund transfers for the settlement of ordinary transactions (import, export, provision of services, dividends, etc) are unrestricted and are handled by approved financial institutions (banks) without prior Central Bank approval. Under a bilateral tax treaty, services provided by a French company for a Tunisian client are liable to 15 per cent withholding tax in Tunisia. Exporters can choose from a wide range of payment instruments (SWIFT, documentary credit, bank guarantees, etc) but should take into account the level of trust established with their partners and the risk of default which, though the situation is much improved, persists. In their contractual relations, French exporters may opt for cases to be tried under French law and by French courts in order to bypass the cumbersome processes of Tunisian law (franchises, exclusivity) and avoid the risk of legal uncertainty.

391

THE MIDDLE EAST AND NORTH AFRICA

■ Attitude towards foreign investors Under the Investment Incentive Act, foreigners and Tunisian nationals are free since 1993 to invest in all sectors, except the retail and wholesale trade, state monopolies (water, electricity, gas, post office, etc), mining, hydrocarbon and financial services (banking and insurance), all of which are governed by ad hoc regulations. For sectors covered by the law, investors benefit from administrative facilities such as a one-stop shop for company incorporation. In some sectors, though, the freedom to invest is conditional upon obtaining prior approval. For nonexport-orientated service activities tight restrictions in fact are in place, including a 49

per cent ceiling on foreign shareholdings. It is also difficult for foreigners to acquire established Tunisian firms. Offshore investments – ie where over 70 per cent of production is exported – enjoy a string of benefits (free warehouse, tax breaks and exemptions, quota of four foreign employees). However, offshore businesses set up after 1 January 2008 will be subject to 10 per cent corporation tax, except those located in regional development areas. Foreigners are barred from owning farmland but can acquire long leaseholds. While the country has an open attitude to foreign investment, companies should be cautious about legal and administrative uncertainty and choosing a local partner.

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 500 450 400

WORLD Tunisia

350 300 250 200 150 100 50

Ju

ne D 93 ec Ju -93 ne D 94 ec Ju -94 ne D 95 ec Ju -95 ne D 96 ec Ju -96 ne D 97 ec Ju -97 ne D 98 ec Ju -98 ne D 99 ec Ju -99 ne D 00 ec Ju -00 ne D 01 ec Ju -01 ne D 02 ec Ju -02 ne D 03 ec Ju -03 ne D 04 ec Ju -04 ne D 05 ec Ju -05 ne D 06 ec Ju -06 ne D 07 ec -0 7

0

392

TUNISIA

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

42 11 15 Imports: 51% of GDP

Exports: 48% of GDP

MAIN DESTINATIONS OF EXPORTS

MAIN ORIGINS OF IMPORTS

Mn USD

Mn USD

3500

5000

3000

4000

2500 2000

3000

1500

2000

4

1000 1000

500 0

0 France

Italy

Germany Spain

Libya

France

Italy

Germany

Spain

Libya

IMPORTS by products ■ Oil and oil by-products 15% ■ Textiles 15% ■ Electrical equipment 14% ■ Machinery 12% ■ Vehicles 6% ■ Chemicals 11% ■ Other manufactured goods (textiles

EXPORTS by products ■ Textiles 29% ■ Electrical equipment 15% ■ Oil and derivatives 13% ■ Leather 5% ■ Olive oil 5% ■ Chemicals 9% ■ Other manufactured goods 13% ■ Other 10%

excluded 18%

■ Other 9%

STANDARD OF LIVING / PURCHASING POWER Indicators

Tunisia

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

8,490 2,970 0.760 32 65 26 57

7,746 4,167 0.716 27 59 32 92

5,983 2,313 0.672 31 44 30 50

393

THE MIDDLE EAST AND NORTH AFRICA

United Arab Emirates

394

Population (million inhabitants): GDP (US$ million):

4.6 163,000

Country @rating: Medium-term rating: Business climate rating:

A2 Low risk A3

STRENGTHS • The economy is diversified and Dubai has been actively developing the non-oil sector (aluminium, financial services, tourism). • Abu Dhabi is endowed with substantial oil and gas reserves and like Dubai has been diversifying its productive fabric. • The Emirates enjoy a solid financial situation. Foreign debt has been rapidly growing but with extensive financial holdings abroad, the country is benefiting from an external net creditor position. • The banking system is efficient.

WEAKNESSES • The opacity of public sector and private company financial data hampers risk analysis. • Although diversified, the economy is still dependent on Abu Dhabi’s oil revenues. • Regional geopolitical instability constitutes a risk for an economy evolving into an international business centre.

RISK ASSESSMENT Driven by oil revenues, investment and rapid population growth, the economy has grown strongly. The non-oil sector grew nearly 10 per cent in 2007 with the relative slowdown in the overall economy resulting from the reduction of hydrocarbon production. The economic dynamism extends to most segments of the economy, from manufacturing and construction to services (commerce, transport and finance). The economy should remain buoyant in 2008, underpinned by high barrel prices, with an oil production recovery expected to contribute to an estimated 8.5 per cent growth acceleration. Outside oil, economic bottlenecks, a credit slowdown and rising costs could delay some large construction projects and affect growth. In this context, inflationary pressures, mainly attributable to the housing shortage and the rising cost of rent, particularly in Dubai, will be unlikely to ease.

Implementation of a vast public investment programme (2006–2011) intended to develop infrastructure – ports, airports, roads and housing – and production capacity in oil, petrochemicals and metallurgy has bolstered the economic outlook. This programme along with a dynamic upscale business environment should continue to spur population growth. The extent of property development in Dubai could ultimately trigger a price correction affecting weaker companies in that sector as well as the most exposed banks. A sudden market collapse does not, however, appear to be the likely scenario. The business environment remains buoyant. Despite the regional geopolitical uncertainties, the economic liberalism – in customs-free area and the property sector – and domestic political stability have been reassuring to investors and have attracted capital.

UNITED ARAB EMIRATES

MAIN ECONOMIC INDICATORS USD billions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%GS& T exports) Foreign exchange reserves (in months of imports)

11.9 3.1 13.0 67.2 45.8 21.4 7.6 8.6 18.9 4.7 2.8

9.7 5.0 18.4 90.2 63.4 26.8 10.3 9.9 26.8 3.5 2.6

8.2 6.2 26.8 117.2 74.5 42.7 24.3 18.3 31.2 3.9 2.4

9.4 9.3 28.8 142.6 86.1 56.5 36.1 22.1 47.3 5.2 2.7

7.7 9.8 27.6 152.0 92.4 59.6 38.7 20.9 55.3 9.0 2.9

8.5 10.0 27.8 168.5 103.3 65.2 42.9 20.6 58.6 10.7 3.2

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■

Market overview In spite of a number of restrictive practices (local majority partner, closure of some sectors to foreigners, local agent, local sponsorship for a residence permit), the United Arab Emirates’ market is very open and highly competitive. The UAE is a member of the WTO and, through the Gulf Co-operation Council (GCC), is a party in talks on a freetrade agreement with the EU. ■ Means of entry UAE customs duties applied since 1 January 2003, the date of introduction of the GCC customs union, are 0 per cent for basic staples and 5 per cent of the CIF value for other goods. The country’s standards policy is based on that of the GCC. A national standards agency Emirates Authority for Standardisation and Metrology (ESMA) was set up in 2003 to establish nationwide standards and, above all, to play an active role in the harmonisation of regulations within the GCC. All modern means of payment are available in the UAE. The cheque, documentary credit collection, promissory note and bill of exchange are not recommended. ■ Attitude towards foreign investors The UAE and the Emirate of Abu Dhabi in particular have actively sought FDI both to

develop the hydrocarbon sector and, more recently, to improve management of some of its public services, particularly those connected with the production and supply of electricity and water. Faced with the gradual depletion of its oil reserves, the Emirate of Dubai is striving to channel foreign investment into economic diversification, particularly in the property, tourism and service sectors and lately in high-tech cluster industries. The Emirate of Abu Dhabi is further diversifying into heavy industry (steel, aluminium, petrochemicals). There is no direct taxation of either individuals or companies (except banks, oil companies and telecoms operators). Capital may be freely repatriated. Moreover, new laws have been passed to open up land ownership to foreigners. Nevertheless, a number of obstacles to FDI remain. Just as foreign companies operating outside the free zones are required to have a local majority partner in a joint venture, so non-nationals residing in the UAE must have a local sponsor. Company law reform legislation, under which foreigners will be permitted to hold a majority stake in local companies, is in the pipeline.

4

■

Foreign exchange regulations There are no exchange controls in the UAE. The UAE dirham has a fixed rate of exchange with the US dollar at AED3.6725 to the dollar. There are no restrictions on capital transfers.

395

THE MIDDLE EAST AND NORTH AFRICA

OPPORTUNITY SCOPE

BREAKDOWN IN DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

26 6 14 Imports: 76% of GDP

Exports: 94% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

30000

15000

25000

12000

20000

9000

15000 6000

10000

3000

5000

0

0 Japan

South Korea

Thailand

India

Iran

USA

China

India

Germany Japan

IMPORTS by products ■ Machinery and vehicles 38% ■ Pearls and precious stones 21% ■ Manufactured goods 15% ■ Ores and metals 11% ■ Foodstuffs 7% ■ Other 8%

EXPORTS by products ■ Hydrocarbons 50% ■ Re-exports 32% ■ Other 18%

STANDARD OF LIVING / PURCHASING POWER Indicators GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

396

Emerging United Arab Emirates Regional average country average 23,990 23,950 0.839 n/a 77 22

7,746 4,167 0.716 27 59 32

5,983 2,313 0.672 31 44 30

197

92

50

YEMEN

Yemen Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

21.6 19,057 C Very high risk D

STRENGTHS • The country enjoys the political and financial backing of the international community with a promise made in November 2006 for US$5 billion in aid to finance development and poverty reduction projects. • The production start-up in 2009 of a natural gas liquefaction facility will breathe new life into the economy. • Foreign debt has been a mild constraint, thanks to relief granted by the Paris Club. • Transfers from expatriate workers have consolidated the invisibles balance.

WEAKNESSES • The economy continues to depend on oil revenues that have been in decline due to depletion of reserves. • Political instability and poverty have impeded the structural adjustments needed to prepare the transition to a post-oil economy. • Insecurity, corruption and a shortage of professional skills have affected the business climate. • Qat consumption has undermined economic activity.

RISK ASSESSMENT A further 10-per cent decline in oil production marked 2007, undercutting economic growth estimated at 3.6 per cent. Growing at a somewhat stronger 5.0 per cent clip, the nonoil sector was the main economic driver underpinned by household consumption spurred in turn by emigrant worker remittances and public spending. The outlook for 2008 is bright in view of an expected investments upturn and progressive implementation of projects financed by international aid, with half contributed by Gulf monarchies. Household consumption will continue to trend up, buoyed by new civil service wage increases, for military personnel in particular, with some increases effective late 2007. Oil production should decline less than it has these past two years with growth accelerating to an estimated 4.3 per cent in conse-

quence. After an upsurge in prices in 2006, attributable to rapid domestic demand growth and rising world prices for commodities, better harvests contributed to slowing the price rise in 2007. Inflation should remain high, however, stoking social tensions in a country among the poorest in the region. It will thus be difficult to implement an overhaul of public finances undermined by gradual decline of oil revenues and larger subsidies prompted by soaring barrel prices. The VAT system introduced in 2007 should diversify sources of fiscal revenues, but as a result of opposition in business circles it includes exemptions that will limit its scope. Accompanied by increased hydrocarbon imports, the decline in oil production also caused external accounts to deteriorate in 2007. More constrained domestic consumption should facilitate reducing the current account deficit in 2008.

4

397

THE MIDDLE EAST AND NORTH AFRICA

MAIN ECONOMIC INDICATORS USD billions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP)* Exports Imports Trade balance Current account balance Current account balance (%GDP)* Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

3.7 11.9 -5.1 3.9 3.6 0.4 0.2 1.5 45.6 2.3 10.4

4.0 12.0 -2.9 4.7 3.9 0.8 0.2 1.6 39.6 3.7 10.3

4.6 14.5 -2.2 6.4 4.7 1.7 0.6 3.8 31.8 3.9 8.9

4.0 20.3 0.8 7.3 5.9 1.4 0.6 3.2 27.3 3.4 10.2

3.6 14.0 -4.1 6.9 7.5 -0.6 -0.7 -3.1 25.8 4.3 10.7

4.3 11.5 -4.6 7.6 7.5 0.1 0.0 -0.1 25.2 3.7 12.2

*ex grants, e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■ Market overview Several types of levy apply to imported goods, including ‘duties and taxes’ on all authorised imports. Customs duty is levied at the single rate of 5 per cent of the cost, insurance and freight (CIF) value. There is also 3 per cent additional tax, a freight tax calculated on the volume and length of storage and, since July 2005, 5 per cent general sales tax (except for flour, rice, drugs, baby milk and raw gold). Exporters are advised to use either irrevocable letters of credit confirmed by a first rate (preferably foreign) bank or advance payments. Some Yemeni traders have financial assets abroad that they can use to pay for imports into the country. A letter of credit opened with CALYON, the only Western financial institution with branches in Yemen, does not need to be confirmed, particularly if the seller is prepared to cover the risk of nontransfer. Some foreign inspection companies are represented in Yemen, with Bureau Ve´ritas due to open a branch in the country at the end of 2007.

398

■

Attitude towards foreign investors Foreign investment is governed by law No. 22 of 1991, amended several times, most recently in 2002. There are also ad hoc laws offering special terms for oil exploration/ production and public works. In general, investors are granted tax breaks and exemptions from customs duty. Investment capital and profits can be freely repatriated at the market rate. The law lays down the principle of equality between Yemenis and foreigners. Foreigners may hold a majority, even 100 per cent, stake in a local company but would be well advised to team up with a local partner. The Labour Code (in Arabic) covers key issues, but its interpretation may give rise to confusion. As social protection is poor, some companies take out private insurance cover for their employees.

■

Foreign exchange regulations The Yemeni rial is stable versus the dollar. The exchange dipped from 198 rials to the dollar in October 2006 to 199 rials in October 2007.

YEMEN

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

36 12 20 Imports: 38% of GDP

Exports: 46% of GDP

MAIN DESTINATIONS OF EXPORTS

MAIN ORIGIN OF IMPORTS

Mn USD

Mn USD

2500

1200

2000

1000 800

1500

600 1000

4

400

500

200

0

0 China

India

Thailand

South Korea

USA

UAE

China

Saudi Switzerland Kuwait Arabia

IMPORTS by products ■ Machinery and transport equipment 23% ■ Fuels 21% ■ Manufactured goods 21% ■ Foodstuffs 20% ■ Chemicals 6% ■ Other 9%

EXPORTS by products ■ Fuels 78% ■ Foodstuffs 3% ■ Machines and transport equipment 2% ■ Other 17%

STANDARD OF LIVING / PURCHASING POWER Indicators

Yemen

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

920 760 0.492 26 27 46 15

7,746 4,167 0.716 27 59 32 92

5,983 2,313 0.672 31 44 30 50

399

Sub-Saharan Africa Outlook for 2008: Sub-Saharan Africa

402

Angola Benin Botswana Burkina Faso Burundi Cameroon Cape Verde Central African Republic Chad Congo Democratic Republic of Congo Djibouti Eritrea Ethiopia Gabon Ghana Guinea Ivory Coast Kenya

410 414 416 420 422 424 427 428 430 432 434 435 437 439 441 445 449 451 455

Liberia Madagascar Malawi Mali Mauritania Mauritius Mozambique Namibia Niger Nigeria Rwanda Sao Tome ´ and Principe Senegal Sierra Leone South Africa Sudan Tanzania Togo Uganda Zambia Zimbabwe

459 462 464 465 467 470 474 478 480 481 485 487 488 492 494 498 500 503 505 509 512

5

OUTLOOK FOR 2008

OUTLOOK FOR 2008

Sub-Saharan Africa Marie-France Raynaud Economic Research and Country Risk Department, Coface

■

402

Growth spurred by raw material prices

Sub-Saharan Africa has achieved strong growth above 5 per cent for the past five years, buoyed by soaring raw material prices amid dynamic Chinese and Indian demand. Economic growth reached 6.1 per cent in 2007 and should climb to 6.8 per cent in 2008. Oil countries in a position to increase their production capacity have capitalised on the upsurge in hydrocarbon prices. Oil prices could reach US$80 per barrel of North Sea Brent in 2008 – having increased over 350 per cent between 2003 and 2007 – due to strong Asian demand, limited refining capacity, speculation prompted by the finite character of hydrocarbon resources and persistent political uncertainties, notably in the Middle East. Angola should thus achieve 26 per cent GDP growth this year, thanks to the development of offshore fields, Equatorial Guinea should continue enjoy growth exceeding 10 per cent and Gabon, whose economy grew at a steady pace below 3 per cent until 2006, should post growth exceeding 5 per cent in 2008 as it did in 2007, buoyed by the production start-up of new fields. Africa’s leading oil producer, Nigeria, should experience a growth rebound this year, thanks to the start of exploitation of offshore fields vulnerable to attacks by insurgents from the Niger Delta region like those that affected output in 2007. Ore and metal-exporting countries should also continue to enjoy strong growth

with prices for iron, copper (Zambia), uranium (Niger) and platinum (South Africa) remaining buoyant, thanks to demand from Asia. Farm-product exporting countries, like Ghana (cocoa) or Benin, Mali and Burkina Faso (cotton) should similarly continue to benefit from upward price trends even if those products are subject to high volatility. Growth has been driven by buoyant raw material prices (%)

8 7 6 5 4 3 2 1 0 2001 2002 2003 2004 2005 2006 2007 2008 Africa

Emerging countries

Domestic demand should also generally remain buoyant. Subject to good weather conditions, household consumption should remain dynamic, underpinned by rising farm incomes. Public sector investment should moreover continue to grow. Thanks to debt-service relief granted and reforms undertaken under the HIPC and MDRI programmes, governments have had the room for manoeuvre to undertake vast investment programmes not only in transport and energy infrastructure but also in health

OUTLOOK FOR 2008

and education. This context has also provided a framework conducive to development of private investment, especially foreign direct investment (FDI). Although mainly focusing on activities related to hydrocarbon and ore extraction where upward price trends buoy profitability, FDI has also been flowing increasingly into the construction and telecommunications sectors. FDI inflows thus increased twofold between 2004 and 2006. This trend should continue in 2008, albeit at a more moderate pace. Despite rising petrol and foodstuff prices, average inflation on the continent should remain limited to under 7 per cent in 2008 although the situations will vary widely. Inflation in countries belonging to the franc zone should remain below 3 per cent with the pegging of the CFA franc to the euro and the European currency’s appreciation against the dollar resulting in a substantial reduction in imported inflation. Inflation should, however, exceed 10 per cent in Ethiopia and Guinea and even 25 per cent in Eritrea, stirring keenly felt popular discontent as a consequence. South Africa, representing 40 per cent of sub-Saharan African GDP, and since 2003 enjoying strong growth driven by buoyant domestic demand, has shown signs of overheating. In 2007, the production capacity utilisation rate exceeded 80 per cent, household debt represented over 80 per cent of disposable income and inflation was above the 6 per cent threshold. The central bank’s restrictive policy, highlighted by a significant increase in its key rate and adoption in June 2007 of the National Credit Act tightening the conditions of access to credit, is expressly intended to achieve a soft landing for household consumption, expected to ease to 4.5 per cent in 2008 and investment should take over as the new growth engine. Despite generally good conditions, the continent’s growth should remain below the 7-per-cent rate needed to achieve the UN Millennium Development Goals, which notably include a 50 per cent reduction in poverty by 2015. Efforts to foster economic dynamism have notably come up against a poor energy and transport infrastructure network and insufficient human capital de-

velopment. A lack of diversification of the productive fabric and exports and the predominance of agriculture in the GDP makes the African economy vulnerable to exogenous shocks, be they inclement weather or the volatility of world prices. A scenario of declining raw material prices in 2008, although highly unlikely, cannot be ignored in view of the appreciable risks of a greater-than-expected decline of American and European demand after a widening of the credit crisis or a more severe growth slowdown in China with the overcapacity generated by the investment boom undermining the financial viability of certain companies. ■

Public sectors accounts generally showing imbalances despite more prudent ﬁscal policies

Oil countries, except Chad, have been running fiscal surpluses, thanks to the growth of oil revenues. In addition, a veritable strategy for managing oil export revenues sometimes accompanies this good fiscal performance, with certain oil countries seeking to leverage past experience with raw material cycles by not basing their long-term spending programmes solely on those erratic revenue flows. Nigeria has thus set up an Oil Fund with resources allocated to long-term savings and introduced a fiscal rule based on a very conservative oil-price hypothesis. Non-oil countries, except South Africa, where the tight fiscal policy pursued has resulted in public sectors essentially in balance, have experienced difficulties in aligning still insufficient revenues with growing needs – primarily concerning infrastructure, combating poverty, public health (especially the effects of AIDS) and education. Reforms relating to fiscal policy undertaken under the HIPC and MDRI programmes have facilitated the start of a build-up of fiscal revenues, thanks notably to improved tax collection and revision of benefits granted to certain foreign investors. Thanks to debt-service relief, countries that have benefited from the HIPC and MDRI programmes have been able to free up additional fiscal room for ma-

5

403

OUTLOOK FOR 2008

noeuvre in funding priority spending, notably on health and education. The additional leeway has nonetheless proven limited in view of the concessional nature of previously contracted debt. Although the amount of debt-service was cut in half in relation to exports on average between 1999 and 2005, down from 15.2 per cent to 7.4 per cent, the improvement proves less significant in relation to total fiscal spending. Despite the undeniable progress, the fiscal positions of certain countries could weaken in 2008. The expiration of the Cotonou Agreement and the introduction of trade reciprocity in the Economic Partnership Agreement could have a depressive effect on customs revenues, which represent 15 per cent of total revenues of countries in the Economic Community of West African States (ECOWAS). More generally, the rise of subsidies intended to maintain purchasing power across Africa amid soaring foodstuff and oil prices could strain public spending even more. In such conditions, international aid will continue to cover financing needs. ■

404

External accounts generally in deﬁcit – except for oil countries

The external positions of African countries vary widely according to changes in the terms of trade. Countries rich in natural resources enjoy trade surpluses and very ample foreign exchange reserves whereas the great majority of sub-Saharan African countries are net importers of hydrocarbon and foodstuffs (corn, wheat, rice, vegetable oil) and suffer from deteriorating trade balances. Food product prices seem to be trending durably up due to growing demand from emerging countries. The change in food habits of consumers in those countries in favour of meat products has resulted in particular in a sharp increase in demand for grain. The increasing use of products like corn and vegetable oil for biofuel production also contributes to the increasing cost of food products. Meanwhile, the vast investment programmes implemented in many African countries have contributed to the increased capital goods imports, a trend likely to intensify in 2008.

6%

The region's current account will remain in deficit (% of GDP)

4% 2% 0% -2% -4% -6% 2001 2002 2003 2004 2005 2006 2007 2008 Africa

Emerging countries

In South Africa, the current account deficit should remain large with capital goods imports undermining the trade balance whereas durable and semi-durable goods imports should be flat amid the slowdown of household consumption. South Africa thus remains exposed to exchange rate risk, especially with external financing needs still mainly covered by volatile capital and with little prospect of a significant increase in direct investment inflows in the near term. The financing needs of other oil-importing countries, except Botswana, will also remain large. Since those countries generally do not benefit from sufficient FDI inflows, international aid will remain crucial in financing development efforts. At the July 2005 Gleneagles Summit, financial backers made commitments to double by 2010 the amount of development aid provided to Africa in the Millennium Development Goals framework. Since then, international aid has mainly taken the form of debt relief, which thus represented over half total aid granted to Zambia compared to 40 per cent for Ghana and nearly 30 per cent for the Democratic Republic of Congo. At the Berlin Summit on 14 December 2007, the World Bank made a commitment to pay out US$41.6 billion from 2008 to 2011 to contribute to the funding of priority spending on energy and transport infrastructure. This aid will, however, remain concentrated on a limited number of countries that benefit from support from financial backers for strategic or political reasons. In 2007, Ethiopia, Mozambique, Nigeria, RDC, Congo Republic, Sudan, Tanzania and Zambia thus

OUTLOOK FOR 2008

received half the Official Development Aid granted to sub-Saharan African countries. Despite the increase in FDI inflows, Africa’s share in total world FDI remains marginal (2 per cent) compared to the other emerging regions, notably South Asia, East Asia and Southeast Asia, which attract 15 per cent of FDI, and Latin America and the Caribbean area (6 per cent). Poor infrastructure, a political situation that is still unstable despite significant progress and an inhospitable business environment have deterred FDI development. FDI also focuses on a limited number of countries and a very limited number of sectors – mainly extractive industries – which offer prospects of high profitability. Nigeria is the main beneficiary followed by Angola, Sudan, Equatorial Guinea, Chad, Ghana and Mozambique. The Least Developed Countries in Africa have nonetheless been host to 23 per cent of FDI inflows to Africa, particularly for exploration projects for mining and oil-bearing resources. In 34 sub-Saharan African countries, however, total FDI was under US$100 million. Although at this juncture FDI has generated only limited locomotive effect on the rest of the productive fabric, outside the building and public works sector, it is increasingly directed at service sectors, particularlytransport and telecommunications. The four leading countries investing in Africa are France, the Netherlands, South Africa and the United Kingdom. China now represents 10% of FDI in Africa. Despite the efforts of the international community and the high profitability of mining extraction development projects, the level of aid provided has not sufficed to support the development of sub-Saharan African countries, while FDI has remained limited. It is thus not surprising that a growing number of African countries that have achieved marked improvement in their debt ratios are now turning to capital markets to finance their development. Ghana thus issued Eurobonds last year with Gabon and Kenya following suit. In these circumstances, the return to indebted-

ness positions by African countries will bear watching. Especially with new financial backers, like China and India, proposing low-interest loans, often guaranteed by natural resources, and in conditions moreover not always entirely transparent. ■

After the HIPC and MDRI programmes, resurgence of debt will bear watching

The HIPC programme reserved for highly indebted poor countries continued in 2007 with Sao Tome and Principe becoming in February 2007 the 17th of the 40 eligible countries to reach the ‘completion point’. The country thus benefited from cancellation of its entire debt to Paris Club financial backers and, subject to continuing efforts on structural reforms, should benefit from debt relief from the World Bank, the African Development Bank, and the IMF under the MDRI programme adopted in July 2005 at the Gleneagles Summit. The 17 countries that have benefited from the HIPC and MDRI programmes have thus achieved a significant reduction in the level of their debt. Oilexporting countries have, meanwhile, capitalised on the soaring hydrocarbon to wipe out their debt. The agreement concluded in October 2005 with the Paris Club – US$18 billion in debt relief and US$12 billion in repayment of residual debt – thus resulted in virtually the total elimination of Nigeria’s foreign debt. Angola normalised with Paris Club creditors in 2007 with the country paying off its arrears entirely and resuming regular and timely repayment of instalments due on its debt.

5

HIPC and MDRI intiatives have contributed to the clear improvement in external debt ratios (in % of goods and services exports) 300% 250% 200% 150% 100% 50% 0% 2001 2002 2003 2004 2005 2006 2007 2008 Africa

Emerging countries

The return to indebtedness of African countries will nonetheless bear watch-

405

OUTLOOK FOR 2008

ing. The IMF has set up a Debt Sustainability Framework (DSF) to guide borrowing decisions by countries having benefit from the HIPC and MDRI programmes. The DSF stipulates – according to the quality of the institution environment – indebtedness thresholds beyond which repayment risk is considered very high. Benin, Madagascar, Mozambique and Zambia thus benefit, due to the quality of their government’s economic and structural policies, from higher thresholds than Ethiopia, Malawi, Niger and Rwanda. Those thresholds could, however, be reached soon with the emergence of new financial backers, like China or India, which extend loans, sometimes in a relatively opaque manner, and thereby jeopardise the coordination efforts of the other official creditors. As such, an ultimate return to over-indebtedness constitutes an appreciable risk. ■

406

A shaky improvement in the political environment with deﬁciencies in governance terms

The political and security situation in Africa has developed along favourable lines in recent years. Although the number of armed conflicts has declined, there are however still as many instability hot spots. The United States has made easing the underlying tensions a strategic priority in combating international terrorism as evidenced by the establishment of a new high-command structure for Africa, the United States Africa Command. Southern Africa should remain the most stable region on the continent, with the notable exception of Zimbabwe, increasingly mired in a political, economic and social crisis marked by galloping inflation, complete disorganisation of economic activity and massive emigration. Botswana, Mauritius and Namibia enjoy a relative political consensus with intercommunity tensions remaining limited despite extensive underemployment and poverty. South Africa has entered a phase of political transition with the election as ANC leader of Jacob Zuma, backed by the COSATU labour union and the Communist Party, raising many uncertainties as to South Af-

rica’s future political and economic options. Stability is still on track, meanwhile, in Mozambique, which emerged from 20 years of civil war in 1993, even if recent developments are not entirely positive. In Angola, five years after the end of the civil war, general elections have still not taken place and have now been postponed until 2009. Madagascar enjoys a stable situation consolidated by the free and transparent elections held in December 2006. Conversely, East Africa seems to be sinking deeper and deeper into a quagmire. In Sudan, the conflict continues in Darfur, and the efforts by the international community to protect the civilian populations have thus far not produced the desired results. Resurgence of the North/South conflict remains moreover a distinct possibility. This violent hot spot has implications for neighbouring countries, particularly the Central African Republic and especially Chad where the government has been contending with a resurgence of the insurrection by rebel movements. The conflict in Somalia opposing the interim government’s forces and rebel movements has continued unabated. It could moreover lead to a new ‘face-off’ between Ethiopia, which backs the government forces, and Eritrea more on the side of the rebels, with these two countries as yet incapable of resolving their own dispute over demarcation of their common border. Prospects for breaking out of the crisis that has developed in the Democratic Republic of Congo have been undermined by an instability fomented by the militias in many regions. Last but not least, the intensification of ethnic tensions in Kenya in the wake of the disputed elections in December 2007 due to perceived unfair redistribution of wealth and land could have a tremendously negative impact on the stability and the development of the Great Lakes region. In West Africa, future developments in the situation in Ivory Coast and Nigeria will mark the political environment. In Ivory Coast, the formation of a national unity government after the Ouagadougou Accords of March 2007, constituted a decisive step in the process of breaking out of the crisis. There is, however, no guarantee of stability,

OUTLOOK FOR 2008

and successful completion of the population identification process, notably in the North, prerequisite to the holding of general elections, is crucial to the country’s reunification. In Nigeria, the new President, Umar Yar’Adua, who came to power via contested elections, has taken pains to enhance his legitimacy by setting up a national unity government and naming as vice-president, a personality coming from the Niger Delta insurrection region. The year 2008 will be decisively important for the new president who must strengthen his legitimacy and authority to follow through on the reforms undertaken, notably as regards combating corruption. The political stability of countries like Mali, Burkina, Senegal, Gabon and Cameroon should not be in jeopardy during the

current year even if some deterioration of the situation has been perceptible in Senegal, with an increase in discretionary political decisions, and in Mali, with the Tuareg rebellion heating up. Stabilisation policy is going forward meanwhile in Sierra Leone, after the success of the elections in July 2007, which resulted in a political changeover without triggering a new civil conflict; in Liberia, which is engaged in a far-reaching structural reform process; in Togo, which recovered international community support after the elections in October 2007 and in Mauritania, which experienced its first free and transparent elections in September 2007. Beyond the security question, governance continues to be the African Achilles’ heel and institutional environment quality is crucial to economic development.

Business climate rating: sub-Saharan Africa D C

5

B A4 A3 A2

So

ut h A Bo fric ts a w M ana au ri N tius am Se ibia ne ga Bu B l rk en in in a Ca Fas m o Iv ero or on yC oa Ga st bo Gh n an Ke a ny a M a Ug li an Za da m b Co An ia ng go o la (D R Et C) hi op i M Gui a oz ne am a bi qu e N ig e N r ig er Su ia d Ta an nz an ia

A1

The efficiency of public services (government, education, health and infrastructure), regulatory quality, the rule of law and a limited degree of corruption are decisively important in doing business and making investment decisions. Improvement of governance also has direct economic implications: the effectiveness and legitimacy of public institutions facilitates better collection of taxes – a resource essential to sustainable development. In addition to rankings established by multilateral institutions, many African initiatives have come into being to support governance efforts across the continent.

NEPAD, the New Partnership for Africa’sDevelopment, has established a peer review mechanism. The Mo Ibrahim Index is a private initiative that rates governance in 48 sub-Saharan African countries. In view of the stakes involved, Coface is launching a business climate rating that henceforth constitutes a pillar of the Coface @rating system. The new Business Climate @ratings reflect the institutional weaknesses in individual countries and Coface’s own experience on the quality of available corporate information and creditor protection.

407

OUTLOOK FOR 2008

Sub-Saharan African countries rank lowest based on the Coface Business Climate @ratings. Out of 34 countries rated, 18 countries received a D rating – the lowest BusinesEnvironment@rating. Nine countries earned a slightly better C and there was one B. Only South Africa, Botswana, Mauritius and Namibia warrant A3, reflecting business environment quality equivalent to that found in the Eastern European countries recently admitted to the European Union. The Business Climate @ratings thus clearly reflect how economic activity in the vast majority of African countries suffers from the poor institutional environment and especially from deficient corporate accounts and legal systems ill-equipped to support debt collection procedures. The poor performances in business climate terms is largely attributable to the fact that the level of risk in individual African countries – as reflected by their country @ratings – has not improved despite better debt ratios. ■

Although economic growth has allowed companies to improve their creditworthiness, the business climate has remained poor overall Economic growth and credit risk

8% 7%

6.2%

6%

6.5%

6.8%

5.1%

5% 4%

6.2%

3.5% 2.7%

3%

3.4%

250 200

4.3% 3.7%

300

3.5%

150

2.6% 100

2% 50

1% 0%

0

1997

1998

1999

2000 2001

2002

2003

2004 2005

2006 2007 2008 (e) (f)

Economic growth (%) Payment incident index

408

The good economic conditions enjoyed by South Africa allowed companies to improve their creditworthiness despite restrictive monetary policy. This situation is reflected by the marked levelling off of bankruptcies in 2007 and the good Coface payment incident index still ranking the country below the world average, a trend likely to continue in 2008. Similarly, in Mauritius, even with the traditional pillars of the economy grappling with hard times, improved economic conditions overall have allowed companies to bolster their creditworthiness. Conversely,

in Senegal, the increase in payment incidents reflects the financial crisis buffeting the Senegal Chemical Industries. In the other countries, corporate payment behaviour continues to suffer from the difficulties that may be experienced in particular sectors like textiles, hampered by Asian competition and agriculture, exposed to weather conditions and difficulties in reorganising the cotton and peanut industries. Oil prices have moreover affected corporate accounts and in certain countries, the difficulties experienced by public and private suppliers of energy (electricity, petrol) faced with the increasing cost of imported oil and the impossibility of passing the increases on to customers has led in some cases to the emergence of payment incidents. Furthermore, in certain countries, like Angola and Nigeria, the poor business climate has sometimes resulted in unpredictable payment behaviour. ■

Country @rating trend

The level of risk, although stable, remains high compared to the average for emerging countries. Persistent weakness on governance underlies the poor performance of African countries in risk terms, notwithstanding the marked improvement in financial ratios. The main southern countries still have the best ratings. They ally political and financial stability (Botswana, A2) despite slight deterioration (South Africa, Mauritius, A3). With their foreign debt remaining limited, they have maintained their reputation for creditworthiness in international capital markets. In Gabon and Cameroon (B), the improvement in the financial situation, thanks to oil revenues, has buoyed payment behaviour in the public sector and, in consequence, that of companies. Reinvigorated policy on structural reforms should moreover accelerate diversification of their productive fabric. Non-oil countries and beneficiaries of substantial debt relief, Senegal, Mozambique and Tanzania (B) have been steadily implementing structural reforms. Despite the improved financial situation of oil countries Angola (C) and Nigeria (D), their country @ratings have not changed with

OUTLOOK FOR 2008

their business climates remaining very difficult. In Nigeria, despite a notable effort to diversify the economy, risks of spiralling tensions have increased in the wake of the April 2007 presidential elections which were marred by controversy. Despite good eco-

nomic conditions, deficiencies in combating corruption and continuing ethnic tensions – which intensified at the time of the highly disputed elections in December 2007 – have prevented the upgrading of Kenya’s rating to (C).

5

409

SUB-SAHARAN AFRICA

Angola Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

410

16.4 44,033 C Very high risk D

STRENGTHS • With the peace process firmly on track, the country’s reconstruction has begun in earnest. • Sub-Saharan Africa’s second largest oil producer, Angola joined OPEC in January 2007 and was expected to reach the 2 million barrel-a-day threshold late that same year. • The prospect of exploiting new deep water offshore oilfields has spurred FDI inflows. • The country’s broad economic potential ranges from diamonds to minerals, hydroelectricity, agriculture and fishing and the emergence of a middle class has spurred development of new consumer markets. • The efforts made to adopt good economic management since the civil war ended has allowed the country to benefit from international community financial backing.

WEAKNESSES • Underpinned by an oil sector representing 65 per cent of GDP and 90 per cent of export revenues, the economy is very vulnerable to a price downturn. • Marked regional inequalities compounded by dilapidated infrastructure and the health and social consequences of 27 years of civil war have impeded development. • A difficult business environment has hampered the economy. • By borrowing from China with oil resources as guarantee, Angola has been able to skirt the IMF’s stricter conditions on reform.

RISK ASSESSMENT The growth rate achieved by Angola in 2007 was among the world’s highest, driven by increased oil extraction and soaring world prices. The non-oil sector – gas and civil engineering – has also contributed to the economic dynamism. Growth should exceed 26 per cent in 2008, thanks to exploitation of new offshore fields and a construction sector buoyed by the prospect of hosting the African Nations Cup football championships in 2010. A notable easing of inflation in a framework

of tight fiscal policy and higher interest rate has accompanied the economic dynamism. The oil export revenues have allowed Angola to maintain a comfortable public finance situation and an excellent position on external accounts. The strong GDP growth has moreover allowed it to improve its debt ratios. The fiscal and current account deficits nonetheless continue to give cause for concern, reflecting an insufficiently diversified economic fabric and Angola’s failure to undertake major structural reforms.

ANGOLA

After many postponements the first legislative and presidential elections since the civil war ended in 2002 have been announced for 2008 and 2009, respectively. While concluding the democratic transition process initiated after the 27 years of civil war ended, they should also consolidate the pre-eminence of incumbent President Jose´ Eduardo

dos Santos’ party the Movement for the Liberation of Angola. Corruption and poor governance are nonetheless still endemic. In such conditions the establishment of a legal framework conducive to development and less-inegalitarian distribution of oil revenues will remain uncertain.

MAIN ECONOMIC INDICATORS USD billions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%GS exports) Foreign exchange reserves (in months of imports)

3.3 98 −6.4 9,508 5,480 4,035 −5.1 75 23.7 0.9

11.2 43.5 −1.6 13,475 5,832 7,642 3.5 54.5 16.5 1.6

20.6 23 7.3 24,109 8,353 15,756 16.8 39.9 10.9 2.9

18.6 12 14.8 31,862 9,586 22,276 23.3 20.3 8.7 4.3

23.4 10 0.9 38,997 15,048 23,949 6.4 19.6 4.5 4

26.6 8.9 3.9 55,916 19,801 36,115 8.7 15.8 3.6 5.7

5

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■

Means of entry The country is highly import-orientated and dependent for 90 per cent of its consumption and investment on imported goods. There are no protectionist tariff barriers and duties range from 2 to 30 per cent. Moves are afoot to simplify import procedures. A single customs document has been introduced, followed by the tendering out of pre-shipment inspection. Yet Angola remains one of the most bureaucratic countries in the world. Clogged ports and institutionalised red tape at government departments, ports authorities and customs is hampering trade and economic development. Angola does not apply a preferential tariff to the countries comprising the Southern Africa Development Community (SADC), as it is not a full member of this free trade area. But it grants tax exemptions on imports intended for foreign investment projects undertaken in priority areas. Exporters are strongly advised to check the creditworthiness and solvency of partners. They should demand cash payment with their order, or

payment by irrevocable documentary credit confirmed by a leading bank. ■

Attitude towards foreign investors Investment law reform is incomplete and fails to offer foreign investors all the guarantees they might reasonably expect. The system has been liberalised and brought into line with that of the other SADC member countries, but it remains complex and short on incentives. The National Agency for Private Investment (Ageˆncia Nacional para o Investimento Privado, ANIP) – a one-stop shop – is attempting to group together key government departments, but its operations are unwieldy. Formalities are lengthy and approval procedures have to be followed up by a local partner or lawyer. Legally established foreign enterprises are frequently subject to tax audits as well as inspections by the employment and health departments. The judicial system is in a critical state. Thanks to its oil business, Angola is one of the biggest recipients of FDI in Africa, along with Nigeria, South Africa and Egypt.

411

SUB-SAHARAN AFRICA

■ Foreign exchange regulations The kwanza (a non-convertible currency)rose against the dollar in 2006 and 2007, trading at AOK75 to the US dollar in September 2007. It has since continued its upward

412

trend. The banking system is being reorganised along more professional lines and has adopted Basel-compliant prudential rules. The securities exchange, set up in 2004, is still at an embryonic stage.

ANGOLA

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

26 23 9 Imports: 48% of GDP

Exports: 74% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

10000

2500

8000

2000

6000

1500

4000

1000

2000

500

0

0 China

France

Chile

USA

Japan

South Korea

USA

Portugal

China

South Africa

IMPORTS by products ■ Consumer goods 68% ■ Capital goods 17% ■ Intermediate goods 15%

EXPORTS by products ■ Crude oil 95% ■ Diamonds 5%

5

STANDARD OF LIVING / PURCHASING POWER Indicators

Angola

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

2,360 1,980 0.445 n/a 53 47 n/a

2,029 842 0.450 34 37 43 18

5,983 2,313 0.672 31 44 30 50

413

SUB-SAHARAN AFRICA

Benin Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

8.7 4,775 B High risk C

RISK ASSESSMENT Improving trade relations with Nigeria and easing the congestion in the Port of Cotonou spurred re-export activity in 2007. The energy shortage after the drought and a timid recovery of cotton production has, however, had a moderating effect on the economy upturn initiated in 2006. In 2008, the economy should benefit at once from the normalisation of relations with Nigeria, rising cotton production and continuation of the reform programme (withdrawal of the government from the cotton company SONAPRA and privatisation of Port of Cotonou management). The growth is still, however, vulnerable to weather conditions, an upsurge in oil prices and a resurgence of tensions over trade with regional partners. Public finances continue to suffer from a narrow tax base limited by the extent of both poverty and the informal economy while public sector investment and the settlement

414

of arrears have strained public spending. International aid continues, however, to largely cover domestic financing needs. The current account balance, meanwhile, should continue to improve in 2008, thanks to the increase in cotton exports and buoyant world prices, which have partially offset the increase in capital goods imports and rising oil costs. The reduction in the debt service burden as a result of the bilateral and multilateral debt cancellation granted in 2005, and the extent of international aid have allowed Benin to largely cover its external financing needs and accumulate very comfortable foreign exchange reserves. The slim majority won by government coalition in the March 2007 legislative elections will bolster President Boni Yayi’s capacity to go forward with the structural reforms initiated in several sectors including cotton (an industry that employs a quarter of the population), electricity, telecommunications and port infrastructure.

BENIN

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP)* Exports Imports Trade balance Current account balance (%GDP)* Foreign debt (%GDP) Debt service (%exports) Foreign exchange reserves (in months of imports)

3.9 1.5 −3.7 289 690 −401 −8.5 47.2 6.3 8.7

3.1 0.9 −3.7 343 789 −446 −7.9 34.9 6.9 6.9

2.9 5.4 −3.6 343 747 −423 −7.1 36.9 6.5 7.3

3.8 3.8 −2.2 324 765 −485 −7.1 10.5 5.6 10.2

4.0 3.0 −6.1 384 911 −527 −6.3 11.0 4.9 9.8

5.3 2.8 −4.7 485 1,010 −525 −5.9 11.9 4.5 9.2

*ex grants, e = estimate, f = forecast

5

415

SUB-SAHARAN AFRICA

Botswana Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

416

1.8 10,328 A2 Low risk A3

STRENGTHS • Africa’s oldest multi-party democracy, Botswana has enjoyed remarkable political stability since gaining independence in 1966. • Transparency International has given Botswana the best Corruption Perception Index rating of any African country, ranking it 37th out of 167 worldwide. • The country boasts extensive natural resources including diamonds (second largest world producer), copper, nickel and gold. • Strict economic policy has facilitated management of diamond revenues and allowed the country to avert the ‘Dutch Disease’. • Quality infrastructure has fostered development of tourism and services (finances, telecommunications).

WEAKNESSES • The economy is still too dependent on a diamond sector that generates a third of GDP, three-quarters of exports, and onehalf of tax revenues. • Diamond production should level off and then decline sharply from 2020. • Despite efforts to diversify the economy, poverty and joblessness are still high with 24 per cent of the population living on under a dollar a day and 19 per cent unemployed. • The HIV pandemic has undermined Botswana’s long-term economic and financial outlook with the country’s AIDS prevalence rate among the world’s highest and with 35 per cent of the adult population infected with the disease.

RISK ASSESSMENT Economic growth remained strong in 2007 and it should stay on track in 2008, thanks to increased diamond production and the dynamism of the tourism and civil engineering sectors, supported by robust investment policy. Restrictive monetary policy should help keep inflation – heightened by the May 2005 devaluation – under the 10 per cent threshold in 2008. After running notable fiscal surpluses in 2005 and 2006 with revenues higher and spending lower than expected, public finances should remain near equilibrium in 2008 due to spending committed to combating AIDS. The current account, meanwhile,

should continue to show large surpluses, thanks to the firmness of diamond prices. In this context, foreign debt will remain low and foreign exchange reserves high. The handover of power between the incumbent President Festus Megoa and the VicePresident Ian Khama, scheduled for April 2008 – over a year before the October 2009 elections – is supposed to guarantee a smooth transition in the leadership of the ruling government party, the Botswana Democratic Party. The new president should thus maintain prudent macroeconomic policy and pursue the Ninth National Development Plan objectives on diversification of the productive fabric, job creation and poverty reduction.

BOTSWANA

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%)* Inﬂation (%) Public sector balance (%GDP) * Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%exports) Foreign exchange reserves (in months of imports)

3.4 9.3 −0.4 3,035 2,135 900 5.6 13.8 3.3 20.7

8.4 6.9 0.9 3,734 2,893 841 3.0 12.6 3.5 18.4

4.2 8.6 8.5 4,559 2,791 1,768 15.4 10.0 2.1 20.8

4.3 11.5 7.0 4,707 3,515 1,192 10.7 9.5 1.7 19.5

4.7 7.2 1.8 4,919 3,852 1,067 8.6 9.4 1.7 19.8

4.4 6.8 1.4 5,265 4,196 1,069 7.6 9.1 1.6 19.9

*starting 1 April, e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■ Market overview Botswana is a member of the Southern African Customs Union (SACU), along with Lesotho, Swaziland, Namibia and South Africa. Ad valorem tariffs and excise duties apply to third countries. The extension to SACU countries of the Trade, Development and Co-operation Agreement between the EU and South Africa ensures preferential access for Botswanan products to European markets. Under African Growth and Opportunity Act (AGOA), the country’s products may also access the North American market. In October 2002, Botswana teamed up with other SACU members to sign a fresh customs protocol establishing a new mechanism for resolving commercial disputes and setting customs tariffs. Botswana is also a member of the Southern African Development Community (SADC), which comprises 14 Southern African countries and is headquartered in Gaborone. The local market, however, remains narrow (less than 2 million inhabitants) and is mainly concentrated in towns to the east of the country. ■ Means of entry The country’s customs regulations grant duty-free admission to commodities and machinery imported for the manufacture of products intended for export. Other tax measures include exemption from sales tax on commodities used in exported products.

Sales agents of any nationality are allowed to operate, though local agents and representatives are predominant. Public invitations to tender and large-scale work contracts comply with internationally recognised standards. Imported goods are usually invoiced in rands, US dollars or pound sterling. The euro is starting to gain acceptance as legal tender for trade, albeit to a limited extent. Payment instruments available in Bostwana are similar to those in Europe and the United States.

5

■

Attitude towards foreign investors Botswana possesses many strengths that make it one of the most competitive countries in Africa. It has a liberal economy, no exchange controls, a convertible currency and fairly attractive tax laws, particularly for financial services. Corporation tax is 15 per cent for manufacturing companies and 25 per cent for the rest, including nonresident companies. A 10 per cent VAT was introduced in July 2002. Industrial relations are peaceful. The government is nevertheless considering simplifying corporation tax, seen by foreign investors as too complex, via a single rate and introducing a withholding tax on dividends. The Botswana Export Development and Investment Authority (BEDIA) encourages investment in the country, especially in the form of export-related projects and import substitution. Priority sectors include manu-

417

SUB-SAHARAN AFRICA

facturing (glass, tanneries, textiles etc), information and communication technologies (ICT), tourism and financial services. There is an International Financial Centre, but it is having teething trouble. The legal system is founded on common law principles. Judicial procedures are very liberal and similar to those in developed countries. As for investment safeguards, Botswana is a signatory to both the World Bank’s MIGA agreement and the OPIC agreement with the United States. A reciprocal investment promotion and protection agreement with France has been under negotiation for several years and could be finalised shortly.

418

■

Foreign exchange regulations Botswana’s healthy foreign exchange reserves allow it to be very flexible on foreign exchange matters. There are no exchange controls. The local currency, the pula, introduced after the country’s withdrawal from the rand area in 1976, is fully convertible. The pula though remains dependent on the rand’s movement. Since 30 May 2005, Botswana has a crawling peg system that enables it to carry out successive adjustments while retaining the same basket of benchmark currencies (rand and SDR). There are no restrictions on capital transfers by nonresidents. Dividends and capital can be freely repatriated by foreign investors upon payment of 15 per cent withholding tax.

BOTSWANA

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

21 17 15 Imports: 35% of GDP

Exports: 51% of GDP

MAIN DESTINATIONS OF EXPORTS

MAIN ORIGINS OF IMPORTS

Mn USD

Mn USD

3000

2500

2500

2000

2000

1500

1500 1000

1000

500

500 0

0 UK

SACU Zimbabwe

USA

Other (Europe)

SACU Zimbabwe

UK

USA

South Korea

IMPORTS by products ■ Electrical machinery and equipment 16% ■ Foodstuffs 14% ■ Fuels 13% ■ Vehicles and transport equipment 13% ■ Chemicals 12% ■ Wood and paper 8% ■ Metals 8% ■ Other 17%

EXPORTS by products ■ Diamonds 75% ■ Copper and nickel 14% ■ Textiles 3% ■ Other 8%

5

STANDARD OF LIVING / PURCHASING POWER Indicators

Botswana

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

12,250 5,900 0.565 51 57 38 45

2,029 842 0.450 34 37 43 18

5,983 2,313 0.672 31 44 30 50

419

SUB-SAHARAN AFRICA

Burkina Faso Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

13.6 6,205 B High risk C

RISK ASSESSMENT In 2007, GDP growth benefited from the increase in cotton exports in both volume and value terms and the start of exploitation of gold mines. Increased gold exports and an influx of foreign investment linked to exploration for the precious metal and to its extraction should drive growth in 2008. Cotton exports buoyed by the restructuring of cotton companies should also contribute to the economic dynamism. With the development of manufacturing impeded by deficient infrastructure, however, the economy has nonetheless remained highly dependent on the agricultural sector, which employs 80 per cent of the population, and thus very vulnerable to weather conditions. The narrowness of a tax base limited by the extent of poverty and a large grey market has undermined the fiscal balance with spending on education, health, electricityprice subsidies and infrastructure remaining high. External accounts are undermined by

420

a structural imbalance. The deterioration of the terms of trade that developed in recent years amid soaring oil prices should stabilise, however, thanks to the firmness of cotton prices and the growth of gold exports. The country has nonetheless remained very dependent on international aid notwithstanding the substantial reduction of foreign debt granted under the HIPC and MDRI programmes. The May 2007 legislative elections strengthened the position of President Blaise Compaore, in office since 1987. The large parliamentary majority should enable him to go forward with the reforms undertaken; especially those intended to improve the business environment. President Compaore, moreover, enhanced his regional and international stature by the decisive role he played in the March 2007 conclusion of the Ouagadougou agreement calling for the formation of a national unity government in Ivory Coast and specifying the steps to reunify the country.

BURKINA FASO

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP)* Exports Imports Trade balance Current account balance (%GDP)* Foreign debt (%GDP) Debt service (%exports) Foreign exchange reserves (in months of imports)

8 2 −8.2 321 685 −365 −12.7 40.6 12.8 5.6

4.6 −0.4 −8.3 472 944 −472 −13.6 38.5 8.6 6.0

7.1 6.4 −8.5 479 1,056 −577 −14.9 36.5 8.5 4.1

6.4 2.4 −9.6 611 1,189 −578 −13.7 20.3 6.2 4.2

4.3 0.5 −11.8 706 1,314 −608 −13.8 22.6 4.3 6.0

6.1 2 −10.3 785 1,428 −642 −13.4 26.2 4.4 5.4

*ex grants, e = estimate, f = forecast

5

421

SUB-SAHARAN AFRICA

Burundi Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

7.8 807 D Very high risk D

RISK ASSESSMENT Economic growth stalled in 2007 due to a lack of rain that affected as much the hydroelectric power supply as coffee production, Burundi’s main export product. Subject to better weather conditions, economic activity in this country in process of reconstruction should rebound, driven by the public works sector, consolidation of the banking sector and development of retailing. In view of the demographic pressure, the growth – moreover vulnerable to external shocks – will remain insufficient to significantly reduce poverty in a country ranking as the world’s third poorest. Defective energy infrastructure notably impeding mining sector development (nickel) has undermined the country’s growth potential. In this context, Burundi’s accounts show severe imbalances with financing needs remaining covered by international aid, which resulted in 2005 in Paris Club debt rescheduling after the country reached the ‘completion point’ under the HIPC programme for highly indebted poor countries. Substantial

422

relief of foreign debt continues to depend, however, on a speed up of structural reforms. Political and security risk is still high with the Burundi’s stability undermined by the suspension in July 2007 of the peace talks with the last Hutu rebel group, the National Liberation Forces and the resurgence of tensions on the occasion of the establishment of the Truth and Reconciliation Commission and the Special Court for judging war crimes. The government has moreover been struggling to organise the return of 350,000 Hutu refugees and release of international aid hinges on the resolution of the institutional crisis paralysing the country for over a year. This will require restoring the National Unity Government set up in 2005 after 12 years of civil war, then dissolved in 2006. Burundi’s integration into the East African Community in 2006 and the revival of the Economic Community of the Great Lakes Countries in April 2007 could ultimately benefit Burundi’s economy and allow the capital in Bujumbura to recover its role as a regional hub for wholesale and retail sales.

BURUNDI

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP)* Exports Imports Trade balance Current account balance (%GDP)* Foreign debt (%GDP) Debt service (%G& S exports) Foreign exchange reserves (in months of imports)

−1.2 10.7 −13.8 38.0 126 −88 −21.3 225 75.5 4.4

4.8 8.0 −19.7 48.0 149 −101 −25.5 220 95.7 3.3

0.9 13.6 −16.8 57.0 239 −182 −34.2 184 39.6 3.5

5.1 2.7 −21.5 60.8 286 −225 −36.8 164 42.7 3.4

3.5 5.3 −22.7 70.0 273 −203 −37.5 147 31.4 4.1

5.8 5.7 −19.6 73.4 301 −228 −33.3 132 30.2 4.1

*ex grants, e = estimate, f = forecast

5

423

SUB-SAHARAN AFRICA

Cameroon Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

424

16.7 18,323 B High risk C

STRENGTHS • Endowed with vast resources ranging from agriculture, wood, mining and tourist potential to oil, gas and hydroelectric energy Cameroon boasts one of Central Africa’s most diversified economies. • Implementation of far-reaching structural reforms allowed Cameroon to obtain in 2006 a 50 per cent reduction of its foreign debt under the HIPC and MDRI programmes. • The structural reforms have attracted investors and accelerated the process of diversifying the productive fabric.

WEAKNESSES • With government finances still too dependent on oil production (30 per cent of tax revenues and 50 per cent of exports), the projected decline of oil resources has made rapid development of alternative revenue sources a necessity. • A poor business environment has hampered development of a formal private sector contending with intense competition from the informal economy. • The growth still does not suffice to meet the Millennium Objectives notably intended to cut poverty in half by 2015. • The political succession crisis looming in the run-up to elections in 2011 could jeopardise the country’s political stability.

RISK ASSESSMENT Economic growth accelerated in 2007, driven by the increased volume of oil exports, spurred by the upward price trend, and by a dynamic non-oil sector. Growth should speed up again in 2008 amid increasing FDI in major industrial projects (aluminium, hydroelectric power stations) and the recovery of public sector investments (urban, road and port infrastructure) buoyed by the increase in oil revenues and new fiscal room for manoeuvre. The process of consolidating public finances has continued, thanks to better realisation of non-oil revenues. The steadiness of the public sector balance is also the result, albeit worryingly, of a failure to carry out all spending budgeted to combat poverty. The current account, meanwhile, continues to show a slight

deficit with oil exports still not sufficing to offset the deficit in the services balance and in revenues undermined by oil company profit repatriation. In this context, the debt ratios – significantly lower since the debt relief granted under the HIPC and MDRI programmes – have remained sustainable. The July 2007 legislative elections, marked by low voter turnout, gave a large majority to President Paul Biya, in office since 1986. The new assembly should approve a constitutional amendment allowing the incumbent president to run for a third term in 2011. This could result in a heightening of tensions. At the regional level, the agreement signed with Nigeria in June 2006 guarantees Cameroon’s sovereignty over the Bakassi Peninsula and its extensive oil resources.

CAMEROON

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

4.0 0.6 0.7 2,638 2,374 264 −2.6 73.5 28.1 2.0

3.7 0.3 -0.8 2,580 2,637 −57 −3.8 60.3 7.1 2.4

2.6 2.0 3.0 2,862 2,830 32 −3.4 36.7 6.7 2.6

3.8 5.1 4.6 3,491 3,127 364 −0.8 5.0 13.7 3.3

4.2 1.8 1.0 3,913 3,491 422 −2.8 5.6 16.4 3.0

4.9 1.8 1.0 3,874 3,646 228 −3.9 6.7 19.5 2.5

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■ Market overview The Cameroon market is open to imports and the authorities apply no special protectionist measures or tariff barriers, except for a health embargo on animal products from areas infected by BSE and avian flu. Customs duties on imports into the Economic and Monetary Community of Central Africa (EMCCA) area, subject to the Common External Tariff, range from 5 per cent for staple commodities, 10 per cent for raw materials and capital goods, 20 per cent for semifinished and miscellaneous products to 30 per cent for some consumer goods. In addition, there is 19.25 per cent VAT, from which staple commodities are exempt, as well as 25 per cent excise duty on so-called luxury products, cigarettes, wines and spirits and most non-alcoholic beverages. The average time for a container to clear customs is two to three weeks. Exporters are strongly advised to demand cash payment upon confirmation of the order, or payment by irrevocable letter of credit confirmed by a first-rate bank. ■ Attitude towards foreign investors Cameroon has an open policy towards FDI. Law no. 2002/004 of 19 April 2002, also called

the Investment Charter, is a general piece of legislation that is supposed to be supplemented with sector regulations. About 40 or so sectors have been earmarked for ad hoc laws. To date, only mining, gas and oil legislation has been passed. The remaining sectors are still, de facto, governed by the investment act 1990. Officially, this law is backed by other arrangements designed to attract foreign capital, such as membership of the Organisation for the Harmonisation of Business Law in Africa (OHBLA), which aims to provide a more secure legal environment for business, an industrial free zone regime (which exists only on paper) and an investment promotion agency. In practice, however, numerous obstacles remain, discouraging all too often any new investors. These include widespread corruption, administrative harassment, poor transport infrastructure, power failures and a malfunctioning judicial system. Consequently, Cameroon is ranked 154 out of 178 countries in the World Bank’s Doing Business 2008 report – which measures ease of doing business – and has shown no improvement these last few years.

5

425

SUB-SAHARAN AFRICA

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

57 8 14 Imports: 25% of GDP

Exports: 23% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

1000

800 700 600 500 400 300 200 100 0

800 600 400 200 0 Spain

Italy

France

France

South Netherlands Korea

Nigeria

China

Belgium

USA

IMPORTS by products ■ Hydrocarbons 30% ■ Machinery and transport equipment 20% ■ Other manufactured goods 19% ■ Foodstuffs 18% ■ Chemicals 11% ■ Other 2%

EXPORTS by products ■ Oil and oil products 54% ■ Foodstuffs 16% ■ Wood and wood charcoal 15% ■ Cocoa 7% ■ Aluminium 5% ■ Cotton 4%

STANDARD OF LIVING / PURCHASING POWER

426

Indicators

Cameroon

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

2,370 1,080 0.497 35 55 41 10

2,029 842 0.450 34 37 43 18

5,983 2,313 0.672 31 44 30 50

CAPE VERDE

Cape Verde Population (inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

518,311 1,144 B High risk B

RISK ASSESSMENT Economic growth reached 6.9 per cent in 2007, driven by a dynamic tourist sector that spurred public and private investment in the building and public works and services sectors. It should exceed 7.0 per cent in 2008 and contribute to a reduction in unemployment below the 20 per cent threshold. The sustainability of economic development centred on high-end tourism has, however, come up against the shortage of skilled labour. Imbalances have persisted in public accounts despite tight fiscal policy. External accounts, meanwhile, are structurally in deficit, indicative of an insufficiently diversified productive fabric. Remittances from expatriates, representing nearly 20 per cent of GDP have not sufficed to offset a trade deficit exacerbated by capital goods imports as well as oil and foodstuff purchases, whose

prices have been trending up. Too developed to qualify for the HIPC and MDRI programmes, the country has high foreign debt. International aid and FDI direct inflows have largely covered the financing needs. The country has enjoyed great political stability since the early 1990s highlighted by four free and democratic elections and two political changeovers. The government in power since 2006 has the support of a large parliamentary majority that has allowed it to pursue reforms fostering development of the private sector and FDI. Cape Verde became the 152nd member of the WTO in December 2007, and it is now on the verge of leaving the Less-Advanced-Country subgroup. In this context, Cape Verde hopes to set up a privileged partnership with the EU focused particularly on trade and investment issues but also on immigration and combating organised crime.

5

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP)* Exports Imports Trade balance Current account balance (%GDP)* Foreign debt (%GDP) Debt service (%G&S exports) Foreign exchange reserves (in months of imports)

4.7 1.2 -9.0 53 344 -291 -15.4 66.2 10.7 1.9

4.4 -1.9 -7.9 58 389 -331 -12 73.1 11.4 2.6

5.8 0.4 -12.8 89 438 -349 -8.0 60.0 8.6 2.8

6.5 5.4 -9.6 84 559 -475 -10.6 48.4 5.9 3.0

6.9 2.5 -9.3 84 894 -810 -15.9 43.2 5.1 3.1

7.5 1.8 -8.4 95 949 -854 -19.2 41.1 5.7 3.2

* = ex grants, e = estimate, f = forecast

427

SUB-SAHARAN AFRICA

Central African Republic Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

4.1 1,486 D Very high risk D

RISK ASSESSMENT The economy continued to grow at a 4 per cent clip in 2007, driven by the recovery of investment in mining extraction (diamond, gold and uranium), oil exploration and telecommunications. The growth of ore exports in value terms also contributed to the good economic performance. Household consumption moreover benefited from rising rural incomes – associated with improved farm productivity – and regular payment of civil service wages. Those trends should continue in 2008, amid a resumption of international aid. Defective transport and energy infrastructure continue however to undermine this landlocked country’s growth potential. Public sector finances improved significantly in 2007, thanks to better resource mobilisation and efforts to control spending. Pursuit of prudent fiscal policy should make it possible to stabilise the public sector deficit this year at a level below 3 per cent. Large external account imbalances have meanwhile persisted. The increase in diamond and wood exports in value terms spurred by demand from China has struggled to offset the increase in capital goods imports generated by the investment upturn. The growing oil bill has also undermined the trade bal-

428

ance. The services balance meanwhile has suffered from the country’s landlocked condition which results in high transport costs. In this context, covering internal and external financing needs still depends on international aid. The country which has restored normal relations with multilateral financial institutions particularly by settling its arrears with the World Bank and African Development Bank became eligible in March 2007 for the HIPC programme. It will however only be able to benefit from debt relief after successfully implementing the structural reform programmes agreed with the IMF in 2006. The security situation remains unstable undermining the economic catch-up process. The ongoing armed rebellion in the country’s northern region has hampered diamond and grain production and exploration for oil. President Franc¸ois Bozize´ has initiated a national dialogue with two of the three main rebel groups agreeing to participate. The process will however have little chance of reaching agreement quickly on the resourcesharing issue especially in the Northeast. In this context the intervention this year by European peacekeeping forces should make it possible to prevent the turmoil from spreading throughout the region.

CENTRAL AFRICAN REPUBLIC

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP)* Exports Imports Trade balance Current account balance (%GDP)* Foreign debt (%GDP) Debt service (%G&S exports) Foreign exchange reserves (in months of imports)

-7.6 4.4 -4.6 126 119 7.0 -6.2 109 21.8 7.2

1.3 -2.2 -5.5 129 151 -22 -6.1 90 27.1 7.7

2.2 2.9 -8.5 128 171 -43 -8.7 77 18.8 7.3

4.1 6.7 -4.7 158 203 -46 -8.1 77 19.8 5.7

4.0 3.0 -2.7 189 220 -32 -7.1 67 20.1 5.5

4.3 2.3 -2.7 201 248 -46 -7.9 63 20.9 4.9

* = ex grants, e = estimate, f = forecast

5

429

SUB-SAHARAN AFRICA

Chad Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

10.0 6,541 D Very high risk D

RISK ASSESSMENT The discovery of oil fields has driven economic growth since 2000, spurring investments extraction and pipeline construction. The gradual depletion of resources and technical failure seem however to be limiting oil production. Economic growth nonetheless rebounded slightly in 2007, spurred by soaring prices and could even reach 4 per cent this year driven by Chinese investments in oil exploration. The economy should also benefit from a dynamic telecommunications sector and subject to good weather conditions an increase in farm production – with agriculture employing 70 per cent of the population. In the longer term, the development of Chad (ranked 173rd out of 177 on the Human Development Index) rests on further diversification of the productive fabric, which will notably come up against the scarcity of skilled labour and the deficiencies of a business climate marked especially by corruption. The normalisation of relations with the World Bank in 2006 enabled oil revenues belonging to the budget to be unfrozen and a

430

slight budget surplus to be maintained in 2007. But the public budget should be penalised in 2008, with public expenditures on the rise notably in the security and infrastructure sectors. The trade balance should continue to benefit from the upsurge in oil prices notwithstanding the substantial discount applicable to Chadian crude. The investment−income balance meanwhile has remained deeply in deficit undermined by dividend repatriation by oil companies. In this context, the current account continues to show a deficit. Nevertheless, incoming FDI largely covers financing needs. Despite the peace accords concluded under Libya’s supervision in October 2007, relations between President Idris Deby and the East Chadian have remained tense. The president should however be able to leverage divisions among rebel factions and reconciliation with the group from Libreville to regain control over the political situation. The tensions building up in Darfur again could however spread to neighbouring countries especially Chad, notwithstanding the highly controversial interposition of a joint UN/EU peacekeeping force this year.

CHAD

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP)* Exports Imports Trade balance Current account balance (%GDP)* Foreign debt (%GDP) Debt service (%G&S exports) Foreign exchange reserves (in months of imports)

14.7 -1.8 -14 604 781 -177 -51 57 8.9 1.1

33.6 -5.4 -6.0 2,165 876 1,288 -15.2 39 2.3 1.0

7.9 7.9 -3.7 3,113 813 2,300 -9.0 30 1.5 0.8

0.5 7.9 0.5 3,749 1,006 2,743 -8.6 24 1.8 1.9

1.5 3.0 0.9 4,219 1,157 3,062 -3.2 25 1.8 4.7

4.1 3.0 -11.2 4,371 1,382 2,989 -5.2 27 1.9 3.9

* = ex grants, e = estimate, f = forecast

5

431

SUB-SAHARAN AFRICA

Congo Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

4.1 7,385 C Very high risk D

RISK ASSESSMENT Economic growth slowed markedly in 2007 as a result of the decline in oil production. The economy should rebound in 2008 with growth exceeding 7 per cent, thanks to start of exploitation of new oil fields. Lacking diversification, the economy has been very dependent on an oil sector representing 55 per cent of GDP and 95 per cent of exports. The non-oil sector, which presents great development potential, particularly in agriculture, forestry and construction, should also experience strong growth, driven by large public investments. Dilapidated infrastructure and governance shortcomings should, however, continue to hamper economic activity. Public sector accounts continued to show large surpluses in 2007 despite substantial slippage on public spending. External accounts have also benefited from the oil wealth. Reforms undertaken in the management of that wealth along with efforts made on governance allowed President SassouNguesso to obtain in November 2007 cancel-

432

lation of 80 per cent of the country’s trade debt from the London Club and of virtually all debt with the Paris Club. Fiscal laxity has, however, delayed agreement on a poverty reduction programme pending with the IMF since 2004, and, thereafter, debt relief from multilateral institutions under the MDRI programme. In this context, the Congo’s per capita debt is among the highest in the world. In 2008, the political scene will be marked by preparations for the presidential elections scheduled in 2009. The Congo’s political stability should not, however, be in jeopardy with President Sassou-Nguesso’s Congolese Labour Party emerging from the August 2007 legislative elections with an overwhelming majority. President SassouNguesso hopes to capitalise on the current situation to unify all pro-presidential parties and establish himself as ‘father to the entire nation’. There are nonetheless still major risks. Besides a nettlesome social situation, violent incidents between the army and the rebels have irrupted repeatedly in the Pool region despite the March 2003 peace treaty.

CONGO

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP)* Exports Imports Trade balance Current account balance (%GDP)* Foreign debt (%GDP) Debt service (%G&S exports) Foreign exchange reserves (in months of imports)

0.8 1.5 0.4 2,598 810 1,788 1.0 267.7 26.8 0.2

3.5 3.6 3.6 3,459 1,100 2,359 1.8 198.7 22.0 0.4

7.8 2.5 15.7 4,875 1,274 3,600 10.9 103.2 25.6 2.2

6.1 4.8 19.7 6,387 1,533 4,855 15.3 78.2 19.6 4.3

3.7 7.0 9.9 5,036 1,563 3,473 7.6 85.7 17.5 6.2

7.3 5.0 15.3 6,153 1,732 4,421 9.9 73.0 12.5 8.1

* = ex grants, e = estimate, f = forecast

5

433

SUB-SAHARAN AFRICA

Democratic Republic of Congo Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

59.3 8,543 D Very high risk D

RISK ASSESSMENT After posting respectable performance from 2001 to 2005, the country’s economic situation deteriorated after the suspension of IMF backing in the 2006 and 2007 pre-election and post-election periods. The mineral extraction sector should be the main growth driver in 2008, with an increase in foreign investment, while financial backers will likely focus their aid on road and rail infrastructure. To foster sustainable growth and reduce poverty, improving the security, health and education situation will be crucial along with combating corruption and the illegal exploitation of natural resources, privatising stateowned companies and significantly improving the business environment. Three decades of lax economic management have

resulted in unsustainable foreign debt and a large stock of arrears with Paris Club creditors. The main objective of President Joseph Kabila’s administration thus entails reaching by mid-2008 the HIPC programme completion point in order to obtain foreign debt relief in the HIPC bilateral framework and the MDRI multilateral framework. This will notably require better public finance management. The Democratic Republic of Congo will benefit concurrently from US$5 billion in loans from China, allocated to rail, road and mining infrastructure, but that could jeopardise the sustainability of even the reduced debt remaining after the cancellations granted. Moreover, the security situation is still critical in Kivus, the eastern region bordering on Rwanda and Burundi, scene of several intertwined conflicts.

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (average annual rate) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

5.7 12.9 −5.9 1,340 1,496 −156 −9.8 198.1 8.0 0.5

6.6 4.0 −6.1 1,813 1,753 60 −7.4 175.8 21.9 1.2

6.5 21.4 −9.6 2,071 2,473 −402 −15.6 153.1 25.6 0.5

5.1 13.2 −10.7 2,320 2,740 −420 −15.6 149.3 19.6 0.5

6.5 17.4 −9.0 2,520 2,879 −359 −15.3 129.9 17.5 0.5

6.2 9.0 −5.5 3,033 3,517 −484 −15.8 87.1 12.5 0.7

e = estimates, f = forecast

434

DJIBOUTI

Djibouti Population (inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

805,657 757 C Very high risk D

RISK ASSESSMENT Djibouti posted strong economic growth in 2007, driven by public and foreign investment in port infrastructure and the construction sector. That dynamism should gain momentum in 2008, thanks to the continuing efforts to ease the congestion in the Port of Djibouti and the development of the new Doraleh oil complex. The growth will nonetheless not suffice to meet the Millennium Development Goals. In this context, most of the rural population – vulnerable to weather conditions – remains dependent on international food aid. The existing currency board foreign exchange regime, meanwhile, with the Djibouti franc pegged to the dollar since 1973, has allowed the country to limit inflation. Despite favourable economic conditions, the imbalance in public sector accounts has persisted. A lack of progress on fiscal policy has moreover prompted the IMF to oppose since 2005 an extension of the Poverty

Reduction and Growth Facility. The growth of capital goods imports needed for investments has, meanwhile, continued to widen the external deficit. The high proportion of exports involving re-export business from Ethiopia or Somalia reflects the lack of diversification of the productive fabric and the great dependency of the economy on spending by foreign troops stationed in Djibouti. The legislative elections in January this year should confirm the pre-eminence of the President Ishmael Omar Guelleh and his coalition, the Union for the Presidential Majority, in the local and national political scene. Regional instability could, however, jeopardise that shaky national equilibrium. A severe deterioration of the security and political situation in Somalia with repercussions throughout the Horn of Africa constitutes indeed an appreciable risk. It could have a significant impact on Djibouti’s economy, which is largely dependent on regional trade.

5

435

SUB-SAHARAN AFRICA

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP)* Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%G& S exports) Foreign exchange reserves (in months of imports)

3.2 2.0 −8.3 37 238 −201 3.4 67 7.5 3.9

3.0 3.1 −8.7 34 261 −227 −1.3 68 9.1 3.3

3.2 3.1 −6.0 40 277 −237 1.2 61 9.0 2.9

4.8 3.6 −6.3 50 346 −296 −8.9 56 8.1 3.2

4.8 3.5 −9.1 146 514 −368 −13.9 58 5.8 2.4

5.7 3.5 −10.6 237 649 −412 −16.9 64 4.8 2.4

*ex grants, e = estimate, f = forecast

436

ERITREA

Eritrea Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

4.5 1,085 D Very high risk D

RISK ASSESSMENT Growth remained sluggish in 2007. And an upturn will be unlikely in 2008 due to low productivity in the farm sector, which employs 77 per cent of the population, and a business climate that has hampered private sector development. The substantial military mobilisation has diverted manpower and thus undermined the workforce in productive sectors. The poor state of Eritrea’s relations with international financial institutions has been detrimental to development of the aid granted and has limited investment inflows. Far-reaching Chinese projects involving as much infrastructure (Port of Assab) as mining extraction should, however, support economic growth in the medium term. Stoked by structural fiscal deficit, inflation has remained above 15 per cent. External imbalances also constitute nettlesome problems. Even if the current account deficit should continue to narrow amid new import restrictions, financing needs still remain large and the level of foreign exchange

reserves critically low. Covering the financing needs is all the more delicate with the president pursuing a policy of refusal of international aid. With Eritrea thus not included among the beneficiaries of the HIPC and MDRI programmes, the level of foreign debt remains unsustainable. National elections have been postponed since December 2001 with the single party, the Popular Front for Democracy and Justice, seeming likely to tighten its grip on power under President Isaias Afewerki’s leadership. And the border dispute pitting Eritrea against Ethiopia has intensified in the wake of a new failure by the International Arbitration Commission to trace a dividing line acceptable to both parties. Eritrea’s support for the Islamic militias in Somalia has moreover been perceived as the opening of a second front by Ethiopia, which has meanwhile been backing the Somali interim transition government. Renewed hostilities between Eritrea and Ethiopia constitute an appreciable risk.

5

437

SUB-SAHARAN AFRICA

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%G&S exports) Foreign exchange reserves (in months of imports)

6.1 22.6 -37 21 534 -513 -27.0 105 31.8 0.5

1.9 21.5 -39 14 548 -534 -28.9 109 34.3 0.7

0.5(*) 19.9 -30 14 558 -544 -30.5 74 33.6 0.5

2.0 15.0 -26 16 571 -555 -28.2 69 38.8 0.5

2.0 15.5 -26 17 569 -552 -25.4 67 40.7 0.4

2.0 16.0 -25 19 572 -553 -22.3 63 47.6 0.4

e = estimate, f = forecast

438

ETHIOPIA

Ethiopia Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

72.7 13,315 C Very high risk D

RISK ASSESSMENT For the fourth straight year Ethiopia achieved strong growth in 2007, up nearly 10 per cent. The agricultural sector, representing 47 per cent of GDP in 2006–2007, continued to underpin the economic activity, a broader base of growth notwithstanding. The economy should benefit from record harvests again in 2007–2008, which will be good for the food industry and exports. In this context, the tighter monetary policy adopted in 2007 should help stem inflation that has been above 10 per cent since 2005, stoked by household consumption and the increasing cost of credit. A narrow tax base continues to undermine public finances. With international aid only covering part of its financing needs, the government has turned increasingly to domestic borrowing. External accounts have also remained deep in deficit with growth in the value and volume of coffee and gold exports not sufficing to offset rising capital goods imports and the increasing cost of oil.

International long-term loans and foreign direct investment have, however, been covering external financing needs. Ethiopia has thus been able to accumulate foreign exchange reserves albeit to an insufficient extent. Debt relief granted under the HIPC and MDRI programmes, respectively, in 2004 and 2006, substantially reduced a debt burden that had become unsustainable in the medium term. Despite notable efforts to foster national reconciliation, the government’s popularity has slackened since the sharp increase in basic foodstuff prices. It has moreover been contending with the insurrection of a jumble of armed groups, linked by ethnic and religious affinities, particularly in Ogaden, in the eastern part of the country. The still-unsettled border-demarcation issue with Eritrea could lead to renewed hostilities in a context of re-armament of the protagonists and of regional tensions. The Ethiopian army’s involvement in Somalia exacerbates furthermore the risk of regionalising the conflicts.

5

439

SUB-SAHARAN AFRICA

MAIN ECONOMIC INDICATORS USD millions

2002/3

2003/4

2004/5

2005/6

2006/7(e)

2007/8(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP)* Exports Imports Trade balance Current account balance (%GDP)* Foreign debt (%GDP) Debt service (%exports) Foreign exchange reserves (in months of imports)

−3.3 15.1 −14.8 483 1,856 −1,373 −9.8 83.9 7.8 3.7

11.9 8.6 −8.1 600 2,587 −1,987 −10.2 77.7 6.7 3.8

10.5 6.8 −9.4 600 3,633 −2,786 −13.4 52.9 5.8 3.5

9.6 12.3 −8.5 1,000 4,593 −3,593 −16.9 44.9 5.1 2.5

9.4 17.0 −10.3 1,099 4,990 −3,891 −13.1 13.1 1.4 2.2

8.5 12.6 −10.0 1,246 5,602 −4356 −11.5 14.9 1.2 2.4

*ex grants, e = estimate, f = forecast

440

GABON

Gabon Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

1.4 9,546 B High risk C

STRENGTHS • Africa’s third largest oil producer, Gabon also expects to become the world’s leading manganese producer by 2010, and, endowed with still-underexploited forestry potential, is already the second largest wood producer. • Gabon also enjoys extensive potential in mining (iron, niobium), hydroelectricity and tourism. • With structural reforms undertaken to diversify the productive fabric, the government has won the support of international financial institutions. • The international community backing resulted in 2004 in agreement with the Paris Club on foreign debt rescheduling while the country is not eligible for the HIPC programme. • Political stability has enhanced Gabon’s attractiveness to investors.

WEAKNESSES • The economy is still too dependent on an oil sector representing 54 per cent of GDP, 80 per cent of exports and 63 per cent of tax revenues. • With gradual depletion of ultimately limited oil reserves, production will ineluctably level off and then decline in the next decade. • The high cost of factors of production associated with deficient infrastructure has undermined Gabon’s competitiveness. • A still-difficult business environment and inadequate institutional capacities have impeded economic development. • High per capita income notwithstanding further improvement in poverty, education and health indicators will depend on meeting substantial challenges.

RISK ASSESSMENT Economic growth soared in 2007 driven by the increase in oil production and the dynamism of the construction and services sectors. It should slow slightly this year with oil production levelling off but with direct investment in mining – notably the Belinga iron mine – and the forestry sector showing renewed dynamism. Gabon’s fiscal position should grow even stronger in 2008, thanks to higher revenues from oil and manganese, whose prices have been trending up. Large fiscal surpluses have, however, masked a narrow tax base with broadening it being a continuing strug-

gle despite efforts on reforms. External accounts have also benefited from the oil wealth. The surpluses, in conjunction with adherence to the IMF programme agreed for 2004 and 2005 have allowed Gabon to consolidate the macroeconomic framework and substantially reduce outstanding debt. The December 2006 legislative elections bore out the pre-eminence of the Gabonese Democratic Party. President Omar Bongo Odimba, re-elected in November 2005 with 80 per cent of the votes cast, has been in office since 1967. His succession will nonetheless be unlikely to become an issue any time soon with the president apparently

5

441

SUB-SAHARAN AFRICA

determined to complete his term in office, which extends until end 2012. And the efforts deployed to maintain an ethnic balance

within the government should ensure the country’s continued stability.

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%G&S exports) Foreign exchange reserves (in months of imports)

2.4 2.1 7.4 3,556 1,167 2,390 6.70 73.2 16.9 0.7

1.3 0.4 7.4 4,661 1,500 3,161 12.6 64.9 14.7 1.3

3.0 0.0 7.8 5,717 1,370 4,348 15.0 44.6 9.6 2.1

1.2 4.0 8.6 6,055 1,583 4,471 19.2 38.8 11.2 3.3

5.6 5.5 9.7 6,377 1,960 4,417 16.8 31.8 11.3 3.7

4.2 3.0 11 7,148 2,171 4,977 16.6 24.8 10.3 4.6

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■

442

Market overview The Gabonese market is very open. The country’s tariff system is common and consists of the common external tariff (CET) and the internal and external general preferential tariff (GPT) of the CEMAC. In principle, it grants duty-free access to goods from other member countries. In practice, however, the customs union does not work too well. A number of tariff and non-tariff barriers remain, including double duties on products imported from third countries, poor application of rules of origin for CEMAC products and conditional, exceptional or discretionary duty-free treatment and exemptions. Duties vary between 0 per cent for some goods such as medical equipment and stationery, 6 per cent for basic staples, 11 per cent for raw materials and capital goods, 21 per cent for semi-finished goods and 31 per cent for consumer goods. The most strongly recommended means of payment is the irrevocable and confirmed letter of credit. Documentary collection upon presentation of a complete set of bills of lading and bills of exchange should only be used if the customer is well known to the exporter. Bank transfers and cheques, for which the customer incurs no liability, should

be avoided. Exporters should exercise caution when dealing with government agencies. For all public-sector orders, it is necessary to obtain a copy of the official purchase order issued by the Budget Expenditure Office at the Ministry of Finance. Contracts and orders placed by the government with a foreign supplier must be countersigned by the Director-General of Public Accounts. Suppliers are advised to check the relevant tax clauses with the departments concerned. ■

Attitude towards foreign investors The legislative and regulatory environment is extremely liberal and the attitude of government officials generally positive. Investors enjoy free trade through CEMAC, modern instruments of business law through OHADA and investment security through the MIGA, the World Bank and the ICSID. However, the judicial process remains lengthy and sentences are often arbitrary, as indicated in the reports drawn up by Conseil Franc¸ais des Investisseurs en Afrique (CIAN) in 2004 and by Foreign Investment Advisory Service (FIAS). The country’s Investment Charter provides for freedom of enterprise, the right to property (including intellectual property), access to foreign currency, free movement of capital, etc. From time to time, it is supplemented with

GABON

special laws (forestry act – adopted in December 2001, investment act, mining act, oil act, labour act, competition act). So far as oil is concerned, Gabon undoubtedly offers oil companies the best terms of investment in sub-Saharan Africa. New production sharing arrangements (CPPs – Contrats de partages de production) with Gabon contain extremely favourable terms for oil companies, including quicker depreciation of oil exploration costs, lower taxation and higher oil profits than neighbouring rivals. In 2005, the government set up a Competition Directorate and a National Commission Against Illicit Gain at the Ministry of Commerce. It also strengthened the Public Procurement Directorate. Gabon became a member of the Extractive Industries Transparency Initiative in 2004. EITI published its first report in 2005 and its second in 2006. At the EITI Oslo conference, Gabon was designated one of the most cooperative countries in this field. The country’s Private Investment Promotion Agency (APIP), set up in 2002, is a one-

stop shop for investors that provides them with practical information. Its services continue to be improved, especially as regards the time required to obtain administrative documents. The Gabonese Employers Federation (CPG) gives entrepreneurs proper support and is proactive rather than reactive. In 2004, it advised the government to set up a government creditors’ club – the Libreville Club – for the settlement of domestic debt. In 2004, 2005 and 2006, Libreville Clubs I, II and III enabled many private companies to have their receivables acknowledged and settled within 120 days. Customs duties and VAT are negotiable for large investment schemes. New VATrelated tax provisions were introduced in summer 2004. Wood processing offers interesting investment opportunities following the adoption of a forestry law. Moreover, Libreville clearly has a competitive edge in the provision of services on a regional scale, in particular as a regional headquarters location for international companies.

5

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 450

WORLD Gabon

400 350 300 250 200 150 100 50

-9 Ju 7 ne 98 D ec -9 Ju 8 ne 99 D ec -9 Ju 9 ne 00 D ec -0 Ju 0 ne 01 D ec -0 Ju 1 ne 02 D ec -0 Ju 2 ne 03 D ec -0 Ju 3 ne 04 D ec -0 Ju 4 ne 05 D ec -0 Ju 5 ne -0 6 D ec -0 Ju 6 ne -0 7 D ec -0 7

ec D

Ju ne

97

0

443

SUB-SAHARAN AFRICA

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

37 5 15 Imports: 39% of GDP

Exports: 59% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

800 700 600 500 400 300 200 100 0

1500 1200 900 600 300 0 USA

China

France

France Trinidad Thailand and Tobago

USA Netherlands Cameroon Belgium

IMPORTS by products ■ Machinery and transport equipment 35% ■ Foodstuffs 19% ■ Consumer goods 16% ■ Chemicals 11% ■ Iron and steel 9% ■ Fuels 4% ■ Other 6%

EXPORTS by products ■ Crude oil 83% ■ Manganese 6% ■ Wood 6% ■ Other 4%

STANDARD OF LIVING / PURCHASING POWER

444

Indicators

Gabon

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

5,310 5,000 0.635 n/a 84 40 33

2,029 842 0.450 34 37 43 18

5,983 2,313 0.672 31 44 30 50

GHANA

Ghana Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

22.5 12,906 C High risk C

STRENGTHS • Political stability and an improved business environment constitute assets for foreign investors. • Ghana’s very successful Eurobond issue, a first for a West African country, was a great success testifying to investor confidence. • The country’s commitment to structural reforms focused on combating poverty has received international community support. • The reduction in debt service resulting from debt relief granted under the HIPC and MDRI programmes should prove beneficial to development projects. • Ghana has been a driving force in the region playing a particularly active role within New Partnership for Africa’s Development (NEPAD).

WEAKNESSES • An insufficiently diversified economy – with gold and cocoa generating about two-thirds of exports – has remained vulnerable to external shocks (such as weather conditions and world prices). • The inadequacy and dilapidated state of transport and energy infrastructure has handicapped various economic sectors. • Despite substantial progress, the limited development of financial intermediation still hampers the private sector. • Public and external finances continue to show structural deficits that keep the country dependent on international aid.

RISK ASSESSMENT Despite the drought that affected agriculture and mining, economic growth remained strong in 2007 buoyed by high gold and cocoa prices and by the dynamism of the services and construction sectors. Better precipitation patterns should benefit agriculture and industry in 2008 while the holding of the African Nations Cup should spur tourist business. Wage increases in the run-up to elections in 2008 should keep inflation at the levels reached in 2007 stoked by increases in food and electricity prices in the wake of the drought. Amid rising social spending a narrow tax bases has handicapped public finances. The

presidential elections in 2008 moreover augur a widening fiscal deficit. The current account deficit, exacerbated by growing demand for both capital and consumer goods, has, meanwhile, remained large despite the high volume of expatriate remittances. In that context, bilateral and multilateral debt relief notwithstanding, the sustainability of the foreign debt is all the more uncertain with the government not excluding a possible recourse to non-concessional loans. Covering internal and external financing needs will thus continue to depend on grants of international aid in the medium term. Political stability and the absence of conflict with neighbouring countries will be

5

445

SUB-SAHARAN AFRICA

conducive to structural reform implementation. The general elections scheduled for December 2008 will mark the end of John A. Kufuor’s second and last term in office

according to the constitution and should thus foster consolidation of democratic institutions.

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP)* Exports Imports Trade balance Current account balance (%GDP)* Foreign debt (%GDP) Debt service (%G& S exports) Foreign exchange reserves (in months of imports)

5.2 26.7 −9.1 2,471 3,259 −788 −3.5 99.0 14.5 3.9

5.6 12.6 −10.0 2,785 4,297 −1,512 −8.8 72.7 16.2 3.9

5.9 15.1 −8.2 2,803 5,345 −2,542 −12.3 59.2 15.3 3.4

6.0 10.9 −12.7 3,680 6,523 −2,843 −11.2 22.3 11.9 3.4

6.0 10.3 −11.9 3,980 7,692 −3,712 −11.9 23.6 3.9 3.2

6.5 10.0 −9.5 4,623 8,652 −4,029 −11.1 25.3 4.0 3.2

* = excluding donations, e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■

446

Means of entry The privatisation programme continues, albeit slowly. Water management was awarded to a foreign consortium in June 2006 for an initial five-year period. Petroleum product distribution has been liberalised and gasoline prices reflect the movement in world oil prices. Liberalisation of the electricity industry is under review. Moves to sell off a majority stake in Ghana Telecom are under way as the government searches for a strategic investor. There are no import licences or foreign exchange controls. The country has comprehensive copyright protection laws. However, these are not always properly enforced. Industrial property is better protected. Trademarks and company logos receive proper and adequate protection, provided they have been registered beforehand. Customs duties vary between 0 per cent and 25 per cent. Some products from the Economic Community of West African States (ECOWAS) are exempt from customs duty. Ghana levies 0.5 per cent duty (Ecowas levy) on products from non-ECOWAS countries. A new 0.5 per cent tax has also been introduced to provision the Export Development Invest-

ment Fund (EDIF). Since 1 April 2000, goods inspection at the point of entry is carried out by GSBV (a Bureau Ve´ritas/Ghana Standards Board joint venture) and Gateway Services Limited-GSL (a Cotecna/Ghanian customs joint venture). GSBV inspects goods at airports and border crossings, while GSL conducts inspections at the ports of Tema and Takoradi. A 12.5 per cent single-rate VAT is applied to the customs value of goods on top of customs duties and levies. Since 1 August 2004, a 2.5 per cent national health tax applies, like VAT, to all imported goods and services. Foreign companies face a number of difficulties: a stifling and omnipresent bureaucracy; a legal and judicial system which, while it seems adequate to get the job done, nonetheless leaves some room for improvement (it is both arbitrary and prone to outside interference); and poor financing (the banking sector is not interested in industrial and business investment). In order to cut minting and currency printing costs and reduce the risks associated with transporting low denomination bank notes, the Ghanian monetary authorities substituted the Ghana cedi for the old cedi on 1 July 2007. This change in denomination has involved neither a devaluation nor a revaluation.

GHANA

■ Attitude towards foreign investors To set up a joint venture with a local partner, the minimum investment is US$10,000. The equity requirement is five times higher for wholly foreign-owned companies. Purchasing

and sales groups are required to invest a minimum of US$300,000 and employ at least 10 local staff. These conditions do not apply to investment and fund management firms or companies exporting Ghanian products.

5

447

SUB-SAHARAN AFRICA

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

50 9 18 Imports: 62% of GDP

Exports: 36% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

350

1200

300

1000

250

800

200

600

150 100

400

50

200

0

0 Netherlands

UK

USA

Spain

Nigeria

Belgium

China

UK

Belgium

USA

IMPORTS by products ■ Machinery and transport equipment 34% ■ Foodstuffs 21% ■ Fuels 14% ■ Chemicals 14% ■ Books and newspapers 4% ■ Other 14%

EXPORTS by products ■ Gold 34% ■ Cocoa beans and products 32% ■ Wood 8% ■ Cotton 6% ■ Plastics 5% ■ Other 15%

STANDARD OF LIVING / PURCHASING POWER

448

Indicators

Ghana

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

2,640 520 0.520 30 48 39 5

2,029 842 0.450 34 37 43 18

5,983 2,313 0.672 31 44 30 50

GUINEA

Guinea Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

9.2 3,317 D Very high risk D

RISK ASSESSMENT Economic growth was limited in 2007, marked by the decline of activity outside the mining sector after the general labour strikes early in the year. Despite the upward price trend for raw materials, the economy will be unlikely to take off in 2008 with the country’s potential – not only the world’s fourth largest bauxite reserves but also diamonds, gold, iron, hydroelectricity and agriculture – remaining underdeveloped and its network of infrastructure in poor shape. The mining sector, which employs less than 1 per cent of the population, has moreover not had much of a snowball effect on the rest of the economy. Galloping inflation has accompanied the economic sluggishness, fuelled by an upward price trend on foodstuff prices amplified by the Guinea syli depreciation. Mining sector resources have facilitated consolidation of public sector finances. External accounts, meanwhile, have remained in deficit, undermined by imports of food goods and oil as well as by profit repatriation by

mining companies. Covering financing needs has thus been dependent on international aid. Foreign debt relief is moreover pending agreement with the IMF under the HIPC programme. External over-indebtedness remains a critical risk in this context. The political situation continues to be shaky. Having taken power the day after the death of the dictator Se´kou Toure´ in 1984, Colonel Lansana Conte´ set up, from 1991, a national transition government open to civilians. The elections of 1993, 1998 and 2003 kept him in power. Growing popular dissatisfaction has, however, resulted in sporadic violent outbursts, especially in cities. The demonstrations of February 2007 led to the appointment of Prime Minister Lansana Kouyate, who has put the country on the path to reform and enlisted the support of financial backers. The first free and democratic legislative elections could take place in 2008 with presidential elections following in 2010. Risks of a coup or popular revolt toppling the government are not, however, negligible.

5

449

SUB-SAHARAN AFRICA

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

1.2 12.9 −6.1 725 644 81 −3.4 95 23.4 1.4

2.7 17.5 −4.9 743 688 55 −5.4 89 24.4 1.1

3.0 31.1 −0.8 850 723 127 −4.0 106 20.3 0.9

2.0 30 1.1 1,004 850 154 −3.6 111 17.2 0.9

2.5 35 −1.0 1,099 1,000 99 −4.6 105 16.0 0.8

2.5 30 −1.0 1,150 1,070 80 −5.0 99 13.9 0.7

e = estimate, f = forecast

450

IVORY COAST

Ivory Coast Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

18.5 17,484 D Very high risk C

STRENGTHS • The country’s agricultural and mining potential is among the highest in West Africa. • The country boasts a developed processing industry and good infrastructure (transport, financial services, telecommunications). • Despite a gridlocked political situation, its membership in Union Mone´taire Ouest Africaine (UMOA), the West Africa Monetary Union, constitutes an element of stability.

WEAKNESSES • The civil war that broke out in March 2002 and the continuing political instability since then have resulted in deteriorated living conditions, dilapidated infrastructure and a bloated informal economy. • This context has generated considerable extra costs for companies and impeded an economic recovery. • The ongoing political crisis has jeopardised the role of Ivory Coast as a regional economic hub (finance, transit, commercial base) and undermined investor interest in the country. • The business environment remains marked by many weaknesses including security and shipping costs, trafficking and racketeering.

RISK ASSESSMENT The political situation remains uncertain despite significant progress that resulted in the March 2007 Ouagadougou Accords concluded between the President Laurent Gbagbo and the representative of the New Rebel Forces Guillaume Soros. Based on the accords, an interim government was set up under Soros’ leadership. Symbolic acts of reconciliation (incineration of weapons) raised hopes of real pacification after the many failed attempts at mediation in the past. The process of disbanding the militias has stalled, however, and country’s reunification seems likely to suffer further delays. These uncertainties are associated with the stumbling pace of the process of identifying

the population – a central rebel demand and a prerequisite to holding free and democratic elections by year end as planned. In this context, a resurgence of acts of violence remains possible. The economy proved to be relatively resilient to the civil war with the country posting positive growth since 2004 even if it remains well below the sub-Saharan African average of 6 per cent. It should nonetheless exceed 3 per cent in 2008, driven by the increase in gas and oil production and development of the telecommunications sector. Under execution of budgeted spending has contributed since 2006 to the emergence of a fiscal surplus while firm world gas, oil and cocoa prices have allowed the country to run

5

451

SUB-SAHARAN AFRICA

a trade surplus and it could ultimately benefit from partial cancellation of its foreign debt and the resumption of concessional loans. The government has already concluded a post-conflict emergency assistance agreement that could lead to agreement on a Poverty Reduction and Growth Facility, the IMF’s special low-interest lending pro-

gramme for poor countries and a prerequisite to any debt relief granted under the HIPC programme. Relations with multilateral financial backers have been strained, however, due to poor governance. Despite the issuance of eurobonds to discharge the debt, the country has accumulated arrears to public creditors.

MAIN ECONOMIC INDICATORS USD billions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP)s Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%G&S exports) Foreign exchange reserves (in months of imports)

−1.6 3.3 −5.0 6,285 3,443 2.842 1.7 94 28.7 2.2

1.8 1.5 −5.0 7,454 4,526 2.928 1.5 101 25.3 3.1

1.2 3.9 −4.3 7,263 4,920 2.343 0.2 87 22.2 2.5

0.9 2.5 2.0 8,992 5,031 3.961 3.0 105 18.2 2.9

1.7 2.0 2.0 8,628 4,991 3.637 2.3 103 21.6 3.0

3.5 3.0 1.5 8,561 5,092 3.469 1.0 100 17.0 2.9

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■

452

Means of entry Since 1 January 2000, the date of introduction of the common external tariff, all countries belonging to the West African Economic and Monetary Union (WAEMU) have had an identical customs regime. Imports from member states are totally exempt from customs duties, while those from third countries are liable to four rates of duty: 0, 5, 10 and 20 per cent. There is also a statistical tax (1 per cent of the CIF value), a community solidarity tax (1 per cent), an ECOWAS community levy (0.5 per cent of the CIF value) and 18 per cent single-rate VAT. Ad hoc duties apply to a number of products, including fish, rice, alcoholic beverages, tobacco, cigarettes and petroleum products. A limited number of goods are liable to temporary sliding-scale duties that vary between 2.5 per cent (lower band) and 5 per cent (upper band). Protectionist measures include an import licence for cotton and 100 per cent cotton products (eg wax and bazin), as well as hydrocarbons. Moreover, sugar imports

are banned by presidential decree since August 2004. Products are quality controlled by a state entity, Codinorm (Coˆte d’Ivoire Normalisation). Quantity control is carried out prior to shipment by Bivac. Under a decree dated 2 April 2002, a certificate of conformity has been required since 2 June 2003 to commercialise 80 or so products. As for exchange controls, capital flows between the Ivory Coast and non-ECOWAS member states (excluding France) are subject to the approval of the Ministry of Economic Affairs and Finance (Finex Department) for sums equal to or greater than FCFA300,000 (€458). ■

Attitude towards foreign investors The current investment act, in force since 1995, establishes two regimes: one that grants five-year or eight-year tax exemptions according to the size and type of investment; the other an approval system under which investors putting up €762,000 or more are liable to 5 per cent single-rate import duty on machinery, equipment and the first batch of spares. The act does not differentiate be-

IVORY COAST

tween origin of investment and applies to both local and foreign investment. However, legal insecurity and the socio-political crisis that has gripped the country since 2002 are causing concern among business people.

There are no special restrictions on the employment of foreign workers. To hire a foreigner though, a vacancy must be advertised for one month and permission obtained from the Ministry of Civil Service and Labour.

5

453

SUB-SAHARAN AFRICA

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

52 6 8 Imports: 42% of GDP

Exports: 50% of GDP

MAIN DESTINATIONS OF EXPORTS

MAIN ORIGINS OF IMPORTS

Mn USD

Mn USD

1500

2000

1200

1500

900 1000 600 500

300 0

0 France Netherlands USA

Nigeria

Nigeria Germany

France

China Venezuela Germany

IMPORTS by products ■ Capital goods 35% ■ Oil and oil products 30% ■ Foodstuffs (including cereals) 17% ■ Chemicals 9% ■ Other 9%

EXPORTS by products ■ Fuels 37% ■ Cocoa 25% ■ Vehicles 7% ■ Rubber 4% ■ Wood 4% ■ Chemicals 4% ■ Other manufactured goods 11% ■ Other 9%

STANDARD OF LIVING / PURCHASING POWER

454

Indicators

Ivory Coast

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

1,550 870 0.420 34 45 42 15

2,029 842 0.450 34 37 43 18

5,983 2,313 0.672 31 44 30 50

KENYA

Kenya Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

35.1 21,186 C High risk C

STRENGTHS • Kenya’s relatively diversified economy has benefited from the growth of the construction and telecommunications sectors. • An emerging middle class has underpinned consumption and fostered greater diversification of production. • The regional integration under way within the East African Community (EAC) has enhanced Kenya’s role in the region and its attractiveness to investors. • The influx of FDI, since 2005 has underpinned an increase in mediumterm potential.

WEAKNESSES • Agriculture remains a crucial sector of the economy, generating 25 per cent of GDP and providing a livelihood for the majority – 85 per cent – of the population whose incomes are thus vulnerable to weather conditions. • A shortage of infrastructure and its deteriorated condition have impeded growth with the road network and port facilities still inadequate and electricity production limited. • An extensive mobilisation of resources will be necessary to stem not only the poverty that afflicted 46 per cent of the population in 2006 but also unemployment and an AIDS pandemic in sharp decline but still affecting 6 per cent of the population. • Persistent corruption and violence have damaged Kenya’s image and have had a negative impact on international aid.

RISK ASSESSMENT Kenya posted strong growth for the fourth straight year in 2007. Good weather conditions benefited agriculture as well as the forestry and fishing sectors. On a more fundamental level, the base of economic growth broadened, thanks to the development of tourism and the intensification of trade within the EAC. Those trends should continue in 2008, provided the post-elections tensions prove to lessen. The economy has, however, been giving signs of overheating due to bottlenecks in transport and energy infrastructure. Rising

despite the central bank’s restrictive monetary policy, inflation should remain above the 5 per cent target. The good economic conditions coupled with prudent fiscal policy have only contributed modestly to the consolidation of public finances with privatisation proceeds and tax revenues less than expected while debt service and investment spending undermined the budget. The fiscal deficit should moreover grow larger in 2008 due to the spending increase. The strong growth has moreover resulted in a widening of the current account deficit attributable to rising capital goods

5

455

SUB-SAHARAN AFRICA

imports and the increasing cost of oil. The country’s external financing needs nonetheless remain largely covered by incoming FDI. The country has ample and growing foreign exchange reserves. Despite the progress made in improving the business environment, which allowed

Kenya to be included in 2007 among the 10 most reform-minded countries in Africa, the anti-corrupt campaign is still inadequate. The escalation of ethnic tensions in the wake of the hotly disputed December 2007 elections constitutes a critical risk for the stability of the country and the region.

MAIN ECONOMIC INDICATORS USD millions Economic growth (%) Inﬂation (%) Public sector balance (%GDP)* Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%G&S exports) Foreign exchange reserves (in months of imports)

2003

2004

2005

2006

2007(e)

2008(f)

2.8 9.8 -3.3 2,412 3,569 -1,157 -0.2 45.9 15.8 5.0

4.6 11.6 -0.4 2,721 4,351 -1,630 0.1 42.7 7.9 4.2

5.8 10.3 0.1 3,455 5,602 -2,147 -0.8 32.3 4.4 3.9

6.1 14.5 -2.1 3,502 6,768 -3,266 -2.4 30.3 5.7 4.3

6.4 6.9 -3.9 3,760 7,602 -3,842 -3.7 30.9 5.9 4.9

6.5 7.2 -5.1 4,152 8,210 -4,058 -5.1 34.6 5.1 4.8

* = ex grants, e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■

456

Market overview Kenya is home not only to the headquarters of UN agencies for Africa but also to numerous regional head offices of firms operating in East Africa. Mombasa port and the Northern Corridor are the gateway to East Africa and the great lakes region. Nairobi airport, currently undergoing capacity expansion work, is a tourism and freight hub. Kenya is a member of the EAC and of the 20country COMESA. This degree of regional integration has been achieved through economic liberalisation of the economy and openness to investment and imports. Only some products (firearms, pesticides, animal and plant seed, etc) are banned or restricted. Protectionist measures restrict foreign ownership of land or investment management and re-insurance businesses, while slowing the liberalisation of utilities. The EAC common external tariff, in effect since 1 January 2005, applies rates of 0, 10 and 25 per cent according to the degree of product transformation. The standard rate of VAT is 16 per cent. Ad hoc duty is applied

to imported crude oil and refined petroleum products. ■

Means of entry The US dollar, euro and pound sterling are the most widely used units of account. Since September 2005, goods exported to Kenya have been subject to pre-shipment inspection. Interteck and SGS, the two firms appointed to carry out such inspections, share the world’s countries between them. In any case, it is advisable to take certain precautions with regard to payments and use tested procedures such as presentation of documents against payment, guaranteed bank cheques, international transfers and confirmed letters of credit.

■

Attitude towards foreign investors The Kenyan government’s proactive pronouncements on foreign investment are not always borne out in practice. The teething troubles faced by the Investment Bill and the Kenya Investment Authority, ostensibly responsible for facilitating foreign investment via the creation of a one-stop shop, have engendered an attitude of scepticism towards

KENYA

them. In fact, Kenya attracts three times less foreign investment than either neighbouring Tanzania or Uganda. Work permits are hard to come by. Other than de facto or de jure limitations on access to specific activities (gaming, hunting, etc), there are few restrictive or discriminatory measures. In terms of investment safeguards, FDI is governed by the Foreign Investment Protection Act 1964, amended in 1988. Other safeguards derive from Kenya’s membership of:

• MIGA with whom Kenya has negotiated a legal instrument for protecting the investments of signatory countries against non-commercial risks; • CSID which requires that a dispute be brought before a neutral organisation; • OPIC (for US investments). The government has also changed the procedure for issuing licences and has put great efforts into facilitating access to credit.

5

457

SUB-SAHARAN AFRICA

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

55 13 13 Imports: 35% of GDP

Exports: 27% of GDP

MAIN DESTINATIONS OF EXPORTS

MAIN ORIGINS OF IMPORTS

Mn USD

Mn USD

800 700 600 500 400 300 200 100 0

1000 800 600 400 200 0 Uganda

UK

UAE

USA NetherlandsTanzania

India

China

Saudi Arabia

USA

IMPORTS by products ■ Industrial products 33% ■ Fuels 24% ■ Transport equipment 20% ■ Consumer goods 7% ■ Foodstuffs 7% ■ Other 10%

EXPORTS by products ■ Fuels 23% ■ Tea 18% ■ Horticultural products 14% ■ Coffee 4% ■ Ores and metals 4% ■ Chemicals 4% ■ Other manfactured goods 15% ■ Other 19%

STANDARD OF LIVING/PURCHASING POWER

458

Indicators

Kenya

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

1,300 580 0.474 34 39 43 9

2,029 842 0.450 34 37 43 18

5,983 2,313 0.672 31 44 30 50

LIBERIA

Liberia Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

3.4 631 D Very high risk D

RISK ASSESSMENT The political stabilisation and economic catch-up process has continued. Growth accelerated in 2007, driven by public sector investment in agriculture (rubber, palm oil and wood) and in mining (diamonds, iron and gold). The economy should gain additional strength with the lifting of the United Nations ban on diamond exports (declared in April 2007) and the development of FDI in infrastructure projects. The dilapidated state of transport infrastructure continues nonetheless to hamper an economic activity based mainly on agriculture. In this context, growth contributes little to reducing unemployment, which amounts to 40 per cent. Public finances have been under IMF control since 2006. Public sector accounts are in balance reflecting continued growth of tax revenues and reductions in fiscal spending. There is a very large external account deficit attributable to the extent of capital goods

imports necessary for the reconstruction. In November 2007, Ellen Johnson-Sirleaf’s government obtained cancellation of 3.7 billion dollars in debt from multilateral financial institutions and the Paris Club. That agreement should pave the way for debt relief under the HIPC and MDRI programmes in coming years. Since the end of the civil war in 2003 security has been maintained in the country by a UN peacekeeping force of 15,300 blue berets likely to remain in Liberia until 2011. Reinsertion of former combatants into civilian life has been making slow progress with under-equipped police struggling to cope with the resurgence of violence in Monrovia. The election as president in late 2005 of former World Bank Economist Ellen Johnson-Sirleaf, fully committed to reconstructing Liberia and combating corruption, was however instrumental in winning international community support.

5

459

SUB-SAHARAN AFRICA

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP)* Exports Imports Trade balance Current account balance (%GDP)(*) Foreign debt (%GDP) Debt service (%G&S exports) Foreign exchange reserves (in months of imports)

-31.3 10.3 -2.6 109 128 -19 -16.2 820 55 0.4

2.6 3.6 1.2 104 236 -132 -46.7 812 54 0.6

5.3 6.9 0.6 110 294 -184 -63.5 690.6 88.4 0.6

7.8 7.2 4.4 158 401 -243 -68.1 737.3 63.8 1.4

9.4 11.2 -0.1 157 418 -261 -66.8 619.7 67.6 2.2

10.4 9.0 0.7 184 468 -284 -66.1 558.6 62.2 3.0

*ex grants, e = estimate, f = forecast

460

LIBERIA

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

58 7 11 Imports: 50% of GDP

Exports: 37% of GDP

MAIN DESTINATIONS OF EXPORTS

MAIN ORIGINS OF IMPORTS

Mn USD

Mn USD

300

3000

250

2500

200

2000

150

1500

100

1000

50

500

0

0 Germany South Africa

Poland

USA

South Singapore Korea

Spain

Japan

China

Spain

IMPORTS by products ■ Oil products 29% ■ Foodstuffs 22% ■ Machinery and transport equipment 11% ■ Manufactured goods 9% ■ Other 29%

EXPORTS by products ■ Rubber 97% ■ Other 3%

5

STANDARD OF LIVING / PURCHASING POWER Indicators

Liberia

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1000 inhabitants

n/a 140 n/a n/a 58 47 n/a

2,029 842 0.450 34 37 43 18

5,983 2,313 0.672 31 44 30 50

461

SUB-SAHARAN AFRICA

Madagascar Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

19.1 5,499 C Very high risk C

RISK ASSESSMENT The economy grew 6.5 per cent in 2007, driven by public sector investments in energy infrastructure and mining extraction (ilmenite, nickel and cobalt at the Ambatovy Mine). This favourable trend should continue in 2008, bolstered by dynamism in the telecommunications, tourism and financial services sectors as well as in agriculture, provided the weather conditions are favourable. The growth has nonetheless not sufficed to significantly reduce the poverty afflicting 70 per cent of the population. Despite the cyclones in March and April last year, the upsurge in foodstuff prices remained limited, thanks to the firmness of rice production. The Central Bank’s restrictive monetary policy and the appreciation of the ariary, which have kept a lid on imported inflation linked to soaring oil prices, should make it possible to keep the increase in prices under 10 per cent this year albeit higher than the 5 per cent inflation targeted. There is a structural imbalance in public sector accounts due to the low level of tax revenues, which represents – in relation to GDP – barely half the average for subSaharan Africa. This shortcoming is indica-

462

tive of a lack of economic diversification. External accounts, meanwhile, have suffered from the deterioration of the terms of trade with oil prices rising and revenues from vanilla and textile exports declining. In this context, the current account balance deteriorated sharply in 2007 in the wake of the increase in capital goods imports concomitant with the large investments made in the mining sector. The current account deficit should widen further in 2008 despite the decline in rice imports and the good performance of fish-product exports. In this context, financing needs remain covered by international aid. In that regard, thanks to the efforts made to speed up structural reforms, the country has enjoyed the backing of the Bretton Woods institutions. It thus qualified for substantial debt relief under the HIPC and MDRI programmes. The party of President Marc Ravalomanana, elected in December 2006, won an overwhelming majority in the September 2007 early legislative elections. This victory should allow the government to pursue reforms initiated with international community backing, particularly those intended to foster the development of the private sector.

MADAGASCAR

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP)* Exports Imports Trade balance Current account balance (%GDP)* Foreign debt (%GDP) Debt service (%exports) Foreign exchange reserves (in months of imports)

9.8 −1.7 −9.3 941 1,131 −190 −7.5 91 12.3 2.6

5.3 14.0 −13.9 1,017 1,472 −455 −12.9 80 5.4 2.7

4.6 18.4 −10.1 857 1,450 −594 −12.1 70 8.3 2.8

4.9 10.8 −10.5 972 1,519 −546 −10.0 29 3.5 3.0

6.5 9.8 −10.7 1,034 2,037 −1,002 −18.2 27 1.6 2.7

7.3 7.1 −7.9 1,090 2,437 −1,347 −21.3 26 1.7 2.7

*ex grants, e = estimate, f = forecast

5

463

SUB-SAHARAN AFRICA

Malawi Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

13.2 2,232 D Very high risk D

RISK ASSESSMENT Good weather and higher fertilizer price subsidies fuelled a moderate recovery in 2007. This trend should continue in 2008 with the development of uranium extraction, which has attracted the lion’s share of foreign investment. The growth will still not suffice to significantly reduce poverty. Ranked 166th of 177 countries based on its human development index, Malawi is among the world’s poorest countries. The economy, largely underpinned by an agricultural sector, which employs 90 per cent of the population, is vulnerable to external shocks. Despite prudent macroeconomic policy, which resulted in September 2006 in cancellation of public foreign debt under the HIPC and MDRI programmes, the fiscal situation is still shaky. The government has been struggling to limit public spending and main-

tain economic policy within the limits of the programme concluded with the IMF in June 2005. The current account, moreover, will doubtless remain deeply in deficit since rising export revenues supported by the development of tourism and the recovery of agriculture are not proving sufficient to offset increasing capital goods imports and a growing oil bill. In this context, financing needs remain largely covered by international aid. Implementation of reforms undertaken with international community backing has come up against stiff resistance from parliament with the priority given by President Mutharika to combating corruption even causing a split in the majority party. In these conditions the risk of a move to impeach the president has been high, and the outcome of the next elections, which could be moved up to 2009, remains uncertain.

MAIN ECONOMIC INDICATORS

464

USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

3.9 9.6 −17.3 433 689 −256 −17.2 178 8.9 1.5

5.1 11.4 −20.8 499 810 −311 −21.3 148 10.0 1.3

5.3 15.5 −17.6 505 1,070 −565 −29.8 137 7.6 1.1

2.3 14 −19.3 463 889 −426 −22.2 20 6.3 1.4

3.4 8.4 −16.8 462 836 −374 −18.0 24 0.8 2.6

5.1 7.5 −20.4 480 877 −398 −17.0 25 0.9 3.3

e = estimate, f = forecast

MALI

Mali Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

13.9 5,929 B High risk C

RISK ASSESSMENT Growth slowed in 2007 undermined by a significant decline in gold and cotton production resulting from technical failures and poor weather conditions. Economic activity should remain dynamic in 2008 underpinned by public and private investment in the oil and mining sectors and infrastructures. GDP growth will nonetheless remain vulnerable to the vagaries of weather and the volatility of the terms of trade. The public sector continues to run large deficits due to the narrowness of the tax base, with spending moreover affected by the increase in petrol subsidies and the lagging pace of the privatisation programme and of pension system reform. Capital goods imports and the increasing cost of oil continue to undermine the current account even if rising gold prices have benefited exports in value terms. In this context, internal and external financing needs are still largely

covered by international aid with Mali even succeeding in building up substantial foreign exchange reserves. As a result of debt relief under the HIPC and MDRI programmes moreover, the debt is now at a sustainable level. Re-elected to second term in April 2007, President Toure´ won a large parliamentary majority in July 2007, which should pave the way for continuing the efforts on structural reforms undertaken. The improved political and security situation in Ivory Coast constitutes moreover evidence of the regional stability prerequisite to reopening a trade corridor to the Port of Abidjan. The armed Tuareg Rebellion, although confined to northern Mali and not presenting a risk of destabilisation at this juncture, has, however, already led to concessions on the composition of the government with the inclusion of Tuareg ministers and has prompted President Toure´ to promote regional cooperation in combating ‘trans-Saharan criminality’.

5

465

SUB-SAHARAN AFRICA

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP)* Exports Imports Trade balance Current account balance (%GDP)* Foreign debt (%GDP) Debt service (%exports) Foreign exchange reserves (in months of imports)

7.4 −1.3 −5.7 1,040 1,105 −65 −8.7 73 5.8 7.3

2.2 −3.1 −6.6 1,035 1,160 −124 −10.3 49 6.4 6.4

6.1 6.4 −7.3 1,071 1,213 −142 −10.4 48 7.4 6.1

5.3 1.5 −7.7 1,543 1,390 153 −6.7 20 3.7 6.1

4.1 2.0 −8.9 1,503 1,582 −79 −8.1 23 3.4 6.3

4.8 2.5 −8.6 1,694 1,760 −66 −7.0 24 3.4 6.6

* ex grants, e = estimate, f = forecast

466

MAURITANIA

Mauritania Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

3.2 2,663 C High risk C

STRENGTHS • Mauritania benefits from extensive mineral resources (iron, copper, gold and diamonds) and, since 2006, from oil extraction. • That potential along with implementation of a democratic regime and structural reforms has attracted foreign investment. • Improved infrastructure has fostered diversification of the productive fabric beyond its traditional pillars of iron and fishing. • The public sector has benefited from substantial foreign debt relief under the HIPC and MDRI programmes.

WEAKNESSES • A sparse population and extensive poverty afflicting 45 per cent of the population limit the country’s domestic market potential. • The UNDP human development index ranks Mauritania 153rd of 177 countries. • The ’Dutch Disease’ represents a substantial risk for manufacturing industry competitiveness. • The growing desertification affecting the rural economy has been responsible for the incompressible flow of food imports.

RISK ASSESSMENT Economic growth was weaker than expected in 2007 due to a decline in oil production, down 36 per cent, notwithstanding good performance in the non-hydrocarbon sector. Infrastructure projects financed by international aid in 2008 should revive the building and public works sector and support the dynamism of telecommunications and commerce. The additional revenues derived from oil production and new mining projects have given rise to inflationary pressures, which have sparked violent demonstrations in several Mauritanian cities. The government has since set up the distribution of basic necessities to compensate for the price increases, which should continue in 2008. With oil revenues still not stabilised, the narrowness of the tax base continues to undermine the fiscal situation. External

accounts, which have been deep in deficit, should stabilise meanwhile, thanks to the upsurge in crude prices offsetting production volatility. In this context, foreign debt has remained substantial despite relief extended under the HIPC and MDRI programmes. The debt should, however, be the subject of new bilateral negotiations with financial backers outside the Paris Club. President Abdallahi’s victory on 25 March 2007 in the first free and democratic election in the country’s history was followed by the dissolution of the Military Council for Justice and Democracy, in power since August 2005. The new government team, mainly staffed by technocrats, has intensified the campaign to wipe out the last vestiges of slavery and has tackled the problem of organising the return of 24,000 black Mauritian refugees from Mali and Senegal. This poor and ethni-

5

467

SUB-SAHARAN AFRICA

cally divided country must now succeed in establishing concerted management of its oil

revenues and thereby demonstrate its new found stability.

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP)* Exports Imports Trade balance Current account balance (%GDP)(*) Foreign debt (%GDP) Debt service (%G&S exports) Foreign exchange reserves (in months of imports)

5.6 5.3 -16.5 318 542 -224 -20.5 219 11.0 0.7

5.2 10.4 -8.0 440 923 -483 -38.7 203 8.7 0.6

5.4 12.1 -9.2 625 1,428 -803 -52.7 169 6.3 1.1

11.4 6.2 1.3 1,367 1,167 200 -4.7 88 6.3 2.6

0.9 7.6 -4.8 1,343 1,199 144 -10.4 92 6.5 1.8

4.5 7.3 -6.1 1,451 1,261 190 -11.6 87 2.7 2.8

*ex grants, e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■ Market overview The business climate in Mauritania remains difficult. Despite the country’s favourable geographical situation, abundant mineral resources and free access to European, American and Asian markets, the macroeconomic and structural reforms carried out since 1992 have failed to improve the investment climate. Manufacturing firms continue to underperform (low productivity; high wage costs). The funding of, access to and cost of bank loans is seen as the primary obstacle to business growth. Extremely high collateral requirements add to the difficulties in obtaining finance, with only 10 per cent of companies in need of finance resorting to a loan. Labour market regulations are cumbersome and costly. Corruption is rife. In 2006, for instance, unofficial payments accounted for some 6.4 per cent of manufacturing firms’ annual sales. Poor infrastructure remains a problem: power cuts cost manufacturing

468

firms around 3.3 per cent of annual sales. The burden of taxation is heavy. Aggregate corporation tax in 2006 was 104.7 per cent. Regulatory restrictions remain in force and there are doubts about the administration’s ability to interpret rules consistently and run the legal system efficiently. ■

Means of entry The banking act of March 2007 aims to consolidate the banking sector. However, the act prohibits local banks from using the counter sureties of parent companies, which places foreign banks at a disadvantage. Another discriminatory measure whereby foreign banks would be required to have a capital of MRO6 billion against MRO1 billion for local ones is due to come into force within two to three years. The currency market created in January 2007 works satisfactorily. The double taxation agreement with France, signed in Nouakchott on 15 November 1967 (law 68-1174), has not run into implementation difficulties of late, except for VAT refunds on services subcontracted in France.

MAURITANIA

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

47 12 23 Imports: 68% of GDP

Exports: 41% of GDP

MAIN DESTINATIONS OF EXPORTS

MAIN ORIGINS OF IMPORTS

Mn USD

Mn USD

400 350 300 250 200 150 100 50 0

200 150 100 50 0 China

Italy

France Belgium

France

Spain

China

USA

Belgium

Italy

IMPORTS by products ■ Oil exploration equipment 45% ■ Oil products 16% ■ Other manufactured goods 10% ■ Chemicals 2% ■ Other 27%

EXPORTS by products ■ Ores and metals 50% ■ Foodstuffs (including fishing products)47%

■ Other 3%

5

STANDARD OF LIVING / PURCHASING POWER Indicators

Mauritania

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

2,600 740 0.477 30 40 43 14

2,029 842 0.450 34 37 43 18

5,983 2,313 0.672 31 44 30 50

469

SUB-SAHARAN AFRICA

Mauritius Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

470

1.3 6,448 A3 Quite low risk A3

STRENGTHS • Among Africa’s most developed countries, Mauritius has benefited from a good political and institutional environment. • It has maintained good relations with countries in the West and on the Indian Ocean Rim. • The economy has been diversifying to high value-added sectors, notably finance and new information and communication technologies. • A well-capitalised and profitable banking sector has made it possible to support growth while limiting foreign debt.

WEAKNESSES • The sugar and textile sectors that generate nearly 20 per cent of jobs and 40 per cent of exports have suffered from the failure to extend preferential trade agreements. • The restructuring needed in these two sectors could increase unemployment and create a possible source of social unrest. • The high debt accumulated by the public sector – 72 per cent of GDP end 2005 — reflects its persistent difficulties.

RISK ASSESSMENT After a two-year slump marked by the end of preferential agreements in the sugar and textiles sectors, growth rebounded in 2007, driven by a dynamic tourist sector that has spurred investment in the building and public works sector, financial services and telecommunications. That trend should continue in 2008 strengthened by restructuring in the textiles, sugar and fishing industries. Improved economic conditions have contributed to strengthening corporate solvency as borne out by the decline in the Coface payment incident index. The economic upturn should facilitate efforts to consolidate a government budget undermined by the poor financial health of state-owned companies. The external position has suffered from the growth of oil

imports in value terms and the decline of sugar exports since cancellation of the European Union’s preferential prices. Rising exports of textiles and fish products in conjunction with GDP growth should pave the way for a further reduction in the current account deficit in relation to GDP. FDI inflows, meanwhile, have more than covered the country’s limited external financing needs. In this context, the country has accumulated ample foreign exchange reserves. The government in power since summer 2005 enjoys a large majority to undertake the necessary structural reforms, particularly the elimination of price administration. A quality business environment, ranked highest among sub-Saharan African countries, should facilitate further diversification of the productive fabric.

MAURITIUS

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

2.9 5.1 -6.2 1,835 2,133 -298 1.7 15.5 12.9 7.6

4.2 4.1 -5.4 1,935 2,309 -375 -3.5 14.5 11.5 8.0

3.0 5.6 -5.0 2,006 2,705 -699 -5.3 14.5 10.1 5.9

3.7 5.1 -5.3 2,263 3,107 -844 -7.4 14.4 7.5 4.5

4.7 10.4 -4.1 2,365 3,441 -1,076 -4.9 14.5 6.7 3.5

4.7 6.0 -3.7 2,412 3,471 -1,059 -3.4 14.9 6.3 4.0

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■ Market overview Mauritius has been a full member of the WTO since 1994. It signed the New York Convention on International Arbitration in 1996, ratifying it in October 2002. Tariff barriers have been dismantled under a series of regional agreements (South African Development Community, SADC; Common Market for Eastern and Southern Africa, COMESA; Indian Ocean Commission, IOC). In 1998, it introduced the single-rate VAT, which currently stands at 15 per cent. Import regime. Import licences remain in force for only a few products. These fall into three categories: prohibited goods (dangerous items – firearms and ammunition – as well as vehicle spare parts); supervised goods subject to government approval (foodstuffs, energy, pharmaceuticals) and unrestricted, formality-free goods. Tariff barriers. The government intends to make Mauritius a duty-free island by 2010, starting with the immediate abolition of customs duties for 1,850 tariff lines and cuts in duty on a host of other products. Tariff peaks of 65, 55 and 40 per cent have all been lowered to 30 per cent, including those applicable to alcoholic beverages and cigarettes, where the cuts have been offset by an increase in excise duties. The number of nonzero-rated tariff bands has been reduced from seven to three at 10, 15 and 30 per cent.

Excise duties are levied on four groups of imported and/or locally manufactured goods (alcoholic beverages, cigarettes, petrol and motor vehicles). Some products (food staples and pharmaceuticals) and services (education, transport, electricity and water) are exempt from VAT. Non-tariff barriers. Import licences and price controls apply to staples, 30 of which are also subject to administered pricing or profit control. Dairy products and pharmaceuticals have recently been added to this list. State monopolies. Some so-called ’strategic’ products may only be imported by stateowned enterprises. The key ones are the State Trading Corporation (STC), which imports almost all the rice ration, some wheat flour, petroleum products and cement (up to 25 per cent of requirements); and the Agricultural Marketing Board (AMB), which holds an import monopoly on onions, garlic, potato seeds, saffron and cardamoms. However, since early 1998 the AMB has relinquished some of its monopoly powers and permits potatoes to be imported free from price controls by approved private agents subject to certain conditions.

5

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Attitude towards foreign investors Mauritius has a highly pro-active policy of attracting foreign investment. The Board of Investment (BOI) is a one-stop shop in charge of this policy. The Board has an office in

471

SUB-SAHARAN AFRICA

Paris. It is possible for SMEs to start up in three days. The government checks compliance with rules and procedures ex post. Procedures are in place to facilitate foreign investment activity as well as the acquisition of property by foreigners. Numerous measures have been taken to promote recruitment of foreign experts by Mauritian firms. On the other hand, all ad hoc investment incentives granted until now have been abolished, except for two schemes: free port and integrated resort. Free zone status has been abolished as well and replaced by a VAT,

corporation tax and income tax regime applicable to all companies and persons at a single rate of 15 per cent. ■

Foreign exchange regulations The rate of exchange of the Mauritian rupee is set by the central bank against a basket of currencies. There are no longer any exchange controls in Mauritius. The Mauritian rupee is fully convertible against the main currencies and may be transferred without restriction upon the sender providing proof of origin of funds.

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300

WORLD Mauritius

250

200

150

100

50

472

-0 7

-0 7

ec

D

-0 6

ne Ju

-0 6

ec

D

-0 5

ne Ju

D

ec

05

-0 4

ne Ju

04

ec D

-0 3

ne Ju

D

ec

03

-0 2

ne Ju

02

ec D

-0 1

ne

ec D

Ju

0

01 ne

Ju

D

ec

-0

00

-9 9

ne Ju

D

ec

99

-9 8

ne Ju

98

ec D

ne Ju

ec D

Ju

ne

97

-9 7

0

MAURITIUS

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

42 9 14 Imports: 61% of GDP

Exports: 57% of GDP

MAIN DESTINATIONS OF EXPORTS

MAIN ORIGINS OF IMPORTS

Mn USD

Mn USD

800 700 600 500 400 300 200 100 0

600 500 400 300 200 100 0 UK

France

UAE

USA

France

Madagascar

South Africa

India

China

Bahrain

IMPORTS by products ■ Machinery and transport equipment 31% ■ Other manufactured goods 25% ■ Fuels 17% ■ Foodstuffs 16% ■ Other 11%

EXPORTS by products ■ Manufactured goods (textiles excluded) 39% ■ Textiles and clothing 32% ■ Sugar 15% ■ Fishing products 7% ■ Other 7%

5

STANDARD OF LIVING / PURCHASING POWER Indicators

Mauritius

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

13,510 5,450 0.791 n/a 42 25 162

2,029 842 0.450 34 37 43 18

5,983 2,313 0.672 31 44 30 50

473

SUB-SAHARAN AFRICA

Mozambique Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

474

20.1 7,608 B High risk D

STRENGTHS • Mozambique is endowed with abundant natural resources (agriculture, ore, hydroelectricity, tourist potential) and benefits from a favourable geographic situation, with proximity to South Africa and a long coastline. • Tension-free relations with neighbouring countries, its political stability and implementation of structural reforms have made Mozambique attractive to investors. • In the post-HIPC and MDRI context, the IMF has classified Mozambique in the ’green light’ group of countries characterised by sustainable debt levels. • Construction of a bridge over the Zambezi River should release the country’s northern region from its landlocked condition.

WEAKNESSES • Economic growth is still too dependent on megaprojects with the benefits not spreading readily to the rest of the economy, particularly in terms of jobs and reduction of the poverty afflicting 54 per cent of the population. • Agriculture still employs 80 per cent of the population whose livelihood thus remains vulnerable to weather conditions. • With infrastructure underdeveloped (energy delivery, transport), marked regional disparities have persisted. • Difficult access to financing and a deficient institutional framework have hampered development of the national private sector. • Covering internal and external financing needs continues to depend on international aid.

RISK ASSESSMENT Mozambique has enjoyed strong growth driven mainly by investment in megaprojects (hydroelectricity, ore mining, natural gas) but also by continued farm-sector development (cotton, tobacco, sugar). The Central Bank’s tight monetary policy should moreover facilitate keeping inflation under the 10 per cent threshold in 2008 despite the high oil prices and rising foodstuff prices. Mozambique is nonetheless still very dependent on international aid. Facing a large fiscal deficit, excluding grants, the government has struggled to broaden the tax base with spending on education and health in-

creasing and the dynamism of the megaprojects not spreading sufficiently to the rest of the economy. Similarly, imports of capital goods and rising oil prices should continue to widen the current account deficit. FDI and the influx of aid have nonetheless largely covered financing needs with the country even accumulating respectable foreign exchange reserves. Debt relief under the HIPC and MDRI programmes moreover paved the way for substantial reductions in the country’s debt ratios. In this context, there will be little risk of sovereign default or unsustainable foreign debt.

MOZAMBIQUE

Politically, the de facto resurgence of a oneparty system does not seem to be a source of concern for foreign investors at this juncture. They seem confident in the government’s

capacity to initiate a new wave of reforms focused on improving the business climate and modernising the financial sector and the legal system.

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006(e)

2007(f)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP)* Exports Imports Trade balance Current account balance (%GDP)(*) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

7.8 13.4 -15.5 1,044 1,741 -697 -19.9 112 24.8 4.8

7.5 9.1 -12.1 1,504 2,035 -531 -14.1 96 23.9 5.8

6.2 11.2 -8.6 1,745 2,467 -722 -15.8 91 19.1 4.6

8.5 9.4 -14.4 2,391 2,878 -487 -13.6 41 13.7 4.4

7.0 6.0 -15.9 2,580 3,119 -539 -17.9 44 14.8 4.2

7.0 5.7 -14.0 2,542 3,275 -733 -17.0 44 16.4 4.2

*ex grants, e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■

Market overview Customs duties currently range from 0 per cent for pharmaceuticals, 2.5 for commodities, 5 for capital goods to 7.5 for semifinished goods and 20 per cent for luxury and similar products. Different rates of duty may apply to one and the same product category (eg vegetables and private vehicles). Duties on passenger cars, for instance, vary between 5 and 20 per cent. According to foreign companies based in Mozambique, the existence of a thriving parallel economy not subject to import duties and levies or VAT (17 per cent) hampers fair competition and the export of their products. Customs procedures are so long-winded and complex that it is essential to hire the services of a special Mozambican agent (despachante), in addition to a shipping agent. For payments not connected with loans granted by international lenders, it is advisable to use the irrevocable and confirmed documentary letter of credit. Foreign capital may be repatriated, subject to the approval of the Central Bank and Ministry of Finance, only if the investment project has been authorised beforehand by the Investment Promotion Centre (CPI). Pre-shipment inspection is carried

out by Intertek Testing Services (ITS) of the United Kingdom. A non-intrusive but expensive system for scanning container goods is in place since May 2006 and operated under concession by a local company.

5

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Attitude towards foreign investors The CPI was set up to facilitate and coordinate the decision-making process for direct investments. While there is no legal requirement to consult this body, foreign investors are strongly advised to do so. The government guarantees legal certainty and protection of property and other rights. A tax benefits law and industrial free zone legislation offer many FDI incentives. The country’s legislation provides for the establishment of wholly foreign-owned businesses, but joint ventures with local partners are encouraged by the government. Living conditions for expatriates in the capital and major towns are highly satisfactory, but hygiene remains a problem in some regions.

■

Foreign exchange regulations An inter-bank currency market to regulate purchases and sales of foreign currency is in place. It is only open to the central bank and approved financial institutions. The value of the metical is determined daily on the basis

475

SUB-SAHARAN AFRICA

of supply and demand. Foreigners are strongly advised to carry out all foreign exchange transactions via approved banks and bureaux de change. Banks can carry out

476

currency transactions up to the value of their hard currency holdings. There are no restrictions on capital transfers.

MOZAMBIQUE

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

56 7 14 Imports: 42% of GDP

Exports: 33% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

600

1200

500

1000

400

800

300

600

200

400

100

200

0

0 Belgium

Italy

Spain

South Africa

China Zimbabwe

Australia

China

India

Portugal

IMPORTS by products ■ Mega-projects 23% ■ Foodstuffs 14% ■ Oil products 12% ■ Capital goods 11% ■ Cars 6% ■ Chemicals 6% ■ Other manufactured goods 17% ■ Other 10%

EXPORTS by products ■ Aluminium 59% ■ Fuels 15% ■ Electricity 8% ■ Tobacco 5% ■ Fishing products 4% ■ Sugar 4% ■ Other 6%

5

STANDARD OF LIVING / PURCHASING POWER Indicators

Mozambique

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

1,220 340 0.379 39 35 44 6

2,029 842 0.450 34 37 43 18

5,983 2,313 0.672 31 44 30 50

477

SUB-SAHARAN AFRICA

Namibia Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

2.1 6,372 A3 Quite low risk A4

RISK ASSESSMENT In 2008 as in 2007, the mining sector will drive GDP growth, particularly with diamond and uranium production higher and their world prices trending up. Zinc refining and copper processing should also contribute to the good performance of the manufacturing sector while offsetting the disappointing performance of agriculture and fishing. Inflation, meanwhile, after a spike in the first half of last year attributable to a poor agricultural harvest and high oil prices, should ease to under 5 per cent in 2008 amid restrictive monetary policy. Although the depreciation of the Namibian currency – pegged to the South African rand – contributed to the inflation, it also enhanced the competitiveness of Namibian production and spurred the increase in tourist revenues. External accounts thus remained in good shape even with the current account surplus likely to shrink in 2008 due to the increase in capital goods imports linked to development of the Kudu gas complex and to the continuing high oil prices. Foreign exchange reserves, undermined by net capi-

478

tal outflows, remain insufficient in that regard, even with foreign debt remaining modest. Increased development spending in 2008 and a planned cut in the redistribution of customs duties by the SACU customs union could moreover jeopardise efforts to consolidate public sector finances. Faced with unrelenting social challenges, the government has undertaken to accelerate the pace of reforms, particularly on property rights and those focused on BEE, or Black Economic Empowerment, the devolution of economic power to the black population. Following the South African model, investors will have to set up partnerships with BEE companies and implement programmes to combat AIDS. They will continue, however, to benefit from tax breaks – albeit currently under revision – as well as a hospitable business environment, enhanced by the Namibia’s creditworthiness. The country’s political stability should moreover not be in jeopardy notwithstanding the leadership crisis currently buffeting the party in power, South West Africa People’s Organisation (SWAPO).

NAMIBIA

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

3.5 7.2 -7.5 1,251 1,711 -460 5.1 23.0 2.7 2.1

6.6 4.1 -3.4 1,823 2,107 -284 9.0 21.2 2.4 1.8

4.2 2.3 -0.7 2,067 2,332 -265 7.2 20.9 3.0 1.5

4.6 5.1 0.1 2,420 2,559 -139 13.9 20.8 2.7 1.7

4.8 6.6 -0.8 2,567 2,783 -216 13.0 20.0 2.8 1.8

5.0 4.9 -3.6 2,624 2,977 -354 8.4 19.6 2.8 1.8

e = estimate, f = forecast

5

479

SUB-SAHARAN AFRICA

Niger Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

14.4 3,544 C Very high risk D

RISK ASSESSMENT Economic growth remained strong in 2007 and that trend should continue in 2008, driven by investments in the mining sector (uranium, gold and coal), telecommunications and transport infrastructure. That outlook will be subject to downward revision, however, in case of severe weather disturbances. Still based on a farm sector that employs 80 per cent of the working population, the economy of this landlocked country, among the world’s poorest, remains vulnerable to exogenous shocks. Public sector finances have suffered from the narrowness of the tax base and the extent of the informal sector. The public deficit increased in 2007 with implementation of major investment projects – involving irrigation, the building of slaughterhouses and creation of an agricultural bank – intended to secure the food supply. And reduction of

the deficit will be unlikely in 2008 despite efforts made to improve resource mobilisation. External accounts also continue to show large imbalances notwithstanding the better terms of trade benefiting uranium exports. In fact, the sharp increase in capital goods imports needed to implement the investment programmes is undermining the trade balance. In this context, even with the significant improvement in debt ratios achieved, thanks to the HIPC and MDRI programmes, the debt is still not sustainable. The country thus continues to depend on support from international financial backers. And despite the lagging pace of structural reforms and the resurgence of political tensions in the run-up to presidential elections in 2009 that backing should not be in jeopardy. Niger is indeed pivotal to regional stability, particularly in maintaining security in the Sahel in the framework of the campaign against international terrorism.

MAIN ECONOMIC INDICATORS

480

USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP)* Exports Imports Trade balance Current account balance (%GDP)(*) Foreign debt (%GDP) Debt service (%G&S exports) Foreign exchange reserves (in months of imports)

4.5 -1.8 -7.5 335 469 -134 -10.1 75.8 27.2 4.7

-0.8 0.4 -10.5 445 599 -153 -10.2 67.8 16.3 3.9

7.4 7.8 -10.1 478 770 -291 -12.0 59.2 11.8 3.1

5.2 0.1 -6.5 521 783 -262 -10.7 22.7 4.4 4.6

5.6 0 -12.5 619 1,022 -403 -14.2 25.0 3.7 4.5

5.4 2 -11.7 680 1,172 -493 -17.4 27.3 3.5 4.7

* = ex grants, e = estimate, f = forecast

NIGERIA

Nigeria Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

144.7 114,686 D High risk D

STRENGTHS • Nigeria boasts extensive hydrocarbon resources and great agricultural potential. • Structural reforms undertaken in 2003 and which resulted in debt relief granted by the Paris Club will provide a solid foundation for future economic and social development. • Representing half of West Africa in population terms, Nigeria has played a major political role at both the regional and continental levels.

WEAKNESSES • Social, ethnic and religious tensions have constituted a major deterrent to investors faced with an unfavourable business environment. • The economy continues to depend on oil, which has represented nearly 90 per cent of exportations, about 25 per cent of GDP and over 80 per cent of tax revenues. • Deficient transport and energy-delivery infrastructure has impeded efforts to diversify the productive fabric. • The oil resources have only partially benefited the population, with the poverty rate remaining very high (70 per cent live on under a dollar a day).

RISK ASSESSMENT Like in 2006, oil production in 2007 was reduced to 60 per cent of capacity due to persistent tensions in the Niger Delta. Growth nonetheless exceeded 4 per cent, driven by a very dynamic agricultural sector and a growing services sector. The growth rate could climb to 8 per cent in 2008, thanks to the production start-up of off-shore oil sites and development of the gas sector. The central bank’s restrictive monetary policy and a good harvest season should moreover make it possible to keep inflation to one digit in 2008. That favourable context, in conjunction with tight fiscal policy, has allowed Nigeria to run a public sector financial surplus and enjoy an excellent external situation. The agreement reached in October 2005 with the Paris Club has moreover resulted in the virtual elimination of foreign debt and made

public sector debt sustainable in the medium term. Nonetheless, the public sector and current account balances, excluding hydrocarbon revenues, have been showing worrying deficits, respectively, a negative 45 per cent and a negative 36 per cent of GDP in 2007, indicative of an insufficiently diversified economic fabric. Political and institutional weaknesses continue to be a substantial risk factor. Coming to power in May 2007 after disputed elections, Umaru Yar’Adua may, despite the formation of a national unity government, experience difficulties in pacifying the Niger Delta region and in carrying on with economic reforms initiated by the previous administration (privatisations, oil fund). In that context, the anti-corruption campaign to which the government gives priority could lose momentum and the business climate remain a source of concern.

5

481

SUB-SAHARAN AFRICA

MAIN ECONOMIC INDICATORS USD billions

2003

2004

2005

2006e

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

10.7 14 0 27.3 17.2 10.1 -3.6 58.2 9.7 2.5

6.1 15 7.7 37.3 19.4 17.9 5.3 50.2 7.8 6.0

7.2 17.9 10.7 53.1 25.4 27.7 9.3 20.8 6.4 8.4

5.6 8.3 8.4 62.5 30.9 31.6 12.2 3 7.9 10.2

4.2 5.3 0.3 60.4 38.9 21.5 0.2 2.6 1.7 11

8 7.4 4.4 65.3 41.0 24.3 2.4 2.4 0.9 12.7

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET

482

■ Market overview The country is a member of the WTO, but does not fully observe its rules. While the application of the ECOWAS common external tariff (more or less the same as WAEMU’s) has recently led to a reduction in the average rate of customs duty (theoretically capped at 20 per cent), a substantial numbers of products continue to receive temporary additional protection via 50 per cent tariffs. Moreover, an import ban is in place for 40 or so products, including retreaded tyres, second-hand clothes, cars over eight years old, furniture, some textiles, frozen meat, mineral water, pasta and biscuits. To favour local products, the Nigerian government has increased the number of protectionist measures against finished goods but cut customs duties on raw materials, intermediate products and machinery. It has also announced the lifting of import bans over the next few years and their replacement with additional protective tariffs. The privatisation of port services has spectacularly speeded up customs clearance. The country recently switched from preshipment inspection to inspection upon arrival. The problems associated with distribution should not be underestimated. Given the country’s size and poor infrastructure, it may be necessary to use the services of a well-established distribution network when starting a business.

■

Attitude towards foreign investors The Nigerian Investment Promotion Commission (NIPC), headquartered in Abuja, regularly publishes a list of priority investment sectors and the various subsidies (financial, tax, etc) granted to companies by the government. It provides a wide range of services for investors and has set up a one-stop investment centre (OSIC) to speed up incorporation formalities for Nigerianlaw companies. Foreign investors may hold a 100 per cent stake in a local company. The repatriation of capital, dividends and profit is unrestricted, though extremely slow. Labour is fairly cheap. A semiskilled worker earns about €150 a month, while an English-speaking local secretary gets around €250. Employees usually receive one month’s extra pay.

■

Foreign exchange regulations The Central Bank of Nigeria (CBN) uses wholesale Dutch auctions to supply the local market with currency. Under this system, twice a week the CBN announces the volume of currency (dollars) it is prepared to sell against nairas and invites banks to put in purchase bids, serving those offering the highest rate first within the amount of foreign currency available. Since spring 2006, moneychangers too have direct access to the central bank. As a result, the traditional spread between the official exchange rate

NIGERIA

and the parallel market rate has been all but eliminated. The naira’s exchange rate against both the dollar and the euro has also steadied. However, the CBN’s decision to proceed with the naira’s redenomination in summer 2007, accompanied by greater con-

vertibility of the Nigerian currency, was blocked by the President. Exporters are strongly advised to obtain payment for all orders before shipment, either by irrevocable and confirmed letter of credit or in cash in a hard currency.

5

483

SUB-SAHARAN AFRICA

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

30 16 16 Imports: 35% of GDP

Exports: 53% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

30000

3500

25000

3000 2500

20000

2000

15000

1500

10000

1000

5000

500

0

0 USA

Spain

Brazil

China

France Germany

USA Netherlands

UK

France

IMPORTS by products ■ Manufactured goods 29% ■ Machinery and transport equipment 21% ■ Chemicals 20% ■ Fuels 16% ■ Foodstuffs 6% ■ Other 9%

EXPORTS by products ■ Oil 82% ■ Gas 9% ■ Machinery and transport equipment 2% ■ Other 7%

STANDARD OF LIVING/PURCHASING POWER

484

Indicators

Nigeria

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

1,050 640 0.453 33 48 44 7

2,029 842 0.450 34 37 43 18

5,983 2,313 0.672 31 44 30 50

RWANDA

Rwanda Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

9.2 2,494 D Very high risk D

RISK ASSESSMENT The mining, services and constructionsectors drove growth in 2007 which should continue at 4.6 per cent this year, far below the 7.0 per cent objective set by the government. Agriculture which represents 40 per cent of GDP and employs 90 per cent of the population has suffered from low productivity and remains very vulnerable to weather conditions. A manufacturing sector (beverages and tobacco) still hampered by defective transport and energy infrastructure has to contend with increased regional competition: Rwanda joined the regional East African Community market in June 2007. Persistent public sector financial imbalances are attributable to the narrowness of the tax base in conjunction with increases in priority spending on education and infrastructure (roads and river transport). External accounts also show large deficits with the good performance of ore, coffee and tea exports not sufficing to offset rising capital

goods imports and a soaring oil bill. And transport costs resulting from Rwanda’s landlocked position continue to undermine the services balance despite the development of tourism. In this context, covering internal and external financing needs still largely depends on international aid. In 2006, this aid resulted in substantial foreign debt relief under the HIPC and MDRI programmes. The national reconciliation process has continued and two milestones will mark 2008: the International Criminal Court for Rwanda will hear its last trial and so-called Gacaca jurisdictions dedicated to the 1994 genocide will be dissolved. In the absence of political opposition, President Kagame should continue to dominate domestic politics. Regional tensions have heightened meanwhile with Uganda and the Democratic Republic of Congo accusing Rwanda of backing an armed rebellion particularly in the majority Tutsi province of North Kivu in the Congo.

5

485

SUB-SAHARAN AFRICA

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP)* Exports Imports Trade balance Current account balance (%GDP)* Foreign debt (%GDP) Debt service (%G&S exports) Foreign exchange reserves (in months of imports)

0.9 7.4 -10.3 63 244 -181 -19.2 93 11.1 5.0

4.0 12 -12.1 98 276 -178 -18.2 92 9.6 6.3

6.0 9.2 -13.4 125 374 -249 -19.4 71 7.2 6.2

5.3 8.8 -12.7 142 438 -295 -17.6 15 3.5 5.5

4.5 8.2 -15.4 153 570 -417 -20.6 15 1.5 5.1

4.6 7.5 -16.5 166 577 -411 -18.4 16 1.3 5.2

* = ex grants, e = estimate, f = forecast

486

´ AND PRINCIPE SAO TOME

Sao Tome ´ and Principe Population (inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

160,055 123 C Very high risk D

RISK ASSESSMENT Strong growth continued in 2007. The economy has benefited from the dynamism of the services sector associated with oil exploration and a buoyant building and public works sector spurred by the development of tourism. The influx of foreign investment in services and building and public works should continue in 2008 and growth should remain at about 6 per cent. High inflation has accompanied the good economic conditions with the dobra depreciation compounding the imported inflation associated with the higher oil and foodstuff prices. Restrictive monetary policy should nonetheless make it possible to slow inflation below the 12 per cent threshold set by the central bank. Public sector finances continue to suffer from large imbalances. The tax system over-

haul and the increase in tax revenues have however resulted in a reduction in the deficit in 2007, a trend likely to continue in 2008. External accounts are also in deficit, the trade balance suffering from rising imports not only of oil but of capital goods necessary for oil exploration with the upward trend of cocoa exports not sufficing to offset the import growth. In this context, financing needs remain high but nonetheless largely covered by the growth of FDI. The country moreover benefited last year from substantial relief of debt that had become unsustainable. Improvement in the country’s political stability has been gradual. President Fradique de Menezes still does not benefit from enough support in parliament to implement the reforms demanded by financial backers, especially those intended to improve the business environment.

5

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP)* Exports Imports Trade balance Current account balance (%GDP)* Foreign debt (%GDP) Debt service (%G&S exports) Foreign exchange reserves (in months of imports)

4.0 9.6 -49.5 6.6 34 -27 -56.7 492 49.5 4.9

3.8 12.8 -58.8 3.6 36 -32 -58.8 468 45.3 3.6

5.4 16.3 -38.3 3.4 42 -38 -39.4 310 48.1 4.7

7.0 23.1 -28.8 3.8 71 -67 -65.0 260 24.6 3.8

6.0 16.6 -20.7 4.5 71 -67 -55.9 53 4.7 3.6

6.0 11.4 -19 4.8 77 -72 -55.0 54 5.1 3.5

* = ex grants, e = estimate, f = forecast

487

SUB-SAHARAN AFRICA

Senegal Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

488

11.9 8,936 B High risk B

STRENGTHS • The country has benefited from relative political stability. • The international community marked its support for Senegal’s efforts on structural reforms via debt relief extended under the HIPC and MDRI programmes. • The reforms – infrastructure, taxes, health, education – have improved the business climate. • Senegal’s membership in the West African Economic and Monetary Union constitutes a guarantee of monetary stability.

WEAKNESSES • With efforts to diversify the productive fabric hobbled by transport and energy infrastructure development, the economy continues to depend heavily on agriculture, which is the livelihood of 60 per cent of the working population active and represents 15 per cent of GDP. • Poverty – which afflicts 57 per cent of the population – and regional disparities constitute major weaknesses. • Senegal’s industrial development depends on the major restructuring challenge facing state-owned and semiprivate companies. • With public and external accounts undermined by structural imbalances, the country remains dependent on expatriate remittances and international community aid to cover its financing needs.

RISK ASSESSMENT GDP growth rebounded in 2007, buoyed by a better harvest season and an increase in phosphate production following the recapitalisation of Senegal Chemical Industries. It should remain strong in 2008, driven by services, particularly telecommunications, and a building and public works sector benefiting from major infrastructure projects. The economy continues, however, to be vulnerable to weather shocks, which affect not only farm production but also the supply of energy, and thereby the entire productive fabric. Despite a broadening of the tax base and an increase in taxes, public sector accounts

are still in deficit due to increases in investment spending and subsidies of electricity consumption. External accounts are also deeply in deficit due not only to rising energy costs but also to a loss of competitiveness by bestselling export products (phosphates, fertiliser) and a decline in fishing resources. As a result of the debt relief granted under the HIPC and MDRI programmes, however, the debt ratios are now sustainable and the debt service very low. After some 10 years of real political stability, Senegal’s political climate deteriorated in the wake of the contested outcome of the February 2007 presidential elections. Abdu-

SENEGAL

laye Wade’s re-election for a third term prompted the opposition parties to boycott the June 2007 legislative elections and for the first time since 1978 the Assembly convenes without the main opposition forces. The large majority won by the Senegalese Democratic Party in both the Assembly and Senate should enable the government to

pursue the reforms supported by the financial backers. The emergence of the new president of the senate, Pape Diop, as a major political figure augurs well for a smooth political transition with the 81-year-old incumbent Abdulaye Wade’s term in office scheduled to end in 2012.

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP)* Exports Imports Trade balance Current account balance (%GDP)* Foreign debt (%GDP) Debt service (%G&S exports) Foreign exchange reserves (in months of imports)

6.5 0 -4 1,411 2,319 -907 -8.6 64.1 10.5 4.1

6.2 0.5 -6 1,486 2,507 -1,022 -8.7 53.2 6.6 4.4

5.5 1.8 -5.3 1,603 2,729 -1,126 -9.2 44.3 5.9 4.4

3.5 1.9 -5.8 1,861 3,174 -1,313 -13.3 30 2.1 4.3

4.5 1.7 -5.4 1,898 3,206 -1,307 -11.3 13.1 2.1 4.4

4.8 2.5 -5.4 2,038 3,402 -1,364 -10.0 12.2 2.0 4.3

5

* = ex grants, e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■ Means of entry The customs union established by the member states of the West African Economic and Monetary Union (WAEMU) is simple and its terms fairly advantageous. Some goods are subject to special import formalities, but only products likely to ‘upset public order’ or ‘contravene good morals’ are banned. However, since October 2005 there is an embargo on poultry meat and eggs. It is also forbidden to import second-hand poultry equipment. At the same time, a market regulation agency (ARM) has been set up with powers to temporarily suspend imports of some farm products in order to promote local produce. ■ Attitude towards foreign investors Senegal has very liberal laws. Foreigners enjoy total freedom of establishment and may set up wholly foreign-owned companies in the country. Only the fish trade, transport and the bakery business are reserved for locals. Acquiring title or a hereditary lease

in connection with a business, though, can be cumbersome, long and complex. A number of entities have been set up to assist investors. These include the national agency for investment promotion and largescale project development (APIX, Agence nationale charge´e de la promotion des investissements et des grands travaux) and the SME development and support agency (ADPME, Agence de De´veloppement des Petites et Moyennes). APIX, which plays a leading role in the investment assistance process, opened a dedicated company startup office (BCE, Bureau d’appui a` la cre´ation d’entreprise) on 19 July 2007. The BCE enables all company incorporation formalities to be completed within 48 hours. These arrangements consolidate the investment code, the concessions act and the community regulatory framework (OHBLA, WAEMU, SYSCOA). A new government procurement law (CMP, Coastal Management Programme) was adopted in 2007 but has not yet come into force. New legislation on SME development

489

SUB-SAHARAN AFRICA

and promotion is in the process of being adopted with regard to taxation, law no. 2006-17 has cut corporation tax to 25 per cent. Equalisation tax was abolished in 2007. ■ Foreign exchange regulations Funds may be transferred freely from Senegal, as from all WAEMU member countries, through approved intermediaries or the post office (for amounts equal to or below FCFA1,000,000), subject to submission of proof and of a currency approval form to the

intermediary concerned. In general, foreign payments for the delivery of goods are authorised, including payment of fees incurred in connection with port services, warehousing, storage, customs inspection and clearance, as well as any fees and expenses related to goods transport, insurance, reinsurance, etc. Administrative formalities can be slow and transfers lengthy. Relations between the BCEAO and local banks tend to be fairly tense.

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 400

WORLD Senegal

350 300 250 200 150 100 50

490

-0 6 D ec -0 Ju 6 ne -0 7 D ec -0 7

-0 5

ne Ju

D ec

05

-0 4

ne Ju

04

D ec

-0 3

ne Ju

D ec

03

-0 2

ne Ju

02

D ec

-0 1

ne Ju

D ec

01

-0 0

ne Ju

D ec

00

-9 9

ne Ju

D ec

99

-9 8

ne Ju

D ec

98

-9 7

ne Ju

D ec

Ju

ne

97

0

SENEGAL

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

54 10 16 Imports: 42% of GDP

Exports: 27% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

1000

350 300

800

250 200

600

150

400

100 200

50 0

0 Mali

India

France

France

Italy The Gambia

Nigeria

UK

Netherlands China

IMPORTS by products ■ Fuels 26% ■ Foodstuffs 23% ■ Electrical machinery and equipment 16% ■ Chemicals 9% ■ Vehicles 6% ■ Other manufactured goods 19%

EXPORTS by products ■ Fuels (including refined oil) 28% ■ Chemicals (including phosphates) 22% ■ Fishing products 18% ■ Machinery and transport equipment 12% ■ Animal and vegetable oils 4% ■ Other 17%

5

STANDARD OF LIVING/PURCHASING POWER Indicators

Senegal

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

1,840 750 0.458 33 42 43 21

2,029 842 0.450 34 37 43 18

5,983 2,313 0.672 31 44 30 50

491

SUB-SAHARAN AFRICA

Sierra Leone Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

5.6 1,443 D Very high risk D

RISK ASSESSMENT Economic growth remained strong in 2007, driven by diamond, rutile and bauxite exploitation. The strong growth should continue this year, underpinned by private investment in ore exploitation and public investment in rehabilitating transport and energy infrastructure devastated by 10 years of civil war (1992–2002). While the reconstruction phase continues, the economy should also benefit from the development of services and the increase in farm production. The growth rate is still not high enough, however, to enable Sierra Leone to reach its millennial objectives by 2015, particularly reducing by half the poverty afflicting 70 per cent of the population. Public accounts remain deeply in deficit. Tax reforms underway have been struggling to increase taxes in a country where the tax burden is among the lowest in sub-Saharan Africa, while spending on infrastructure and combating poverty remain incompressible. There has also been a continuing current account imbalance. Despite improvement in

492

the terms of trade, ore exports have not sufficed to offset the increase in imports of capital goods needed in developing mining infrastructure. In this context, covering internal and external financing needs continues to depend on international aid. Sierra Leone’s cooperation with the IMF should, however, lead in the near term to significant foreign debt relief under the HIPC and MDRI programmes. The holding of democratic elections in August 2007, the first since the civil war ended constituted a further step in the process of reconstructing the country. The main opposition formation, the All People’s Congress, was the winner in voting that took place in a context of limited violence. The new President Ernest Koroma will, however, have to take up important challenges like reintegrating some 70,000 former combatants and the return of refugees. To accomplish this, the new President, a trained economist, intends to lead and manage the country like a business and make the anti-corruption campaign the priority of his term in office.

SIERRA LEONE

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

9.3 7.5 −14.5 146 295 −149 −14.1 167 30.1 1.6

7.4 14.2 −12.4 171 274 −103 −11.5 193 27.4 3.6

7.3 12.1 −12.8 190 362 −171 −14.6 167 20.8 3.8

7.4 12.2 −9.0 245 389 −144 −10.3 138 14.5 3.5

7.4 10.8 −12.2 296 443 −147 −10.1 111 14.2 3.4

7.0 10.2 −13.9 332 475 −143 −9.3 103 14.0 3.5

e = estimate, f = forecast

5

493

SUB-SAHARAN AFRICA

South Africa Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

494

47.4 254,992 A3 Quite low risk A3

STRENGTHS • With the country generating 40 per cent of African GDP, its economic and political influence has been an inescapable fact on the continent. • South Africa boasts extensive mineral resources, diversified industry and an outperforming tertiary sector (banks, telecommunications, transports). • With public finances under control and the country’s external financing needs at moderate levels, debt has been low. • With the country’s good creditworthiness, the government continues to enjoy substantial borrowing capacity. • Tight economic management, in conjunction with a good business environment, constitutes a major asset.

WEAKNESSES • The social and economic dualism inherited from the apartheid era and now reflected by a wage gap has been a source of social and political tensions. • The campaigns against poverty, unemployment and the AIDS pandemic have made it necessary to increase the growth rate, which in turn requires eliminating economic bottlenecks. • A shortage of skilled labour has stalled implementation of vast investment projects in the transport and energy sectors. • With its growing financing needs, South Africa has been vulnerable to a crisis of investor confidence.

RISK ASSESSMENT Economic activity, which has been remarkably dynamic since 2004, slowed slightly in 2007 with tighter credit controls and higher interest rates facilitating a soft landing for household demand. In 2008, investment should become the new engine of strong growth even if the shortage of skilled labour should delay infrastructure programmes. Those favourable economic conditions, which have benefited construction, financial services and manufacturing, have bolstered corporate solvency as evidenced by a Coface payment incident index remaining below the world average. The tight fiscal policy these past years has allowed the government to gain substantial

leeway in supporting the economy without increasing public debt. The energy bill and the increases in imports of consumer and capital goods have contributed to further undermining the current account deficits. Although the limited foreign debt burden has tended to ease insolvency risk, the country has moreover remained vulnerable to foreign exchange liquidity crisis risk. Especially with its financing needs largely covered by volatile portfolio investment and with the prospects limited for a significant increase in direct investment. The considerable credibility of the Central Bank, which has been taking pains to bring inflation within its target range (between 3 and 6 per cent), should limit exchange rate volatility.

SOUTH AFRICA

In the political field, the election of Jacob Zuma, supported by the Communist Party and the Congress of South African Trade Union (COSATU) , as president of the African National Congress (ANC) in December 2007 has raised uncertainties about the country’s political and economic direction. Year 2008 may see a leadership crisis and early presidential elections since the current president, Thabo Mbeki, has been weakened

by defeat in the ANC elections. Furthermore, newly elected Zuma is currently facing judicial charges. In this context, the election contest to choose Mbeki’s successor, scheduled for 2009 at the latest, remains wide open. Moreover, social risks have remained significant, stoked by the frustrations of the large proportion of the population that has not benefited from the fruits of economic growth.

MAIN ECONOMIC INDICATORS USD billions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%)* Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%G&S exports) Foreign exchange reserves (in months of imports)

3.1 4.0 -2.3 38.5 35.0 3.5 -1.1 22.9 13.0 1.5

4.8 4.3 -1.5 48.1 48.3 -0.2 -3.2 20.2 9.9 2.3

5.1 4.0 -0.3 55.4 56.6 -1.2 -3.8 19.1 7.2 2.8

5.0 5.0 0.3 64.1 70.4 -6.3 -6.3 22.4 8.1 2.8

4.5 6.1 0.6 70.7 76.6 -5.9 -5.8 24.3 7.9 3.0

4.8 5.3 -0.1 78.6 84.2 -5.6 -5.3 24.5 7.7 3.0

* = current December price level compared to previous December, e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■ Market overview South Africa’s trade liberalisation started in 1990 and got a much-needed fillip from WTO accession in 1994. The country uses the World Customs Organisation’s harmonised international nomenclature. Customs duties have been slashed. The cuts have been facilitated by the Trade, Development and Co-operation Agreement signed between the EU and Africa in 1999, the full impact of which will be felt in 2012. Talks have begun to amend this agreement. Talks are also under way in Southern Africa on economic partnership agreements (EPAs) between the EU and the countries of the region, including South Africa. ■ Means of entry Under the free-trade agreement signed with the EU in October 1999 and implemented in January 2000, about 86 per cent of products imported from the EU will be exempt from customs duty by 2012. South Africa is not a

signatory to the WTO government procurement agreement. Tenders have traditionally been overseen at central level by the State Tender Board and at local level by one of nine Provincial Tender Boards. However, a common service provider is shortly to replace the Tender Boards with the aim of facilitating the adoption of a uniform policy on government procurement in line with the State Tender Board Act. The Preferential Procurement Policy Framework Act, in force since February 2000, creates a points system that favours companies whose shareholders or managers are ‘historically underprivileged people’ (blacks, mixed-race, Indian), women and the disabled. Public procurement in South Africa serves to widen Black Economic Empowerment (BEE) by encouraging South African and foreign companies to team up with Black partners. Where a public tender exceeds US$10 million, foreign companies are required to contribute a 30 per cent compensatory package (offset) on the total value of imports under the National Industrial Participation Programme.

5

495

SUB-SAHARAN AFRICA

Current legislation imposes restrictions on foreign investment in the audiovisual sector. Consequently, no foreign investor may own more than 20 per cent of a local radio or television company. The South African Bureau of Standards (SABS) co-operates with a large number of similar international bodies to harmonise technical standards and regulations. International standards such as IEC and ISO, as well as a vast number of European standards, are recognised by the Bureau, but must still be approved by it. ■ Attitude towards foreign investors Foreign companies are subject to numerous statutory obligations and orders, especially in matters of BEE, positive discrimination and immigration. They operate in an administrative environment which can lack transparency and predictability, especially in

matters of government procurement and administrative procedure. About 80 per cent of imported goods are invoiced in US dollars. Other widely used currencies include the euro, the pound sterling and the South African rand. Payment instruments in South Africa, which has a sophisticated financial services sector, are similar to those available in Europe and the United States. ■

Foreign exchange regulations The regulations for ordinary business transfers by non-residents have been liberalised. Currency traders are of the opinion that there are no de facto exchange controls any longer. Capital transactions – in particular loans from a parent company to a South African subsidiary – remain subject to some restrictions. Relaxation measures aimed at removing restrictions on the size of foreign investment came into force in October 2004.

PAYMENT INCIDENTS INDEX (12 months moving average - base 100 : World 1995) 300

250

WORLD South Africa

200

150

100

50

Ju

ne D 93 ec Ju -93 ne D 94 ec Ju -94 ne D 95 ec Ju -95 ne D 96 ec Ju -96 ne D 97 ec Ju -97 ne D 98 ec Ju -98 ne D 99 ec Ju -99 ne D 00 ec Ju -00 ne D 01 ec Ju -01 ne D 02 ec Ju -02 ne D 03 ec Ju -03 ne D 04 ec Ju -04 ne D 05 ec Ju -05 ne D 06 ec Ju -06 ne D 07 ec -0 7

0

496

SOUTH AFRICA

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

49 16 14 Imports: 29% of GDP

Exports: 27% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

8000 7000 6000 5000 4000 3000 2000 1000 0

10000 8000 6000 4000 2000 0 Japan

USA

UK

Germany Netherlands

Germany

EXPORTS by products ■ Machinery and cars 13% ■ Iron and steel 11% ■ Agricultural raw materials and foodstuffs 11% ■ Fuels 10% ■ Platinum 10% ■ Chemicals 8% ■ Gold 7% ■ Other manufactured goods 31%

China

USA

Japan

Saudi Arabia

IMPORTS by products ■ Machinery and transport equipment 39% ■ Other manufactured goods 20% ■ Oil products 15% ■ Chemicals 10% ■ Other 17%

5

STANDARD OF LIVING / PURCHASING POWER Indicators

South Africa

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

11,710 5,390 0.658 45 59 33 85

2,029 842 0.450 34 37 43 18

5,983 2,313 0.672 31 44 30 50

497

SUB-SAHARAN AFRICA

Sudan Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

37.0 37,565 D Very high risk D

RISK ASSESSMENT Social and political risk remains critical. The failure of the peace accords concluded in May 2006 caused instability to spread from the Darfur region to Chad and the Central African Republic. Complicating the stabilisation process even more, the international community has been struggling to identify credible interlocutors, with dissension between the various Arab tribes intensifying. Implementation of the February 2005 peace accord with the south was moreover called into question last year by the withdrawal from the national unity government of the south’s representatives dissatisfied with the division of resources. In this context, there is appreciable risk of a resurgence of civil war that would no longer be limited to Darfur but would again engulf the south. Despite international sanctions, economic conditions are still good, underpinned by the oil sector and dynamic investment mostly from China. The buoyant growth has facili-

498

tated the management of public sector finances and the consolidation of external accounts which remain however in deficit with the invisibles balance undermined by repatriation of dividends from extractive industries. In this context, financing needs have been declining and are still largely covered by direct investment inflows. GDP growth has similarly resulted in improvement in debt ratios, without the benefit of bilateral debt cancellation. New international sanctions notably entailing a freeze on the assets of Sudanese companies abroad should moreover ultimately restrict Sudan’s access to international financing. The conversion of foreign exchange reserves to euros effected by the central bank in 2007 will likely destabilise the banking sector indefinitely. Sudan’s future development will remain dependent on the political situation and reconstruction of infrastructure devastated by twenty years of civil war.

SUDAN

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%G&S exports) Foreign exchange reserves (in months of imports)

7.1 7.7 0.7 2,577 2,536 41 -7.7 145 33.8 0.9

5.1 8.4 -1.5 3,778 3,586 192 -6.6 107 26.0 2.2

8.6 8.5 -1.8 4,878 5,946 -1,068 -11.5 96 20.9 2.4

11.8 7.2 -4.6 5,813 7,105 -1,292 -15.7 71 16.9 1.7

11.2 8.0 -4.4 7,567 7,518 49 -11.6 60 14.3 1.4

10.7 6.5 -3.5 9,440 9,000 440 -9.7 53 11.9 1.7

e = estimate, f = forecast

5

499

SUB-SAHARAN AFRICA

Tanzania Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

500

39.5 12,784 B High risk D

STRENGTHS • Tanzania’s political stability, regional integration within the East African Community (EAC) and close cooperation with the international community have facilitated progress on structural reforms. • Tanzania, which has enjoyed broad support from the international community, obtained in 2005 substantial public sector foreign debt reduction under the HIPC and MDRI programmes. • The country nonetheless boasts extensive economic potential (arable land, gas, mineral wealth, tourism). • The Tanzanian Investment Centre’s efforts to facilitate foreign investment have produced results.

WEAKNESSES • Tanzania is still among the poorest subSaharan countries with life expectancy at birth only 47 years. • It remains very dependent on international aid. • The economy is handicapped by insufficiently developed energy infrastructure. • Relations with the semi-autonomous Island of Zanzibar, where the economic situation has been poor, have remained tense.

RISK ASSESSMENT GDP growth strengthened to 7.3 per cent in 2007, driven by a good harvest season and the resumption of energy delivery. It should reach 7.7 per cent in 2008 spurred by the start of exploitation of new mine fields and development of road and tourist infrastructure. Despite prudent macroeconomic policy, the imbalances in public and external accounts are still substantial. The public sector balance remains undermined by a narrow tax base – limited by the high-poverty rate in the country, an extent of the informal economy, and the preferential tax regime granted to foreign investors – with the necessary investment spending on infrastructure, health and education continuing to grow. The current account, meanwhile, will likely continue to

show a large deficit, exacerbated by capital goods imports, even should the steadiness of gold prices lead to improvement in the terms of trade. In this context, covering internal and external financing needs will remain dependent on international aid. In the political arena, President Jakaya Kikwete, elected in December 2005 with 80 per cent of the votes cast has not initiated the reforms so hoped for by the public, especially in the area of corruption. He has moreover proven incapable of finding a durable solution to the Zanzibar problem. He intends, however, to strengthen Tanzania’s regional influence with the country notably named to head the SADC’s mediation mission to Zimbabwe and selected as host for one of the key Summits on the Darfur crisis in 2007.

TANZANIA

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

5.7 4.4 -9.3 1,299 2,159 -860 -6.9 73.6 4.5 7.2

6.7 4.1 -11.1 1,594 2,728 -1,134 -10.1 70.5 5.2 8.1

6.5 4.4 -11.6 1,736 3,436 -1,700 -12.6 64.5 3.0 6.8

6.7 7.3 -12.5 1,830 4,081 -2,251 -15.4 35.5 1.4 5.9

7.3 5.6 -12.3 2,131 4,672 -2,541 -15.3 36.2 1.5 5.0

7.7 5.0 -11.2 2,296 5,092 -2,796 -15.1 36.0 1.5 5.0

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■ Conditions of access to the market Import duties within the EAC have been harmonised at 0, 10 and 25 per cent according to the degree of product transformation. Some goods are duty-exempt (unpackaged drugs, gold, gems, perishable goods); others like foodstuffs, live animals, fish, reptiles, firearms and ammunition require an import permit. Tanzania has set up free zones – or export processing zones (EPZs) – which are managed by the National Development Corporation (NDC), a separate entity from the Tanzanian Investment Centre. Capital goods may be imported duty-free into these zones but are liable to VAT. The tourism industry enjoys tax breaks subject to the issue of a certificate of incentive by the Tanzania Investment Centre (TIC) for a fee of US$750. Tanzania applies article VII of the WTO which provides for pre-shipment goods inspection and valuation. The importer’s bank is responsible for submitting the file to the pre-shipment inspection (PSI) agency which then forwards it to its agent in the country of origin of the goods. A 20 per cent VAT is levied on the CIF value of goods, marked up by customs and excise duties and all applicable import levies. A rate of 0 per cent applies to imports financed out of the budget of international donors.

There are no exchange controls in Tanzania. It is up to the contracting parties to decide which payment instrument to use. Most transactions are carried out in Tanzanian shillings or dollars, although the euro is gaining ground. ■

Means of entry The Tanzania Investment Act has established a one-stop shop for investors, the TIC. Foreign equity in investment projects must be equal to or higher than US$300,000 in exchange for a certificate of incentives. Legislation relating to the free zones, set up in 2002, is extremely investor-friendly, but imposes an obligation to export 70 per cent of production. Restrictions on property ownership and a system of permits for foodstuffs are the main obstacles to market access. Work permits are issued to foreigners on a regulated basis.

5

■

Attitude towards foreign investors The Tanzanian government proactively promotes foreign direct investment (FDI) that develops exports, facilitates the transfer of technology and creates jobs. Tanzania is the leading recipient of FDI in the region (US$377 million in 2006, compared with US$307 million for Uganda and US$51 million for Kenya). Growth sectors include mining, telecommunications, energy and agriculture. Tanzania is still heavily assisted by international aid donors on account of its status as a LDC.

501

SUB-SAHARAN AFRICA

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

61 11 15 Imports: 26% of GDP

Exports: 17% of GDP

MAIN DESTINATIONS OF EXPORTS

MAIN ORIGINS OF IMPORTS

Mn USD

Mn USD

150

500

120

400

90

300

60

200

30

100

0

0 China

Hong Netherlands Japan Kong

South Africa

UAE

China

Kenya

India

UAE

IMPORTS by products ■ Capital goods 39% ■ Consumer goods (excluding foodstuffs) 21% ■ Fuels 19% ■ Intermediate goods (excluding fuels) 13% ■ Foodstuffs 8%

EXPORTS by products ■ Gold 44% ■ Fishing products 12% ■ Manufactured goods 9% ■ Coffee 4% ■ Cotton 4% ■ Tobacco 4% ■ Cashews 4% ■ Other 20%

STANDARD OF LIVING/PURCHASING POWER

502

Indicators

Tanzania

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

740 350 0.418 27 35 43 7

2,029 842 0.450 34 37 43 18

5,983 2,313 0.672 31 44 30 50

TOGO

Togo Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

6.3 2,206 C Very high risk D

RISK ASSESSMENT In 2007, economic growth remained below average for sub-Saharan Africa hampered by repeated breakdowns in the delivery of energy and by the weak recovery of cotton production, limited to a quarter of the average level recorded between 2001 and 2005. Forecasts for 2008 call for a significant increase in cotton production in the wake of the SOCOTO Togolese cotton company’s debt wipe-off intended to enable Togo to benefit fully from the firm cotton prices. The improvement in energy delivery and the intensification of public sector and foreign investment in transport infrastructure, especially ports, should moreover enable growth to climb to 3.5 per cent. Public sector accounts continue to show imbalances with tax revenues not sufficing to cover rising investment spending on health, education and infrastructure. Despite improvement in the terms of trade, meanwhile, it has been a struggle to offset capital goods imports and increased spending on oil with phosphate exports. In the absence

of international aid and FDI, the debt has reached unsustainable levels. The resumption of relations with multi-lateral financial backers not only paves the way to a poverty reduction and growth facility (PRGF) agreement — the IMF’s special low-interest lending programme for poor countries — but also allows Togo to look forward to debt relief in the medium term under the HIPC and MDRI programmes. The holding of free and transparent legislative elections in October 2007 was a turning point in the Togolese government’s international rehabilitation. The elections marked the end of the period of severe political instability initiated in 2005 with the contested election as president of Faure Gnassingbe, son of General Eyadema, deceased in February 2005. The recent successful elections will facilitate a renewal of cooperation with the EU and international financial institutions since they broke off all relations in 1998. Carrying out far-reaching structural reforms could come up against strong resistance from the professions concerned, notably opposition from the army.

5

503

SUB-SAHARAN AFRICA

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP)* Exports Imports Trade balance Current account balance (%GDP)* Foreign debt (%GDP) Debt service (%G&S exports) Foreign exchange reserves (in months of imports)

5.2 -0.9 1.8 598 755 -157 -9.2 95.1 13.3 2.8

2.3 0.4 0.2 613 870 -257 -3.7 92.9 9.8 3.8

1.2 6.8 -3.6 597 944 -347 -6.5 80.8 6.4 1.9

2.0 2.2 -4.2 612 1,041 -429 -7.4 84.6 5.4 3.3

2.9 3.2 -5.1 668 1,169 -501 -9.6 80.3 5.4 2.9

3.5 3.0 -5.8 722 1,278 -555 -9.5 79.2 5.5 2.9

* = ex grants, e = estimate, f = forecast

504

UGANDA

Uganda Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

29.9 9,322 C High risk C

STRENGTHS • Uganda has remarkable economic potential (agriculture, fishing, tourism and ore). • Exploitation of recently discovered oil resources should enable the country to reach energy independence by 2011. • Greater integration into EAC, the East Africa Community, constitutes an additional asset. • With a sustained policy of structural reforms, Uganda has won the backing of the international financial community. • The country has benefited from significant foreign debt relief under the HIPC and MDRI programmes. • The progress made on improving education, combating poverty and improving public health conditions has been encouraging.

WEAKNESSES • GDP growth potential, underpinned by one of the world’s fastest growing populations, remains limited by transport, energy and public-service bottlenecks. • The continuing environment of instability in the Great Lakes region and a difficult business climate limit the country’s interest for investors. • The country’s development potential remains largely unrealised and, concomitantly, its economic fabric lacks diversification. • The country’s landlocked position and defective infrastructure inflate production costs. • Agriculture is still preponderant (33 per cent of GDP, 70 per cent of employment) with coffee, tea and horticultural product exports remaining vulnerable to weather conditions and world price trends.

RISK ASSESSMENT Despite repeated energy supply breakdowns, the economy rebounded in 2007, driven by the telecommunications and civil engineering sectors. The Commonwealth Summit of Heads of State governments hosted by Kampala along with transport and energy infrastructure investments (Bujagali Dam) spurred civil engineering activity in particular. GDP growth should remain strong in 2008, driven by large investments in oil exploration. The strong growth has allowed Uganda to approach its Millennium Development Goals, especially as regards reducing

the poverty rate, which improved spectacularly from 56 per cent in 1992 to 31 per cent in 2007. Public sector accounts are structurally imbalanced. Even with current spending trending down, tax revenues still do not suffice to cover rising investment spending. Imports of capital goods imports and oil have moreover been growing faster than exports, despite firm coffee prices. The country has little foreign debt, however, thanks to relief extended under the HIPC and MDRI programmes. The presence of new financial backers outside the Paris Club could, how-

5

505

SUB-SAHARAN AFRICA

ever, contribute to significant increase in outstanding debt. In this context, international aid will remain essential to cover internal and external financing needs. In the political arena, President Musevini has succeeded in leveraging the general elections held in March 2006 without incident, the first such elections in 25 years, to rehabilitate his image on the international scene and resume cooperation with multilateral institutions that are sources of aid. Donor countries have, however, called for a strengthening of governance and greater political liberalisation. The security

situation in the north of the country, meanwhile, has remained precarious. Despite the progress made in the talks under way since July 2006 to bring to an end 18 years of hostilities, the LRA – Lord’s Resistance Army – has refused to lay down its arms as long as the International Criminal Court threatens action against its members. There have moreover been perceptible tensions between Uganda and the Democratic Republic of Congo over the exploitation of Lake Albert oil, and the risks of destabilisation remain high especially with Sudan and Chad nearby.

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP)* Exports Imports Trade balance Current account balance (%GDP)* Foreign debt (%GDP) Debt service (%G&S exports) Foreign exchange reserves (in months of imports)

4.5 5.7 -10.8 512 1,131 -619 -14.0 68.2 8.2 6.4

5.7 5.0 -10.7 647 1,321 -674 -11.0 68.7 7.9 6.6

6.7 8.0 -8.5 786 1,624 -838 -10.6 57.7 7.3 6.3

5.4 6.6 -7.4 890 1,991 -1,101 -9.9 57.7 4.3 5.7

6.2 7.5 -8.4 1,180 2,377 -1,197 -8.6 13.6 2.7 7.6

6.5 5.1 -7.9 1,270 2,900 -1,630 -11.4 16.7 3.0 7.4

* = ex grants, e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■

506

Market overview The introduction in January 2005 of a customs union between the member countries of the East Africa Community (EAC) has led to the harmonisation of tariffs around three rates – 0, 10 and 25 per cent – according to the degree of product transformation. Zerorated access is granted to industrial machinery and essential goods. Some 426 products imported from Kenya are liable to temporary duty at an initial rate of 10 per cent, which will be lowered by two points each year over a five-year period. COMESA member countries are granted a preferential tariff also based on three rates: 0, 4 and 6 per cent. Customs declarations must be supported by an invoice and a certificate of origin, as well as an import certificate valid for six

months on a renewable basis that can be obtained within 24 hours from the Ministry of Commerce and Industry. Where applicable, a health certificate for live animals, an import licence plus a health certificate for plants (fresh fruits, vegetables and seeds) and a disinfection certificate for second-hand clothes, bedding and similar articles intended for sale must also be produced. Customs clearance takes about a week. All duties are ad valorem and calculated on the cost, insurance and freight (CIF) value of goods transported by road, and on the insured value of goods transported by air. As well as customs duties and a 4 per cent levy calculated on the CIF value (warehousing duty), all imports are charged 0.8 per cent import duty on the free on board (FOB) value (in respect of inspection fees), 2 per cent

UGANDA

import levy on the CIF value (Import Licence Commission) and, where applicable, 17 per cent VAT and excise duties. Uganda does not apply minimum import prices or quotas. Several import prohibitions and restrictions apply on grounds of health, safety, etc. The country observes the most favoured nation (MFN) clause for all its trade transactions. ■ Attitude towards foreign investors FDI in Uganda is governed by the 1991 investment act, which is restrictive on paper but liberal in its application. The Uganda Investment Authority (UIA) is responsible for handling investment proposals and offering assistance and advice to investors. In a pragmatic move, the government has given it wide powers of initiative to reduce discrimination between foreigners and nationals, pending revised, less restrictive legislation. To obtain a licence, foreign investors must submit a business plan to the UIA, along with detailed financial statements of their company’s activities. The UIA is not overly strict in this matter and licences are liberally awarded for a minimum period of five years, provided the investment complies with the act. The time limit for issuing a licence is two to five days. The UIA is required to draw up a report on each investment application within 30 days, and reach a decision within the following 14 days. The investment act, however, does not

guarantee foreign investors equal treatment with local ones. Foreigners face a number of obstacles or obligations, including a minimum investment of US$100,000, staff training, use of local suppliers, respect for the environment, technology transfer, etc. But no sector of the economy is closed to foreign investment. Foreign investors are protected from forced sales. Where a company is subject to an expropriation order, it is entitled to receive compensation based on the real value of its business within 12 months of the date of expropriation. Property laws continue to pose problems for investors seeking land for their businesses. In such cases, it is advisable to turn to specialist agencies, law firms or the UIA as they can offer a number of safeguards (land register, identity checks on landlords). The shortcomings of the judicial system constitute an obstacle to investment. Lack of professionalism, corruption and files that go missing means it can take years to get a judgement or conclude an action. However, assistance (and pressure) from lenders has already yielded tangible results, such as the setting up of a Tax Appeal Tribunal. Uganda has been a member of the MIGA since 1992. The agency provides investors with safeguards against non-commercial risks such as profit repatriation in hard currency, foreign currency transfers, breach of contract, labour disputes, etc.

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507

SUB-SAHARAN AFRICA

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

62 11 17 Imports: 27% of GDP

Exports: 13% of GDP

MAIN DESTINATIONS OF EXPORTS

MAIN ORIGINS OF IMPORTS

Mn USD

Mn USD

80 70 60 50 40 30 20 10 0

800 700 600 500 400 300 200 100 0 Kenya

Belgium Netherlands France Germany Rwanda

UAE

China

India

South Africa

IMPORTS by products ■ Capital goods 34% ■ Foodstuffs 15% ■ Chemicals 13% ■ Oil and oil by-products 12% ■ Other manufactured goods 26%

EXPORTS by products ■ Coffee, tea and spices 26% ■ Fishing products 15% ■ Gold, Cobalt 13% ■ Electrical equipment and other manufactured goods 14%

■ Fuels 4% ■ Cotton 3% ■ Other 26%

STANDARD OF LIVING / PURCHASING POWER

508

Indicators

Uganda

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

1,490 300 0.508 38 13 51 4

2,029 842 0.450 34 37 43 18

5,983 2,313 0.672 31 44 30 50

ZAMBIA

Zambia Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

11.9 10.907 C High risk C

STRENGTHS • Endowed with extensive mining resources, Zambia is the world’s largest cobalt producer and Africa’s largest copper producer. • The country’s agricultural and tourist potential has been the focus of development policy that will facilitate the necessary economic diversification. • Zambia has enjoyed the support of the international financial community that resulted in a substantial cancellation of its foreign debt. • In addition to tension-free relations with neighbouring countries, the domestic political situation has been stable despite considerable ethnic diversity.

WEAKNESSES • With its continuing dependency on the extraction of copper, the economy remains vulnerable to exogenous shocks – not only swings in copper prices but also the impact of weather conditions on the food supply. • The high 67 per cent poverty rate afflicting the population is compounded by a 16 per cent AIDS prevalence rate. • The exports of this landlocked country have suffered from a lack of transport infrastructure and have been sensitive to rising shipping costs. • The business environment has been undermined by major shortcomings.

RISK ASSESSMENT Despite strikes and floods hampering copper mine operations, economic growth was still strong in 2007, spurred by soaring ore prices, and should exceed 6 per cent in 2008 underpinned by the dynamism of the building and public works sector and the expansion of production capacity. The bright outlook for raw material prices is conducive to investment in extraction and prospecting for deep copper and cobalt. Despite prudent macroeconomic policy, hailed by international financial backers, a fiscal deficit is likely to persist due to an excessively narrow tax base, particularly favourable to foreign investors. Zambia’s external position has improved, meanwhile,

thanks to cancellation of US$3.3 billion in debt under the HIPC and MDRI programmes. Its financing needs are nonetheless still large with the country remaining dependent on international aid to cover them. Although re-elected in September 2006 with 43 per cent of the votes cast, President Mwanawasa has been contending with protests by the urban population in areas as strategic as the capital Lusaka and the main copper-producing region, known as the ‘copper belt’. The government will have to meet the challenge of achieving an equitable redistribution of the fruits of growth. The tensions should not, however, jeopardise the reforms supporting modernisation of the financial sector and improvement of the business environment.

5

509

SUB-SAHARAN AFRICA

MAIN ECONOMIC INDICATORS USD millions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP)* Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports)

5.1 21.4 -13.5 1,061 1,393 -332 -15.9 150 15.0 1.2

5.4 18 -7.2 1,779 1,727 52 -12.2 130 18.5 1.0

5.2 18.3 -8.2 2,221 2,211 10 -11.8 81 6.7 1.5

5.9 9.0 -7.1 3,819 2,636 1,183 -1.4 12 4.0 1.7

6.0 11.3 -7.5 3,793 3,063 730 -7.8 12 5.0 2.4

6.2 5.7 -6.4 3,268 3,311 -43 -5.5 14 6.0 2.7

* = ex donations, e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■ Means of entry Goods may be freely exchanged, and imports of certain goods in the agricultural and mining sectors are exempt from duty. ATA carnets are accepted. Customs clearance is usually completed within 72 hours of the goods being presented. Imports may be consolidated. For an import to qualify for preferential treatment, a COMESA or SADC certificate of origin is required. Excise duties vary between 5 and 125 per cent of the product’s value, and customs duties between 0 and 25 per cent. VAT is levied at the rate of 17.5 per cent. There is also a duty drawback system allowing local businesses to obtain a refund of the duties and levies paid on inputs, provided the products manufactured are exported. Various means of payment can be used. However, documentary credit is recommended. ■ Attitude towards foreign investors The Investment Act 1993, amended in 1998, guarantees freedom of investment in Zambia.

510

Some sectors – tourism, mining, air and road transport, financial services – require an additional operating licence. There are no restrictions against foreign shareholdings on the statute book, and the Lusaka stock exchange is open to foreign investors. Corporation tax varies between 15 and 45 per cent according to activity. Profits are fully repatriable. Free zones (export processing zones, EPZs) introduced in 2003 offer foreign investors tax benefits such as exemption from corporation tax and excise duties. The country has reciprocal investment protection and double taxation agreements with several countries, including France. Disputes between a foreign investor and a local party are subject to local or international arbitration (ICSID, UNICITRAL). Zambian law makes it difficult to employ expatriates and 50 per cent of managers must be Zambian. ■

Foreign exchange regulations There are no exchange controls in Zambia. A foreign resident may open a foreign currency account with a local bank. There are no hedging arrangements against exchange risk. Financial transaction costs remain high.

ZAMBIA

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

56 10 21

Imports: 25% of GDP

Exports: 16% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

1500

800 700 600 500 400 300 200 100 0

1200 900 600 300 0 Switzerland

South Africa

Thailand China

South Zimbabwe Africa

Italy

UAE

China

India

IMPORTS by products ■ Machinery 21% ■ Chemicals 18% ■ Fuels 15% ■ Vehicles 10% ■ Electrical equipment 8% ■ Iron and steel 3% ■ Other manufactured goods 24%

EXPORTS by products ■ Copper 69% ■ Ores 12% ■ Other metals 4% ■ Other 15%

5

STANDARD OF LIVING / PURCHASING POWER Indicators

Zambia

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

1,000 630 0.394 39 35 46 10

2,029 842 0.450 34 37 43 18

5,983 2,313 0.672 31 44 30 50

511

SUB-SAHARAN AFRICA

Zimbabwe Population (million inhabitants): GDP (US$ million): Country @rating: Medium-term rating: Business climate rating:

512

13.1 5,010 D Very high risk D

STRENGTHS • Zimbabwe boasts considerable agricultural, tourist and mineral potential – platinum (world’s second largest producer), palladium, gold and nickel. • Its industrial fabric is diversified. • Quality transport and financial infrastructure along with a well-trained labour force could facilitate efforts to revive the economy.

WEAKNESSES • The country’s economy and finances are still in a disastrous state and overcoming the crisis effects will take some time. • The economic crisis, which has further heightened political and social tensions, has moreover exacerbated the deteriorating food and health situation in the country, with a majority of the population dependent on international aid for subsistence. • The AIDS infection rate is among the highest in Africa and the world with a 25-per cent prevalence rate in the adult population.

RISK ASSESSMENT The recession that has gripped the country since 1999 and caused a 40 per cent reduction in GDP intensified in 2007. The economy should, however, only contract by 3.6 per cent in 2008 with some improvement expected in mining extraction, especially gold and platinum – whose prices have been trending up – along with a modest recovery in the agricultural sector. The marked depreciation of the Zimbabwe dollar exchange rates, which has accentuated the increasing cost of imported products, and the monetisation of public and parapublic deficits will nonetheless continue to fuel hyperinflation. Despite a foreign exchange system favour-

able to exporters and the firmness of raw material prices, foreign currency revenues have not increased. With its foreign debt now unsustainable, the country is constantly in arrears to most of its creditors. In this context, the current debate over a possible nationalisation of mining companies and an otherwise poor business climate have limited investor interest in the country, which further delays a hypothetical recovery. The substantial economic deterioration notwithstanding, President Mugabe, aged 82, has deftly exploited divisions within his own ZANU PF camp to impose himself as the party’s candidate in next presidential elections in March 2008. He is sure of re-election.

ZIMBABWE

MAIN ECONOMIC INDICATORS USD billions

2003

2004

2005

2006

2007(e)

2008(f)

Economic growth (%) Inﬂation (%) Public sector balance (%GDP) Exports Imports Trade balance Current account balance (%GDP) Foreign debt (%GDP) Debt service (%Exports) Foreign exchange reserves (in months of imports).

-10.4 365 -0.4 1,670 1,778 -108 -3.1 64.4 21.4 0.1

-3.8 350 -7.7 1,680 1,989 -309 -7.3 67.4 16.9 0.5

-7.2 255 -16.1 1,694 2,053 -359 -6.8 75.9 16.4 0.0

-4.1 1,027 -43 1,727 2,000 -273 -6.8 83.7 16.8 0.0

-5.7 2,880 -34.9 1,800 2,100 -300 -7.7 93.2 16.5 0.0

-3.6 6,470 -34.9 1,900 2,200 -300 -8.0 96.7 15.8 0.0

e = estimate, f = forecast

CONDITIONS OF ACCESS TO THE MARKET ■ Means of entry Goods can be freely exchanged from a legal standpoint, although a certificate of origin is required for imports. Customs duties vary between 0 and 138 per cent according to the type of import, except for goods from COMESA which are exempt from duties on the basis of reciprocity. Since 1 August 2005, VAT on all imports has risen to 17.5 per cent from 15 per cent, the rate in force when VAT was introduced on 1 January 2004. A 15 per cent surtax applies to all products charged more than 30 per cent customs duty. Due to the now chronic shortage of hard currency, exporters are strongly advised to demand advance payment. While many companies, especially in mining, have off-shore accounts, experience shows that some, usually from other sectors, use the restrictions on obtaining foreign exchange from the Reserve Bank as an excuse for not paying their bills.

armaments and water. Since 1 January 1995, all profits and dividends may be repatriated after payment of taxes. However, money transfers remain a rarity in a country suffering an acute shortage of foreign exchange. Companies operating in Zimbabwe are liable to a 20 per cent tax on the dividends earned by their foreign-based subsidiaries. A 3 per cent tax is levied on all companies to support the fight against AIDS. Zimbabwe has a double-taxation agreement with France and some other countries. However, the reciprocal investment protection agreement signed with France in May 2001 was never ratified, notwithstanding several attempts by the French government to obtain its ratification. Since September 2007, the so-called new ‘indigenisation’ law requires foreign companies to sell off at least 50 per cent of their Zimbabwean subsidiaries to local interests. Disputes between a foreign investor and a local party are subject to local or international arbitration.

5

■ ■

Attitude towards foreign investors The Investment Act 1989 guarantees protection of foreign investment. A 100 per cent foreign ownership is allowed in mining, manufacturing and tourism, 70 per cent in services and 35 per cent in agriculture,

Foreign exchange regulations Hyperinflation – followed by the massive devaluation of the Zimbabwean dollar − makes it virtually impossible to maintain a stable currency regime. The country’s traditional dual currency market is unworkable in practice.

513

SUB-SAHARAN AFRICA

OPPORTUNITY SCOPE

BREAKDOWN OF DOMESTIC DEMAND (%GDP + IMPORTS) Private consumption Public consumption Investment

46 18 9 Imports: 53% of GDP

Exports: 43% of GDP

MAIN DESTINATIONS OF EXPORTS Mn USD

MAIN ORIGINS OF IMPORTS Mn USD

800 700 600 500 400 300 200 100 0

1200 1000 800 600 400 200 0 South Africa

China

Zambia

Japan

South Africa

USA

China

Botswana Zambia Germany

IMPORTS by products ■ Fuels 21% ■ Chemicals 20% ■ Foodstuffs 19% ■ Machinery 14% ■ Manufactured goods 14% ■ Other 13%

EXPORTS by products ■ Foodstuffs 30% ■ Aluminium and platinum 16% ■ Gold 16% ■ Tobacco 14% ■ Manufactured goods 24%

STANDARD OF LIVING/PURCHASING POWER

514

Indicators

Zimbabwe

Regional average

Emerging country average

GNP per capita (PPP dollars) GNP per capita (USD) Human Development Index Wealthiest 10% share of national income Urban population percentage Percentage under 15 years old Number of computers per 1,000 inhabitants

1,950 340 0.505 40 36 40 92

2,029 842 0.450 34 37 43 18

5,983 2,313 0.672 31 44 30 50

ACRONYM TABLE AND LEXICON

ACRONYM TABLE AND LEXICON ACN: Andean Community of Nations ADB: Asian Development Bank AFTA: ASEAN’S Free Trade Area AGOA: African Growth and Opportunity Act APEC: Asia Paciﬁc Economic Cooperation ASEAN: Association of South East Asian Nations ATA: Africa Travel Association ATPDEA: Andean Trade Promotion and Drug Eradication Act BCEAO: Banque Centrale des ´Etats de l’Afrique de l’Ouest CAFTA: Central American Free Trade Area CAP: Common Agricultural Policy CCASG: Cooperation Council of the Arab States of the Gulf CEFTA: Central European Free Trade Agreement CEMAC: Economic and Monetary Community of Central Africa CET: common external tariff CIF: Cost, insurance and freight CIS: Community of Independent States COMESA: Common Market of Eastern and Southern Africa CSID: International Centre for Settlement of Investment Disputes Currency board: system whereby a country pegs its currency to a foreign currency (generally the US dollar or euro) with a currency board supplanting the central bank DR/CAFTA: Dominican Republic-Central American Free Trade Agreement EAC: East African Community EBRD: European Bank for Reconstruction and Development EC: European Commission ECLAC: Economic Commission for Latin America and the Caribbean ECOWAS: Economic Community of West African States EDB: Economic and Development Board EFTA: European Free Trade Association EMCCA: Economic and Monetary Community of Central Africa EMU: Economic Monetary Union EU: European Union FDI: foreign direct investment FIC: Foreign Investment Commission

515

ACRONYM TABLE AND LEXICON

GAFTA: Greater Arab Free Trade Area GATS: General Agreement on Trade in Services GATT: General Agreement on Tariffs and Trade GCC: Gulf Co-operation Council. The GCC member countries are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates GDP: gross domestic product GNP: gross national product GOEIC: General Organization for the Import and Export Control HIPC: initiative or programme: a joint IMF/World Bank initiative in favour of heavily indebted poor countries, which can permit cancellation of their public external debt once they meet speciﬁed conditions and thus reach the HIPC ‘completion point’ IAEA: International Atomic Energy Agency IBRD: International Bank for Reconstruction and Development ICSID: International Centre for Settlement of Investment Disputes IDB: Inter-American Development Bank IFO: Information and Forschung, one of the leading economic research institutes in Germany IMF: International Monetary Fund LAIA: Latin American Integration Association LDC: Least Developed Countries MDRI: Multilateral Debt Relief Initiative MFN: Most Favoured Nation MIGA: Multilateral Investment Guarantee Agency NAFTA: North American Free Trade Agreement NATO: North Atlantic Treaty Organisation NEPAD: New Partnership for Africa’s Development OECD: Organisation for Economic Cooperation and Development OHBLA/OHADA: Organisation for the Harmonisation of Business Law in Africa OPEC: Organization of the Petroleum Exporting Countries OPIC: Overseas Private Investment Corporation Paris Club: an informal group of ofﬁcial creditors devoted to ﬁnding sustainable solutions to payment difﬁculties experienced by debtor nations Payment incidents index: payment default indices reﬂect the payment-incident trend on commercial transactions payable in the short term worldwide across a broad range of economic sectors. The monitoring of payment incidents is based on a composite of several sets of company-payment–capacity indicators available in Coface databases: those derived directly from its credit insurance, receivables management and company information activities, and those obtained from partners. Payment incidents are expressed as indices based on the average of incidents recorded over the world between 1995 and 2000. The resulting curves thus permit comparing a country’s or sector’s payment risk level with the world average as well as monitoring the trend of those risks

516

ACRONYM TABLE AND LEXICON

PPP: purchasing power parity PRGF: Poverty Reduction and Growth Facility R&D: research and development SACU: Southern African Customs Union SADC: Southern African Development Community SEC: Security and Exchange Commission SME: Small and Medium Enterprises SWIFT: Society for Worldwide Interbank Financial Telecommunication, which runs a worldwide network whereby messages concerning ﬁnancial transactions can be exchanged between banks and other ﬁnancial institutions in 194 countries SYSCOA: Syste `me Comptable Ouest-Africaine (West African Accounting System) TRIPS: Trade-Related Aspects of Intellectual Property Rights UEOMA/WAEMU: Union Economique et Mone ´taire Oust Africaine/West African Economic and Monetary Union UNCITRAL: United Nations Commision on International Trade Law UNCTAD: United Nations Conference on Trade and Development UNDP: United Nations Development Programme UNICITRAL: United Nations Commission on International Trade Law UNCTD: United Nations Conference on Trade and Development WIPO: World Intellectual Property Organization WTO: World Trade Organisation

517